Order momentum offers hope for Sonata amid short-term demand issues

The stock of Sonata Software, a mid-tier IT services exporter, has lost 24% over the past two weeks after the company reported lacklustre December quarter performance affected by ramp down in a key client account. The stock is likely to remain under pressure given the spillover effect of the project ramp down on the fourth quarter revenue and profit. A turnaround is expected in the second half of FY26 given a sustained momentum in the order bookings. Analysts have cut FY26 revenue and earnings estimates due to the weakness in the short term.

Sonata provides digital engineering and modernisation solutions to global clients across verticals including technology, media and telecom (TMT), retail, manufacturing and distribution (RMD), banking, financial services and insurance (BFSI), and healthcare and life sciences (HLS). The company’s domestic business formed 74% of the revenue while international business contributed the rest.

For international business, the US and Europe contributed 78% and 11% to revenue respectively while the remaining was from the rest of the world in the December quarter. The company added 11 new clients during the third quarter. While it was higher than eight added in the prior quarter reflecting improving momentum, it was still lower than 13 compared with the year-ago quarter indicating room for further recovery.

In addition, client concentration for the international segment increased during the December quarter as top 10 customers contributed 66% to revenue compared with 56% a year ago while the concentration of the top 20 clients rose to 78% from 69%. This is a cause of concern as any slowdown in the business of top clients will impact Sonata’s performance significantly.

For instance, the performance of the international segment was affected in the third quarter due to a ramp down for a client and a one-off discount given to a TMT customer. The division’s revenue grew by 2.8% sequentially to $ 87 million. This was slower than the 44.4% growth in the domestic revenue at Rs2,111.1 crore. The project ramp down also affected the consolidated operating margin before depreciation and amortisation (EBITDA margin), which shrank by 250 basis points sequentially to 6.5%.The company had earlier guided for $ 1.5 billion in revenue by FY26 compared with $ 1 billion in FY24 with an EBITDA margin in the low 20s.Given the slower project ramp ups, it now expects to achieve the target by FY27.
IDBI Capital expects the first half of the next fiscal year to be better than the second half of the current fiscal year given a strong order book. Though the brokerage has retained a buy rating on the stock, it has reduced the revenue and earnings per share (EPS) estimates for FY26 by 6% and 26% to Rs 10,888 crore and Rs 18.5 respectively. It has also cut the 12-month price target by 9% to Rs 635.