Sonata Software says Q3 loss linked to additional payouts for acquired company

Mid-tier IT firm Sonata Software, which reported a loss of ₹46.2 crore in the third quarter, said the dip was due to additional payouts made to its acquired company Quant. The company, amid a tough demand environment, is seeing green shoots in its largest vertical high-tech and is expecting the effects of deal ramp-ups to reflect in the first quarter, notes Jagannathan Chakravarthi, CFO of Sonata Software.

The company reported a loss of ₹46.2 crore from a profit of ₹124.2 crore last quarter. Revenue from operations stood at ₹2,493 crore, a 10 per cent year-on-year (yoy) rise and a sequential rise of 30 per cent.

Underscoring the reason for the loss, Chakravarthi said, “We acquired Quant last year, which works on a calendar year basis. After 2023, we made an assessment and as per the terms of acquisition, if they overperformed beyond an EBITDA limit, they were entitled to get additional money, which is what they have done by a substantial margin. This was not estimated and as a result there was an additional payout for Quant. In fact, if you see, when we acquired Quant the EBITDA multiple was 11, but now it has come down to 6. It is a huge ROI from a CFO perspective.”

Encore, acquired over three years ago, surpassed targets with a lucrative 0.6 revenue multiple and 6 times EBITDA. This success reinforces our M&A strategy, highlighting our ability to integrate and deliver value to customers, he added.

Demand environment

In terms of the demand environment, Chakravarthi said, “We are expecting our largest vertical high-tech to mount back by the first quarter of next year. High-tech is recovering and we have seen some green shoots and some ramp-ups are happening. The BFSI vertical however is soft and is expected to remain the same in the next quarter as well.”

In Q3, EBITDA stood at ₹227.2 crore, a qoq growth of 3 per cent. The company expects to maintain an EBITDA between 20 and 22 per cent in the medium term. Chakravarthi noted that the company will continue to invest 1-2 per cent of revenue to achieve growth as it sees opportunities in the AI ​​and Microsoft fabric.

Chakravarthi said, “Currently we are running at 22.6 per cent for the quarter. We are not saying there’s going to be any further decline but our guidance in the medium term is only 20-22 per cent.” Further, the company said, for particular verticals and customers, it is seeing delays of around four to six weeks in closing the deals.