Sonata Software A Turnaround Story

Stock Opportunities Untested - but worth a good look
41

Hi Rupesh

Thanks for some great analysis !!

Am curious what prompted your comment on the CEO. To my mind the management has been responsible and conservative while giving out guidance (which is a good thing) and always over delivered. Further they have articulated their strategy quite well. Also so far they have been good at capital allocation (dividend payout of ~50% and cautious acquisition strategy). To my mind even if they ‘sound’ casual I would focus on their actions which to me look responsible. Would be glad to hear more details from you.

Dis: Invested hence maybe biased.

42

Amit,

I’m probably comparing him to the Mr. Suresh Poddar of Mayur Uniquoters. He said something like we are over efficient. That’s sign of overconfidence probably.
Also when asked about strategy of getting new customers, we was vague and kept saying “stuff like that”.

That being said - I think it can be ignored for now and we can focus on management actions.

Thanks,
Rupesh

1 Like
43

Nikhil,

I don’t think it is very difficult for the TCS and Infys of the world to do what Sonata is doing. I also don’t see a lot of IP built into Sonata’s business or applications.

Also rate of $25 an hour is lesser than some of my friends command when they are at an onsite location.

Also, all IT companies have debt free balance sheet :smile:.

Thanks,
Rupesh

2 Likes
44

Rupesh,

It is not always about ‘ease of doing the business’.TCS,Infy,etc. are massive in size,and the CPG/Travel opportunities may not be big enough for them to address.Those companies may like to focus on bigger market opportunities like Digital,AI,etc.Let’s say the market size of CPG/Travel solutions,is north of 3BUSD.Thus,for a company of TCS’ size,this is not such a great figure…and they won’t like to pursue it with much attention,until and unless,its a part of their ‘legacy offerings’.On the other hand,SMAC & Digital,are touted to be 1 trillion dollar opportunities.Doesn’t it make sense to go after these for TCS,etc.? This lack of attention can create a vaccuum at the services level,which is filled by smaller companies.Moreover,for IT firms,customer loyalty is very siginificant.Thus,if Sonata has been offering Microsoft some services since 15 years,then there is little chance that one fine day,Microsoft would replace them for no reason.

Sonata recently acquired a company called Rezopia,which should help them consolidate their position in the Travel vertical.Moreover,the company is also trying to address the SMAC opportunity through its offerings. https://www.youtube.com/watch?v=4TKSqpe1Uqo

The balance sheet is very strong,and the company has been generating FCF of 85-90cr. in the last two fiscals.Revenue growth has also been decent.Payouts are very high and valuations aren’t demanding.My concern is,about the ‘high base effect’.Sonata’s margins in the Exports offerings are extraordinarily high and might be difficult to sustain(for the record,the company has been conservative in guidance from the last 7-8 quarters) Thus,if revenue growth doesn’t exceed 15-20%,the bottomline may suffer.The good news comes from their cash cow business: Domestic products division,which requires 0 capex & is running on very low(,though improving) margins.This can provide cushion to its earnings in the coming years,even if margin expansion in the exports division is hard to come by.

With a cash pile of ~200cr.,the EV comes out to be 1300 crore.With an annual profit of 135cr.,we are paying just about 10x earnings.Dividend yield too,is very healthy.Remember also,that Sonata is able to generate RoEs & RoCEs,in excess of 30%.

The recent sentiment around IT sector has been very poor,and companies have started to report decent earnings.The best time to buy a sector is always when things are looking gloomy.I see no reason why Sonata is not a ‘good stock’ to own.

Would be great to have some counter views.

Disc.: Invested.

7 Likes
45

We probably shouldn’t be making much regarding the purchase of a company that has been present in its “niche domain” for more than decade but has revenues of just around half a million dollars. Maybe things will change under Sonata’s management. All that I’m saying is looking at Rezopia’s past, seems like travel companies are extremely sticky with their IT infrastructure and is a difficult market to penetrate.

From earlier post:

Currently we have 300-400k$ business from 2 clients of Rezopia.

3 Likes
46

did any one attended concall today? What was said in the concall that is leading to such a fall post concall?

47

Hi,

I think you may corroborate your question with the following statement of the management in the today’s concall: " In International services segment - the sales growth will remain slow at-least for one more quarter (or in line with current quarter of ~19% YoY / 0% QoQ in rupee terms)" AND for FY16 they don’t expect to match the last year’s performance of 25% growth in rupee terms (however they expect to exceed the industry growth of 10-12% in dollar/constant currency terms).
Having said this, my understanding of the company/management is a bit divergent based on my experience of hearing them over the last 16-17 quarters.
Regarding the price action - actually i was more curious with the sharp run-up over the last few days :smile:
Best
Mayank

48

@Mayank_7772 Thanks. When u say your understanding is a bit divergent, do you mean management is conservative and over delivers?

49

why is WC for sonata increasing disproportionately ? for a higher sale in FY 15, operating cash flow was much lower

did the mgmt have a view on this ? I am surprised that no one has a view on this.

WC has gone up by Rs. 65 Cr. for a Rs. 100 Cr. in sales from FY 14 to FY 15. What gives ?

1 Like
50

@Ishank - What i mean is that i appreciate what management has been doing over the past few years to build a robust business AND yes they are conservative (just an opinion) and stick to what they say (if you track them closely over a time-period and sometimes they over-delivers also :smile:

@varadharajanr - Given the context, i dont have any issues on the fact you have highlighted. On the contrary, i checked my note - originally prepared before the FY15 numbers and updated only for critical items - and this cashflow/WC is a non-event (not critcal) from my perspective (contextual).

However to just give you a brief background, you might be able to connect better -

  • On the domestic products vertical - sometimes WC is required and company takes bank facility whenever required, (though they have 200 Cr+ of cash in books) as they solely target RONW metric due to the nature of business.
  • Regarding operating cashflow - i’m guessing you might have seen the cash flow from operations in FY15 over FY14 from the accounts. Pasting a brief graphic from the AR 15 and duly discussed by management, i hope it will shed some light.

Pasted image1281×103 47.8 KB

Have tried to simplify and i might be wrong in simplification, rest seems okay :blush:

4 Likes
51

Listened to con call. Following is the update:

Halocin (I might be mis-spelling)

  • Acquired 100% stake, 10 guys in US + 10 people India
  • They have 3 clients as of now and revenue is less than a million $
  • They have invested a lot in their platform and now we will do some capital infusion to take it to the next level.
  • The platform is a horizontal deployment platform that also supports cloud. What it means is - as more enterprises want to go mobile, this platform allows for easy deployment of apps services, security, analytics and backward integration into other services. E.g. Rezopia can build vertical applications and they can be hosted/deployed using Halocin’s platform.
  • Since this also supports cloud, what this means is a lot of large enterprises who want to host their apps on company specific cloud, we have a platform that can do it.
  • This increases our ability to get new opportunities by 5x and we can market ourselves as enterprise mobility partner of choice with more complete set of products and services.
  • It takes usually 6 to 9 months to get a new account, typical client profile is like large cloud hosting provider or large healthcare provider.
  • With this platform we should look attractive to Accenture, RedHat. We are also happy to license the platform to large enterprise.
  • Total deal size is about ~5 mn$. For next 3 years, direct and indirect revenue contribution is expected to be 15 mn $.

Strategy

Today: We will develop apps for you on any platform. (HTML5 or native or Android etc.). We can white label the apps as well.
Tomorrow: Mobile First Strategy. You need to think of development for mobile, deployment, security etc. And we provide complete enterprise package.

  • We aim to do IP lead growth. We will provide differentiated products for long term. Current contribution is < 10% which should rise to 40% in next 4 years.
  • We intend to double our top line to 200 mn$ by FY18. That target is still intact.
  • We are always looking for suitable acquisitions - maximum budget of 25-30 mn$
  • Majority of new deals are through digital space, we have traction with all out top 10 clients in digital space. Idea is to enter using digital and then convert clients into using one or two dedicated services.

Product Engineering (Application Software)

  • We provide full gamut of products for new digital world like moving to cloud, analytics etc.
  • For DevOps, we provide some cutting edge offerings.
  • 360 offerings product - doing everything like support/maintenance/marketing/deployment

IT Services

  • There is internal products reduction from one major client that will show up in revenue. Q1 FY16 - we managed it well, Q2 FY16 will be slow and then there will be steady growth afterwards.
  • We don’t see any general slowdown in the industry.
  • We have steady state margins of 21-22%.

Retail

  • With FlipKart, SnapDeal etc., is India not a lucrative retail market? - These guys are big and they are spending heavy to build their own platforms.
  • We provide “Brick2Click” solutions i.e. players unlike FlipKart who can’t afford to build their own platform. We provide them solution to being them online for retail.

Travel and Rezopia

  • We are adding some more features to their platform. Rezopia did not spend to build a pipeline of clients which we are doing now.
  • We have attended six major travel events so far and we are steadily trying to build a pipeline.
  • Rezopia contributed ~1 mn$ (3-4%) in the top line for this Q.

India Business

  • Not a top line focused business as mentioned before.
  • Average India growth rate of 10-12%, margin of 5%.

Financials

  • Expect to do better than industry average growth of 12%. Revenue for last year was 98 mn$. Growth rate might be better in INR terms.
  • Average realisations($/hour): Onsite : 60-65, Offshore: 25
  • Income Tax refund of 2.7 Cr from India
  • Forex gain of 6.25 Cr (Included in EBIDTA)
  • Average breakeven time for investments : Accounts (6 months), Technology/Platform (2-3 years), Geography (18 months)

Attrition

  • Attrition rate of 18%
  • We are good in attracting entry level talent and building skill level.

(Any mistakes are solely mine)

Disc: Invested, might add more on declines

7 Likes
52

FY16 results have been decent.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/FC5E00A7_864D_4BE6_BF44_97049BC0A480_164608.pdf

Top line growth of 15%, bottomline growth of 18%.
The two negatives are -

  • Total debt has increased from 26Cr to 190Cr, although they have cash of 295Cr on books.

  • A lot of the gain in international business (which has excellent margin and ROCE), it seems, is coming via acquisitions. Although the acquisitions can be classified as “capability” acquisitions and are small in nature, the sales are still counted.
    Sonata needs to show some organic growth for rerating.

From valuation point of view, it remains attractive.

Disc - I hold

2 Likes
54

CONFERENCE CALL - from Capital Markets

Current EBIDTA margins in international business are not sustainable

Sonata Software held conference call on 24th May 2016 to discuss results for the period ended March 2016.

Highlights of the call:

  • On consolidated basis revenues for the quarter stood at Rs 541 crore, y-o-y growth of 38% for the quarter and 15% to Rs 1938 crore for FY 2016.

  • EBIDTA for the quarter stood at Rs 60 crore, y-o-y growth of 20% for the quarter and 25% for the year.

  • PAT for the quarter stood at Rs 41 crore, up 17% y-o-y. For FY 2016 it grew 19% to Rs 158.59 crore.

  • The company had cash and equivalents of approximately Rs 228 crore (without long term debt). Long term debt that the company has taken abroad at good rate is Rs 52 crore.

  • International IT Services provides services in Product Engineering & Enterprise IT solutions

  • International IT Services revenues for the quarter stood at Rs 189 crore, y-o-y of 17% for the quarter and the year.

  • International IT Services EBIDTA for the quarter stood at Rs 46 crore, up 18% y-o-y for the quarter. It grew 22% for FY 2016.

  • International IT Services PAT for the quarter grew 16% y-o-y to Rs 32 crore. For FY 2016 it grew 15%.

  • For its International IT Services, the company added 10 new customers during the quarter. In FY 2016 it added 26 new customers.

  • Domestic Products & Services revenues for the quarter grew 52% y-o-y to Rs 356 crore. It grew 14% for FY 2016.

  • Domestic Products & Services EBITDA for the quarter grew 25% y-o-y to Rs 15 crore. It grew 42% for FY 2016.

  • Domestic Products & Services PAT for the quarter grew 21% y-o-y to Rs 9 crore. It grew 34% for FY 2016.

  • The company delivers innovative new solutions for Travel, Retail & Consumer Goods and Software Product Companies by integrating technologies such as Omni-channel commerce, Mobility, Analytics, Cloud and ERP, to drive enhanced customer engagement, operations efficiency and return on IT investments.

  • A trusted long-term service provider to Fortune 500 companies across both the software product development and enterprise business segments, Sonata seeks to add differentiated value to leadership who want to make an impact on their businesses with IT.

  • The company had an important quarter and a successful year with key acquisitions and new solution builds to become a strong IP led solutions provider in its focus verticals of Travel, Retail, Distribution and ISV.

  • It has invested in key digital technologies including omni-channel commerce, mobility, cloud and analytics which is in line with its strategy of becoming a digital transformation partner for its clients.

  • International IT Services account for 35% of revenues and 79% of PAT.

  • Domestic business consists of IT Infrastructure Consulting, Licensing & Deployment. This business has footprint primarily in India. It accounts for 65% of revenues and 21% of PAT.

  • International IT Services business has World leading Tour Operator and Top NA Corporate Travel Co as its customers in travel segment.

  • In retail segment it has World leading Retailer and Global F&B CPG Leader a s its clients. In ISv the company has global software leader and Top SMB ERP companies as its customers.

  • The company is continuing to build, integrate and acquire platforms across ecommerce, analytics & DevOps to complete portfolio for future ready IP led solutions.

  • Q1-16 & Q2-16 EBITDA and PAT includes exceptional income of Interest on IT Refund

  • Total headcount stands at 3259. Out of which 3111 are in international IT services business and 148 Domestic Products & Service

  • International IT Services Q4 revenues grew 17% y-o-y and 4% q-o-q. EBIDTA grew 18% y-o-y but fell 6% q-o-q. PAT grew 16% y-o-y and grew 2% q-o-q.

  • During the quarter ended March 2016, 60% of sales came from USA, 26% came from Europe and UK and the rest 14% came from rest of the world.

  • During the quarter ended March 2016, 43% of sales came from onsite business and 57% came from offshore.

  • As on March 2016 quarter number of million dollar clients stood at 21.

  • It had 18 Fortune 500 accounts

  • Revenue from top 10 customers stood at 67% in March 2016 quarter against 72% in December 2015 quarter and 72% in March 2015 quarter.

  • Employee cost rose due to bonus provision due to retrospective amends in the Bonus Act (Rs 3.4 crore) and due to change in onshore and offsite mix.

  • The company will continue to invest in IP, technology, people, marketing and sales. The company will invest in verticals and delivery side also. So there will be pressure on margins. But this is the investment the company is doing.

  • The company would like to double its revenues (in constant currency terms) in the international business in the next 4 years and it is working towards it. Domestic business will grow at the rate that market grows. However the EBITDA margins in the international business which are at 26% now will gradually fall.

  • 26% is peak margin in the international business and is definitely not sustainable. Sustainable margin would be low 20s. It will go below 24% which it saw in March 2016 quarter.

  • So as it plans to double its sales in 4 years profit will not double.

  • The company does not see the revenue per employee dropping.

  • The company gets 31% of sales thru digital business.

  • Utilization stands at 85% and it stands same for the past 4 quarters.

  • Day Sales Outstanding fell from 64 q-o-q to 60 during the quarter.

  • Day Sales outstanding for International Services grew from 52 days q-o-q to 55 days during the quarter and the same for domestic business has fallen from 65 days to 62 days q-o-q.

7 Likes
55

I think this was an offshore rate. One shore is around USD70 as per the concalls.

56

Hi @rohitbalakrish_,

Are you tracking the company? Any specific inputs/updates regarding the contingent liabilities they carry on the books?

Thanks,
Aksh

57

Disc - I hold, this is not buy/sell reco

3 Likes
58

There was an interesting disclosure yesterday. CFO of the company, Mr. Prasanna Oke, had an interview with Rare Enterprises(Rakesh Jhunjhunwala Company) to discuss “Strategies and sonata plans going ahead”.

Here is the link

Although, this is no indication to buy the stock, it is good to see that the CFO is trying to attract visibility for the company.

Discl: Invested

2 Likes
59

While it is good to see large HNI Investor showing their interest in Sonata, we need to look at our profile and investment philosophy while investing our money. The HNI Client may put even 0.5% of wealth which would be very high amount. Even if it does not perform well, s/he may be fine with allocation. However, we may have different allocation and hence I would suggest to apply only one principle, “BUYER BE AWARE”.

I would also like to appreciate your effort to share this link as it is always good to know about development in your stock:

Discl: I have invested in Sonata Software and my view may be biased. Investor are request to do their own due diligence.

3 Likes
60

Hi Dhiraj,

No disagreements there. An HNI investor investing should absolutely be no validation of an investment idea. We should go with our independent research before investing in a company.

Kunal

61

Hi everyone,

I had few questions about some of the metrics of the company. I would be glad if others can help me here:

  1. Free Cash Flow/Sales: In the last ten years, only once did the company had negative FCF, the ratio of FCF/Sales is less. It is 7.415%. For players like TCS, this ratio is 15. How should we read this?

  2. Verticals: The company has following verticals: opd, ttl, retail distribution and others. What do these stand for? I read the reports but could not find any details.

  3. Onsite vs Offsite: So most of the revenue of the company comes from Offshore(approximately 60%). Is this a good metric? I mean say if 60% came from onsite, should that be considered negative as there will be cost incurred by the company for sending the resource there?

  4. Travel Clients: Nearly 20% of the clients are in the travel vertical. It would be great if the members can speak about the nature of client. Players like Booking.com or Makemytrip would have there own IT team. So what kind of clients would Sonata be catering? In any country, there would not be more than 5-6 major players for travel sites. And my assumption is that these sites would have internal IT teams as software would be their core competence. So I am trying to understand the segment here.

I am currently reading the investor presentation which you can read here.

Discl: Invested

Thanks,
Kunal