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RESULTS REVIEW 2QFY19 05 NOV 2018

Sonata Software BUY

IP-led growth strategySonata delivered a good quarter, International IT services (IITS) revenue was up 3.4% QoQ (+4.0% CC) to USD 39.1mn, in-line with our estimate of USD 39.1mn. Growth was led by higher IP-led revenue (+14.2% QoQ) and Digital (35% of rev, +9.7% QoQ). IITS margin contracted -153bps QoQ to 20.6%, after a significant improvement of 480 bps over the past five quarters. Total revenue stood at Rs 5.93bn, down 13.8% QoQ, led by drop in Domestic Product & Services’ (DPS) rev (Rs 3.26bn, -25.4% QoQ).

IITS’ strategy to focus on providing IP-led services is yielding results. IPs like Rezopia, Halosys and Brick & Click are witnessing increased traction. IP-led revenue (18.0% of IITS rev) has grown at a healthy 8.6% CQGR and is aiding margin expansion. Microsoft Dynamic AX (Cloud ERP platform) is growing strongly and Sonata has become a preferred development vendor for Microsoft. Growth will be led by OPD (Microsoft AX), Retail (Brick & Click Platform) and Travel (SAP Hybrid and Rezopia) verticals. We expect IITS’ USD revenue to grow 11/13% with margin of 21.7/22.0% in FY19/20E.

We like Sonata’s IP-focussed business model, capability to scale up top-accounts, quality balance sheet (net cash of Rs 32/share, ~11% of Mcap), high RoE (~31%) and attractive dividend yield (~3.4%). Maintain BUY with a TP of Rs 445 based on 16x Sep 20 EPS. Highlights of the quarter ADM/IMS was down 0.5/2.6% QoQ while AX was up

14.9% QoQ led by Microsoft. Eleven new customers were added and Top5/10 revenue grew 3.4/2.0% QoQ.

Consolidated EBITDA margin expanded 182bps QoQ to 12.5% led by DPS margin (+161 bps QoQ).

In 1HFY19 total 336 employees were hired in IITS and utilisation remains at peak level (85.9%). Revenue per employee declined 1.9% QoQ to USD 43.8K.

Near-term outlook: We expect revenue growth to continue in 3Q but will be offset by furloughs. Margins will expand led by higher IP-led revenue and currency tailwind. The stock is at ~19% discount to the mid-cap IT average P/E multiple.

Financial Summary YE Mar (Rs bn) 2QFY19 2QFY18 YoY (%) 1QFY19 QoQ (%) FY17 FY18 FY19E FY20E FY21E Net Revenue 5.93 4.27 38.9 6.88 (13.8) 23.71 24.54 28.32 31.27 34.37 EBITDA 0.74 0.55 35.2 0.73 0.9 1.92 2.31 2.97 3.45 3.95 APAT 0.62 0.45 37.1 0.57 8.3 1.56 1.93 2.34 2.70 3.07 Diluted EPS (Rs) 6.0 4.4 37.1 5.5 8.3 15.1 18.6 22.6 26.0 29.6 P/E (x) 20.7 16.8 13.8 12.0 10.6 EV / EBITDA (x) 15.6 12.2 9.4 7.9 6.7 RoE (%) 29.3 31.0 33.7 34.4 34.6 Source: Company, HDFC sec Inst Research # Consolidated

INDUSTRY IT CMP (as on 05 Nov 2018) Rs 313 Target Price Rs 445 Nifty 10,524 Sensex 34,951 KEY STOCK DATA Bloomberg/Reuters SSOF IN No. of Shares (mn) 105 MCap (Rs bn) / ($ mn) 33/450 6m avg traded value (Rs mn) 124 STOCK PERFORMANCE (%) 52 Week high / low Rs 429 / 182 3M 6M 12M Absolute (%) (5.3) (7.2) 68.0 Relative (%) 1.6 (7.3) 64.3 SHAREHOLDING PATTERN (%) Promoters 30.95 FIs & Local MFs 6.98 FPIs 16.64 Public & Others 45.43 Source : BSE

Amit Chandra [email protected] +91-22-6171-7345

Apurva Prasad [email protected] +91-22-6171-7327

Akshay Ramnani [email protected] +91-22-6171-7334

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

SONATA SOFTWARE: RESULTS REVIEW 2QFY19

Quarterly Consolidated Financials Snapshot Particulars 2QFY19 2QFY18 YoY (%) 1QFY19 QoQ (%) IITS Net Revenues (USD mn) 39.1 36.4 7.3 37.8 3.4 Net Revenues 5,931 4,269 38.9 6,883 (13.8) Inventory Costs 3,063 1,873 63.5 4,191 (26.9) Employee Costs 1,464 1,321 10.8 1,321 10.9 Other Operating Expenses 664 527 25.9 639 4.0 EBITDA 740 547 35.2 733 0.9 Depreciation 29 32 (10.9) 29 (0.3) EBIT 711 515 38.1 704 0.9 Interest Cost 10 12 (22.8) 7 41.8 Other Income 167 114 46.2 97 71.9 PBT 869 617 40.8 795 9.3 Tax 247 163 51.4 221 11.7 Minority Interest 0 0 NM 0 NM RPAT 622 454 37.1 574 8.3 E/o (adj for tax) 0 2 NM 19 NM APAT 622 452 37.7 555 11.9 Source: Company, HDFC sec Inst Research Margin Analysis Particulars 2QFY19 2QFY18 YoY (bps) 1QFY19 QoQ (bps) Inventory Cost % Net Revenue 51.6 43.9 775 60.9 (924) Employee Cost % Net Revenue 24.7 30.9 (626) 19.2 550 SG&A and Other Expenses % Net Revenues 11.2 12.4 (116) 9.3 192 EBITDA Margin (%) 12.5 12.8 (34) 10.7 182 EBIT Margin (%) 12.0 12.1 (7) 10.2 176 Tax Rate (%) 28.4 26.4 197 27.8 63 APAT Margin (%) 10.5 10.6 (10) 8.1 241 Source: Company, HDFC sec Inst Research

IITS’ revenue grew 7.1% QoQ to Rs 2.75bn and DPS revenue declined 25.4% QoQ to Rs 3.25bn in INR terms IITS’ EBITDA margin adjusted for other income declined 153bps QoQ due to wage hike and employee additions offset by off shoring and currency benefits APAT stood at Rs 0.62bn up 11.9% QoQ (vs. our exp of Rs 0.64bn) led by higher other income (Rs 0.17bn vs Rs 0.10bn QoQ) Tax rate will remain the range of 27-28% for FY19-20E

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Segmental Revenue & EBITDA Mix Particulars (Rs mn) 2QFY19 2QFY18 YoY (%) 1QFY19 QoQ (%) 6MFY19 6MFY18 YoY (%) IITS Net Revenues 2,753 2,346 17.3 2,571 7.1 5,324 4,459 19.4 DPS Revenue 3,259 1,997 63.2 4,371 (25.4) 7,630 6,278 21.5 Inter segment (81) (74) NM (59) NM (140) (123) NM Total Revenue# 5,931 4,269 38.9 6,883 (13.8) 12,814 10,614 20.7

EBITDA (Rs mn) 2QFY19 2QFY18 YoY (%) 1QFY19 QoQ (%) 6MFY19 6MFY18 YoY (%) IITS * 568 413 37.6 570 (0.3) 1,138 748 52.2 DPS 177 140 26.4 167 6.0 344 291 18.2 Inter segment (5) (6) (9.5) (3) 50.0 (9) (15) (41.8) Total EBITDA 740 547 35.2 733 0.9 1,474 1,024 43.9

EBITDA Margin (%) 2QFY19 2QFY18 YoY (bps) 1QFY19 QoQ (bps) 6MFY19 6MFY18 YoY (bps) IITS 20.6 17.6 304 22.2 (153) 21.4 16.8 461 DPS 5.4 7.0 (158) 3.8 161 4.5 4.6 (13) Total EBITDA Margin (%) 12.5 12.8 (34) 10.7 182 11.5 9.6 185 Source: Company, HDFC sec Inst Research, *IITS EBITDA excludes other income and income tax refunds, # Reported revenue

IITS Vertical Revenue Mix (% Contribution) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 OPD 29.0% 30.0% 29.0% 28.0% 28.0% 28.0% 28.0% TTL 27.0% 28.0% 27.0% 28.0% 27.0% 27.0% 29.0% CPG & Retail 26.0% 24.0% 26.0% 27.0% 25.0% 25.0% 26.0% Others 18.0% 18.0% 18.0% 17.0% 20.0% 20.0% 17.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research

IITS Vertical-wise Revenue Growth (Growth % QoQ; USD) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 OPD -2.1% 10.2% 7.7% -0.9% 0.0% 1.1% 3.4% TTL 5.2% 10.5% 7.4% 6.5% -3.6% 1.1% 11.1% CPG & Retail -2.4% -1.7% 20.7% 6.6% -7.4% 1.1% 7.6% Others 7.3% 6.5% 11.4% -3.0% 17.6% 1.1% -12.1% Total 1.3% 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% Source: Company, HDFC Sec Inst Research

DPS business is lumpy in nature due to closure of some large deal in a particular quarter. The best way to measure its performance is on absolute EBITDA basis, which was up 6.0% QoQ IITS EBITDA declined in the quarter but in 6M the improvement has been significant (+461bps) OPD/Travel/Retail has grown at an eight quarter CQGR of 1.6/3.3/4.5% respectively Retail & Travel are the key focus verticals Out of the total 112 customers 47/14/12 are in Retail/OPD/Travel respectively

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IITS Service Line Break-up (% Contribution) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 ADM 25.0% 23.0% 23.0% 23.0% 24.0% 26.0% 25.0% Testing 17.0% 19.0% 18.0% 19.0% 18.0% 17.0% 17.0% IMS 19.0% 18.0% 17.0% 17.0% 19.0% 17.0% 16.0% AX 15.0% 17.0% 19.0% 20.0% 19.0% 18.0% 20.0% BI 8.0% 8.0% 7.0% 8.0% 7.0% 8.0% 8.0% E-commerce 6.0% 5.0% 6.0% 5.0% 5.0% 6.0% 7.0% ERP 5.0% 5.0% 5.0% 4.0% 4.5% 4.0% 4.0% Rezopia/Mobility/Cloud 5.0% 5.0% 5.0% 4.0% 3.5% 4.0% 3.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research IITS Service Line Growth (Growth %, QoQ) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 ADM 5.5% -2.0% 11.4% 2.7% 4.3% 9.5% -0.5% Testing 1.3% 19.0% 5.5% 8.4% -5.3% -4.5% 3.4% IMS 1.3% 0.9% 5.2% 2.7% 11.8% -9.6% -2.6% AX 1.3% 20.7% 24.5% 8.1% -5.0% -4.2% 14.9% BI -9.9% 6.5% -2.5% 17.3% -12.5% 15.5% 3.4% E-commerce 1.3% -11.2% 33.7% -14.4% 0.0% 21.3% 20.7% ERP 1.3% 6.5% 11.4% -17.9% 12.5% -10.2% 3.4% Rezopia 1.3% 6.5% 11.4% -17.9% -12.5% 15.5% -22.4% Total 1.3% 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% Source: Company, HDFC Sec Inst Research

IMS revenue has declined due to shift to cloud, but is nearing bottom ADM/Testing has grown at a CQGR of 2.9/3.6% over the last eight quarters Microsoft Dynamics AX has growth at a 8-quarter CQGR of 6.6% (company average is 2.9%) Among IPs, Rezopia and Halosys are witnessing increased traction Cloud migration, front end development and Analytics engine is a significant part of Digital revenue

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IITS Geographic Revenue Mix (% Contribution) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 USA 60.0% 60.0% 59.0% 59.0% 58.0% 60.0% 58.0% Europe 24.0% 26.0% 27.0% 27.0% 28.0% 29.0% 30.0% RoW 16.0% 14.0% 14.0% 14.0% 14.0% 11.0% 12.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research IITS Geographic Revenue Growth (% QoQ) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 USA 1.3% 6.5% 9.5% 2.7% -1.7% 4.6% 0.0% Europe 1.3% 15.4% 15.7% 2.7% 3.7% 4.7% 7.0% RoW 1.3% -6.8% 11.4% 2.7% 0.0% -20.6% 12.8% Total 1.3% 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% Source: Company, HDFC Sec Inst Research IITS Onsite-Offshore Split IT services revenue break-up (%) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 Offshore 57.0% 57.0% 55.0% 55.0% 59.0% 56.0% 58.0% Onsite 43.0% 43.0% 45.0% 45.0% 41.0% 44.0% 42.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research IITS Onsite-Offshore Growth IT services revenue growth (% QoQ) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY19 Offshore -3.7% 6.5% 7.5% 2.7% 7.3% -4.1% 7.1% Onsite 8.9% 6.5% 16.6% 2.7% -8.9% 8.5% -1.3% Total 1.3% 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% Source: Company, HDFC Sec Inst Research

Europe is seeing significant traction led by Travel and Microsoft ISV center, focus is to grow US revenue which is a bigger market Offshore revenue registered a significant jump this quarter, some of the Digital/OPD work is shifted to offshore locations

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IITS Client Concentration Client concentration (%) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 Top 5 59.0% 61.0% 60.0% 62.0% 61.0% 61.0% 61.0% Top-10 70.0% 70.0% 69.0% 71.0% 69.0% 70.0% 69.0% Non-top 10 30.0% 30.0% 31.0% 29.0% 31.0% 30.0% 31.0% Top 20 81.0% 79.0% 78.0% 79.0% 79.0% 80.0% 77.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research IITS Client Concentration Growth Client concentration (% growth) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 4QFY18 4QFY18 Top 5 1.3% 10.1% 9.6% 6.1% -1.6% 1.1% 3.4% Top-10 1.3% 6.5% 9.8% 5.6% -2.8% 2.5% 2.0% Non-top 10 1.3% 6.5% 15.1% -4.0% 6.9% -2.2% 6.9% Top 20 2.6% 3.9% 10.0% 4.0% 0.0% 2.3% -0.4% Total 1.3% 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% Source: Company, HDFC Sec Inst Research

Top 5/10 clients grew strongly for the second consecutive quarter, added 11 new clients in the quarter High client concentration is a risk, but there is enough scope to grow increase wallet share in Top-accounts

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IITS Rev Growth Trend IITS EBITDA, Margin Trend

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

IITS Headcount IITS Debtor Days


IITS revenue/EBITDA has growth at a CQGR of 3.7/6.5% over the last eight quarter IITS EBITDA margin will be in the range of 20-22% Added 225 employees in the IITs business Average revenue per employee stood at USD 43,583 down 1.9% QoQ but up 3.6% YoY Debtor days is among the lowest in the industry, stable at 40-42 level

27.4 28.5 29.2 31.2 30.3 30.7 32.7 36.4 37.4 37.4 37.8 39.1

(5)

(1)

3

7

11

15

0 5

10 15 20 25 30 35 40 45

3QFY

16

4QFY

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17

4QFY

17

1QFY

18

2QFY

18

3QFY

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4QFY

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1QFY

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2QFY

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Revenue (USD mn) QoQ growth (RHS)(USD mn) (%, QoQ)

423

320 342 414 394

325 335

413

503 479

570 568

9

11

13

15

17

19

21

23

25

50

150

250

350

450

550

650

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1QFY

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4QFY

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2QFY

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EBITDA EBITDA margin (RHS)(Rs mn) (%)

2,90

8 3,13

9

3,11

1

3,14

4

3,14

7

3,16

1 3,21

3 3,41

8

3,46

4

3,29

6

3,31

3 3,45

4 3,67

92,500

2,700

2,900

3,100

3,300

3,500

3,700

3,900

2QFY

16

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16

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Nos

60

52 55

60 60

48

52

47

40 39 40 41 42

0

10

20

30

40

50

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70

2QFY

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1QFY

19

2QFY

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Days

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DPS Quarterly Revenue Trend DPS EBITDA Margin Trend


DPS’ Headcount DPS’ Debtor Days


DPS EBITDA has grown at a CQGR of 2.8% over the last eight quarter DPS’ debtors days has come down to 48 led by efficient collections and higher cloud license sales

2,31

6

3,43

8

3,55

6

4,89

3

2,95

5

4,15

7

4,86

1

4,28

1

1,99

7

5,30

3

3,88

7

4,37

1

3,25

9

0

1,000

2,000

3,000

4,000

5,000

6,000

2QFY

16

3QFY

16

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16

1QFY

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17

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1QFY

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3QFY

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4QFY

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1QFY

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2QFY

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(Rs mn)

132

150 149 142 142

149 141

151 140

154 158 167

177

0

1

2

3

4

5

6

7

8

50

70

90

110

130

150

170

190

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19

2QFY

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EBITDA EBITDA margin (RHS)(Rs mn) (%)

142

140

148

147

156

153 15

3 157

164

163

163

161

157

125

130

135

140

145

150

155

160

165

170

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16

3QFY

16

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19

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(Nos)

101

65 62

69

110

95

76 81

59

38

49

55

48

0

20

40

60

80

100

120

2QFY

16

3QFY

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1QFY

18

2QFY

18

3QFY

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4QFY

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1QFY

19

2QFY

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Days

Page | 8


IITS’ Segment Estimates IITS (Rs million) FY17 FY18 FY19E FY20E FY21E Revenue (USD million) 121.4 143.9 159.1 180.2 203.6 % Growth 12.6 18.6 10.5 13.3 13.0 Revenue 8,218 9,285 11,239 12,978 14,659 % Growth 16.3 13.0 21.0 15.5 13.0 EBITDA 1,438 1,730 2,439 2,855 3,298 EBITDA Margin (%) 17.5 18.6 21.7 22.0 22.5 Source: Company, HDFC sec Inst Research

DPS’ Segment Estimates DPS (Rs million) FY17 FY18 FY19E FY20E FY20E Revenue 15,774 15,468 17,421 18,669 20,120 % Growth 26.2 (1.9) 12.6 7.2 7.8 EBITDA 583 603 696 781 868 EBITDA Margin (%) 3.7 3.9 4.0 4.2 4.3 Source: Company, HDFC sec Inst Research

Change In Estimates Particulars Earlier estimates Revised estimates % change FY19E Revenue (Rs mn) 27,757 28,321 2.0 EBITDA (Rs mn) 3,020 2,972 (1.6) EBITDA margin (%) 10.9 10.5 (39) APAT 2,295 2,342 2.0

FY20E Revenue (Rs mn) 30,667 31,271 2.0 EBITDA (Rs mn) 3,510 3,446 (1.8) EBITDA margin (%) 11.4 11.0 (43) APAT 2,637 2,698 2.3 Source: Company, HDFC sec Inst Research

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Peer Set Comparison

Company Mcap

(Rs bn)

CMP (Rs) Rating TP

(Rs)

EPS (Rs) P/E (x) RoE (%)

FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E

LTI 290 1,685 BUY 2,195 67.1 87.2 93.9 105.5 25.1 19.3 17.9 16.0 33.2 35.5 32.1 30.6 Mphasis 182 942 BUY 1,430 45.5 55.3 65.9 82.9 20.7 17.0 14.3 11.4 14.6 19.6 22.8 24.8 Mindtree 135 822 BUY 1,210 29.5 45.9 52.5 58.4 27.8 17.9 15.7 14.1 21.4 25.4 25.1 24.0 Hexaware * 93 313 BUY 560 16.9 20.9 23.2 26.4 18.6 14.9 13.5 11.8 26.9 28.6 27.3 26.8 LTT 171 1,665 BUY 1,950 46.4 68.9 79.7 98.6 35.9 24.2 20.9 16.9 27.7 32.9 30.6 29.6 Tata Elxsi 66 1,064 NR 1,120 38.5 48.2 54.4 63.1 27.6 22.1 19.6 16.9 37.0 36.0 32.6 30.9 Cyient 69 616 BUY 850 38.6 43.2 49.9 56.6 16.0 14.3 12.3 10.9 18.1 19.6 20.2 20.5 Persistent 45 563 BUY 850 40.4 46.2 52.9 60.9 13.9 12.2 10.7 9.2 16.0 16.4 16.7 17.1 Zensar 54 240 BUY 320 10.6 16.0 18.8 21.6 22.6 15.0 12.7 11.1 15.1 19.6 19.8 19.5 KPIT Tech 43 218 BUY 285 12.8 19.2 21.4 23.6 17.1 11.4 10.2 9.2 14.8 19.3 18.5 17.7 eClerx 41 1,064 NEU 1,140 70.8 70.9 79.0 96.7 15.0 15.0 13.5 11.0 23.9 22.3 23.9 23.8 Sonata 32 313 BUY 445 18.6 22.6 26.0 29.6 16.8 13.8 12.0 10.6 31.0 33.7 34.4 34.6 Intellect 30 244 BUY 300 3.7 8.3 11.4 17.3 NM 29.2 21.4 14.1 6.5 11.4 13.5 17.6 Majesco 14 498 BUY 731 (2.1) 28.4 40.4 49.6 NM 17.5 12.3 10.0 (1.5) 14.4 17.7 18.3 Midcap Average 21.4 17.4 14.8 12.4 20.3 23.9 23.9 24.0

Source: HDFC sec Inst Research * YE Dec, NR - Not Rated

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Consolidated Income Statement YE March (Rs bn) FY17 FY18 FY19E FY20E FY21E IITS USD Revenue (mn) 121.4 143.9 159.1 180.2 203.6 Growth (%) 12.6 18.6 10.5 13.3 13.0 Net Revenues 23.71 24.54 28.32 31.27 34.37 Growth (%) 22.2 3.5 15.4 10.4 9.9 Total Operating Expenses 21.79 22.23 25.35 27.82 30.42 EBITDA 1.92 2.31 2.97 3.45 3.95 EBITDA (%) 8.1 9.4 10.5 11.0 11.5 EBITDA Growth (%) (0.2) 20.6 28.7 16.0 14.6 Depreciation 0.11 0.12 0.13 0.14 0.16 EBIT 1.81 2.19 2.84 3.30 3.79 Other Income 0.55 0.47 0.46 0.47 0.51 Interest 0.09 0.05 0.03 0.03 0.04 PBT 2.26 2.60 3.27 3.74 4.26 Tax (incl deferred) 0.69 0.68 0.93 1.05 1.19 Minority Int. and associate profit -0.01 0.00 0.00 0.00 0.00 RPAT 1.56 1.93 2.34 2.70 3.07 EO (Loss) / Profit (Net Of Tax) 0.08 0.01 0.00 0.00 0.00 APAT 1.49 1.91 2.34 2.70 3.07 APAT Growth (%) (4.1) 28.8 22.4 15.2 13.8 EPS 15.1 18.6 22.6 26.0 29.6 EPS Growth (%) (1.4) 23.2 21.6 15.2 13.8

Source: Company, HDFC sec Inst Research

Consolidated Balance Sheet YE March (Rs bn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital - Equity 0.10 0.10 0.10 0.10 0.10 Reserves 5.80 6.43 7.26 8.21 9.30 Total Shareholders' Funds 5.90 6.53 7.36 8.32 9.41 Minority Interest 0.00 (0.00) 0.00 0.00 0.00 Total Debt 0.35 0.19 0.19 0.19 0.19 Net Deferred Taxes (0.05) (0.12) (0.12) (0.12) (0.12) Long-term Provisions & Others 0.14 0.13 0.13 0.13 0.13 TOTAL SOURCES OF FUNDS 6.36 6.72 7.55 8.51 9.60 APPLICATION OF FUNDS Net Block 0.38 0.33 0.37 0.42 0.46 CWIP 0.00 0.00 0.00 0.00 0.00 Goodwill & Other Intangible Assets 0.80 0.81 0.81 0.81 0.81 Investments 0.00 0.00 0.00 0.00 0.00 LT Loans & Advances, Others 0.80 0.85 0.96 1.10 1.25 Total Non Current Assets 1.99 1.99 2.15 2.32 2.52 Inventories 0.00 0.00 0.00 0.00 0.00 Debtors 5.20 3.96 5.04 5.57 6.12 Cash & Equivalents 3.81 5.46 5.72 6.40 7.18 Other Current Assets 0.93 0.80 0.88 0.97 1.07 Total Current Assets 9.94 10.22 11.64 12.94 14.37 Creditors 4.48 4.32 5.00 5.49 6.00 Other Current Liabilities & Provns 1.09 1.17 1.24 1.26 1.29 Total Current Liabilities 5.58 5.49 6.24 6.75 7.29 Net Current Assets 4.37 4.73 5.40 6.18 7.07 TOTAL APPLICATION OF FUNDS 6.36 6.72 7.55 8.51 9.60


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Consolidated Cash Flow YE March (Rs bn) FY17 FY18 FY19E FY20E FY21E Reported PBT 2.26 2.60 3.27 3.74 4.26 Non-operating & EO items (0.48) (0.45) (0.46) (0.47) (0.50) Interest expenses 0.09 0.05 0.03 0.03 0.04 Depreciation 0.11 0.12 0.13 0.14 0.16 Working Capital Change (0.78) 1.13 (0.60) (0.23) (0.26) Tax paid (0.69) (0.68) (0.93) (1.05) (1.19) OPERATING CASH FLOW ( a ) 0.52 2.78 1.45 2.17 2.50 Capex (0.09) (0.08) (0.17) (0.19) (0.21) Free cash flow (FCF) 0.43 2.70 1.28 1.98 2.29 Investments 0.00 0.00 0.00 0.00 0.00 Non-operating income 0.47 0.45 0.46 0.47 0.51 INVESTING CASH FLOW ( b ) 0.38 0.38 0.29 0.28 0.30 Debt Issuance (1.36) (0.17) 0.00 0.00 0.00 Interest expenses (0.09) (0.05) (0.03) (0.03) (0.04) FCFE (1.02) 2.49 1.24 1.95 2.26 Share capital Issuance (0.00) 0.00 0.00 0.00 0.00 Dividend (1.13) (1.28) (1.51) (1.74) (1.98) FINANCING CASH FLOW ( c ) (2.58) (1.49) (1.54) (1.78) (2.02) NET CASH FLOW (a+b+c) (1.68) 1.66 0.19 0.68 0.78 Non-operating and EO items 0.60 0.01 0.00 0.00 0.00 Closing Cash & Equivalents 3.86 5.53 5.72 6.40 7.18


Key Ratios FY17 FY18 FY19E FY20E FY21E PROFITABILITY (%) EBITDA Margin 8.1 9.4 10.5 11.0 11.5 APAT Margin 6.6 7.8 8.3 8.6 8.9 RoE 29.3 31.0 33.7 34.4 34.6 RoIC or Core RoCE 48.4 127.2 110.9 112.8 113.0 RoCE 19.1 24.6 28.5 29.6 64.1 EFFICIENCY Tax Rate (%) 31.7 26.3 28.5 28.0 28.0 Fixed Asset Turnover (x) 17.3 17.0 17.6 17.4 17.1 Inventory (days) 0 0 0 0 0 Debtors (days) 80 59 65 65 65 Other Current Assets (days) 14 12 11 11 11 Payables (days) 75 71 72 72 72 Other Current Liab & Provns (days) 17 17 16 15 14 Cash Conversion Cycle (days) 3 (17) (12) (10) (9) Net Debt/EBITDA (x) (1.8) (2.3) (1.9) (1.8) (1.8) Net Debt/Equity (x) (0.6) (0.8) (0.8) (0.7) (0.7) Interest Coverage (x) 19.5 45.5 89.5 98.2 106.7 PER SHARE DATA EPS (Rs/sh) 15.1 18.6 22.6 26.0 29.6 CEPS (Rs/sh) 16.1 19.7 23.8 27.4 31.1 DPS (Rs/sh) 9.3 10.5 12.4 14.3 16.3 BV (Rs/sh) 56.9 63.0 70.9 80.2 90.6 VALUATION P/E 20.6 16.7 13.7 11.9 10.5 P/BV 5.5 4.9 4.4 3.9 3.4 EV/EBITDA 15.5 12.1 9.3 7.9 6.7 OCF/EV (%) 1.7 9.9 5.2 8.0 9.5 FCF/EV (%) 1.4 9.6 4.6 7.3 8.7 FCFE/mkt cap (%) (3.2) 7.7 3.9 6.1 7.0 Dividend Yield (%) 3.0 3.4 4.0 4.6 5.2


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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 15-Nov-17 190 BUY 230 21-Dec-17 251 BUY 275 10-Jan-18 284 BUY 300 8-Feb-18 291 BUY 335

12-Apr-18 333 BUY 375 23-May-18 338 BUY 380

6-Jul-18 284 BUY 380 16-Aug-18 327 BUY 375 10-Oct-18 334 BUY 421 5-Nov-18 313 BUY 445

RECOMMENDATION HISTORY

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Sonata Software TP

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Disclosure: We, Amit Chandra, MBA, & Apurva Prasad, MBA & Akshay Ramnani, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. 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