>SONATA SOFTWARE (ICICI DIRECT)

Sonata Software is a mid-tier company, which has seen a PAT CAGR of 48% over the past five years. The company is strategically expanding in new geographies (Middle East). We believe the current valuations make it a compelling buy…

Company background
Sonata Software is a Bangalore headquartered company having offices across the globe in the US, Europe, Middle East and Asia Pacific.

The company’s portfolio of services includes IT consulting, product engineering services, travel solutions, application development, application management, managed testing, business intelligence, infrastructure management and packaged applications. It serves segments like manufacturing, travel transport & logistics, independent software vendors (ISV), BFSI, telecom and construction.

Investment arguments

■ Entering new geographies
Through the years, the company has expanded its geographical presence both organically and inorganically. For the European region, it formed a joint venture with TUI, Europe’s largest tourism group. Sonata has a majority stake in TUI InfoTec, which provides a portfolio of services comprising IT operations and IT services. TUI InfoTec's basket of IT operations includes infrastructure management, helpdesk and hosting services, while it offers IT services such as application development, application management, business intelligence and managed testing.
The company is currently trying to offshore a lot of work, which is currently being done in Germany, to its development centres in India. TUI InfoTec employs around 440 IT professionals in Germany. The company has recently opened up a 100% subsidiary in Dubai to cater to the growing demand of the Middle East market.

■ Well diversified in terms of geography
The company has a good mix of business coming from the international and domestic market in the ratio of 60:40. We believe this augurs well for the company, as in comparison to some of the other peers in the sector it is not totally dependent on international clients for its growth.

■ Looking at acquisitions for growth
The company has cash of Rs 8 per share, which makes the valuations even more attractive. Sonata is looking at acquisitions to further fuel its growth and is looking at companies with $50 million revenue with mature business models. It is also looking at companies specialising in niche markets.

Risks & concerns
With the reduction in IT spend globally clients are asking for price cuts, which could affect margins, going ahead. The company also has a large dependence on the travel segment the IT spend of which is largely discretionary and within such global uncertainty would take time to revive.

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