COMPANY REVIEW: Sonata Software Ltd
Sonata Software Ltd: Music To Investors Ears
Company URL:
sonata-software.com
Stock Price as of 02/18/99
Exchange:BSE
Sonata Software
Exchange: BSE Securities Group: B2 Securities Code: 32221
Previous Close Open High Low Close
365.00 355.25 366.75 340.50 341.00
Price Earning Ratio-34.07
52 Week High=Rs. 390.00
52 Week Low= Rs. 170.00
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The software sector has been doing a big favour to the Indian economy. Apart from earning hard currency, creating jobs and making life easier, the sector has also revived the moribund primary markets of the country. The primary market is the most critical element in the nation's resource allocation for new and existing projects. With the retail investors shying away from the capital markets many new projects were delayed. With software stocks moving upward in the stock markets it was only a matter of time before the public issues of software companies get going. DATASTOCK believes that egged on with the bullishness in the markets on software stocks, a number of new public issues are likely to hit the market in the near future.
Among the first companies to go public was the Bangalore-based Sonata Software Ltd. The company's shares were listed on the stock market on January 15, 1999 at Rs170 and closed at Rs225. Thereafter, in just four days trading the share prices rose to Rs283. Post-issue the promoters hold 47%, mutual funds hold 2% and corporate bodies, including employee trust, hold 39% whereas the public holds 12%.
Background: Organic growth...
Formed as a division of Indian Organic Chemicals Ltd (IOCL) in 1986, Sonata was spun off as an independent software company in 1994. In view of the depressed market conditions and to meet the increasing borrowing liabilities, IOCL decided to hive off its software division as a separate software company. The company was valued at Rs8.14 crore in 1993 against which IOCL was allotted 17.50 lakh shares worth Rs1.75 crore and the balance amount of Rs6.39 crore was considered as debt. The debt has been subsequently paid off by Sonata. Subsequently, IOCL divested its entire stake in favour of Rajan Raheja and Bhupati Finance & Investment, an investment company floated by Ghia. Shares were also allotted on private placement to the promoters. The company also allotted about 15 lakh shares to Sonata Software Employee Welfare Trust. In September 1998, the company issue bonus shares in the ratio 13:10 that resulted in an increase in the share capital from Rs3.25 crore to Rs7.48 crore.
Sonata has since then reported a substantial growth in the revenue. Total revenue grew from Rs38.02 crore (annualized) in March 1996 to Rs54.47 crore in March 1997 and Rs84.65 crore in the next year. Similarly, net profit grew from Rs3.66 crore in the annualized 12 months ended March 1996 to Rs5.58 crore in March 1998. The company's operations are spearheaded by the President and MD Byanna Ramaswamy.
Sonata came out with a public issue of 25,22,000 shares at a premium of Rs80 per share in December 1998. The Rs22.70 crore issue was to finance the expansion plan of the company and to meet the long-term fund requirements. Out of the total funds, Rs5 crore and Rs10 crore were kept separately for land and building and expansion of SDC respectively. The company intended to use Rs6 crore for meeting long-term resources whereas the balance was assigned for meeting the issue expenses.
Operations: From products to exports...
Sonata Software is engaged in the distribution of software products, software development, ERP implementation and the recently introduced consulting services. The company's main revenue earner is its product division that contributed 55% of the total turnover of Rs84.65 crore in March 1998. The company distributes and markets software products of major global software companies. It has marketing and distribution tie-ups with Microsoft, SCO, Symantec, Lotus and Oracle. The marketing and distribution activity has helped the company earn projects from MNCs and provide business solutions and consulting services in which the company plans to expand. In the current year, the company was appointed the Regional Director for Microsoft Solution Development Network, Lotus Premier Business Partner and Oracle Network Computing Initiative Alliance Partner.
The second largest and the fastest-growing division that accounted for 40% of the turnover is the international operations division. The company provides both onsite and offshore facilities in the area of reengineering projects, full cycle software development, conversion and migration, ERP customization, euro conversion and datawarehousing. The division, with an employee strength of 302, garnered a turnover of Rs34.20 crore. Its major clients include Delaware, Konertz, Wirton, Scala and Smithkline Beecham. The contribution from offshore activity accounted for 14% of the total revenues in 1997-98.
A small but growing domestic operation is software services, which contributed Rs3.15 crore in March 1998. The business solution division of the company offers implementation services of Scala ERP package. The company formed the division in 1995 as a strategic alliance partner with Sweden-based Scala International. Sonata has implemented the product for various companies in the past three years. The company has exclusive marketing and implementation rights for the product in India and neighboring countries apart from the largest development center in the world of Scala. The contribution from this division was Rs2.50 crore in March 1998. Some of the major clients for whom the company has implemented Scala includes Nokia Telecommunications Pvt Ltd, Ericsson Telecommunications Ltd, Novartis India Ltd, Novartis (Bangladesh) Ltd, Alpha Drugs Ltd, Coca Cola and Becton Dickinson. Consulting is the recently launched division, which aims to provide full cycle services in new technologies. The division, with an employee strength of 25 as on March 1998, raked in Rs66 lakh.
The company has also received ISO 9001 certification in the year 1994 and is aiming for SEI-Level 4 certification by the end of 1999. Sonata has set up two branch offices in the US and one in the UK, which are focused on the marketing activities. The company also has 46.67% stake in a JV in the US called Offshore Digital Services Inc. The other shareholders of the JV are IOCL, which also has 46.67% stake and independent US residents hold the balance.
The company has also formed a new company JV with Scala. Sonata holds 80.10% of the total equity of $6.25 lakh in the JV, Abisko Development. Based in Cyprus the main activity of the JV will be marketing of Sonata's services in the areas of software development.
Future: Moving offshore
Sonata aims to excel in offshore development and providing high-end services to its clients. The company intends to increase revenues from international operations from 40% of the turnover in 1997-98 to 50% in the current year and more than 60% in the next year.
Similarly, the Business Solution division is also expected to increase its share in the overall revenues of the company. The company is planning to provide service in the high-end areas such as ERP implementation.
Until now, the major part of Sonata's turnover comes from the products division, which is a very low margin business. Apart from this, the product distribution business also implies high investments in receivables, which increases the working capital requirement of the company. While the company does not have plans to exit the product distribution business, the share of the same is expected to come down substantially in the years to come.
The company is also planning to open new offices in Germany and Japan in the near future. This will ensure growth in the international operations business and increase the dollar income of the company thus resulting in better profits. Within the International Operations division, Sonata expects to achieve 63% from software development, 22% from reengineering, 6% each from product development and euro conversion and 2% from software maintenance. In the next year, revenue from reengineering are expected to increase to 35% and that from development will come down to 48% of the total revenues. While the company has executed a few Y2k projects in the past for its clients, it is not the main focus for Sonata.
In overall terms, the increase in the international revenues will boost the bottomline of the company. The company's revenue from international operations has jumped from 42% of the total revenues in March 1998 to 55% of the total revenue in the nine months ended December 1999. It expects the offshore activity to contribute 31% of the total export revenue in March 1999, which will further increase to 41% in March 2000. With increasing focus on software development and reorganizing the human resource to high-realization areas, the company is likely to perform much better than the previous years. Moreover, the high level of comfort built over a period of time with its strategic alliance partners should ensure constant flow of business to the company.
Financial performance: Exports lead the show...
Sonata reported a turnover of Rs 84.65 crore in the period ended March 1998 out of which Rs46 crore was from the product division. While operating margins from software development services are in the range of 20% to 25%, those from the products marketing are not more than 7%. Moreover, the investment in receivables also adds to the company's cost. The receivables as on March 1998 stood at Rs29.98 crore. Similarly, on a turnover of Rs 53.74 crore in the first six months ended September 1998, the receivables stood at Rs30.39 crore. The operating margins of the company remained at the same level of 10% in the last two years. Similarly, the net profit margins too have remained at the level of 5% to 6%.
In the third quarter ended December 1998, the company has reported a turnover of Rs28.88 crore and net profits of Rs3.10 crore. For the nine months ended December 1998, total turnover stands at Rs82.61 crore whereas the net profit before providing for tax was Rs7.51 crore. The company has projected a turnover of Rs128 crore in March 1999 and a net profit of Rs8.54 crore in the same period. The operating margins of the company too have increased to 13.70% in the nine months ended December 1998. Considering the performance in the three-quarters, the company might achieve the targeted services income, there may be a shortfall in the projected sales income of Rs61.12 crore. However, the net profit should be higher than projected due to lower depreciation provision than projected.
With a fall in outstanding receivables and better revenue and operating margins from international operations, the company should cross the Rs190-crore mark in the next financial year. While the overheads on the new facility and higher depreciation and interest costs will put some constraint on the operating margins, it will be higher than the previous year due to higher revenues from exports. Consequently, the net profit is expected to reach approximately Rs16 crore.
Investment potential: Long-term buy...
The shares of Sonata Software were listed in a bullish software driven market at Rs170. Thereafter, the scrip jumped to the current high of Rs283 in just four days trading. The current share price discounts the March 1999 EPS by 32 times and March 2000 earnings by 19 times. It is worth noting that the scrip of Sonata Software was listed in a very bullish software market where every infotech scrip made significant gains. In such a market scenario, it is not surprising that the shares opened trading at almost 200% premium to the issue price of Rs90. With increasing volatility in the software share prices and the entry of a number of new software companies in the market, the current price may not hold in the short term. DATASTOCK believes that Sonata will gain on account of its economies of scales as well as change in business mix. A factor that may have a bearing on the valuations is the promoters of the company are businessman and not technical professionals. However, with a strong management at the helm and an EPS of Rs16 in 1999-2000 fiscal, the scrip is likely to appreciate in the medium term. Accumulate.
Financial: Growth Ahead
(All figures in Rs Crore)
Year Ended
March 31 1997 1998 1999* 2000*
Sales 52.47 84.65 120.50 186.00
Other Income 0.73 0.95 1.10 1.47
OPM (%) 10.27 10.22 13.28 15.22
Operating Profit 5.39 8.65 16.01 28.30
Net Profit 3.76 5.58 8.96 15.22
Equity 3.25 3.25 10.00 10.00
EPS (Rs) 11.57 17.17 8.96 15.22
* Projected
(Sushanto Mitra
is a financial consultant
with Technology Capital Partners.
sushanto@techcapIndia.com
The views reflected here are not necessarily those of the organization. No liability is accepted for losses based on the authenticity/accuracy of information presented here.)
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