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%
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.