Sonata Software Shares Plunge 15% Amid Client Ramp Down and Revenue Concerns
Sonata Software witnessed a sharp decline of over 15% in early trade on February 7. This downturn came after the company revealed details regarding a significant client ramp down in a key vertical during Q3FY25.
The company stated that this ramp down would impact revenue for Q4FY25 as well.
“During the quarter, we had unplanned ramp down and one-time discount for a large hitech client, as a result, our TMT vertical de-grew,” the company stated during its earnings call. Sonata Software added that this ramp down would have a ‘full-quarter impact’ on Q4FY25.
Revenue and Margin Impact
Sonata Software had previously projected strong revenue growth for Q4FY25. However, due to the sudden ramp down by the client, the company now anticipates Q4FY25 to be a ‘de-growth’ quarter.
The ramp down also affected Q3FY25 margins, with EBITDA seeing a negative impact, partly attributed to a one-time discount.
The company reported that the margin decline was due to the ramp down, leading to an impact of approximately 260 basis points (bps) quarter-on-quarter (QoQ).
Additional costs, including wage hikes, severance payouts, and furloughs in the international IT business, resulted in a total margin decline of about 360 bps for Q3FY25.
A ‘ramp down’ refers to a gradual reduction in services or engagement with a client, which may eventually lead to contract termination. Sonata Software stated that this decision was made by the client as part of their cost-optimization strategy.
The company expects the impact to last until Q4FY25, with the possibility of extending into Q1FY26. However, Sonata is optimistic about returning to a growth trajectory within the next few quarters.
Q3FY25 Financial Performance
The IT services firm reported a 1.4% QoQ decline in consolidated net profit, amounting to Rs 105 crore. Profit from international services declined by 8.4% QoQ to Rs 57 crore.
Consolidated EBITDA fell by 7.8% QoQ to Rs 163.6 crore, while international services EBITDA dropped 16.9% QoQ to Rs 107 crore.
On the revenue front, international services revenue stood at Rs 731.7 crore, marking a 3.4% QoQ increase. Meanwhile, domestic business revenue saw significant growth of 44.4%, reaching Rs 2111 crore.
Large Deal Wins and Market Position
Despite the revenue setback, Sonata Software reported healthy deal wins. The company secured a total contract value (TCV) of $107 million. Notably, over 44% of its large deal pipeline is attributed to Fortune 500 clients.
During the quarter, the company successfully closed two major deals: one multi-million-dollar deal on Microsoft Fabric and another focused on Gen AI modernization.
Stock Performance and Analyst Ratings
Sonata Software’s stock plummeted by up to 19% on February 7, hitting a 52-week low of Rs 445.65 following its Q3FY25 results.
By 12:43 PM, the stock was trading at Rs 491.15, marking a decline of 10.75% from its previous close at Rs 550.30. The stock has dropped by 20.39% over the past month and 38.86% over the past year.
HDFC Securities revised its earnings per share (EPS) estimates for FY26 and FY27 downward by 9% and 8%, respectively, factoring in growth challenges.
The brokerage maintains an ‘Add’ rating on the stock with a target price of Rs 570 per share, based on FY27e EPS.
Sonata Software’s recent performance reflects the challenges posed by the client ramp down, affecting revenue and margins. While the near-term outlook appears challenging, the company remains confident in its large deal pipeline and expects a recovery within a few quarters.
Investors and analysts continue to monitor Sonata Software’s progress as it navigates these headwinds.
