At a Glance
Sonata Software dropped its Q1 FY26 numbers with the subtlety of a Windows update—quiet but impactful. Revenue came in at ₹2,965 Cr, growing 13.3% YoY, while PAT was ₹109 Cr, a mere 1.7% QoQ bump (yawn). The operating margin shrank to a 5% wafer, reminding everyone this isn’t TCS or Infosys territory. To keep investors happy, management threw in an interim dividend of ₹1.25 per share. Stock trades at ₹414 with a P/E of 27, so it’s neither dirt cheap nor outrageously priced. The bigger question: is Sonata still a digital transformation wizard, or is the magic fading?
Introduction
Ah, Sonata Software – the IT midcap that once strutted around as the poster child for digital transformation with its shiny Platformation™ buzzword. While IT giants like TCS and Infosys have been stuck in the “we’re growing but not really” lane, Sonata carved out a niche in modernization services, cloud automation, and platform engineering. Investors loved it… until the last year, when the stock crashed 45% faster than your phone battery on 5G.
Now Q1 FY26 is here, showing growth but not fireworks. Revenue rising is great, but margins slipping from 7% to 5%? Ouch. Management calls it a “transition phase”; analysts call it a “margin squeeze.” Let’s tear apart the numbers and see if Sonata still sings a profitable tune.
Business Model (WTF Do They Even Do?)
Sonata isn’t just another IT outsourcing shop—it sells dreams of digital transformation wrapped in automation and cloud buzzwords. The company operates via:
- Platformation™ Framework – Fancy way of saying “we build platforms so clients don’t cry.”
- IT Services – Managed services, cloud migration, automation, analytics.
- Solutions Business – Reselling Microsoft products (the less glamorous but cash-generating part).
Clients span the US, Europe, Middle East, Australia, and India. The business is service-heavy, margin-light, and insanely competitive. They compete with both giants (Infosys, HCL) and hungry upstarts (Persistent, Coforge). Their USP? Flexibility and speed – or so the marketing deck claims.
Financials Overview
Q1 FY26 results scream “growth on a diet”:
- Revenue: ₹2,965 Cr (up 13.3% YoY)
- Operating Profit: ₹160 Cr (OPM 5%, down from 7% last year)
- PAT: ₹109 Cr (up 1.7% QoQ)
- EPS: ₹3.9 (TTM EPS ₹15.3)
For FY25, Sonata clocked ₹10,157 Cr in revenue and ₹425 Cr PAT, down from ₹452 Cr in FY24. Margins have consistently eroded, falling from 8% to 6%. ROE remains stellar at 27%, but the market is skeptical.
Dividend payout has historically been high (60%), but with profits stagnating, sustainability is questionable.
Valuation
Time to crunch:
1. P/E Method
Industry P/E (midcap IT): ~30x
TTM EPS: ₹15.3
Fair Value = 30 × 15.3 = ₹459
2. EV/EBITDA Method
EV/EBITDA multiple: ~15x
FY25 EBITDA: ₹673 Cr
Debt: ₹516 Cr | Cash: negligible
EV = 15 × 673 = ₹10,095 Cr
Minus Debt → Equity = ₹9,579 Cr
Per Share ≈ ₹341
3. DCF
Assume 8% FCF growth, discount 12%, terminal 3%.
Intrinsic Value ≈ ₹400
Fair Value Range: ₹340 – ₹460
(Current price ₹414 sits bang in the middle. Meh.)
What’s Cooking – News, Triggers, Drama
- Q1 shows revenue growth but margin pain.
- Interim dividend ₹1.25 per share announced.
- FIIs reducing stake (9.68% vs 14% a year ago).
- DIIs ramping up (now 25.5%); seems domestic funds still have hope.
- New client wins in cloud automation could boost H2 FY26.
- Risk: global IT spending slowdown + cutthroat pricing pressure.
Balance Sheet
| (₹ Cr) | Mar 2025 |
|---|---|
| Assets | 4,670 |
| Liabilities | 2,992 |
| Net Worth | 1,678 |
| Borrowings | 516 |
Auditor’s Quip: Borrowings are under control, but liabilities have a knack for creeping up like hidden bugs in legacy code.
Cash Flow – Sab Number Game Hai
| (₹ Cr) | FY23 | FY24 | FY25 |
|---|---|---|---|
| Ops CF | 268 | 281 | 644 |
| Investing CF | -771 | -53 | -437 |
| Financing CF | 187 | -108 | -433 |
Comment: Ops cash flow is solid, but investing burn is high (capex + acquisitions). Financing outflows due to dividends and debt repayment.
Ratios – Sexy or Stressy?
| Ratio | Value |
|---|---|
| ROE | 27% |
| ROCE | 29% |
| P/E | 27 |
| PAT Margin | 4% |
| D/E | 0.30 |
Verdict: ROE/ROCE hot, PAT margin not. Sonata is efficient but struggling to keep margins intact.
P&L Breakdown – Show Me the Money
| (₹ Cr) | FY23 | FY24 | FY25 |
|---|---|---|---|
| Revenue | 7,449 | 8,613 | 10,157 |
| EBITDA | 604 | 728 | 690 |
| PAT | 452 | 308 | 425 |
Auditor Roasts: FY24 was the hangover, FY25 the recovery. FY26? Investors still waiting for the afterparty.
Peer Comparison
| Company | Rev (₹ Cr) | PAT (₹ Cr) | P/E |
|---|---|---|---|
| TCS | 2,56,148 | 49,273 | 22.4 |
| Infosys | 1,65,954 | 27,266 | 23.1 |
| Persistent Sys | 12,535 | 1,519 | 53.1 |
| Sonata Software | 10,595 | 428 | 27.1 |
Comment: Sonata’s P/E is lower than Persistent’s bubble, but margins lag peers. It’s midcap IT—growth with risk.
Miscellaneous – Shareholding, Promoters
- Promoters: 28.17% (stable)
- FIIs: 9.68% (falling – red flag?)
- DIIs: 25.5% (rising – domestic faith)
- Public: 35.6%
Promoters holding hasn’t budged. FIIs running out like users from a laggy app.
EduInvesting Verdict™
Sonata Software Q1 FY26 shows the classic IT conundrum: growth in revenue but shrinking profitability. Its Platformation™ strategy still attracts clients, but rising costs, wage hikes, and competitive pricing are killing margins. Add in a declining FII interest, and you have a stock that’s stuck in neutral despite growth.
SWOT Analysis
- Strengths: Strong ROE, decent cash flows, dividend payout.
- Weaknesses: Margin squeeze, slowing profit growth.
- Opportunities: Cloud, AI, and digital transformation demand.
- Threats: IT spending cuts, competition, currency risks.
Final Word: At ₹414, Sonata isn’t a screaming buy or a short candidate. It’s the IT equivalent of a safe mid-level manager – not flashy, not terrible, just… there. Investors should hold if they like stability, but don’t expect this to moon anytime soon.
Written by EduInvesting Team | 30 July 2025
SEO Tags: Sonata Software, IT Services Stocks, Q1 FY26 Results, Midcap IT
