IT stock surges to trade at record high on its largest acquisition. More rally ahead?

“Sonata Software announced its largest acquisition of Quant Systems. The deal is valued at P/S of 4.3x, which we believe is on the higher side but it is justified by Quant’s high growth profile, superior margin of >25%, excellent partnership network and domain capabilities in the BFSI and healthcare verticals. The acquisition is in line with management’s target to double IITS revenue (hit half a billion) in four years, supported by higher investments in new verticals and geographies and expanding partnerships beyond Microsoft. The deal is EPS accretive and will boost FY24/25E EPS by +2/6% respectively,” said analysts at HDFC Securities. 

The acquisition will also add two new clients to the top-5 list of Sonata’s and will help expand its presence in the BFSI and healthcare verticals. The brokerage likes Sonata based on growth acceleration in IITS, strong Microsoft relationship, new CEO focus on improving sales engine, continued growth in DPS and high RoE. It has maintained its BUY rating on the IT stock and increased its target price to ₹775 per share.

“Sonata’s share price has grown by ~3x over the past five years. Acquisition of QS will strengthen Sonata offering in BFSI and Healthcare & Life science verticals which will aid the revenue growth of company. It will also help in commanding better pricing as Quant Systems led data analytics, data engineering is already commanding premium billing rates. Winning large deals and strong digital spending by the clients prompt us to build IT service dollar revenue growth of over 23.8% CAGR over FY22-25E,” said analysts at ICICI Securities who have also maintain BUY rating on the stock with a target price of ₹835 apiece.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.