SONATSOFTW - Fundamental Analysis: Financial Health & Valuation

Last Updated Time : 19 Sept 25, 2:16 pm

Fundamental Rating: 3.7

📊 Core Financials Overview

Profitability

ROE: 28.4% and ROCE: 30.6% are excellent, indicating strong capital efficiency and operational performance.

EPS of ₹7.53 supports a P/E of 53.2, which is significantly above the industry average of 30.0—suggesting premium pricing.

PAT improved YoY but declined QoQ (₹22.7 Cr vs ₹18.0 Cr), with a −10.4% quarterly profit variation, hinting at short-term margin pressure.

Balance Sheet Strength

Debt-to-equity ratio: 0.03 — virtually debt-free, a major strength.

Book Value: ₹28.6 vs Current Price: ₹400 → P/B ratio ~14, which is high but not unusual for high-growth tech firms.

Dividend Yield: 1.10% — modest, but adds income appeal.

Cash Flow & Stability

PEG ratio of −17.2 is distorted due to recent earnings volatility.

RSI at 64.9 and MACD positive suggest short-term bullish momentum, though nearing overbought territory.

📉 Valuation Metrics

Metric Value Insight

P/E Ratio 53.2 Overvalued vs industry PE of 30.0

P/B Ratio ~14.0 Premium pricing

PEG Ratio −17.2 Not meaningful due to erratic growth

Intrinsic Value ~₹340–₹370 Estimated below current price

Sonata Software appears moderately overvalued, though its fundamentals remain strong.

💻 Business Model & Competitive Edge

Sector: Sonata Software Ltd is a mid-cap IT services firm specializing in digital transformation, cloud, data analytics, and platform engineering.

Strengths

High-margin verticals and strong client retention

Strategic acquisitions (e.g., Encore Software Services) to expand US footprint

Strong return metrics and low debt

Challenges

Recent decline in FII and DII holdings

PEG distortion and valuation pressure

According to Simply Wall St, Sonata has underperformed both the Indian IT sector and broader market over the past year, though its share price volatility remains low

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📌 Entry Zone Recommendation

Suggested Entry Range: ₹360–₹380

Below 50 DMA (₹380) and closer to intrinsic value

RSI nearing overbought zone; MACD suggests momentum may be peaking

🧭 Long-Term Holding Guidance

Hold if Already Invested: Strong fundamentals and sector tailwinds support long-term growth.

Accumulate on Dips: Especially near ₹360 for better margin of safety.

Watchlist Triggers

EPS recovery and margin expansion

Strategic wins in cloud and platform services

Institutional accumulation

Sonata Software is a high-quality mid-cap tech play with solid fundamentals and global ambitions. While valuation is elevated, its long-term story remains compelling.

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simplywall.st

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