Sonata Software Limited's stock witnessed a steep decline of over 16% after the company posted its Q3 FY25 results. At ₹460.7 per share on the BSE during morning trade, the stock experienced heavy selling pressure.
The dip came as investors reacted to the company’s marginal 1.4% quarter-on-quarter decline in consolidated profit after tax (PAT), which stood at ₹105 crores. Despite maintaining revenue growth in international markets, Sonata Software's profitability failed to meet market expectations, prompting a negative sentiment.
Financial performance and key metrics
The company’s EBITDA dropped 7.8% quarter-on-quarter to ₹163.6 crores, reflecting increased operational costs. While revenue from international IT services saw a 3.4% sequential increase, reaching ₹731.7 crores, profitability suffered. In dollar terms, revenue stood at $87 million, up 2.8% quarter-on-quarter and 3.9% year-on-year.
The EBITDA for this segment fell 16.9% quarter-on-quarter to ₹107.1 crores, while PAT declined 8.4% to ₹56.9 crores. The stock’s sharp movement signals investor concerns despite steady revenue expansion.
Impact of industry trends and market sentiment
The IT sector has been grappling with macroeconomic challenges, affecting investor confidence. Analysts believe Sonata Software's margin contraction was influenced by one-time cost items and an unplanned ramp-down of a major client in the Technology, Media, and Telecom (TMT) sector.
Additionally, salary hikes and a client settlement added to the financial strain. Such factors have led to a cautious stance on the company’s near-term prospects, even as Sonata remains optimistic about long-term growth. For those looking to invest in stocks, assessing industry headwinds and company fundamentals is essential.
Future outlook and growth strategy
Despite the recent downturn, Sonata Software continues to focus on strategic expansion. The company secured two significant deals during the quarter, including a multi-million-dollar project on Microsoft Fabric and another centred on Gen AI (artificial intelligence) modernisation.
Management remains confident in the company’s long-term vision, with revenue recovery anticipated in the coming quarters. Investors who plan to invest in stocks should monitor Sonata’s ability to stabilise margins and drive sustained earnings growth.
Market valuation and investor considerations
Sonata Software is currently trading at a stock P/E of 32.2, with a market capitalisation of ₹13,766 crores. While the stock has fallen significantly from its 52-week high of ₹870, it remains a key player in the IT services industry.
The company boasts a strong return on equity (ROE) of 35.5% and a dividend yield of 1.64%, making it an appealing option for long-term investors. However, with the stock trading at 8.90 times its book value, valuations remain a critical aspect to consider before making any decision to invest in stocks.
Is Sonata Software a buy after the decline?
Sonata Software Limited traded at ₹491 per share on BSE as of February 07, 2025, at 11:40 AM, reflecting a 10.79% drop. While short-term challenges persist, Sonata’s consistent revenue growth and strategic initiatives indicate the potential for recovery.
Investors should evaluate the company’s margin trends and industry developments before making decisions. Those who aim to invest in stocks must weigh the risks and opportunities, keeping a long-term perspective on Sonata Software’s performance.
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