Sonata Software, the Bengaluru-based IT services firm, delivered disappointing quarterly results for Q3 FY25, leading to heavy backlash from investors and analysts alike. Shares plummeted, marking significant unease among stakeholders, as the company reported narrowing profit margins and missed expectations.
For the quarter ended December 2024, Sonata Software's total revenue reached ₹2,843 crore, which is commendable on the surface, reflecting a 31% jump compared to the previous quarter and up 14% from ₹2,493.4 crore year-on-year. Yet, behind these figures simmered some underlying issues, particularly evident when examining the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) which fell by 7.8% QoQ, landing at ₹163.6 crore, and the Profit After Tax (PAT) which dropped to ₹105 crore—1.4% lower than the preceding quarter.
The real culprit of the market's dissatisfaction appeared to be the client ramp-downs affecting the Technology, Media, and Telecom (TMT) vertical, alongside management's bonuses eating away at margins. EBITDA margins contracted sharply to 4.6% from 6.7%, raising red flags for future performance. This margin contraction resulted from several factors, including unplanned cost items due to ramp-downs from key clients.
Samir Dhir, CEO of Sonata Software, acknowledged the tough quarter, stating, “During the quarter, we experienced an unplanned ramp-down and a one-time discount for a large hi-tech client, which led to decline in our TMT vertical.” His comments hinted at the prospective challenges as Q4 FY25 could see similar impacts, with projections of revenue declines between 2.5% to 3.5% due to these issues.
Market reactions were swift; Sonata Software's shares sank nearly 19% on the BSE, hitting 52-week lows, which only added to the uncertainty as investors faced diminishing returns. The stock even touched ₹446.10 per share and has significantly dropped by 43.88% over the past year. Analysts noted heavy trading volumes during this period, with some trading at five times the normal volume rate.
Despite the struggle, Sonata Software's domestic business managed to record gross contribution growth of 16.7% QoQ. This demonstrates resilience, particularly against the backdrop of stronger sectors like Banking, Financial Services, and Insurance (BFSI) which accounted for 39% of the firm's revenues.
Looking forward, analysts are cautiously optimistic. Emkay Global maintained a “buy” rating on the stock but revised its earnings forecasts for FY25-27, reeling back expectations due to pressures from TMT client-specific issues. The brokerage suggested maintaining close monitoring of margins and emphasized the strength displayed outside the TMT segment.
Commenting on the long-term perspective, Dhir asserted, “We remain optimistic about our long-term vision and growth prospects of Sonata,” following the announcement of winning two large deals, including significant engagements focused on Microsoft Fabric and Gen AI modernization.
While Fortuna may be shining down on specific segments, the immediate focus remains on recovery efforts related to TMT and evaluating consumer confidence as the retail sector is expected to rebound by second half of FY25. Yet, the road remains fraught with potential hurdles as the company continues grappling with historical client ramp-downs.
Analysts note the importance of careful navigation through these turbulent waters, highlighting the necessity of adapting to changes and refocusing growth strategies. The overarching sentiment is one of wariness as Sonata Software moves forward, now firmly entrenched within investor scrutiny.
For Sonata Software, the quarter indicates both challenges and opportunities, urging its leadership and the wider market to strategize effectively to maintain momentum against headwinds. The immediate prospects will heavily rely on management’s ability to efficiently address the situation stemming from its largest clients, thereby restoring confidence across its financial reporting.
Overall, SONATA software remains under the spotlight, with the market eager to see how it will respond to current challenges and exploit forthcoming opportunities.