Sonata Software A Turnaround Story

FY25Q1 concal Summary:

• Aims to achieve $1.5 billion in revenue by the end of FY ’26 for its international business, with an EBITDA margin in the low 20s.
• 3 new big deals: Healthcare company in US (a 7 year deal), Manufacturing in Australia, BFSI in US. The Healthcare deal requires some initial investments in AI, which will lead to some short term margin impact. It’s onsite right now and will be taken offshore in a few quarters.
• Sonata’s pipeline in cloud and data now represents 52% of the total pipeline, compared to 15% two years ago. The book-to-bill ratio stood at 1.24 for the International Services business, indicates a healthy demand.
• Sonata now has 21 clients with an annual revenue run rate exceeding $3 million, compared to 16 last year.
• There are 4 verticals in which Sonata is: Healthcare and Life Sciences, Banking, Financial Services, and Insurance (BFSI), Retail, Manufacturing and Hi-tech TMT (Technology, Media, and Telecom).
  Tailwinds in Healthcare and Life sciences while headwinds due to delays in deal decision-making and slow project completion in the UK, Europe and retail manufacturing. Also, the new Healthcare deal will be dilutive for the first two to three quarter and get profitability at the end of the fiscal year.
• There was impact on Profitability due to: Forex losses, change in taxation due to SEZ moving into the second 5-year bracket and investments in AI for the new client.
• The declines in ROCE and RONW is due to increase in borrowing from $43 million to $75 million.
• The guidance for $0.5 billion to $1.5 billion target was that it will be delayed by 2-4 quarters. Healthcare will be bouncing back sooner while BFSI is taking time.
• Earlier, large deals were closed in 1-2 quarters, but now this timeline has extended to 3-3.5 quarters due to decision delays (industry headwinds).
• The Domestic business model is volume-driven with inherently low margins, to measure this business the better metric to use is absolute gross contribution rather than percentage margins.
• Revenue wise H2 will be better than H1 however there will be margin pressure because of the deal.
• High Tech, BFS, Healthcare verticals are key growth verticals, while retail (consumer-facing retailers) will remain soft for the next 2-3 quarters.
• Some headwinds in Q2 & Q3 due to salary hikes, also, the healthcare deal is slightly margin dilutive compared to the company’s average margin, but it is not loss-making.
• There are green shoots in BFS largely due to increase in discretionary spending. Also, Quant which was one of their acquisition is seasonal in nature (Q4 being softer).
• The repayment of the loan for the acquisition of Quant has been delayed due to a procedural issue with the RBI. This issue is still ongoing and may take a couple of more quarters to resolve.

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