Target Price: ₹400
Current Market Price (CMP): ₹390.40
Sonata Software aims to distinguish itself as a modernisation engineering and AI-focused entity, targeting above-average growth. However, the Banking, Financial Services, and Insurance (BFSI) sector is under ongoing pressure from a significant U.S. banking client. Following a seasonal downturn in Q4 FY25, this client is now facing budget restrictions and cost-control measures that are likely to continue affecting discretionary spending through Q1 FY26 and potentially extending into Q2 and Q3.
While core banking operations remain stable and new client acquisitions bolster growth in the broader BFSI segment, the challenges faced by this key client loom over the short-term outlook. Additionally, the retail and manufacturing sectors are experiencing difficulties due to global economic softness, tariffs, and regulatory shifts, suggesting a gradual recovery that will depend on international macroeconomic conditions. These obstacles are anticipated to impact Sonata’s overall growth trajectory in the immediate future, even as large deals ramp up and a robust pipeline is in place.
Conversely, the healthcare and life sciences divisions are stabilizing after prior client-specific issues. Growth in these areas is increasingly supported by pharmacy and health technology platforms that leverage modern technologies and artificial intelligence.
Sonata aims to achieve an 18% EBITDA margin in its Information Technology Services (IITS) division by FY26E, despite expected wage increases in Q2 and Q3. This target is predicated on revenue stabilization, a better onsite-offshore operational mix, and improved utilization rates. Overall, the company’s growth engine appears strained, with expectations for FY26E to be relatively subdued, forecasting a CAGR of 7% for IITS revenue and 13% for consolidated EPS from FY25 to FY28E. Given the near-term growth obstacles and slow recovery in margins, EPS estimates have been adjusted downward by 7-8%. The recommendation remains as ADD, with a target price derived from a Sum of the Parts (SoTP) valuation approach set at ₹400, assessing the IITS business at 22x and the DPS business at 15x.
Published on September 17, 2025
