Expanding AI Initiatives And Partnerships With Microsoft And AWS Will Drive Future Success

Key Takeaways

• Strategic deals and expanded partnerships with major tech players could drive significant future revenue growth for Sonata Software.
  
• Investments in AI and targeted high-growth sectors are expected to enhance margins and accelerate the company's competitive edge and earnings growth.
  
• Macroeconomic challenges, tech spending slowdown, client ramp-downs, and unexpected costs threaten revenue growth and profitability in volatile sectors like TMT and Retail.

Catalysts

Provides information technology services and solutions in the United States, Europe, the Middle East, Asia, India, and Australia.

• Sonata Software is focusing on winning large and mid-sized deals and has successfully secured 8 large deals year-to-date in FY '25. This can positively impact future revenue growth as these deals are rolled out.
  
• The company is deepening partnerships with major players such as Microsoft and AWS and expanding its client base with 16 new enterprise-grade logos, which could significantly increase revenues as these accounts scale over the next few years.
  
• Sonata is investing in and developing its capabilities in AI and data modernization, with a target of generating 20% of its revenue from AI-enabled services in the next 3 years, which may lead to improved margins due to higher-value service offerings.
  
• The establishment of an AI center of excellence in Melbourne and achieving AWS' generative AI competency are expected to boost the company's competitive edge and drive higher revenue growth through differentiated offerings.
  
• Sonata's strategic focus on high-growth verticals such as Healthcare, Life Sciences, and Banking, which are projected to become major revenue contributors, could accelerate overall company revenue and earnings growth in the coming years.

Sonata Software Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sonata Software's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 5.5% in 3 years time.
• Analysts expect earnings to reach ₹7.9 billion (and earnings per share of ₹28.33) by about March 2028, up from ₹4.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹6.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2028 earnings, up from 23.1x today. This future PE is greater than the current PE for the IN IT industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.25%, as per the Simply Wall St company report.

Sonata Software Future Earnings Per Share Growth

Risks

• Macroeconomic challenges and a slowdown of tech spending could lead to decision delays, impacting future revenue growth.
  
• Unexpected client ramp-downs and onetime discounts with large clients, such as the TMT vertical, demonstrate potential volatility, affecting revenue and net margins.
  
• The high-tech client's decision to cut down on costs due to AI implementation could lead to temporary revenue loss, impacting earnings.
  
• Unanticipated personnel costs and onetime severance payouts due to ramp-downs lead to a significant decrease in EBITDA margins, negatively impacting earnings.
  
• Prolonged periods of uncertainty and cyclical market effects, particularly in sectors like TMT and Retail, could hinder consistent revenue growth and affect profitability.

Valuation

• The analysts have a consensus price target of ₹631.75 for Sonata Software based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹760.0, and the most bearish reporting a price target of just ₹517.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹142.3 billion, earnings will come to ₹7.9 billion, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 15.3%.
• Given the current share price of ₹355.3, the analyst price target of ₹631.75 is 43.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.