As with Avanti Feeds, I picked Sonata Software from the screen of low debt, high growth companies with low P/E ratio.
Numbers and Narratives
Sonata Software is a small software services company trying to reinvent itself through new age technologies and digitisation. I think it will have a new lease of growth due to the reinvention and will give up margins because of that. The growth will taper over the next 5 years after which the company will focus on improving its margins.
The core numbers that I arrive at based on the story are
- Compounded revenue growth for next 5 years = 12% (17% 5 year historical)
- EBIT margin in year 5 = 12% (~10% historical)
- Initial cost of capital = 8.77%
Valuation
I’ve used the above numbers along with the financial information to compute my DCF valuation for Sonata Software as seen below.
As you can see, the valuation price came out to ₹601.11, about 18% higher than the last traded price of ₹505.85.