Sonata Software sees early growth revival as AI deal momentum builds

Investment View and Key Takeaways

In its November 8, 2026 result update on Sonata Software, Anand Rathi Research retained its BUY rating, citing early signs of an international-services revenue revival, rising AI-led deal activity and medium-term domestic opportunities. The broker nevertheless views margin recovery and execution as key monitorables because the revenue recovery remains modest and uneven across accounts.

Q2FY27 Financial Performance

Sonata Software reported Q2FY27 International IT Services revenue of $82.8 million, up 1.0 per cent QoQ and 0.9 per cent YoY, or 1.2 per cent QoQ and 1.3 per cent YoY in constant currency. Anand Rathi considers this the first meaningful sequential improvement in four to five quarters despite a programme ramp-down at a top account.

International Services EBITDA margin improved 10 basis points QoQ to 15.5 per cent as utilisation increased 200 basis points to 90.5 per cent and delivery efficiency improved. Wage hikes covering around 60 per cent of employees, one-time severance expense of around 50 basis points and AI proof-of-concept investment of around 100 basis points partly offset these gains.

Management reiterated its 18 to 20 per cent EBITDA margin aspiration but did not provide a timeline. Anand Rathi notes that with utilisation already high, sustained margin expansion will depend increasingly on revenue growth, operating leverage and AI investment monetisation.

International DSO improved to 52 days from 60 days, partly because of advance collections, although management expects it to normalise towards around 60 days. Consolidated gross cash declined to Rs 426.3 crore from Rs 567 crore, and net cash changed from positive Rs 67 crore to negative Rs 69.3 crore.

AI Strategy and Order Pipeline

The AI strategy is central to the growth thesis. Sonata Software is positioning itself as an AI-native engineering company, with legacy modernisation, AI-powered engineering and AI-ready data representing around 61 per cent of incremental pipeline generation.

Management said Harmoni.AI workbenches are being monetised through client engagements and have shown delivery efficiencies of around 35 to 40 per cent, but revenue and margin contribution remain undisclosed. Management is prioritising $2 million to $4 million deals to reduce dependence on larger deals with longer decision cycles.

Growth Outlook and Sector Trends

Management expects improving momentum from recovering large accounts, AI-led bookings and new offerings, although it expects isolated Q3FY27 pressure in one to two large BFSI and TMT accounts. Retail could require another one to two quarters to recover, while healthcare remains resilient.

Cloud contributed 63 per cent of revenue, up from 62 per cent QoQ, and Dynamics increased to 23 per cent from 21 per cent. AWS and Google partnerships support domestic growth potential, although AWS-led execution is expected only from Q1FY28.

Estimates and Valuation

Anand Rathi raised FY27E, FY28E and FY29E dollar revenue estimates by 1.2 per cent each, while revising PAT by 1.0 per cent, negative 1.5 per cent and negative 1.2 per cent respectively. It forecasts FY27E to FY29E EPS CAGR of 11.2 per cent.

Key Risks and Monitorables

• Further large-account ramp-downs in BFSI and TMT.
• Delayed conversion of AI-led deals.
• Continued AI investment and slower monetisation of AI initiatives.
• Prolonged enterprise decision cycles.
• Data and Retail weakness.
• Slower monetisation of domestic hyperscaler partnerships.
• Margin recovery and execution, given the modest and uneven revenue recovery across accounts.