The quarter's results present a paradox for investors: whilst topline growth faltered significantly, the company demonstrated improved operational efficiency through margin expansion. The 28.53% sequential revenue decline raises questions about demand volatility, but the simultaneous 9.92% profit growth suggests effective cost management and operational leverage. Year-on-year comparisons paint a slightly better picture, with net profit up 12.87% despite revenues declining 2.33%.
Sonata Software's stock has been under severe pressure, declining 44.13% over the past year, substantially underperforming both the Sensex (up 7.07%) and its sector peers (down 20.15%). The stock currently trades at a price-to-earnings ratio of 20x, representing a discount to the industry average of 26x, whilst maintaining a healthy return on equity of 31.24%.
| Metric | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | Jun'24 | Mar'24 |
|---|---|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 2,119.30 | 2,965.18 | 2,617.20 | 2,842.79 | 2,169.83 | 2,527.43 | 2,191.61 |
| QoQ Change (%) | -28.53% | +13.30% | -7.94% | +31.01% | -14.15% | +15.32% | — |
| Net Profit (₹ Cr) | 120.19 | 109.34 | 107.53 | 105.01 | 106.49 | 105.63 | 110.36 |
| QoQ Change (%) | +9.92% | +1.68% | +2.40% | -1.39% | +0.81% | -4.29% | — |
| Operating Margin (%) | 8.15% | 5.38% | 6.60% | 5.75% | 8.17% | 6.97% | 6.58% |
| PAT Margin (%) | 5.67% | 3.69% | 4.11% | 3.69% | 4.91% | 4.18% | 5.04% |
Financial Performance: Margin Resilience Amid Revenue Volatility
In Q2 FY26, Sonata Software's revenues contracted sharply to ₹2,119.30 crores from ₹2,965.18 crores in Q1 FY26, marking a 28.53% sequential decline. This represents the company's lowest quarterly revenue since September 2024. Year-on-year, revenues declined 2.33% from ₹2,169.83 crores in Q2 FY25, indicating challenging demand conditions persisting across comparable periods.
However, the profit story diverged significantly from the revenue narrative. Net profit climbed 9.92% sequentially to ₹120.19 crores, up from ₹109.34 crores in Q1 FY26. Year-on-year profit growth stood at a robust 12.87%, rising from ₹106.49 crores in Q2 FY25. This profit expansion despite revenue contraction highlights improved operational efficiency and cost optimisation.
The margin expansion story is particularly compelling. Operating margin (excluding other income) surged to 8.15% in Q2 FY26 from 5.38% in Q1 FY26, representing a substantial 277 basis points sequential improvement. This brought margins back to levels last seen in September 2024 (8.17%). PAT margin similarly expanded to 5.67% from 3.69%, a 198 basis points improvement quarter-on-quarter.
Operating profit (PBDIT excluding other income) stood at ₹172.70 crores in Q2 FY26, up 8.18% sequentially from ₹159.65 crores, despite the revenue decline. This demonstrates strong operating leverage and cost discipline. Employee costs remained relatively stable at ₹422.50 crores compared to ₹418.04 crores in the previous quarter, suggesting headcount rationalisation or improved productivity per employee.
Interest costs rose significantly to ₹14.21 crores from ₹5.08 crores sequentially, reflecting higher debt utilisation. However, depreciation remained stable at ₹26.26 crores versus ₹26.08 crores. The tax rate moderated to 26.53% from 28.40%, providing some relief to bottom-line growth.
Operational Challenges: Revenue Volatility and Demand Uncertainty
The sharp revenue contraction in Q2 FY26 raises concerns about demand stability and project pipeline visibility. The 28.53% sequential decline is one of the steepest in the company's recent history, suggesting either completion of large projects, client-specific issues, or broader demand softness in key markets. Historically, Sonata Software has exhibited revenue volatility, with quarterly swings ranging from -14.15% to +31.01% over the past seven quarters.
From a longer-term perspective, the company has demonstrated solid growth credentials, with a five-year sales compound annual growth rate (CAGR) of 21.87% and EBIT CAGR of 11.92%. However, the recent quarterly performance suggests this growth trajectory may be facing headwinds. The company's return on capital employed (ROCE) stood at 25.50% as of the latest period, down from historical averages of 63.47%, indicating reduced capital efficiency.
Key Concern: Revenue Volatility
The 28.53% sequential revenue decline in Q2 FY26 represents a significant red flag for investors. Whilst margin expansion partially offset the topline weakness, sustained revenue volatility could pressure long-term profitability and valuation multiples. The company needs to demonstrate more stable revenue generation and improved visibility on its project pipeline to restore investor confidence.
On the balance sheet front, Sonata Software maintains a relatively healthy financial position. Long-term debt stood at ₹227.90 crores as of March 2025, down from ₹431.01 crores a year earlier, indicating deleveraging efforts. The company's debt-to-EBITDA ratio averaged 0.72, whilst net debt-to-equity averaged 0.24, both suggesting manageable leverage levels. However, the sequential increase in interest costs bears monitoring.
Return on equity (ROE) at 24.94% remains robust, though below the five-year average of 31.24%. This suggests the company continues to generate healthy returns for shareholders, albeit with some moderation. The company's average EBIT-to-interest coverage ratio of 16.57 times indicates strong debt servicing capability, providing a cushion against near-term financial stress.
Industry Context: IT Services Sector Facing Headwinds
The Indian IT services sector has faced challenging conditions over the past year, with global economic uncertainty, client budget constraints, and technology disruption impacting demand. Sonata Software's 44.13% stock price decline over the past year, whilst severe, reflects broader sector weakness, with the Computers - Software & Consulting sector down 20.15% over the same period.
However, Sonata Software's underperformance of 23.98 percentage points relative to its sector suggests company-specific challenges beyond macro headwinds. The stock's high beta of 1.59 indicates it is more volatile than the broader market, amplifying both upside and downside moves. This high volatility, combined with negative risk-adjusted returns over the past year, places the stock in the "high risk, low return" category.
The company operates in a highly competitive landscape, competing with both large-cap IT services giants and nimble mid-sized players. Its focus on IT services and software solutions across the US, Europe, Middle East, and Asia-Pacific provides geographic diversification, but also exposes it to multiple regional economic cycles. The company's product distribution business in India adds another revenue stream but may contribute to overall revenue volatility.
| Company | P/E (TTM) | P/BV | ROE (%) | Debt/Equity | Div Yield (%) |
|---|---|---|---|---|---|
| Sonata Software | 19.50 | 4.87 | 31.24% | 0.24 | 2.24% |
| Birlasoft Ltd | 24.77 | 3.28 | 16.74% | -0.51 | 1.49% |
| Cyient | 21.26 | 2.13 | 14.28% | -0.21 | 2.81% |
| Intellect Design | 27.57 | 3.58 | 15.11% | -0.11 | 0.92% |
| Latent View | 44.43 | 5.43 | 13.51% | -0.34 | — |
| Black Box | 32.94 | 9.98 | 31.59% | 0.83 | 0.19% |
Peer Comparison: Valuation Discount Despite Strong ROE
Relative to its peer group, Sonata Software presents an interesting valuation proposition. Trading at a price-to-earnings ratio of 19.50x, the stock commands a significant discount to peers like Latent View (44.43x), Black Box (32.94x), and Intellect Design (27.57x). The company's P/E multiple is also below the industry average of 26x, suggesting the market is pricing in concerns about growth sustainability or operational challenges.
However, Sonata Software's return on equity of 31.24% stands out as the highest among its peer group (tied with Black Box at 31.59%), significantly exceeding Birlasoft (16.74%), Cyient (14.28%), Intellect Design (15.11%), and Latent View (13.51%). This superior capital efficiency suggests the company generates more profit per rupee of shareholder equity, a key quality indicator.
The company's price-to-book value ratio of 4.87x sits in the middle of the peer range, higher than Cyient (2.13x) and Birlasoft (3.28x) but lower than Black Box (9.98x) and Latent View (5.43x). Given its strong ROE, the P/BV multiple appears reasonable, though the valuation discount to peers on P/E terms reflects market scepticism about near-term growth prospects.
Sonata Software's dividend yield of 2.24% is attractive relative to most peers, second only to Cyient's 2.81%. The company paid a dividend of ₹1.25 per share with an ex-dividend date of November 21, 2025, representing a payout ratio of 28.76%. This suggests a balanced approach to capital allocation, returning cash to shareholders whilst retaining sufficient funds for growth investments.
Valuation Analysis: Attractive Entry Point or Value Trap?
At the current price of ₹307.45, Sonata Software trades at a P/E ratio of 20x, representing a 23% discount to the industry average of 26x. The stock's enterprise value-to-EBITDA multiple of 13.54x and EV-to-EBIT multiple of 16.13x both suggest reasonable valuations relative to historical norms and peer comparisons. The EV-to-capital employed ratio of 4.11x appears attractive given the company's ROCE of 25.50%, implying the market is paying approximately 4.11 rupees for every rupee of capital that generates a 25.50% return.
The stock has declined 45.96% from its 52-week high of ₹568.90, currently trading just 7.35% above its 52-week low of ₹286.40. This substantial correction has brought valuations down to more reasonable levels, with the stock's valuation grade recently shifting from "Expensive" to "Fair" in September 2025. The company's proprietary Mojo score of 51 out of 100 places it in "HOLD" territory, reflecting attractive valuations offset by weak technical momentum and flat recent financial trends.
The key question for investors is whether the current valuation represents an attractive entry point into a quality business facing temporary headwinds, or a value trap where the low multiples reflect structurally challenged growth prospects. The company's strong long-term fundamentals (21.87% sales CAGR, 31.24% average ROE, minimal debt) support the former view, whilst recent revenue volatility and weak technical momentum support the latter.
Based on the company's book value per share of ₹61.45 and assuming a normalised P/BV multiple of 5.5x (slightly above current levels given strong ROE), a fair value estimate would be approximately ₹338, representing 10% upside from current levels. However, this assumes the company can stabilise revenue growth and maintain margin improvements, which remain uncertain given recent quarterly volatility.
Shareholding Pattern: Institutional Confidence Under Pressure
Sonata Software's shareholding pattern reveals a stable promoter base at 28.17%, unchanged over the past five quarters. This consistency provides governance stability, though the relatively low promoter holding (compared to many Indian IT companies) means greater influence from institutional and retail investors.
| Category | Dec'25 | Sep'25 | Jun'25 | Mar'25 | Dec'24 |
|---|---|---|---|---|---|
| Promoter | 28.17% | 28.17% | 28.17% | 28.17% | 28.17% |
| FII | 8.79% | 8.85% | 9.68% | 10.76% | 12.29% |
| Mutual Funds | 25.62% | 25.69% | 25.11% | 25.31% | 23.09% |
| Insurance | 0.36% | 0.47% | 0.30% | 0.36% | 0.75% |
| Other DII | 0.32% | 0.17% | 0.15% | 0.18% | 0.46% |
| Non-Institutional | 36.73% | 36.65% | 36.59% | 35.22% | 35.24% |
More concerning is the steady decline in foreign institutional investor (FII) holdings, which have dropped from 12.29% in December 2024 to 8.79% in December 2025, representing a 350 basis points reduction over four quarters. This sustained selling by sophisticated global investors suggests concerns about the company's growth trajectory or sector outlook. The most recent quarter saw FII holdings decline by 6 basis points from 8.85% to 8.79%.
Mutual fund holdings have remained relatively stable around 25-26%, currently at 25.62%, down marginally from 25.69% in the previous quarter. The fact that 22 mutual funds continue to hold the stock indicates domestic institutional support, though the lack of meaningful accumulation suggests a wait-and-watch approach. Insurance company holdings remain minimal at 0.36%, down from 0.75% a year ago.
Non-institutional holdings (largely retail investors) have increased from 35.24% to 36.73% over the past year, suggesting retail accumulation during the price decline. This could provide price support, though retail holdings are typically less stable than institutional holdings during market stress.
Stock Performance: Severe Underperformance Across All Timeframes
Sonata Software's stock performance has been dismal across most timeframes, with the severity of underperformance intensifying in recent periods. Over the past year, the stock has plummeted 44.13%, generating a negative alpha of 51.20 percentage points relative to the Sensex's 7.07% gain. This represents one of the worst performances in the IT services sector.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -2.81% | +1.59% | -4.40% |
| 1 Month | -12.68% | -1.74% | -10.94% |
| 3 Months | -16.09% | +0.32% | -16.41% |
| 6 Months | -11.47% | +3.77% | -15.24% |
| YTD | -14.59% | -1.92% | -12.67% |
| 1 Year | -44.13% | +7.07% | -51.20% |
| 2 Years | -62.62% | +15.78% | -78.40% |
| 3 Years | +0.25% | +38.13% | -37.88% |
| 5 Years | +101.66% | +64.75% | +36.91% |
The two-year performance is even more concerning, with the stock down 62.62% whilst the Sensex gained 15.78%, resulting in a negative alpha of 78.40 percentage points. Short-term trends remain equally weak, with the stock declining 12.68% over the past month, 16.09% over three months, and 14.59% year-to-date, all substantially underperforming the benchmark.
However, longer-term investors who entered five years ago would still be sitting on positive returns of 101.66%, outperforming the Sensex's 64.75% gain by 36.91 percentage points. This suggests the company has created value over the long term, but recent operational challenges and sector headwinds have severely impacted sentiment and valuations.
From a technical perspective, the stock is in a confirmed bearish trend, trading below all key moving averages: 5-day (₹314.64), 20-day (₹325.08), 50-day (₹343.62), 100-day (₹356.88), and 200-day (₹375.07). Multiple technical indicators including MACD, Bollinger Bands, and KST are flashing bearish signals on both weekly and monthly timeframes. The stock's beta of 1.59 indicates high volatility, with risk-adjusted returns deeply negative at -0.98 over the past year.
Investment Thesis: Quality Business at Crossroads
Sonata Software presents a complex investment proposition characterised by strong fundamental quality metrics offset by weak near-term momentum and operational uncertainty. The company's Mojo score of 51 out of 100 reflects this dichotomy, with excellent quality credentials (31.24% average ROE, 21.87% sales CAGR, minimal leverage) undermined by flat financial trends and bearish technical indicators.
The company's valuation has become attractive following the severe correction, with the P/E ratio of 20x representing a discount to both historical levels and peer multiples. The strong ROE of 31.24% and healthy dividend yield of 2.24% provide downside protection, whilst the absence of promoter pledging and reasonable leverage levels (debt-to-equity of 0.24) suggest financial stability.
However, several red flags temper enthusiasm. The 28.53% sequential revenue decline in Q2 FY26 raises serious questions about demand visibility and growth sustainability. The sustained FII selling over four consecutive quarters suggests sophisticated investors harbour concerns about the company's prospects. The bearish technical setup, with the stock trading below all moving averages and multiple indicators flashing sell signals, suggests further downside risk in the near term.
Key Strengths & Risk Factors
KEY STRENGTHS
- Exceptional ROE: Average ROE of 31.24% demonstrates superior capital efficiency, highest amongst peer group
- Margin Expansion: Operating margins improved 277 bps QoQ to 8.15% despite revenue decline, showing operational leverage
- Strong Long-Term Growth: Five-year sales CAGR of 21.87% reflects solid historical growth trajectory
- Healthy Balance Sheet: Low debt-to-equity of 0.24 and debt-to-EBITDA of 0.72 provide financial flexibility
- Attractive Valuation: P/E of 20x represents 23% discount to industry average of 26x
- Zero Promoter Pledging: No pledged shares indicates strong promoter confidence and governance quality
- Solid Dividend Yield: 2.24% yield with 28.76% payout ratio balances returns with growth investments
KEY CONCERNS
- Severe Revenue Decline: 28.53% QoQ revenue drop in Q2 FY26 raises questions about demand stability and pipeline visibility
- Persistent FII Selling: Foreign institutional holdings down 350 bps over four quarters signals institutional concerns
- Bearish Technical Setup: Stock below all moving averages with multiple indicators flashing sell signals
- High Volatility: Beta of 1.59 indicates stock is 59% more volatile than market, amplifying downside risk
- Sector Underperformance: Stock down 44.13% vs sector decline of 20.15%, suggesting company-specific issues
- Declining ROCE: Latest ROCE of 25.50% down from historical average of 63.47%, indicating reduced capital efficiency
- Flat Financial Trend: Recent quarterly performance rated "Flat" with mixed operational indicators
Outlook: What to Watch
POSITIVE CATALYSTS
- Revenue Stabilisation: Sequential revenue growth in coming quarters would signal demand recovery
- Sustained Margin Gains: Maintaining 8%+ operating margins would validate operational improvements
- Deal Pipeline Announcements: Large deal wins would improve visibility and sentiment
- FII Accumulation: Reversal of institutional selling would indicate confidence restoration
- Technical Breakout: Move above 20-DMA (₹325) could trigger momentum reversal
RED FLAGS
- Further Revenue Decline: Another quarter of topline contraction would confirm structural issues
- Margin Compression: Inability to sustain Q2 margin levels would pressure profitability
- Accelerated FII Selling: Continued institutional exodus would create supply overhang
- Breach of 52-Week Low: Break below ₹286.40 would open further downside to ₹250-260
- Sector Headwinds: Broader IT services weakness could extend the downturn
The next few quarters will be critical in determining whether Sonata Software's current challenges represent a temporary cyclical downturn or a more structural shift in its business model. Investors should closely monitor quarterly revenue trends, margin sustainability, deal pipeline visibility, and institutional shareholding patterns. Any stabilisation in topline growth accompanied by sustained margin expansion would significantly improve the investment case.
The Verdict: Quality Business Awaiting Operational Turnaround
Score: 51/100
For Fresh Investors: Wait for signs of revenue stabilisation and technical trend reversal before initiating positions. Whilst valuations appear attractive, the operational uncertainty and bearish momentum suggest patience is warranted. Consider accumulating only if the stock breaks above ₹325 with improving volumes, or if quarterly results demonstrate sustained revenue growth.
For Existing Holders: Continue holding given the strong fundamental quality and attractive long-term prospects. The 45% correction has already priced in significant pessimism, and the company's excellent ROE, healthy balance sheet, and margin expansion capability provide a solid foundation for eventual recovery. However, maintain strict monitoring of quarterly results and consider reducing positions if revenue decline persists beyond Q3 FY26.
Fair Value Estimate: ₹338 (10% upside from current levels), based on normalised P/BV of 5.5x and book value of ₹61.45, contingent on stabilisation of revenue growth and sustained margin improvements.
Sonata Software represents a classic turnaround situation where patient investors with a 2-3 year horizon could be rewarded, but near-term volatility and operational uncertainty make it unsuitable for those seeking immediate returns or with low risk tolerance.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. All investments carry risk, including potential loss of principal.
