Stock @ ₹434 | P/E 28.6x | ROE 27.3% | FY25 PAT ₹425 Cr
1. 🧠 At a Glance
Sonata Software is an IT services company with a stronghold in the US and Europe. Known for its Platformation™ framework and profitable past, Sonata went on a shopping spree (Quant Systems, Encore), layered in every AI partnership possible, and watched its margins fall from 10% to 7%. Still, it maintains strong ROEs and a tidy dividend — because old habits die hard.
2. 🎬 Introduction with Hook
This isn’t Sonata from your nani’s portfolio anymore.
Post-Quant Systems acquisition, it’s now a “transformed, AI-first, outcome-led digital company.”
But here’s the punchline:
💸 Margins are falling
🧮 Profits are flat
🏗️ Capex & office size are rising
🤖 AI press releases = 10x revenue growth? Hmm.
3. 💼 WTF Do They Even Do? (Business Model)
Sonata plays the midcap IT game like a seasoned operator:
- Services portfolio: Digital engineering, data & AI, cloud, managed services
- Products & Platforms: Focused on travel, retail, distribution, and manufacturing
- Differentiator: Platformation™ — fancy word for reusable modular IT stack
- Key Clients: US TMT company ($73M contract), Fortune 50 tech, Fortune 500 manufacturing co.
Throw in Qualtrics, AWS GenAI competency, and the newly launched “AgentBridge” for agentic workflows — and they’ve now entered ChatGPT mode.
4. 📊 Financials Overview – Profit, Margins, ROE, Growth
| Metric | FY23 | FY24 | FY25 | Trend |
|---|---|---|---|---|
| Revenue | ₹7,449 Cr | ₹8,613 Cr | ₹10,157 Cr | Solid growth |
| Net Profit | ₹452 Cr | ₹308 Cr | ₹425 Cr | Yo-yo |
| EBITDA Margin | 8% → 7% | Shrinking | ||
| ROE | 27% | Still good | ||
| 5Y Sales CAGR | 22% | 5Y PAT CAGR | 9% |
⚠️ Operating profit up only 14% despite 36% revenue jump. Why? Margin drop due to integration & infra build-out.
5. 🔍 Valuation – Is It Cheap, Meh, or Crack?
- P/E: 28.6x
- P/B: 7.13x
- EV/EBITDA: ~16x
- PEG: ~3 (Not a value bet)
- Dividend Yield: 1.0%
For a 7% OPM business, it’s not screaming undervaluation.
🎯 Fair Value Range (FY26E EPS ₹16–18):
- Bear Case (P/E 20x): ₹320–₹360
- Base Case (P/E 26x): ₹430–₹470
- Bull Case (P/E 32x): ₹510–₹575
Market’s already pricing in a clean FY26 turnaround — so tread carefully.
6. 🍿 What’s Cooking – News, Triggers, Drama
- 🧠 AI overload: AgentBridge, IntellQA, AWS GenAI competency, IISc AI research tie-up
- 💼 Quant Systems acquisition: $65M deal, now with performance-linked earnouts
- 🏢 New 200,000 sq ft Hyderabad facility — 5,000 hires in 3-5 years
- ⚠️ Q4FY25 alert: Revenue from largest client declined
- ✨ New deals: $73M TMT contract, Australia modernization deal, Fortune 500 managed services
Will AI translate into ARR? That’s the ₹12,000 Cr question.
7. 📉 Balance Sheet – How Much Debt, How Many Dreams?
| Item | FY23 | FY24 | FY25 |
|---|---|---|---|
| Equity | ₹28 Cr | ₹28 Cr | ₹28 Cr |
| Reserves | ₹1,379 Cr | ₹1,678 Cr | 🆙 |
| Borrowings | ₹765 Cr | ₹516 Cr | Reduced ✅ |
| Total Liabilities | ₹5,061 Cr | ₹4,670 Cr | Leaner |
| Fixed Assets | ₹1,671 Cr | ₹1,603 Cr | Hyderabad infra adds up |
⚙️ Still clean, despite M&A. Cash flows strong enough to cover interest, dividend, and some expansion.
8. 💵 Cash Flow – Sab Number Game Hai
| Metric | FY24 | FY25 |
|---|---|---|
| CFO | ₹281 Cr | ₹644 Cr |
| Capex | ₹53 Cr | ₹437 Cr |
| FCF | ₹200 Cr est. | |
| Financing CF | -₹108 Cr | -₹433 Cr |
🤑 Healthy free cash flow generation despite heavy investments.
9. 📐 Ratios – Sexy or Stressy?
| Ratio | Value | Comment |
|---|---|---|
| ROE | 27.3% | Still elite |
| ROCE | 29.1% | Efficient |
| OPM | 7% | Worrying |
| D/E | <0.2 | Safe |
| Working Capital Days | -13 | Efficient ops |
| Dividend Payout | 29% | Conservative this year |
The biggest red flag: declining OPMs in a rising topline environment.
10. 🧾 P&L Breakdown – Show Me the Money
FY25 Revenue: ₹10,157 Cr
- Sonata Software standalone: ~₹3,500 Cr
- Quant + US subsidiaries: ₹6,500 Cr est
- Key segment: BFSI, Retail, Manufacturing
- FY25 PAT: ₹425 Cr
- FY25 EPS: ₹15.14
➡️ Large part of EPS growth from stabilization post Quant integration.
11. 🥊 Peer Comparison – Who Else in the Game?
| Company | P/E | ROE | OPM | FY24 PAT | FY24 Sales | Comment |
|---|---|---|---|---|---|---|
| Persistent | 66x | 24% | 17.2% | ₹1,357 Cr | ₹11,938 Cr | Premium king |
| LTIMindtree | 34x | 21.5% | 17% | ₹4,598 Cr | ₹38,000 Cr | Midcap muscle |
| Hexaware | 46x | 23.3% | 15% | ₹1,174 Cr | ₹11,974 Cr | IPO buzz |
| Sonata | 28.6x | 27.3% | 7% | ₹425 Cr | ₹10,157 Cr | Margin weak, ROE strong |
| Coforge | 39x | 23% | 13% | ₹1,200 Cr | ₹8,500 Cr | Best comp? Maybe. |
✅ Sonata looks cheap on P/E, but P/E hides OPM decay.
⚠️ You’re betting on margin rebound, not topline.
12. 🧑💼 Miscellaneous – Shareholding, Promoters
- Promoters: 28.17%
- FIIs: 10.76% (↓ from 14.98%)
- DIIs: 25.85% (↑ consistently)
- Retail: 34.2%
- Shareholders: 1.7 lakh+
- No pledging
- 🤖 Sonata’s PR team = ChatGPT on Red Bull
13. 🧑⚖️ EduInvesting Verdict™
Sonata Software is like that nerdy kid who topped school, went abroad, and came back with a GenAI startup.
✅ Profitable
✅ Solid ROE
❌ But now struggling to protect margins while growing too fast
The AI buzz is nice.
The client wins are real.
But unless Platformation™ also comes with Profitstation™, this stock needs to prove margin discipline first.
🎯 FV Range: ₹360–₹575
- ₹360 = Fair for FY26 P/E 20x
- ₹575 = Only if OPM crosses 10% again and AI isn’t just… PR
✍️ Written by Prashant | 📅 July 10, 2025
Tags: Sonata Software, Platformation, Quant Systems Acquisition, AI Midcap Stocks, ROE Kings of IT, EduInvesting Tech Series, Persistent vs Sonata, India Digital Stocks, Managed Services AI, Midcap IT Turnaround
