Sonata Software sinks 15% as Q3 profit drops sequentially on margin erosion

Shares of Sonata Software fell as much as 15.1% on Friday to Rs 467 on the BSE after the mid-tier IT services firm reported a third-quarter profit of Rs 105 crore, a 1.4% sequential decline from Rs 106.5 crore in the preceding quarter, as margins eroded due to a deal ramp-down from its largest client.

The Bengaluru-based company’s operating margins narrowed sharply to 4.6% in the October-December period, down from 6.7% in the previous quarter, impacted by a 3% margin contraction from the client ramp-down and an additional 0.7% hit due to senior management bonuses.

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Despite the sequential decline, profit rebounded from a year-ago net loss of Rs 46 crore, aided by strong domestic business and stable international services revenue. Revenue for the December quarter surged 14% year-on-year to Rs 2,842.8 crore from Rs 2,493.4 crore a year earlier, while quarter-on-quarter growth stood at 31%.The company has guided for a sequential revenue decline in the March quarter, citing continued weakness from its top customer. “We think this customer will be back on growth for us in Q1 but the back half of Q3 and full quarter Q4 will see an impact on this customer, which is also the largest customer for Sonata,” said Samir Dhir, CEO & MD, Sonata Software. BFSI and healthcare, contributing 39% of Sonata’s revenue, helped offset the softness in retail and TMT verticals. The company also crossed the $1 billion revenue mark in FY24 and is engaging with over 100 customers on AI, with 20% of revenue expected from AI-driven services in three years.

Emkay Global said it expects Sonata to be under pressure in the near term due to TMT client-specific issues, with the brokerage trimming the company’s FY25-27 EPS forecasts by 6-10%, factoring in Sonata’s third quarter performance and guidance.

The brokerage has retained a “buy” rating on the stock at a target price of Rs 700 per share, which implies a potential upside of 48% from the stock’s current levels.

Shares of Sonata Software ended almost flat on Thursday at Rs 550.30. The stock has fallen 43.88% in the past year and declined 28.84% over six months.

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