What Next for this Beaten Down IT Stock with High Dividend Yield?

The 2024 Indian stock market narrative is experiencing a dramatic plot twist.

After a rough March marred by SEBI's comments triggering a small-cap sell-off, these feisty underdogs are back with a vengeance. Forget their supporting role; they're stealing the show.

While the BSE Sensex has maintained a respectable performance exceeding 4% year-to-date, and the mid-cap index has seen a steady 3% climb, smallcaps have become the market's darlings.

This dramatic turnaround follows two months of underperformance compared to the broader market.

April witnessed a phenomenal surge, with the small-cap index skyrocketing a staggering 11.4%.

While the overall segment is booming, a smallcap with a dividend yield of over 2%, Sonata Software, has plummeted 21% in a month.

Here's why.

Why Sonata Software Share Price is Falling

#1 Weak Q4 Results

Sonata Software's stock price has been on a downward trend following the company's disappointing financial results for the March 2024 quarter.

For the quarter, the company reported a 15% YoY rise in revenue at Rs 21.9 billion (bn).

Meanwhile what troubled the street was the net profit. The company reported a 3% YoY decline in net profit to Rs 1.1 bn.

What raised significant concerns was not just the slight drop in net profit but also the sequential decreases in both revenue and net profit. Sequentially, revenue witnessed a notable decline of 14.6%, while net profit plummeted by a significant 14%.

This downward trajectory can be attributed to various factors. Firstly, delays in decision-making processes for large deals have contributed to the revenue decline.

Additionally, an increase in associated costs has further exacerbated the company's profitability challenges.

Although there was modest year-on-year revenue growth, the sequential declines in both revenue and net profit underscore underlying operational challenges within Sonata Software.

#2 Deal Closure Challenges

The company observed prolonged cycles in finalising major deals, and if these trends persist for another 1 or 2 quarters, potential challenges may arise.

Seasonal factors, in combination with delays in closing significant deals, notably affected the company's performance during the quarter.

During this period, the company maintained investment in a substantial deal with a healthcare client.

However, the client's decision to postpone the deal due to organisational and leadership changes significantly impacted both revenue and the investments earmarked for this project.

Consequently, the company's financial results for the quarter were affected.

To address this delay, the company plans to redeploy the investments allocated for this deal over the next 1 or 2 quarters.

This involves reallocating resources to other deals in the pipeline, which the company anticipates closing within the specified timeframe.

This delay in the redeployment of investments not only prolongs the utilisation of capital but also raises concerns about the company's operational effectiveness, further dragging the stock down.

#3 Gloomy Sectoral Outlook

The Indian IT sector has faced significant challenges for over a year, primarily stemming from weakened discretionary demand from key US and European markets, exacerbated by elevated interest rates.

Despite recent earnings reports and cautious growth guidance from major IT players, the sector continues to grapple with pervasive pessimism.

While the March quarter earnings of major Indian IT firms displayed a mixed bag of results - with some reporting healthy deal wins and improved margins due to enhanced efficiency and utilisation - management commentary underscored the persistent weakness in demand.

Moreover, the increasing adoption of Generative Artificial Intelligence (Gen AI) is catalysing a substantial transformation within the industry, adding another layer of uncertainty to the sector's trajectory.

Disappointing revenue growth guidance from several large IT companies has only served to compound the prevailing gloom. The key focus remains on effectively translating deal wins into tangible revenue streams.

Although reductions in subcontracting costs and enhanced utilisation have bolstered margins, the benefits have been offset by wage hikes and escalating travel expenses.

This overall weak outlook has likely exacerbated the downward pressure on stock prices.

What Next?

Sonata is expected to uphold its platformation approach as a central strategy. This approach, emphasising the development of open, intelligent, and scalable platforms, is well-aligned with the evolving demands of businesses in the digital era.

Furthermore, acquisitions have historically played a pivotal role in Sonata's growth strategy and are anticipated to continue doing so. The company may set its sights on smaller players possessing complementary technologies or expertise to enhance its portfolio of offerings.

Additionally, the company has a history of paying consistent dividends, having declared 48 dividends since 2000. In the past 12 months, Sonata Software has declared an equity dividend amounting to Rs 15.7 per share.

At the current share price, the company has a dividend yield of 2.9%. Looking ahead, the company plans to continue rewarding shareholders with regular dividends.

Additionally, prioritising customer satisfaction and fostering robust client relationships are poised to remain at the forefront of Sonata's agenda.

How Shares of Sonata Software have Performed Recently

So far in 2024, Sonata Software shares are down by 24%, while it has lost 21% in past one month.

The company touched its 52-week high of Rs 870 on 27 February 2024 and its 52-week low of Rs 475.1 on 11 July 2023.

About Sonata Software

Sonata Software is a global technology company, that enables successful platform-based digital transformation initiatives for enterprises, to create businesses that are connected.

It enables successful platform-based digital transformation initiatives for enterprises, to create businesses that are connected, open, intelligent, and scalable.

The company also distributes products from global technology companies present in India.

Sonata a division of IOCL was later spun off as an independent company, namely Sonata Software.

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