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00:00Hello and welcome back to NDTV Profit, you're watching Earnings Edge. I'm your host Mihika
00:11Barve and with me is Rucha Sumayya. But before we go on to what we have in store for you
00:15today, let's just take a look at how markets are faring right now. Well, the Nifty 50 is
00:20fairly flat, a little bit of a positive bias. But the ones when you look at the ones that
00:27the counters that have been gaining, you have something like a BPCL. This seems like
00:31a positive sentiment with earnings due tomorrow. We have Coal India as well as Power Grid and
00:37Tata Motors up more than 2% to 2.5%. The ones that are showing a little bit of weakness
00:44is a Dr. Reddy's on the back of their earnings, as well as some of the Nifty FMCG counters
00:52like Asian Pains and HUL. But on Earnings Edge today, the first company that we do have
00:58in focus today is Sonata Software. And with us joining us is the CFO of the company, Mr.
01:04Jagannath Chakravarty. Good afternoon, Mr. Chakravarty. Good afternoon. Yes. So I'd first
01:09like to just ask you, what is your view on how the quarter went by? Kind of give your
01:14outlook on the same. Yeah. Thanks for this opportunity to buy NDTV Profit for explaining
01:20the quarterly results for Q4 of 2024. We, this quarter, we have already given a warning
01:27saying that the quarter will be soft for our acquired company, QuantSystem. This is a seasonal
01:32impact for them. January to March is always soft for them. The impact of that, what we
01:38were thinking is, there was a large deal supposed to come. We thought that will compensate,
01:44the large deal will compensate the drop in revenue in Quant. The drop in revenue in Quant
01:51was a little bit deeper, and the large deal did not happen. Hence, we could not compensate
01:56the degrowth in the revenue. The impact of the degrowth in revenue had directly impacted
02:01the profitability of the business. Apart from it, for the large deal, we have added people
02:06in on-site, and we were holding the people for the purpose of the large deal. That also
02:11impacted our margin. We tried to optimize this with the reduction in the offshore, means
02:19non-addition increase in the offshore, and increasing the utilization in offshore. So,
02:24that will compensate for the on-site additions, what we are on-site, we were holding for the
02:30large product. We tried our best, but still it had an impact on the margins also. Because of
02:36the Quant seasonality, and because we could not replace that with a large deal revenue degrowth,
02:42and because of the revenue degrowth, and also the investment for the large deal, we had an impact
02:48on the margin for the quarter. The outlook for next two quarters, we expect that Quant to overall
02:54for the year to achieve the result. We are very confident that Quant will still be able to achieve
03:00whatever we were planning for in Q3 for Quant. However, we are not very sure about which quarter,
03:08what is the amount of recovery going to happen in Q1. Having said that, with the uncertainties of
03:13getting a large deal, it is getting delayed. Earlier it was 6 months, 9 months, now it is like
03:17clearly 9 to 12 months it takes to get a large deal. Because of uncertainties in the large deal,
03:22we believe that there can be a softer quarter for Q1 and Q2. Softer quarter does not mean
03:29there will be a degrowth. It is not going to be a degrowth. It is going to be 1 to 3 percentage
03:33of revenue growth for us in Sonata software, as well as including the Quant perspective.
03:40The Q3 and Q4 of this financial year, we are expecting to bounce back to the earlier growth
03:46rates, what we were growing earlier in the last year up to Q3. So, we are very, very confident
03:51on the medium term and the long term. Our bet on AI and Microsoft Fabric is going to help us.
03:57We are continuing to invest because we see a great prospect for us to grow
04:01in the subsequent financial years. This uncertainty is mainly driven by market situation,
04:07but we are very, very confident of overcoming that and beating the industry in the growth,
04:12the revenue growth perspective. Profitability perspective, once the revenue growth comes back,
04:16we will be back to the low 20s EBITDA margin without other income for us.
04:21That's the current situation for us.
04:25Sure, sir. Thank you so much, Rucha Somaiya at this side. Just wanted some more perspective on
04:31the delay in deal, right? So, this is not a cancellation. This is just a delay. Is that
04:38correct, sir? Exactly. You are right. Absolutely right. There is a delay. There is not even a
04:43deferment. Actually, there is just a delay. What happened is in the particular cases,
04:47the management of the customer came and they wanted to review the project on the objective
04:52of project and scope of the project and what they can do with the, what are their priorities
04:59of the project and they are taking a couple of quarters more to decide on that. But there is no
05:04cancellation. There is no deferment also. There is a delay in the project closure.
05:10Sure, sir. So, as you rightly mentioned, the macroeconomic environment is pretty much uncertain
05:14for almost all the IT companies. So, by when do you expect the growth to revive? Is it during
05:20the second half or are you still unsure of how FY25 would pan out? Yes, it's a good question,
05:27but it's a thousand-dollar question. No, the answer will be different. Everybody knows,
05:31everybody would have answered the same question. Industry, I don't want to answer, but we expect
05:35the Q3 and Q4 for us will be good. We will be back to industry-leading growth. We will be back to
05:41having a differential offering. We will be back to be an exceptional performer in the Q3, Q4 of
05:46the coming year. That's our expectation and so that the momentum will be differentiated
05:51between industry and us in the third and fourth quarter of this year.
05:57Sure, sir. So, just a follow-up on that, how do you expect the vertical segment to perform? So,
06:03once this deal starts getting ramped up, do you expect more to come from healthcare and BFSI has
06:09also been great over the years? So, how do you expect the vertical mix going ahead?
06:16Yes, the interesting part is our largest vertical, high-tech. High-tech is actually,
06:20we said there is a green shoe, now it has grown into a plant and we'll be growing much, much
06:24faster. That's a very good news for us. High-tech has actually recovered back very strongly.
06:31What we see here is BFS growth is solid, tied up with the quant growth. We expect the quant growth,
06:36when it bounces back, the BFS also should bounce back for us and we expect that to happen anytime
06:42soon. The healthcare segment actually had a growth in Q4. They were having a decent growth.
06:50This quarter, they will still have a growth for this quarter also. But what we think is this,
06:56for a larger growth, faster growth, we expect a large deal to come and help them in this
07:00coming quarter. So, definitely healthcare also may be having a green shoe in the coming quarter.
07:06We are waiting for that. One of the largest will help them to make growth faster than
07:11other players. The last is retail manufacturing. We expect a little more growth in retail
07:16manufacturing for some time till the Fed decides to change the interest rate. This may be a
07:22situation for some of these quarters. Sure, sir. So, further in terms of revenue
07:28segmentation, the dynamic segment has reduced from around 35% to 25% for the quarter and while
07:38the other segment has higher mid-digit revenue around 6%. So, what constitutes and how do you
07:48see the trajectory for these both segments going ahead?
07:52A good question, very insightful question. The dynamic asset is contributing around 30-33% of
08:00our revenue earlier. We had two segments, sell to Microsoft, which has bounced back very strongly.
08:05Microsoft as a customer, sell with Microsoft. We are implementing a partner for dynamics for them
08:10and other power tools also. So, what happens here is this business had been growing very
08:17well for the last 3-4 years and there are some project completion and all these things are
08:22happening. The dynamics business made, there is no major issue in that. It's a question of time
08:27that it will pick up and run. We expect that in two quarters dynamic business should pick up to
08:32the earlier growth rate and can grow faster. So, we are not very worried about it because
08:37this kind of cycles can happen in any ERP business and Microsoft dynamics is also similar kind of
08:43thing. With a project, major project completion and the new, large project coming in, there can
08:50be a lag in time frame. We still expect that Microsoft dynamics will do well and come back to
08:54the situation later. There are other opportunities also, like the AI is going to drive a lot of
09:00opportunity. We have around $55 million of pipeline in AI. We have at least, we got a new
09:06project now this quarter in AI, which is very significant. We have got one more project in
09:10Microsoft fabrics in this current quarter. Very, very interesting possibilities are coming up.
09:15AI to have a full potential for the growth and impact the growth may take 5-6 quarters of time.
09:20But lot of use cases, lot of investment, lot of activities are happening and every deal,
09:25every proposal that goes out of us has the AI component in that. Even a deal which is less
09:31than a million dollars, customer comes and asks us what we, how can we implement AI to make it
09:35more efficient. So the AI is going to be the way of business and that is going to drive the growth
09:40in the coming years for us. There is the opportunity of planting. Pipeline is very good.
09:46We expect the growth to be very, very strong in the medium term to long term, particularly after
09:52the third quarter of this year, we expect the Marriott business to perform very well. This is
09:56temporary, the short term blip and we expect the temporary blip also to be positive growth,
10:021-3% growth, but it can be better than that also. We are very, very confident that in the
10:08medium term we will maintain the growth. We will also have a low 20 EBITDA margin in the coming days.
10:15So speaking of the margins, you expect margins to be in low 20% around range. So I just wanted to
10:23know what will be the key levers for sustaining that kind of margin and also on utilization
10:30specifically, it has been a great number at 87%, a sharp uptick from the previous quarter.
10:36So do you expect this to maintain going ahead or do you expect a tad lower utilization for the
10:44long term? Yes, a tad lower is the right answer for this. We will bring down the utilization a
10:50bit more, but the growth is mainly in the market quarter, mainly because of the growth that comes
10:56in. When the revenue drops to some extent suddenly, you can't change people and structure
11:02and cost. It's not that flexible, right? You can't take it and leave it kind of a situation.
11:08It is a short term blip. Once the revenue growth comes in, our margin will bounce back to the
11:13range and we are very, very confident that the revenue growth is going to help us grow much,
11:18much faster and there are plenty of opportunities. AI will play a major role
11:22in bringing the margin for us also in future. So we believe that there are plenty of
11:27opportunities. So these are the levers like AI is going to help us. Utilization will be a little
11:33tad lower than that, but onsite offshore makes our pyramid. Pyramid can be really good
11:38based on application of the pyramid and the ETG addition and average salary cost. We have a lot
11:44of play to do in this area and these areas are going to help improve the margin in the coming
11:50days. Sure, so one last question from my side. There's a lot of Gen AI thing going on around all
11:59the IT companies. So are you seeing any kind of generative AI deals and is it getting converted
12:05into revenue or is it too soon for that? Yes, it is getting converted. That's what I told you
12:09this time. We have got a Gen AI deal, purely driven by Gen AI. It has nothing to do with
12:14something else. All proposals for us go with the AI component that mostly Gen AI component
12:20as you rightly know, we were the first mid-size companies to launch a AI platform, Harmony.AI
12:26a couple of quarters back. We are now building Harmony.AI in a full-fledged scale with the
12:31security and other frameworks, interstate-specific solutions and all those things. This is going to
12:37play a major role in the coming days, but with that platform, we were able to win a Gen AI,
12:42pure Gen AI implementation project for our customers. We have already started converting
12:47that into revenue, a strong pipeline of $55 million for our side. We are actually doing
12:52really well and our investments have already started paying off, but the footprint benefit
12:57of that may take five, six quarters of time because it's an evolving technology. All those
13:03things are there, but we are very, very confident in the coming days, it will be a really great
13:08opportunity for Sonata Software. Sure, sir. Thank you so much. Very insightful conversation on the
13:14company. It's time to slip into a short break, but do stay tuned. We have lots more lined up
13:20on the other side.