Rating Rationale
March 31, 2022 | Mumbai
Sonata Software Limited
Rating Reaffirmed and Withdrawn
 
Rating Action
Total Bank Loan Facilities RatedRs.50 Crore
Long Term RatingCRISIL A+/Stable (Rating Reaffirmed and Withdrawn)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long-term bank facility of Sonata Software Limited (SSL) and has subsequently withdrawn the rating at the company’s request on receipt of a ‘no-objection certificate’ from the lender. This is in line with the CRISIL Ratings policy on withdrawal of bank loan ratings.

 

SSL's revenue grew 29% during the nine months of fiscal 2022, compared to the corresponding period of the previous fiscal, driven by a 31% growth in the domestic products and services business. After registering a de-growth in fiscal 2021, revenues in the higher-margin international information technology (IT) services business also grew by 25% due to healthy recovery in the travel and retail vertical and stabilization of business due to easing of the pandemic. The growth was also aided by increasing demand for digitization across verticals such as distribution, manufacturing, utility and service; and commodity business, share of digital segment in IT services segment has now risen to ~72% from around 60% in the year ago period. Further, earnings before interest, tax, depreciation, and amortization (EBITDA) margins also increased marginally by 30 basis points (bps) on year-on-year basis to 9.1% during the period.

 

Over the medium term, SSL is likely to sustain healthy revenue growth driven by continuing growth in the domestic business due to rising demand for cloud services, strong rebound in retail, Independent Software Vendors (ISV) and travel segment, client additions, and healthy deal pipeline. Although, operating margin is expected to moderate by 100-150 bps in the next fiscal due to headwinds pertaining to rising hiring costs, increase in attrition and impact of wage hikes, the same is expected to remain steady in the range of 9-10%.

 

The rating continues to reflect SSL’s comfortable business risk profile, marked by its established position in the IT services sector and software distribution business, and improving revenue diversity. The rating also factors in the strong financial risk profile. These strengths are partially offset by exposure to risks arising from geographical concentration in revenue, changes in regulations such as restrictions on H1B visas, and intense competition, especially in the software distribution business.

Analytical Approach

  • CRISIL Ratings has combined the business and financial risk profiles of SSL, its domestic subsidiary, Sonata Information Technology Ltd (SITL), and its overseas subsidiaries. This is because all the entities operate under a common management, with significant business and financial linkages.
  • Goodwill arising from the consolidation of SSL’s subsidiary (Rs 90 crore in fiscal 2016, and Rs 61 crore in fiscal 2019) has been amortised over five years.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

  • Comfortable business risk profile, driven by established market position: SSL has an established position in the IT services sector, and is one of the leading players catering to the travel, tourism, and logistics verticals. It also services the manufacturing, retail, and consumer packaged goods verticals, and offers outsourced research and development services to independent software vendors. The company is also building capability to cater to the fast-growing social, mobility, analytics, and cloud (SMAC) solutions space. It operates a software distribution business for companies such as Microsoft, Oracle, and IBM. It has longstanding relationships with customers and has also been actively adding clients. SSL should continue to benefit from its established market position in the international IT services business and the domestic software distribution business, driven by diversified service offerings, alliances with leading software vendors, and longstanding customer relationships.

 

  • Strong financial risk profile: Financial risk profile is marked by a healthy capital structure and debt protection metrics. Gearing improved to 0.13 time as on March 31, 2021 (0.17 time a year ago) due to the decrease in working capital debt. SSL is also expected to maintain a prudent dividend policy in the current fiscal. Financial risk profile is also supported by comfortable liquidity of Rs 670 crore as on September 30, 2021. Besides organic growth, SSL intends to expand through acquisitions in complementary service lines. CRISIL Ratings believes the acquisitions will be funded largely through internal accrual, thereby keeping the financial risk profile strong.

 

Weaknesses:

  • Geographical concentration in revenue: Similar to other players in the IT services industry, SSL drew bulk of its revenue from the US (54%) and Europe (24%) in fiscal 2021. This exposes the company to the risk of economic slowdown in these regions, as well as regulatory changes such as restriction on H1B visas. Earlier, SSL also faced client concentration risk as the travel and tourism sector contributed to 25% of revenue in fiscal 2020 which has reduced to 9% in fiscal 2021. While these clients were affected adversely by the pandemic during the first half of fiscal 2021, SSL’s IT services business was also impacted. However, SSL is expected to continue to focus on other verticals to mitigate client concentration as travel gradually returns to normal.

 

  • Exposure to intense competition, especially in the software distribution business: With rapid evolution of the Indian IT-enabled services sector, competition is intensifying as more companies vie for a share of the outsourcing pie. SSL has to compete with multiple players in most of the verticals within the IT services business. Additionally, a large portion of revenue comes from the software distribution business where price competition is high. SSL's profitability may remain constrained over the medium term as increasing competition curbs the hike in realisations. Availability of low-cost skilled talent also remains a concern.

Liquidity: Strong

SSL had a liquid surplus of Rs 670 crore as on September 30, 2021, against modest working capital debt of Rs 66 crore. Annual cash accrual of more than Rs 150 crore, expected over the medium term, will support yearly capital expenditure of around Rs 60-65 crore.

Outlook: Stable

CRISIL Ratings believes SSL’s credit risk profile will continue to benefit from its moderate business risk profile, supported by recovery in orders from key customers, moderate client addition and strong financial risk profile. 

Rating Sensitivity factors

Upward factors:

  • Substantial and sustained growth in revenue (compound annual growth rate of over 15% in the medium term) and EBITDA margin of over 13%
  • Steady improvement in business risk profile, with material increase in revenue share of the high-margin IT services business

 

Downward factors:

  • Slowdown in key markets, leading to significant pressure on revenue and decline in EBITDA margin to below 8%
  • Any large, debt-funded acquisition, impacting the financial risk profile, and cash and balance falling below Rs 250 crore
  • Negative outcome regarding large contingent liabilities

About the Company

SSL, incorporated in 1986, provides IT consulting, product engineering services, application development, application management, managed testing, business intelligence, infrastructure management, packaged applications, and travel solutions. The company derives most of its services revenue from overseas, with the US and Europe accounting for over 84%. SITL primarily distributes software products and is focused on the Indian market.

 

For the nine months ended December 30, 2021, SSL reported net profit of Rs 275 crore on net sales of Rs 4,089 crore, as against Rs 161 crore and Rs 3,152 crore, respectively, for the corresponding period in the previous fiscal.

Key Financial Indicators

As on / for the period ended March 31

 

2021

2020

Operating income

Rs crore

4245

3,743

Profit after tax (PAT)

Rs crore

244

277

PAT margin

%

5.7

7.4

Adjusted debt / adjusted networth

Times

0.13

0.17

Interest coverage

Times

26.23

29.94

   CRISIL Ratings adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon

rate (%)

Maturity

date

Issue size

(Rs crore)

Complexity

level

Rating assigned

with outlook

NA

Working Capital Facility*

NA

NA

NA

50.00

NA

CRISIL A+/Stable

(Rating Reaffirmed and Withdrawn)

*Fully interchangeable between fund- and non-fund-based limits

Annexure – List of entities consolidated

Name of entity

Extent of consolidation

Rationale for consolidation

Sonata Software Ltd

Full

Holding

Sonata Information Technology Ltd

Full

Subsidiary with business and financial linkages

Sonata Software Solutions Ltd

Full

Subsidiary with business and financial linkages

Sonata Software North America Inc

Full

Subsidiary with business and financial linkages

Interactive Business Information Systems Inc

Full

Subsidiary with business and financial linkages

Sonata Software FZ LLC

Full

Subsidiary with business and financial linkages

Sonata Software (Qatar) LLC

Full

Subsidiary with business and financial linkages

Sonata Europe Ltd

Full

Subsidiary with business and financial linkages

Sonata Software GmbH

Full

Subsidiary with business and financial linkages

Scalable Data Systems Pty Ltd

Full

Subsidiary with business and financial linkages

Sopris Systems LLC

Full

Subsidiary with business and financial linkages

GAPbuster China company Ltd

Full

Subsidiary with business and financial linkages

GAPbuster Europe Ltd

Full

Subsidiary with business and financial linkages

GAPbuster Inc.

Full

Subsidiary with business and financial linkages

GAPbuster Ltd

Full

Subsidiary with business and financial linkages

GAPbuster Worldwide Malaysia Sdn Bhd

Full

Subsidiary with business and financial linkages

GAPbuster Worldwide Pty Ltd

Full

Subsidiary with business and financial linkages

Kabushiki Kaisha GAPbuster Japan

Full

Subsidiary with business and financial linkages

 

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 50.0 CRISIL A+/Stable (Rating Reaffirmed and Withdrawn)   -- 29-01-21 CRISIL A+/Stable 08-04-20 CRISIL A+/Stable 30-11-19 CRISIL A+/Positive CRISIL A+/Stable
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Working Capital Facility* 50 CRISIL A+/Stable (Rating Reaffirmed and Withdrawn)
*Fully interchangeable between fund- and non-fund-based limits
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Software Industry
CRISILs Criteria for Consolidation

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