By Anjana C Shriram

Copyright thehindubusinessline

Target: ₹400

CMP: ₹390.40

Sonata Software has positioned itself as a differentiated modernisation engineering and AI-driven organisation aiming for top-quartile growth.

However, BFSI is facing sustained pressure from one large US banking client, which after seasonal weakness in Q4FY25 continues to grapple with budgetary constraints and cost-control pressures through Q1FY26, with further impact expected in Q2 and Q3, keeping discretionary spending muted.

While core banking operations remain stable and new client additions support broader BFSI growth, the performance of this key client clouds the near-term outlook. Retail and manufacturing also remain under stress from global softness, tariffs and regulatory changes, with recovery likely to be gradual and dependent on global macro conditions. These headwinds are expected to weigh on the overall growth profile in the near term, despite healthy large deal ramp-ups and a strong pipeline.

In contrast, healthcare and life sciences have stabilised from earlier client-specific challenges, with growth now driven by pharmacy and health tech platforms built on modern technologies and AI.

Sonata aims for 18 per cent IITS EBITDA margin by FY26E (wage hike in Q2 and Q3), driven by revenue stabilisation, an improved onsite-offshore mix and better utilisation. Overall, the growth engine appears to be under stress, and we expect FY26E to be a muted year, with IITS revenue/consolidated EPS CAGR of 7/13 per cent over FY25-28E. Considering the near-term growth challenges and slow margin recovery, we cut our EPS estimates by 7-8 per cent. We maintain ADD with a SoTP-based target price of ₹400, valuing the IITS business at 22x and the DPS business at 15x.

Published on September 17, 2025