Sonata Software recently faced a major setback as its shares dropped over 13% following a key client ramp down in Q3FY25. The company, which had earlier projected strong growth for Q4FY25, now anticipates a decline in revenue due to this unforeseen development. Let’s dive into what caused this downturn and how it might impact the company’s future.
What Led to the Decline in Sonata Software’s Share Price?
The sharp fall in Sonata Software shares came after the company revealed a significant ramp down in one of its major client accounts. This unexpected reduction in engagement within the high-tech sector led to a contraction in its TMT (Technology, Media, and Telecom) vertical during Q3FY25. As a result, the company’s financial performance took a hit, which spooked investors and led to the stock decline.
Impact on Q4FY25 Revenue and Margins
Sonata Software had initially expected strong revenue growth for Q4FY25. However, due to the client ramp down, the company now foresees a de-growth phase. This will also impact margins, as the EBITDA for Q3FY25 suffered a negative hit. The overall impact was further aggravated by a one-time discount given to the client.
How Much Did Sonata Software’s Margins Decline?
The company’s margins took a severe blow due to multiple factors, including:
- A 260 basis points (bps) decline quarter-over-quarter (QoQ) due to a severance payout.
- An additional 360 bps hit caused by wage hikes and furloughs in the international IT business.
These setbacks collectively dented Sonata’s profitability for the quarter, raising concerns over its short-term financial stability.
What is a Client Ramp Down?
A ‘ramp down’ refers to the gradual reduction of services or engagement with a client. In some cases, this can lead to the termination of a contract or project. According to Sonata Software, this decision was made by the client as part of their cost-cutting measures.
How Long Will This Impact Last?
The company stated that the impact of this ramp down will persist through Q4FY25 and might even extend into Q1FY26. However, they remain optimistic about returning to a growth trajectory in the upcoming quarters.
Financial Performance in Q3FY25
Despite the setbacks, Sonata Software managed to post a mixed set of numbers in Q3FY25:
- Consolidated Net Profit: Declined 1.4% QoQ to Rs 105 crore.
- International Services Profit: Dropped 8.4% QoQ to Rs 57 crore.
- Consolidated EBITDA: Fell 7.8% QoQ to Rs 163.6 crore.
- International Services EBITDA: Declined 16.9% QoQ to Rs 107 crore.
- International Services Revenue: Increased 3.4% QoQ to Rs 731.7 crore.
- Domestic Business Revenue: Surged 44.4% to Rs 2111 crore.
Sonata Software’s Deal Pipeline Remains Strong
Despite the financial turbulence, Sonata Software reported healthy deal wins. The company secured a total contract value (TCV) of $107 million in new deals. Notably, 44% of its large deal pipeline comprises Fortune 500 clients, signaling strong long-term business potential.
What Analysts Are Saying About Sonata Software?
Brokerage firm HDFC Securities has revised its earnings per share (EPS) estimates for FY26 and FY27, cutting them by 9% and 8%, respectively. While acknowledging Sonata Software’s growth challenges, they have maintained an ‘Add’ rating with a target price of Rs 570 per share based on the FY27 EPS estimate.
Investor Takeaway: What Lies Ahead for Sonata Software?
While the immediate future looks challenging for Sonata Software, the company’s strong deal pipeline and continued engagement with Fortune 500 clients suggest a potential recovery. However, the near-term impact on earnings and margins cannot be ignored. Investors should closely monitor the company’s Q4FY25 results and any further updates regarding client retention strategies.
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Conclusion
The recent client ramp down has caused a significant dent in Sonata Software’s share price and financial performance. While the impact is expected to linger through Q4FY25 and possibly into Q1FY26, the company remains optimistic about a recovery. With a strong deal pipeline and steady business from Fortune 500 clients, there’s hope for a turnaround in the coming quarters. Investors should tread cautiously but keep an eye on Sonata’s long-term growth prospects.
