Sonata Software

Company Report
Industry: Information Technology
Sonata Software
Steady growth, Reasonable valuations
Madhu Babu (madhubabu@plindia.com)

+91-22-66322300
Sonata Software
Contents
Page No.
Niche competencies in select focused Verticals and Services ................................... 5
Key Investment thesis for the IT Services Business ........................................................................... 5
OPD for Independent Software Vendors (~29% of total IT services revenues) ................................. 6
Travel vertical (~27% of Total Revenues): Focus on Tour Operators ................................................ 7
Retail/CPG (Accounts for 26% of total revenues) : On a strong footing............................................ 8
Investing in Platformation within the focused verticals .................................................................... 9
Focus remains on new logo wins .............................................................................. 13
Strong Hiring in Senior management to aid traction ............................................... 15
Acquisitions aimed at improving IP competencies................................................... 17
Steady performance in Operating Metrics ...................................................................................... 17
Product Business (Reseller): Focus on margin expansion ........................................ 19
Growth and Margins fare well relative to Midcap peers ......................................... 21
Sonata enjoys steady EBITDA margin in the IT services business.................................................... 21
Challenges: Subscale and high client concentration ................................................ 22
High Client Concentration remains the biggest risk ........................................................................ 22
Financial Analysis ...................................................................................................... 23
Revenue growth: Expect Consolidated Revenue Growth CAGR of 13% over FY17-FY19E .............. 23
EBITDA margin expected to remain stable over FY17-FY19E .......................................................... 24
Steady FCF generation aids strong payout ratios ............................................................................ 25
Valuation and View ................................................................................................... 27
Company Background ............................................................................................... 29
Quarterly Financials ......................................................................................................................... 30
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July 11, 2017 2

Company Report
July 11, 2017
Sonata Software
We initiate coverage on Sonata Software with a ‘BUY’ rating and a TP of Rs200/sh
Rating BUY (11.5x FY19E EPS). The IT services business (Revenues at US$122mn for FY17 and
Price Rs164 headcount of 3,350 employees) is on a transformational path with increased focus
Target Price Rs200 on IP and Platforms within its focused verticals (Travel, Retail, CPG). Over the past
Implied Upside 22.0% two years, Sonata has used both “Build and Buy” approach to develop IP and
Sensex 31,716 Platforms (Brick and Click, Retina, Rezopia, Halosys). Apart from own IP, Sonata
Nifty 9,771 enjoys expertise in delivering vertical specific solutions on third-party platforms
(Prices as on July 11, 2017) (Microsoft Dynamics AX, Hybris). Aided by this strategy, Sonata has seen strong
new client additions (10-15 accounts are scalable into large engagements),
especially within its focus verticals. IT services business of Sonata has grown at
18.5% CAGR (FY13-FY17). We expect IT services revenues to grow at 11.5% CAGR
Trading data
(FY17-FY19E) and reach revenues of US$150mn by FY19E. Traction in Digital, cross-
Market Cap. (Rs m) 17,236.4
selling and new logo wins are likely to aid growth. Valuations are reasonable (9.3x
Shares o/s (m) 105.1
FY19E EPS) and are at 35% discount to Mindtree. Steady revenue growth, robust
3M Avg. Daily value (Rs m) 43.6
balance sheet (net cash of Rs3.1bn, ~18% of Mcap) and superior dividend yield
(5.5% at CMP) are positives. We see favourable risk return. Initiate with ‘BUY’.
 IT Services business is the value driver: Though IT services business accounts for
Major shareholders 32% of total revenues, it contributed to 78% of PAT for FY17. This is led by
Promoters 32.36% higher EBITDA margins of the IT services business (Adjusted EBITDA margin at
Foreign 14.32% 17.4% as on FY17). Key focus verticals are Offshore Product engineering for
Domestic Inst. 1.57% Independent Software vendors (29% of IT services revenues), Travel with focus
Public & Other 51.75% on Tour operators (27% of IT services revenues) and Retail and CPG (26% of IT
services Revenues). Among service offerings, Sonata enjoys strong competence
in delivering solutions on Microsoft Dynamics, SAP Hybris. Key clients include
Stock Performance Microsoft, TUI Travel, Johnson and Johnson. We expect the IT services business
(%) 1M 6M 12M to grow at 11.5% CAGR (FY17-FY19E) aided by mining new accounts.
Absolute 2.3 (17.2) (4.3) Management has guided for an aspirational goal of US$200mn revenues for IT
Relative 0.9 (35.1) (21.2) services business by FY20 (which implies 18% CAGR).
Contd...4
How we differ from Consensus Key financials (Y/e March) 2016 2017 2018E 2019E
EPS (Rs) PL Cons. % Diff. Revenues (Rs m) 19,404 25,211 28,229 32,079
2018 15.4 16.2 -4.7 Growth (%) 15.4 29.9 12.0 13.6
2019 17.5 19.2 -8.8 EBITDA (Rs m) 1,919 1,923 2,207 2,520
PAT (Rs m) 1,586 1,538 1,622 1,840
EPS (Rs) 15.1 14.6 15.4 17.5
Growth (%) 137.3 (3.1) 5.5 13.4
Price Performance (RIC: SOFT.BO, BB: SSOF IN)
Net DPS (Rs) 9.0 9.0 9.3 10.5
(Rs)
250
Profitability & Valuation 2016 2017 2018E 2019E
200 EBITDA margin (%) 9.9 7.6 7.8 7.9
150 RoE (%) 35.3 31.3 30.3 31.3
RoCE (%) 29.2 24.3 24.5 26.5
100
EV / sales (x) 0.8 0.6 0.6 0.5
50
EV / EBITDA (x) 8.3 8.0 7.1 6.1
0 PE (x) 10.9 11.2 10.6 9.4
Jul-17
Jul-16
Sep-16
Jan-17
May-17
Nov-16
Mar-17
P / BV (x) 3.7 3.4 3.1 2.8

Net dividend yield (%) 5.5 5.5 5.7 6.4
Source: Bloomberg Source: Company Data; PL Research
Sonata Software
 Platformation strategy to enable client stickiness: In a bid to differentiate

within its focused verticals, Sonata has invested in developing IP and platforms.
This has enabled company maintain and consolidate its position within top
accounts as well as generate new logo wins. Top 10 clients contributed 70% to
total revenues as on Q4FY17. Company added 40 new logos wins over the past
two years and majority of the wins are in Retail & CPG and Travel vertical. Of
these, management indicated that ~10-15 clients can scale into larger
engagements. Sonata Software has also expanded senior management with new
additions over the past 18 months. This includes Mr Ranga Puranik, Mr Rajiv
Puri, Mr OmPrakash Subba Rao and Mr Tridip Saha who have joined Sonata
Software from various reputed organizations
(Persistent/Mindtree/Accenture/CSC respectively).
 Products business (Re-seller of Licenses) enjoys high ROCE: Apart from IT

services, Sonata is involved in reselling of Licenses of Microsoft/Oracle/SAP in
India through its wholly-owned subsidiary (Sonata Information Technology
Limited). This business accounts for 68% of the total revenues, but has thin
EBITDA margins (~3% for FY17). Hence, this segment contributed to the
remaining 22% of the consolidated PAT for FY17. Management indicated that
products business has a very low capital employed as well as a negative working
capital cycle. Consequently, Sonata generates a high ROCE (~26% for FY17) in
this business and hence continues operating in this segment. We expect this IT
Products business to grow at 13% CAGR (FY17-FY19E) and model a margin
expansion led by SITL’s focus on value-added services like Cloud, System
Integration and Security Solutions.
 Steady growth, Reasonable valuations: We expect Sonata Software

Consolidated Revenues/EBIDTA/APAT to grow at 12.8/14.2/12.2% CAGR (FY17-
FY19E). Valuations are reasonable with stock trading at 9.3x FY19E. Initiate
coverage with BUY and TP of Rs 200/sh (11.5x FY19E EPS).
July 11, 2017 4

Sonata Software
Niche competencies in select focused Verticals and Services
Key Investment thesis for the IT Services Business
The IT services business of Sonata Software has revenues of US$122mn for FY17. We
discuss the key sub segments of the IT services business which contributed to ~32%
of Sonata Services consolidated revenues and 78% of consolidated PAT for FY17.
Sonata Software focuses on three major industry verticals in the IT services business:
Offshore Product engineering for Independent Software vendors (OPD), Travel
vertical with focus on Tour operators, Retail & Consumer Packaged Goods. The
vertical mix of revenues of the IT services business is shown below.
Exhibit 1: Vertical mix of IT Services revenues as on Q4FY17 (%)
Others Offshore
18 Product
Engineering (ISV)
29
Retail/ CPG
26
Travel
27
Source: Company Data, PL Research
Exhibit 2: Vertical Mix of IT services revenues (%)

Verticals (%) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17
OPD ( ISV) 34 31 29 28 30 31 30 29
Travel 32 31 33 31 29 28 26 27
Retail & CPG 16 19 21 24 24 23 27 26
Others 18 19 17 17 17 17 17 18
July 11, 2017 5

Sonata Software
Exhibit 3: Key Focus areas within the verticals
OPD for Independent Software Vendors (~29% of total IT services

revenues)
Sonata has a strong footprint in Product engineering with marquee clients which
include leading global ISVs. Sonata’s services in offshore product Engineering spans
include Testing, Performance Engineering, Cloud Engineering, Mobile Engineering
and Analytics Integration. Sonata is seeing traction in enabling enterprise software
product companies to evolve into cloud-based SaaS & PaaS models. Apart from
Product Engineering, Sonata extends product support and professional services to
strategic partners. The OPD business has annual revenues of US$36.4mn and
delivered 0% CAGR over FY15-FY17. The slower growth was on account of ramp-
down of a European client (A midsized Accounting ERP software provider) owing to
Technology shift. Hence, the OPD vertical revenues declined by 9% YoY in FY16.
However, this unit has bounced back in FY17 delivering 11% USD revenue growth.
Exhibit 4: Select projects for the ISV Clients

Client Nature of Offerings
Strategic partnership with ISV product team to design solution, develop, customize, deploy it as
A Leading Supply Chain Solution company
part of releases, and provide maintenance support to customers across various releases
A Mobility Platform Vendor Strategic partnership spanning professional services and go-to-market
Exhibit 5: Offerings in Product Engineering
July 11, 2017 6

Sonata Software
Microsoft is the largest account in the OPD vertical and also happens to be the
second largest client of the company. Sonata has hired Mr Ranga Puranik effective
May 2016 as the Chief Growth Officer. In his earlier role, Mr Ranga Puranik was the
Head of Sales at Persistent Systems, a much larger midsized IT company focused on
Product Engineering for ISVs. We believe Mr Ranga Puranik addition can help Sonata
Software expand its footing in the OPD segment. Sonata Software has ~20 clients in
the OPD vertical and we believe that ramp-up of the next set of accounts is a key
growth driver. We model the OPD business revenues to grow at 9% CAGR over
FY17-FY19E predominantly driven by mining new accounts.
Travel vertical (~27% of Total Revenues): Focus on Tour Operators
In the Travel vertical, Sonata is predominantly focused on tour operators, corporate

travel and online travel companies. The largest client in Travel vertical is TUI UK
which is a large luxury tour operator based in Europe. TUI is the largest client of
Sonata Software as on FY17.We note that a large share of revenues from Travel
Vertical are from TUI account. Management indicated that relationship with TUI has
been for more than 10 years and Sonata has high stickiness with the account. Sonata
also has in-depth understanding of the core IT application landscape of the company.
Sonata also works within multiple departments in TUI with relationships at multiple
levels. Hence, Sonata does not see any major risk from vendor consolidation in this
account. Management indicated that it is currently focusing on diversifying its client
base in Travel vertical with focus on new client additions.
Exhibit 6: Select projects of Sonata in Travel vertical

Client Solution
Re-platforming the customer system which helped reduces operating costs. The project involved Reverse-engineered
A Leading European Travel
legacy mainframe customer system, identified and refined core functionalities, and moved to Cloud-based
Company
infrastructure for scalability and costs
Provided a Workforce management solution. Sonata provided solutions for crew-centric functions: Simple Search,
A Large Asian Airline
Crew Notes, Crew Profile & Advanced Crew Search, Crew Alerts & Trends, Return to Base, and Crew Tracking System
Sonata acquired Rezopia, a Cloud-based Platform focused on Travel vertical in

August 2014. The IP-based solution strengthened Sonata’s position in cloud-based
offerings for tour operators and online travel companies. Sonata has built on
additional features on the Rezopia platform and has substantially upgraded it over
the past three years. Rezopia platform has enabled expand Sonata client base in the
Travel vertical with key wins which includes a large Australian Rail Travel company as
well as multiple midsized tour operators. As on Q4FY17, Sonata Software has ~12
accounts within the Travel vertical and a majority of them are Tour and Luxury
operators.
Travel vertical revenues for FY17 came at US$33.4mn and have grown at 7% CAGR
over FY15-FY17 aiding new logo additions. Sonata offers a variety of solutions which
include Business Intelligence, Mobility Solutions, Omni-Channel Commerce, etc.
Sonata also has strong expertise in SAP Hybris competency for the Travel vertical.
We expect the Travel vertical revenues to grow at 9% CAGR over FY17-FY19E
predominantly driven by mining new accounts.
July 11, 2017 7

Sonata Software
Retail/CPG (Accounts for 26% of total revenues) : On a strong footing
Sonata has a strong presence in Retail vertical with specialization in Omni-Channel

Commerce, Mobility and Analytics. Sonata has a track record of powering Brick-and-
Click-led business transformation initiatives for some of the most well-known Retail
enterprises. Marquee clients in Retail and CPG include Johnson & Johnson, Pepsi,
etc. Sonata’s offerings to this vertical predominantly include providing customised
vertical specific solutions on ERP packages like Hybris, Microsoft Dynamics AX and
Oracle Apps. Retail/CPG vertical revenues came at US$30.3mn and delivered 40%
CAGR over FY15-FY17. The strong growth in this vertical was also driven by
acquisition of IBIS. Excluding IBIS acquisition, organic growth in the vertical was
19% CAGR over FY15-FY17. Sonata Software has ~35 clients in Retail and CPG
vertical as on 4QFY17. This vertical has seen the maximum new client additions
overs the past two years aided by Sonata’s competency in offering vertical specific
solutions in Microsoft Dynamics and SAP Hybris. Owing to traction in Sonata’s core
offerings, we expect this vertical revenue to grow at 18% CAGR over FY17-FY19E.
Exhibit 7: Case studies in Retail vertical
Digital enabablement for Fashion Retailer

...For a retailer who has multiple independently running legacy systems and non-
integrated IT environment. Sonata Digital commerce solution has seamlessly
integrated and extended back-end system, logistics and loyalty programs to
online channels. Sonata solution is providing superior customer experience &
optimized business operation resulting in more than 3000 orders everyday
Enabling mobile first strategy for a Health & Beauty Retailer in

record time
...For a leading Asian retailer with more than 1000 brick and mortar stores.
Sonata Digital commerce has defined & delivered a mobile first engagaement
and commerce solution comprising responsive mobile, web & mobile app for
android and I-phone devices. Sonata launched the solution in record time of 6
weeks significantly reducing the costs by up to 40%
e-Commerce solution for Emerging Online Retailer

Asia based emerging retailer having various systems and vendor systems.
Looking for a solution that can enhance order process and enrich customer
experience . Sonata provided accurate inventory solution to help in committing
correct delivery dates. Fulfilment cycle process time reduced to few minutes,
hence a big boost in the operational bottomline confidence.
July 11, 2017 8

Sonata Software
Investing in Platformation within the focused verticals
Sonata has focused on ‘Platformation’ and IP-led offering and has made substantial
investments on this front over the past two years. In the analyst meet held on May
31, 2017, Management classified its IP strategy in three buckets.
 Sonata-Ready: This is company’s own IP-based end-to-end solutions developed

by Sonata Software for its focused verticals (Brick and Click Platform for Retail
vertical, Retina for Retail vertical).
 Sonata Accelerate: Within this, company deploys and manages the platforms
from technology partners like Microsoft and SAP for customers and businesses.
 Sonata Custom: A completely custom-built solution based on either company’s

own platforms which customers can white label or source code the license and
build on top. (Client can take the base platform from Sonata and built custom
offerings on the top).
Sonata has boosted its Platformation’ journey over the past two years with both
organic initiatives as well as acquisitions. This acquisition done by Sonata on the IP
front include Halosys (enterprise mobility management platform), IBIS (supply chain
platform running on Dynamics AX solution) and Rezopia (cloud-based travel industry
software platform).
We discuss some of the IP-led Solutions:
Brick and Click Platform (An IP for Retail vertical): Brick & Click enables traditional
retailers to take the leap to the digital by getting the best of store & online retail on
one seamless platform.
Exhibit 8: Offerings of the Brick and Click Platform

Smart Multi-Channel
Superior Customer Experience Next Gen Technology
Operations
Connected Web, Mobile & Store Single view of customer, Seamless Digital- Omni-channel,
shopping- Search, buy, fulfil inventory & operations mobile, analytics, cloud-ready
Faster scalable deployment- Pre-
Personalization-Cross/up- Flexible fulfilment &
built cloud platform and
sell,Offers, Promotions, Loyalty delivery
components
Turnkey solution- customize,
Digital In store experience Supply chain efficiency
implement, support
Rezopia – IP led offering for Travel Vertical: Sonata acquired IP platform Rezopia, a
leading cloud-based travel ERP system provider in Aug 2014. Rezopia offers a
complete end-to-end reservation, contract management, operations and distribution
system. It enables travel providers to scale revenues, reduce costs and better serve
customers via the web, social networks, mobile devices and traditional call centres.
The focused segment for Rezopia Platform include Tour operators, Online travel
agencies offering dynamic packages, Travel suppliers such as rail, activity provider
and hotels.
July 11, 2017 9

Sonata Software
Exhibit 9: Functionalities of Rezopia Platform
 Halosys (An Enterprise Mobility Platform): Halosys provides a single Unified

Enterprise Mobile Enablement platform that enables businesses to build,
secure, manage and deploy an enterprise wide mobile applications portfolio.
 Management guided that IP-led offerings currently account to 14% of total

revenues as on FY17. However, Sonata indicated that while IP can help gain
inroads into accounts, Sonata further mines these accounts with additional
services. Company classifies the whole revenues from these accounts (wherein
Sonata made inroads with IP) as IP led revenues. We believe that this method
of classification has inflated the proportion of revenues from IP.
 In our view, IP led strategy would aid Sonata improve its positioning in focused
verticals and drive new wins. However, Sonata’s mettle would be tested in its
ability to mine the new accounts won over from IP led strategy by cross-selling
other service lines.
“We are saying we will do it by building Digital-ready platforms. The way to

approaching this is three ways – one is by keeping people our own IP led platforms;
two is deploy global lead popular platforms like Dynamics or Hybris or Power BI or
Cortana or Azure kind of stuff; and the third is to create world-class platforms.
There we are saying that the fact that today we have really Cloud products of our
own with the domain skills and running large critical businesses. We are able to
then add value and be able to create solutions for enterprises which are scalable
and which are Cloud-ready and which will help them what we call “Go the digital
way” through adoption of platform.” Sonata Software CEO in Concall.
July 11, 2017 10

Sonata Software
Niche Competencies in Key Service Lines
Sonata has strong competency in select technologies which include SAP hybrid
Omni-Channel Commerce, Microsoft Dynamics AX ERP, Microsoft Azure Cloud and
JDA supply chain. The company offers customisation, implementation as well as up-
gradation services to clients. Sonata‘s strength in these service offerings (Hybris,
Dynamics AX) is the key enabler for new account wins.
Exhibit 10: Areas of Competency within Verticals
Microsoft Dynamics AX: Sonata has strong relationship with Microsoft extending
over two decades. The company developed strong skills across Microsoft
technologies and has efficiently deployed them on customer engagements. Some of
Sonata’s key offerings on Microsoft stack include Enterprise Solutions on MS
Dynamics AX and CRM, Cloud solutions on Windows Azure and Office 365. Sonata's
capability to build solutions around Dynamics AX has made it a partner of choice for
many Fortune 500 ISVs and enterprises. Sonata has developed an array of solution
accelerators around Dynamics AX that help faster turnaround time and cost savings.
Hybris: Sonata has a dedicated team of consultants specialised in Hybris (E-

commerce and Omni-Channel Solution). Sonata offers customised solutions in
technologies such as Travel e-Commerce Framework on Hybris, Hybris B2B & B2C
accelerators etc. Apart from Hybris, Sonata has competency in SAP business All-in-
One implementation and is positioned as a key player in providing technology
services and solutions around SAP Mobility and SAP BI Stack.
July 11, 2017 11

Sonata Software
Exhibit 11: Service line mix of IT services revenues (%)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17
ADM 26 26 24 23 25 26 24 25
Test 19 19 18 18 15 16 17 17
AX 15 14 13 15 16 15 15 15
ERP 5 6 3 4 4 4 5 5
IMS 10 12 12 15 16 18 19 19
BI 6 7 9 9 9 9 9 8
E-commerce 9 9 10 9 7 6 6 6
Mobility 4 2 4 2 2 2 2 1
Cloud 3 3 5 4 6 3 4 4
Sonata indicated a strong traction in Digital Services which currently accounts for
31% of total revenues. Management guided that while projects tend be smaller in
size, it benefits from providing adjacent services like Integrating Digital with legacy
applications, etc.
“Yeah absolutely, I think, while digital is a great way to enter, there is obviously
there are a lot of scope for cross-selling other services and that's really the strategy
for us. It's not just enter through digital and stay digital, but then to see at least
get one or two service lines additional into an account and that's what we are
doing and then again actually we are investing a lot more on that in terms of more
dedicated kind of a client champion and how do we want to get in, what can we do
with these accounts, so that's something we are focusing on a lot more now this
quarter onwards” Mr Srikar Reddy in Q1FY16 concall.
July 11, 2017 12

Sonata Software
Focus remains on new logo wins
As with the case of small and midsized vendors, Sonata Software derives a higher
proportion of revenues from top 10 clients. As on Q4FY17, revenues from top 10
clients contributed 70% to the total revenues. Management indicated cross-selling
additional services to top 10 accounts to improve revenue stability. Revenues from
Top 10 accounts have grown at 9.4% CAGR over FY15-FY17. Key clients which are
within the Top 10 accounts are TUI, Microsoft, PennyMac etc.
Exhibit 12: % of revenues derived from top 10 clients for the IT services business
76 75
74 73 73
72 72 72
72 71
70 70 70 70
70
68 67
66
64
62
2QFY15
3QFY15
4QFY15
2QFY16
3QFY16
1QFY17
2QFY17
3QFY17
1QFY15
1QFY16
4QFY16
4QFY17
Sonata has seen a steady rise in number of accounts contributing to annual revenues
of US$1mn per year (21 accounts in Q4FY17). We believe that further client mining
initiatives in these accounts would be aiding incremental growth. Management
indicated of beefing client partners to focus on these key accounts.
Exhibit 13: Number of clients contributing to US$1mn per year
21.5 21 21 21 21 21
21
20.5 20 20 20
20
19.5 19 19
19
18.5 18 18
18
17.5
17
16.5
1QFY15
2QFY15
3QFY15
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
4QFY15
1QFY16
2QFY16
July 11, 2017 13

Sonata Software
Aided by expansion in the sales team, Sonata has seen strong new client addition as
well. Management guided that a majority of new client wins are led by Digital
Offering (80% of our new clients wins). Sonata’s competency in IP led solutions as
well as strengths in its focus areas (Microsoft Dynamicx and SAP Hybris) are also
driving new client wins. Over the past two years, company added over 40 new
clients. While new client additions might remain strong, Sonata might also see
attrition at the tail accounts as some of the new accounts won might be for project
specific work. Management guided that over 10-15 new accounts can scale into
larger engagements. We believe mining the new accounts is the key metric to watch
over FY18-FY20 as this would aid in lowering client concentration. Our interaction
with the management indicates that Sonata’s initiatives are also focused on the
same.
Led by its focus on Digital offerings for Exhibit 14: New account additions over the past few quarters
Travel & Retail clients, Sonata software has 12
seen steady new account wins over the 10
10
past few quarters 8 8
8 7
6 6 6
6 5
4
4 3
2
2 1
0
2QFY15
3QFY15
4QFY15
2QFY16
3QFY16
1QFY17
2QFY17
3QFY17
1QFY15
1QFY16
4QFY16
4QFY17
July 11, 2017 14

Sonata Software
Strong Hiring in Senior management to aid traction

Exhibit 15: IT Services revenues (USD mn) and YoY Growth (%)
Revenues Growth (%)
160.0 150.7 40.0%

140.0 29.5% 133.6
23.0% 121.4 30.0%
120.0 107.8
98.3 12.8% 20.0%
100.0
9.0% 79.9 12.6%
80.0 9.7% 10.0%
56.6 61.7
60.0 10.0% 0.0%
40.0
-10.2% -10.0%
20.0
0.0 -20.0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Mr Srikar Reddy has been the CEO of Sonata Software had seen major internal management restructuring in FY12 with Mr
Sonata Software for over six years. Most of Palem Srikar Reddy, a veteran in the company taking over as the CEO. Mr Srikar has
the turnaround in IT services business has been with Sonata since 1986, handling various functions during his tenure
been driven under his leadership (Operations, Delivery, and HR). His last role in the company was that of Chief
Operating Officer (COO) before taking over as CEO. Mr Srikar is an engineer from
REC, Tiruchirappalli, and post graduate in management from IIM, Calcutta.
Mr Srikar has undertaken various measures to revive the growth momentum.
 The first major restructuring on the operations front was the exit from TUI JV in
October 2012. For FY12, TUI JV contributed 31.5% to the company’s total
revenues. The JV had a lower EBITDA margin (~5% for FY12) owing to the higher
onsite effort and onsite costs. The JV was making losses at the net level in FY12.
Sonata Software’s exit from the JV has helped improve the overall profitability.
This was visible with the steep improvement in consolidated PAT in FY13.
However, TUI Travel continues to remain a large client for the company as of
date.
 Sonata ramped up its sales functions by hiring various senior resources with
strong credentials. Sonata has aggressively bolstered the front-end onsite Sales
team, Pre-Sales team and Hunters. We present some of the recent hires of
Sonata Software over the past 18 months.
July 11, 2017 15

Sonata Software
Exhibit 16: Recruits under Mr Srikar Reddy

Recruit Designation Earlier Experience Joining
Mr Om Prakash Subba Rao Head of Digital He was earlier with Accenture Feb- 2016
Mr Ranga Puranik Chief Growth Officer Head of Sales at Persistent Systems. May 2016
Mr Rajiv Puri Head of US Sales He was earlier with Mindtree in Sales Aug- 2016
Mr Tridip Saha Head of Europe Region He was earlier with CSC and Mindtree Dec- 2016
Sonata has also increased investments in participation in Industry conferences,

events to improve its positioning and Branding. The results are visible with the
company showing a strong acceleration in IT services business. Revenues from IT
services came in at US$122mn for FY17 and registered 18.4% CAGR (FY13-FY17).
Company has set an internal target to reach revenue of US$200mn by FY20. We
believe that this is an aspirational target as it requires 18% CAGR over FY17-FY20.
July 11, 2017 16

Sonata Software
Acquisitions aimed at improving IP competencies
Sonata’s acquisition strategy has been predominantly focused on building IP and

platforms. Over the past three years, the company has done three acquisitions and
all the acquisitions were centred on boosting IP competency. With a net cash of
Rs3.1bn as on 4QFY17, we see scope for Sonata to further pursue acquisitions
targeting companies with annual revenues of US$10-15mn with niche competencies.
Exhibit 17: Acquisitions done by Sonata

Acquisition Number of
Amount Paid Annual Revenue Rationale
period employees
Strengthens the Cloud 75
Rezopia ~US$2mn ~US$3.5mn Aug-14 based Platform
offering
US$5mn 20
(US$2mn is Strengthens the
Halosys < US$1mn Aug-15
fixed and Rest Mobility offerings
is earn out)
Strengthen Microsoft ~60
IBIS US$14mn US$12mn Oct-2015 Dynamics AX IP
offerings
Steady performance in Operating Metrics
Sonata Software has shown a solid turnaround in operating performance under the
leadership of Mr Srikar Reddy. We note that Sonata Software’s IT services segment
revenues have grown at 2.6% CQGR over the past eleven quarters. Considering the
low revenue base, we believe that Sonata has the potential to deliver accelerated
growth over FY18-FY20.
Exhibit 18: QoQ USD revenue growth of IT Services (%) Exhibit 19: IT Services EBIDTA Margins (Adjusted and reported)
8.0% 7.4% 6.8% Reoprted EBIDTA Margin Adjusted EBITDA Margins

6.0% 5.2% 5.4%
3.6% 4.0% 27.0%
4.0% 2.9% 2.5%
2.0% 1.3% 23.3%
22.0% 21.6%
0.0%0.4%
0.0% 21.7% 21.7%
17.0% 20.3% 18.4% 20.1% 18.7%
-2.0% 16.7%
18.0%
15.2% 17.4%
-4.0% -2.9% 12.0%
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
Source: Company Data, PL Research* Acquisitions aided growth in Source: Company Data, PL Research
3QFY16 and 4QFY16
July 11, 2017 17

Sonata Software
Exhibit 20: USD revenues of IT services business

Fig in USD mn FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Revenues 56.6 61.7 79.9 98.3 107.8 121.4 133.6 150.7
Growth (%) (10.2) 9.0 29.5 23.0 9.7 12.6 10.0 12.8
Adjusted EBITDA margin (%) NA NA 16.0 21.3 19.9 17.4 17.0 17.5
Sonata Software’s management has guided for an ambitious target of US$200mn in

revenues for IT services business by FY20. We believe that achieving this is an uphill
task at it requires 18% CAGR. However, we believe that company can comfortably
deliver 11-13% USD revenue growth over the next two- three years considering its
smaller revenue base and niche positioning.
We analyze the key competencies of Sonata which could aid revenue growth
 Traction in its Niche Services (Dynamics AX, Hybris): We see Sonata’s strong
position in these service offerings aiding client recall. With demand for Omni-
Channel Commerce in Travel and Retail verticals, Sonata could enjoy new
business opportunities in developing customised solutions on Dynamics and
Hybris.
 Mining the next set of accounts: Sonata has shown steady results in client
mining over the past eight quarters. Company currently has 21 accounts which
contribute to annual revenue of US$1m as of Q4FY17 (v/s 13 accounts in
Q1FY14). We note that company has strong potential for further account
mining.
 Further acceleration in S&M Investments: Management indicated of continued

expansion in Sales and Marketing efforts. Sonata has increased participation in
Marketing Events for Travel and Retail verticals over the past few quarters.
 IP-Led offerings and competencies in digital technologies: Sonata has invested

substantially in IP within its focused verticals both organically as well as
acquisitions. Management guided that Digital accounts for 31% of total
revenues and is seeing steady traction.
We estimate 11.5% USD revenue growth CAGR over FY17-19E as compared to 18.5%
CAGR (FY13-17). The IT Services business accounts to 32% of Sonata Software’s
revenues but contributes to 78% of PAT owing to higher EBITDA margins. We model
IT services adjusted EBIDTA margin at 17/17.4% for FY18/FY19E ( vs 17.4% for FY17).
July 11, 2017 18

Sonata Software
Product Business (Reseller): Focus on margin expansion
Sonata, through its subsidiary Sonata Information Technology (SITL) operates as a

value-added distributor for a broad range of software products and services. This
business accounts for 68% of total revenues, 27% of EBITDA and 22% of PAT for
FY17. SITL has been providing end-to-end services which include software licensing,
support, installation and implementation. Sonata has been in this business since
1986, and hence enjoys strong position in the domestic market. SITL offers services
to enterprises across verticals such as Manufacturing, Banking, Financial Services &
Insurances, Telecommunications, IT/ITES, Government, Retail and Hospitality.
Sonata increased focus on new technologies and products and has grown
substantially in the area of Cloud, Social and Analytics. Sonata has strategic
partnerships with leading technology providers which include Microsoft, SAP, Oracle
and Appcelerator. These relationships also serve as an advantage in accessing
emerging technology solutions for the company. Management indicated that despite
thin margins, the segment has a high RoCE of ~26% for FY17.
Sonata is able to garner a strong Exhibit 21: Major products distributed by Sonata Software
relationship with product companies like
Microsoft, IBM and Oracle owing to the
third party re-selling business. This helps
the company stay ahead on the technology
Exhibit 22: Domestic products business (Revenues and Margins)

Fig in Rs mn FY11 FY12 FY13 FY14 FY15 FY16 FY17
Revenues 6,020 7,940 9,780 10,850 10,930 12,501 17,342
Growth (%) 20.4 31.9 23.1 10.9 0.7 14.4 38.7
EBITDA 175 30 223 351* 413 584 584
EBITDA Margin (%) 2.9 0.4 2.3 3.2* 3.8* 4.7 3.4
Source: Company Data, PL Research * FY14 and FY15 EBITDA for Products business includes interest on Income tax of Rs68.3mn and Rs31mn,
respectively. If we exclude this, EBITDA margins for the IT products business would be 2.6% and 3.5% respectively.
July 11, 2017 19

Sonata Software
Sonata Software’s headcount in the products business stands at 153 employees. We

note that the products business has delivered growth of 17% CAGR (FY12-FY17).
EBITDA margins for this business are at ~3% for FY17. Going forward, management
believes that focus in this segment would remain margin expansion. Management
indicated that the business is strategic in nature despite lower margin profile.
Sonata has relationship with CIOs of over 1000 firms in India due to its presence in
this business. The business also complements the OPD business of the Sonata
Software. We note that large chunk of the IT products business is from Microsoft
Products and Microsoft is also the largest client for Sonata in the OPD segment.
Exhibit 23: Number of employees on the IT product business
160 156
155 153 153
150 147
145 142
140 140
140
135
130
130
125
120
115
1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17
We estimate the IT products business to grow at 13% CAGR over FY17-FY19E. We

also see scope for margin expansion in this business which would remain the key
focus of the management. We model EBITDA margin of the business at 3.5/3.5% for
FY18/FY19E (v/s 3% delivered in FY17).
July 11, 2017 20

Sonata Software
Growth and Margins fare well relative to Midcap peers

Exhibit 24: Organic USD revenue growth (%) of small and mid-sized IT vendors
Sonata Software Mindtree Hexaware NIIT Tech
35.0%
29.5%
30.0%
25.0% 23.0%
20.0%
15.1% 15.8% 13.2% 14.9%
15.0%
8.9% 9.0% 8.3%
10.0% 6.4% 6.0%
3.4% 4.5%
5.0% 1.5% 0.8%
0.0%
-5.0% FY14 FY15 -1.2% FY16 FY17
Source: Company Data, PL Research, Hexaware revenue growth is for CY13/CY14/CY15/CY16.

We have only mentioned the organic USD revenue growth of the companies.
Under the leadership of Mr Srikar Reddy, Sonata has delivered solid growth in FY14
and FY15 which is ahead of other midsized IT peers. However, Sonata has seen
slowdown in growth in FY16 owing to challenges in one of its large ISV client.
Hence, organic revenues for FY16 grew by a modest 6% YoY. Revenue growth
remained modest in FY17 as well with Sonata delivering ~9% organic USD Revenue
growth (~12% constant currency revenue growth) led by slowdown in Travel vertical.
We have modeled company to deliver 10/12.5% USD revenue growth in FY18/FY19
with mining of new accounts as the key driver for incremental growth.
Sonata enjoys steady EBITDA margin in the IT services business

Sonata’s Adjusted EBITDA margin for the IT services business is at ~17.4% for FY17
and is comparable with other mid-sized peers in the sector. We believe that Sonata
Software’s EBITDA margins could remain in a stable band over the next two years.
Exhibit 25: EBITDA Margins of mid-sized IT Vendors

22.4%
21.3%
24.0%
20.1%
19.9%
19.6%
22.0%
18.5%
17.8%
17.7%
17.6%
17.4%
17.4%
20.0%
17.0%
16.5%
18.0%
15.2%
14.6%
13.70%
16.0%
14.0%
12.0%
10.0%
FY14 FY15 FY16 FY17
Source: Company Data, PL Research * NIIT Tech reports hedge gains in Revenue line and hence
boosting its reported EBIDTA margin.
July 11, 2017 21

Sonata Software
Challenges: Subscale and high client concentration
Sonata’s IT services business is much smaller compared to other midsized IT vendors.

Hence, the company is subscale with competencies limited to niche offerings in
select verticals and service lines. Headcount of the company stands at ~3,350
employees as on FY17.
Exhibit 26: USD Revenues (mn) as of FY17 Exhibit 27: IT services headcount as on Q4FY17
900 18,000 16,470

780
800 16,000
700 600 14,000 12,734
600 12,000
500 411 10,000 8,853
400 8,000
300 6,000
3,366
200 121.4 4,000
100 2,000
0 -
Sonata Mindtree Hexaware NIIT Tech Sonata Mindtree Hexaware NIIT Tech
Software Software
Source: Company Data, PL Research* Hexaware revenues are for CY17E Source: Company Data, PL Research
High Client Concentration remains the biggest risk
Midsized IT vendors have a higher client concentration as compared to Tier 1 IT

vendors which derive 20-25% of their revenues from top 10 accounts. Among
Midsized IT vendors, Mindtree/Hexaware /NIIT Tech derive 45-55% of total revenues
from top 10 clients. Sonata being a smaller IT vendor has a much higher client
concentration with top 10 clients accounting to 70% of total revenues as on
Q4FY17.We believe high client concentration is the biggest risk for Sonata Software.
Exhibit 28: Revenue contribution from top 10 accounts
80%
70%
70%
60% 57%
50% 46%
42%
40%
30%
20%
10%
0%
July 11, 2017 22

Sonata Software
Financial Analysis
Revenue growth: Expect Consolidated Revenue Growth CAGR of 13% over FY17-FY19E
Exhibit 29: Summary of revenue and revenue growth for Sonata

Rs mn FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Services 2,250 2,986 2,800 3,353 4,835 6,068 7,068 8,153 8,816 9,944
Growth (%) (0.8) 32.7 (6.2) 19.8 44.2 25.5 16.5 15.4 8.1 12.8
Products 5,000 6,021 7,940 9,777 10,847 10,926 12,501 17,342 19,389 22,136
Growth (21.7) 20.4 31.9 23.1 10.9 0.7 14.4 38.7 11.8 14.2
TUI 6,680 5,039 4,948

Growth (9.4) (24.6) (1.8)
Total Revenues 13,930 14,046 15,688 13,130 15,682 16,994 19,569 25,495 28,205 32,079
Growth (13.0) 0.8 11.7 (16.3) 19.4 8.4 15.2 30.3 10.6 13.7
As a % of revenues
Services 16.2 21.3 17.8 25.5 30.8 35.7 36.1 32.0 31.3 31.0
Products 35.9 42.9 50.6 74.5 69.2 64.3 63.9 68.0 68.7 69.0
TUI 48.0 35.9 31.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Exit from TUI JV in FY12 was a strategic positive move: In FY06, Sonata Software
entered into JV with TUI by paying Euro18mn to buy 50.01% stake in TUI Info Tek.
TUI Info Tek was a subsidiary of TUI AG, a Germany-based Leisure Travel group. TUI
Info Tek provided IT services to the parent company as well as other clients in the
Travel sector. However, owing to the higher onsite effort, the JV’s performance has
been volatile on the revenue as well as margins. Sonata Software exited TUI Info Tek
JV in October 2012 by selling its 50.01% stake to TUI Travel PLC. Although the JV
contributed 31.5% to total revenues in FY12, it was making losses at the net level in
FY12. Sonata has taken a hit of Rs580mn which led to the company reporting an
overall loss in FY13.
Steady growth over FY17-FY19E: Post this exit, Sonata Software streamlined its
focus on International IT services which led to steady acceleration in the segment’s
growth. We expect IT services to continue contributing ~30-32% to the company’s
total revenues. We model revenues from IT services USD revenues to grow at 11.5%
CAGR over FY17-FY19E. Domestic IT products business currently accounts for the
lion’s share of revenues (~68% for FY17). We expect this division to show moderate
growth (13% CAGR over FY17-FY19E). Management guided that for the products
business, the focus would be on operating metrics like EBITDA margin, working
capital cycle and ROCE. We expect overall consolidated revenues to grow at 13%
CAGR over FY17-FY19E.
July 11, 2017 23

Sonata Software
EBITDA margin expected to remain stable over FY17-FY19E
Sonata’s adjusted EBITDA Margin for IT Exhibit 30: IT Services EBITDA Margins (Reported and Adjusted)
service segment is ~17.5% for FY17. This is
Reoprted EBIDTA Margin Adjusted EBITDA Margins
in line with select Midcap vendors
26.5%
26.9%
25.5%
26.3%
29.0%
25.4%
24.4%
24.2%
23.9%
23.3%
27.0%
23.2%
23.3%
22.5%
21.8%
21.7%
21.6%
21.7%
25.0%
20.3%
20.1%
23.0%
18.7%
18.0%
18.4%
17.4%
21.0%
16.7%
19.0%
15.2%
17.0%
15.0%
13.0%
1QFY15
3QFY15
4QFY15
1QFY16
2QFY16
4QFY16
1QFY17
2QFY17
3QFY17
2QFY15
3QFY16
4QFY17
IT services:. Though reported EBITDA margins stand at ~22.7% for the IT services
business, we note that adjusted EBITDA margin stands at 17.4% for FY17. The higher
reported segmental EBITDA margin for IT services is owing to company reporting
interest income and Forex gains from hedging in the IT Services segmental margin.
Domestic products: Due to the trading nature of this business, Sonata has muted
EBITDA margins in the products business. As of FY17, the domestic products business
has ~3.5% EBITDA margin. Management guided that focus would remain on gradual
margin expansion in this business as well. This would be driven by focussing on new
technologies like cloud, security offerings etc.
Exhibit 31: EBITDA margins of Sonata Software

Adjusted EBITDA ( Rs mn) FY14 FY15 FY16 FY17 FY18E FY19E
IT Services 773 1,294 1,406 1,415 1,491 1,697
IT Products 280 383 547 517 679 775
Total Adjusted EBITDA 1,053 1,677 1,954 1,931 2,170 2,471
Adjusted IT services EBITDA margin (%) 16.0% 21.3% 19.9% 17.4% 17.0% 17.5%
Adjusted IT products EBITDA margin (%) 2.6% 3.5% 4.4% 3.0% 3.5% 3.5%
Overall EBITDA margin (%) 6.7% 9.9% 10.0% 7.6% 7.7% 7.7%

We expect consolidated EBIDTA margin to remain in a narrow band and model
overall consolidated EBIDTA margin at 7.7/7.7% for FY18/FY19E ( vs 7.6% in FY17)
July 11, 2017 24

Sonata Software
Steady FCF generation aids strong payout ratios
Sonata Software’s cash flow generation remained volatile owing to fluctuations in

working capital cycle as well as capital expenditure. The company had negative free
cash flow in FY12 due to higher capital expenditure. Over the past few years, the
company has shifted to a leased model which has substantially reduced the capital
expenditure. Hence, company has shown steady improvement in free cash flow
trajectory over the past few years.
Exhibit 32: Consolidated Cash Flow

Fig in Rs mn FY12 FY13 FY14 FY15 FY16 FY17P FY18E FY19E
Operating Cash Flow 374 458 1269 768 1581 1479 848 1457
Capex 681.4 19 39 59 144 250 150 200
Acquisition 82 704
Capex+ Acquisitions 681.4 19.3 39.4 140.1 848 250 150 200
FCF (307) 439 1,229 627 733 1,229 698 1,257
FCF/EBITDA -63.2% 82.3% 117.9% 37.4% 37.5% 63.6% 32.0% 49.9%
Net Cash on Balance sheet 799 1405 2387 2375 1600 2131 1946 2189
Net cash per share 7.6 13.4 22.7 22.6 15.2 20.3 18.5 20.8
Net cash per share as a % of Mcap 5.1% 8.9% 15.1% 15.1% 10.1% 13.5% 12.3% 13.9%
ROE(%) 6.5% 8.4% 19.7% 32.5% 34.5% 31.3% 30.3% 31.3%
Sonata Software has delivered a steady dividend payout ratio over the past six years.
For FY17, the company paid a total dividend of Rs9/sh (5.5% dividend yield).
Management guided for intent to maintain the pay-out ratio at ~50% of profits. The
company has a strong cash position, with net cash of Rs3.1bn on the balance sheet
as on Q4FY17. Debtor days remain moderate which is another key positive. Aided by
improvement in margins as well as strong dividend payout ratio, Sonata Software
has shown steady expansion in RoE, which is a key positive.
July 11, 2017 25

Sonata Software
Exhibit 33: DPS of Sonata (Rs) Exhibit 34: Dividend payout ratio (%) ( Excluding dividend tax)
12.0 64.0%
10.5
10.0 9.0 9.0 9.3 62.0% 61.3% 61.0% 61.5%
60.0% 60.0%
60.0%
8.0 7.0
58.0% 56.4%
6.0 55.9%
3.7 56.0%
4.0
54.0%
1.8
2.0 0.8 52.0%
0.0 50.0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Source: Company Data, PL Research Source: Company Data, PL Research
Exhibit 35: Debtor days

DSO 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17
International Services 71 59 56 61 55 58 52 55 60 60 48 53
Domestic Products 40 85 82 79 76 101 65 62 59 102 90 73
Total Debtor Days 51 76 74 72 70 84 61 60 60 85 77 68
July 11, 2017 26

Sonata Software
Valuation and View
Sonata Software IT services revenues came in at US$122m for FY17, delivering 18.4%
CAGR (FY13-17). We expect IT services revenues to grow at 11.5% CAGR (FY17-19E),
aided by strong traction in emerging services (Digital) as well as steady new account
wins. Owing to strong growth trajectory, steady margin and dividend, Sonata
Software can trade a respectable P/E multiples.
We study the possible target price scenarios based on sum of the parts valuation.
We assign higher P/E to the IT services earnings (11.5x FY19E EPS) and a relatively
lower P/E (7.5x FY19 EPS) to the IT products business due to the trading nature of
business and lower margins. The sum of parts yields a target price of Rs190/sh.
Exhibit 36: Sum of part valuation for Sonata (P/E multiple)

Sum of the parts FY19E Target multiple Value
IT services PAT 1,472
IT Services EPS 14.0 11.5 161.0
IT Products ( Reseller) PAT 368

IT products EPS 3.5 8.0 28
Total Target Price 190

We have also done an EV/EBITDA-based valuation for each business (services and
products) separately. We have assigned 7.5x EV/EBITDA for the IT services business
and 5x EV/EBITDA for the IT products business. The sum of parts results in an implied
target price of Rs185/sh.
Exhibit 37: Sum of part valuation for Sonata (EV/EBITDA)

Sum of the parts ( EV/EBITDA) FY19E Target Multiple Value
IT Services Adjusted EBITDA 1,746 7.5 13,092

IT products EBITDA 775 5.5 4,261
Implied EV 17,353
Net Cash as on FY19E 2,131
Implied Mcap 19,484

Target Price 185
July 11, 2017 27

Sonata Software
Sonata Software currently trades at 9.3x FY19E EPS. Superior dividend yield (5.5% at
CMP), Net cash of Rs 3.1bn on balance sheet (18% of Mcap), superior return ratios
(~31% for FY17) and moderate valuations lead us to initiate coverage with a ‘BUY’
with a target price of Rs200/sh (11.5x FY19E EPS).
Exhibit 38: Sonata Software’s one-year forward P/E Exhibit 39: Sonata v/s Mindtree (Discount/premium)
18 0.0%
15 -10.0%
12 -20.0%
9 -30.0%
6 -40.0%
3 -50.0%
0 -60.0%
-70.0%
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Nov-13
Nov-14
Nov-15
Nov-16
Mar-14
Mar-15
Mar-16
Mar-17
-80.0%
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Nov-13
Nov-14
Nov-15
Nov-16
Mar-14
Mar-15
Mar-16
Mar-17
P/E Mean
Mean + Std Dev Mean - Std Dev
Source: Company Data, PL Research Source: Company Data, PL Research
July 11, 2017 28

Sonata Software
Company Background
Sonata Software is a global IT services company headquartered in Bengaluru, with

presence across major markets (US, UK, Europe, APAC and Middle East). The
company operates in two major business units: International IT Services and
Domestic Products. Within International IT Services (Contributes to ~32/73/79% of
Revenues/EBIDTA/PAT for FY17), the company caters to Travel, Retail, CPG and
Product Engineering services. Sonata’s offerings span across service lines, which
include consulting, application development, testing, maintenance and
infrastructure support. Sonata, through its subsidiary, resells software products in
India. The major software products sold by the company include Microsoft, SAP,
Oracle, Abode, IBM, HP and TIBCO. This Products business accounts for 68/27/21%
of the revenues/EBIDTA/PAT. The company is co-promoted by Raheja Group, which
owns 29% stake. The company is currently headed by Mr Palem Srikar Reddy who
took over as the CEO in February 2012.
Exhibit 40: Board of Directors

Mr Pradip Shah is a non-executive Independent Director and Chairman of
Sonata. He assisted in founding HDFC in 1977 and was the founder
Chairman Managing Director of CRISIL, India’s first and largest credit rating agency.
He is also Director in BASF India Ltd., Godrej & Boyce Mfg. Ltd., Hardy Oil &
Gas Ltd. [U.K.], Kansai Nerolac Paints Ltd., Pfizer Ltd.
Mr Srikar Reddy is the MD and CEO and a Member of the Board of
Managing
Directors of Sonata Software. Srikar has an Engineering degree from REC,
Director and CEO
Tiruchirappalli and is a Post Graduate in Management from IIM Kolkata.
S. N. Talwar is a Director of Sonata. He is Director/Alternate Director of the
following public limited companies: Biocon Ltd., Blue Star Infotech Ltd.,
Director Elantas Beck India Ltd., FCI OEN Connectors Ltd., Merck Ltd., Shrenuj & Co
Ltd., Samson Maritime Ltd.He is Chairman of the Audit Committee of FCI
OEN Connectors Ltd., Merck Ltd. and Sandvik Asia Private Ltd.
Mr Brijendra Syngal is a Director of Sonata. He also sits on the Board and
Director
Committees of several listed and unlisted companies in the ICT sector.
Mr S.B. Ghia is a non-executive Promoter Director of Sonata Software. He
Non-Executive is an industrialist with interests in a variety of fields including Chemicals
Director and Consumer Food products. He is also Director in the following public
companies: Alkyl Amines Chemicals Ltd., AVT Natural Products Ltd.
Mr Viren Raheja is a non-executive Promoter Director of Sonata. He is
Non-Executive Director/Alternate Director of several companies: Asianet Satellite
promoter director Communications Ltd., Innovassynth Technologies (India) Ltd., Hathway
Cable & Datacom Ltd. and Supreme Petrochem Ltd. etc.
Non-Executive Mr Radhika Rajan is a Non-Executive Independent Director of Sonata
Independent Software. She is the Executive Vice President, DSP Investments and heads
director DSP Investments.
July 11, 2017 29

Sonata Software
Quarterly Financials
Exhibit 41: Headcount details

Headcount 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17
IT Services 2,575 2,746 2,837 2,896 2,889 2,908 3,139 3,111 3,144 3,147 3,161 3,213
Products 111 110 114 122 130 142 140 140 147 156 153 153
Total 2,686 2,856 2,951 3,018 3,019 3,050 3,279 3,251 3,291 3,303 3,314 3,366
Exhibit 42: Geography Mix by revenues (%)

Geographical Mix (%) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17
USA 53 56 55 52 51 55 56 60 61 59 60 60
Europe incl UK 35 35 31 34 34 31 31 26 26 26 24 24
ROW 11 9 15 14 15 14 13 14 13 15 15 16
Exhibit 43: Revenues by Delivery centers (%)

Delivery Mix (%) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17
Onsite 34 38 42 43 42 45 40 43
Offshore 66 62 58 57 58 55 60 57
July 11, 2017 30

Sonata Software
Exhibit 44: Consolidated Financial model of Sonata Software

FY14 FY15 FY16 FY17P FY18E FY19E
USD revenues of IT services (USD mn) 79.9 98.3 107.8 121.4 133.6 150.7
Growth (%) 29.5% 23.0% 9.7% 12.6% 10.0% 12.8%
Average Rate (USD vs INR) 60.5 61.7 65.6 67.2 66.0 66.0
IT services Revenues (Rs mn) 4835 6068 7067.8 8153 8816 9944
Growth (%) 44.2% 25.5% 16.5% 15.4% 8.1% 12.8%
IT Products Revenues (Rs mn) 10847 10926 12501 17342 19389 22136
Growth (%) 10.9% 0.7% 14.4% 38.7% 11.8% 14.2%
Consolidated Revenues (Rs mn) 15,659 16,821 19,404 25,211 28,229 32,079
Growth (%) 19.4% 7.4% 15.4% 29.9% 12.0% 13.6%
Mix of Revenues ( As a % of Revenues)

IT Services 31% 36% 36% 32% 31% 31%
Products (Reseller of Licenses) 69% 65% 64% 69% 69% 69%
EBITDA (Rs mn)
IT Services 773 1294 1406 1415 1505 1746
IT Products 280 383 547 517 679 775
Total Adjusted EBITDA 1053 1677 1954 1931 2183 2520
Adjusted IT services EBITDA margin (%) 16.0% 21.3% 19.9% 17.4% 17.1% 17.6%
Adjusted IT products EBITDA margin (%) 2.6% 3.5% 4.4% 3.0% 3.5% 3.5%
EBITDA margin 6.7% 10.0% 9.9% 7.6% 7.8% 7.9%
PAT (Rs mn) 777 1337 1586 1537 1621 1839
APAT (Rs mn) 706 1305 1549 1460 1621 1839
Adjusted EPS 6.7 12.4 14.7 13.9 15.4 17.5
Growth (%) 135.3% 84.9% 18.7% -5.8% 11.0% 13.4%
P/E 24.0 13.0 11.3 11.1 10.5 9.3
DPS 3.7 7.0 9.0 9.0 9.3 10.5
Dividend Payout Ratio 55.8% 56.4% 62.5% 64.7% 60.0% 60.0%
Dividend Yield (%) 2.5% 4.3% 5.6% 5.6% 5.7% 6.5%
ROE (%) 19.7% 32.5% 34.5% 31.3% 30.3% 31.3%
Consolidated Balance sheet (Rs mn)
Net cash on Balance sheet 2387 2375 1600 2131 1946 2189
Net Cash per Share 22.7 22.6 15.2 20.3 18.5 20.8
Net Cash per share/Mcap 15.1% 15.1% 10.1% 13.5% 12.3% 13.9%
Consolidated cash flows (Rs mn)

Cash Flow from Operations 1269 768 1581 1479 848 1457
Capex+ Acquisition 39 140 848 250 150 200
FCF 1229 627 733 1229 698 1257
FCF/EBITDA 117.9% 37.4% 38.2% 63.9% 31.6% 49.9%
Headcount 2445 3018 3251 3366 3666 3966
July 11, 2017 31

Sonata Software
Income Statement (Rs m) Balance Sheet Abstract (Rs m)

Y/e March 2016 2017 2018E 2019E Y/e March 2016 2017 2018E 2019E
Net Revenue 19,404 25,211 28,229 32,079 Shareholder's Funds 4,710 5,113 5,596 6,144
Software Dev. Exp. 11,600 16,477 18,152 20,256 Total Debt 1,712 1,312 1,112 912
Gross Profit 7,805 8,734 10,077 11,823 Other Liabilities 161 161 161 161
Employee Cost 4,097 4,555 5,540 6,416 Total Liabilities 6,583 6,586 6,869 7,217
Other Expenses 1,788 2,256 2,330 2,887 Net Fixed Assets 291 448 485 557
EBITDA 1,919 1,923 2,207 2,520 Goodwill 910 910 910 910
Depr. & Amortization 62 93 113 128 Investments 522 522 522 522
Net Interest (231) (201) (236) (236) Net Current Assets 4,722 4,568 4,814 5,090
Other Income 420 403 300 280 Cash & Equivalents 2,951 3,081 2,697 2,739
Profit before Tax 2,216 2,143 2,350 2,628 Other Current Assets 5,103 5,973 6,964 7,818
Total Tax 666 682 729 788 Current Liabilities 3,332 4,487 4,847 5,467
Profit after Tax 1,549 1,461 1,622 1,840 Other Assets 138 138 138 138
Ex-Od items / Min. Int. 37 77 — — Total Assets 6,583 6,586 6,869 7,217
Adj. PAT 1,586 1,538 1,622 1,840
Avg. Shares O/S (m) 105.1 105.1 105.1 105.1
EPS (Rs.) 15.1 14.6 15.4 17.5
Cash Flow Abstract (Rs m) Quarterly Financials (Rs m)

Y/e March 2016 2017 2018E 2019E Y/e March Q1FY17 Q2FY17 Q3FY17 Q4FY17
C/F from Operations 1,581 1,479 848 1,457 Net Revenue 6,778 5,224 6,126 7,083
C/F from Investing (1,319) (100) 50 20 EBITDA 439 506 536 441
C/F from Financing (297) (1,325) (1,282) (1,435) % of revenue 6.5 9.7 8.7 6.2
Inc. / Dec. in Cash (35) 54 (384) 42 Depr. & Amortization 20 22 23 29
Net Interest 42 13 24 11
Other Income 125 83 86 110
Profit before Tax 501 555 575 511
Total Tax 154 176 189 163
Profit after Tax 368 379 387 405
Adj. PAT 368 379 387 405
Source: Company Data, PL Research.
Key Financial Metrics
Y/e March 2016 2017 2018E 2019E
Growth
Revenue (%) 15.4 29.9 12.0 13.6
EBITDA (%) 14.5 0.2 14.8 14.2
PAT (%) 18.6 (3.1) 5.5 13.4
EPS (%) 137.3 (3.1) 5.5 13.4
Profitability
EBITDA Margin (%) 9.9 7.6 7.8 7.9
PAT Margin (%) 8.2 6.1 5.7 5.7
RoCE (%) 29.2 24.3 24.5 26.5
RoE (%) 35.3 31.3 30.3 31.3
Balance Sheet
Net Debt : Equity (0.3) (0.3) (0.3) (0.3)
Valuation
PER (x) 10.9 11.2 10.6 9.4
P / B (x) 3.7 3.4 3.1 2.8
EV / EBITDA (x) 8.3 8.0 7.1 6.1
EV / Sales (x) 0.8 0.6 0.6 0.5
Earnings Quality
Eff. Tax Rate 30.1 31.8 31.0 30.0
Other Inc / PBT 18.9 18.8 12.8 10.7
Source: Company Data, PL Research.
July 11, 2017 32

Sonata Software
Notes:
July 11, 2017 33

Sonata Software
Notes:
July 11, 2017 34

Sonata Software
Notes:
July 11, 2017 35

Sonata Software
Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage PL’s Recommendation Nomenclature
50% BUY : Over 15% Outperformance to Sensex over 12-months

44.3%
37.7% Accumulate : Outperformance to Sensex over 12-months
40%
% of Total Coverage
Reduce : Underperformance to Sensex over 12-months

30% Sell : Over 15% underperformance to Sensex over 12-months
18.0%
20% Trading Buy : Over 10% absolute upside in 1-month
10% Trading Sell : Over 10% absolute decline in 1-month

0.0% Not Rated (NR) : No specific call on the stock
0%
BUY Accumulate Reduce Sell Under Review (UR) : Rating likely to change shortly
DISCLAIMER/DISCLOSURES
ANALYST CERTIFICATION
We/I, Mr. Madhu Babu, BTech & PG MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the
subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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Company Report

Industry: Information Technology

Madhu Babu (madhubabu@plindia.com)

July 11, 2017 2

P / BV (x) 3.7 3.4 3.1 2.8

 Platformation strategy to enable client stickiness: In a bid to differentiate

 Products business (Re-seller of Licenses) enjoys high ROCE: Apart from IT

 Steady growth, Reasonable valuations: We expect Sonata Software

July 11, 2017 4

Niche competencies in select focused Verticals and Services

Key Investment thesis for the IT Services Business

Exhibit 1: Vertical mix of IT Services revenues as on Q4FY17 (%)

Source: Company Data, PL Research

Exhibit 2: Vertical Mix of IT services revenues (%)

Source: Company Data, PL Research

July 11, 2017 5

Exhibit 3: Key Focus areas within the verticals

Source: Company Data, PL Research

OPD for Independent Software Vendors (~29% of total IT services

Exhibit 4: Select projects for the ISV Clients

Source: Company Data, PL Research

Exhibit 5: Offerings in Product Engineering

Source: Company Data, PL Research

July 11, 2017 6

Travel vertical (~27% of Total Revenues): Focus on Tour Operators

In the Travel vertical, Sonata is predominantly focused on tour operators, corporate

Exhibit 6: Select projects of Sonata in Travel vertical

Sonata acquired Rezopia, a Cloud-based Platform focused on Travel vertical in

July 11, 2017 7

Retail/CPG (Accounts for 26% of total revenues) : On a strong footing

Sonata has a strong presence in Retail vertical with specialization in Omni-Channel

Exhibit 7: Case studies in Retail vertical

Digital enabablement for Fashion Retailer

Enabling mobile first strategy for a Health & Beauty Retailer in

e-Commerce solution for Emerging Online Retailer

Source: Company Data, PL Research

July 11, 2017 8

Investing in Platformation within the focused verticals

 Sonata-Ready: This is company’s own IP-based end-to-end solutions developed

 Sonata Custom: A completely custom-built solution based on either company’s

We discuss some of the IP-led Solutions:

Exhibit 8: Offerings of the Brick and Click Platform

July 11, 2017 9

Exhibit 9: Functionalities of Rezopia Platform

Source: Company Data, PL Research

 Halosys (An Enterprise Mobility Platform): Halosys provides a single Unified

 Management guided that IP-led offerings currently account to 14% of total

“We are saying we will do it by building Digital-ready platforms. The way to

July 11, 2017 10

Niche Competencies in Key Service Lines

Exhibit 10: Areas of Competency within Verticals

Source: Company Data, PL Research

Hybris: Sonata has a dedicated team of consultants specialised in Hybris (E-

July 11, 2017 11

Exhibit 11: Service line mix of IT services revenues (%)

Source: Company Data, PL Research

July 11, 2017 12

Focus remains on new logo wins

Exhibit 13: Number of clients contributing to US$1mn per year

Source: Company Data, PL Research

July 11, 2017 13

July 11, 2017 14

Strong Hiring in Senior management to aid traction

Revenues Growth (%)