Sonata Software AI pipeline and deal ramp-up support margin recovery

Investment View and Valuation

ICICI Securities' 10 August 2026 result update on Sonata Software retains a HOLD rating and values the company at Rs 310 per share, based on 16x FY28E EPS. Against the CMP of Rs 319, the target price implies approximately 3 per cent downside.

The investment case is based on a gradual recovery in international IT services growth, recovery in the domestic business, improving utilisation following delayed deal ramp-up and expanding AI-led opportunities. However, near-term international-services performance and margins remain muted.

Business Overview and Q1FY27 Performance

Sonata Software provides IT services and product-licensing services across BFSI, healthcare and life sciences, retail and manufacturing, and technology, media and telecom.

Domestic Products and Services accounted for 76 per cent of the revenue mix, while International IT Services contributed the remaining 24 per cent.

Profitability Remains Under Pressure

Consolidated EBITDA was Rs 171 crore, up 7.0 per cent YoY but down 18.2 per cent QoQ. The EBITDA margin was 5.2 per cent, down approximately 300 basis points QoQ and 18 basis points YoY.

• IITS EBITDA margin: 15.4 per cent, down approximately 481 basis points QoQ and 117 basis points YoY.
• Domestic EBITDA margin: 2.4 per cent.
• PAT: Rs 108.1 crore, down 17.2 per cent QoQ and 1.1 per cent YoY.

The decline in IITS margin reflected a one-time benefit in Q4FY26, lower utilisation due to delayed large-deal ramp-up, investment in AI talent and advisory capabilities, and approximately 50 basis points of cross-currency impact. PAT was also affected by forex losses of Rs 6.8 crore.

Utilisation Recovery and Domestic Business Outlook

Management indicated that the large-deal ramp-up affecting utilisation is largely behind the company, with completion expected in Q2FY27. This is expected to support a recovery in utilisation.

• IITS utilisation declined to 88.5 per cent from 91.8 per cent QoQ.
• IITS headcount stood at 5,795, broadly flat QoQ.
• Attrition increased by approximately 200 basis points QoQ to 13 per cent.

Management expects revenue and EBITDA to improve gradually from Q2FY27 as one-offs normalise, utilisation improves and the deal ramp-up is completed. The domestic business has navigated earlier OEM direct-billing headwinds, with several customer renewal risks now behind it. Sonata is concentrating its investment and go-to-market efforts on nine micro-verticals where it has established domain strengths.

AI Pipeline and Order Book

AI-led positioning remains a principal medium-term driver for Sonata Software. The company's AI-led pipeline expanded 21 per cent QoQ to US$ 340 million, with cloud and data contributing 51 per cent of the pipeline.

The AI-led order book rose 27 per cent QoQ to US$ 21.73 million, representing 18 per cent of the total order book. Sonata added seven customers, including a three-year multimillion-dollar application-development, modernisation and managed-services deal.

The company launched Workbench, its enterprise-grade agentic AI service-delivery platform, and was selected among approximately 40 organisations globally for Microsoft's Copilot Agents and Platform Engineering Depth Program.

Earnings Outlook and Estimates

ICICI Securities forecasts IITS revenue growth at a 5 per cent CAGR in US dollar terms over FY26-FY28E. Its consolidated estimates are as follows:

The broker reduced its FY27E EBITDA estimate by 5.9 per cent and PAT estimate by 4.8 per cent. For FY28E, EBITDA was reduced by 2.9 per cent and PAT by 4.1 per cent.

Key Risks and Shareholder Return

ICICI Securities identifies slower-than-expected revenue growth as a key risk. Conversely, faster-than-expected recovery in revenue and margins, along with stronger pipeline conversion, could improve the outlook.

The Board declared an interim dividend of Rs 1.25 per share.