Summary
Sonata Software Limited - Q3 FY26 Earnings Call Summary Friday, February 6, 2026 11:00 AM IST
Event Participants
Executives 3 Jagannathan CN, Samir Dhir, Sujit Mohanty
Analysts 4 Amit Chandra, Ashis Dash, Dipesh Mehta, Sachin Sehgal
Financials & KPIs
| Metric | Reported | Commentary |
|---|---|---|
| Consolidated Revenue | ₹3,080.6 crores | +45.4% QoQ; +8.4% YoY; Driven by strong domestic growth offsetting international headwinds. |
| International Services Revenue | $82.3 million | +0.3% QoQ (CC); Impacted by ramp-downs in 3 of top 10 clients. |
| Domestic Business Revenue (SITL) | ₹2,345.9 crores | +68.6% QoQ; Significant rebound despite large client loss. |
| Consolidated PAT (Normalized) | ₹127.5 crores | +6.1% QoQ; +21.4% YoY; Excludes ₹31.3 crores pre-tax one-time labor code impact. |
| EBITDA Margin (International) | 19.5% | +220 bps QoQ; Driven by utilization (90%), offshore mix (63%), and AI efficiencies. |
| Order Book | $97 million | Book-to-bill ratio of 1.18x; AI-led deals now account for 14% of the total order book. |
| Dividend | ₹1.25 per share | Interim dividend; Company transitioned to a quarterly payout policy. |
| Headcount | 6,404 | Decrease from 6,649 (Q2); Reflects utilization push and AI-led productivity. |
Geographic & Segment Commentary
- North America: Now represents over 70% of total revenue, up from 54% three years ago. The region remains the primary growth engine, supported by a deepening of client relationships in the TMT and BFSI sectors.
- International Verticals (BFSI & HLS): Combined contribution rose to 31% of total revenue, up from 13% three years ago. While one large BFSI client saw significant ramp-downs, two new multi-year large deal wins in the payment-tech and mortgage space are expected to drive growth from Q4 onwards.
- Domestic Business (India): Management implemented a three-pillar strategy focusing on the SMC segment (Microsoft channel), expansion into new ISVs (Oracle, IBM), and large system integration deals. Gross contribution grew 10.8% QoQ, with a projected return to YoY growth by Q2 FY27.
Company-Specific & Strategic Commentary
- AI and Modernization: AI-led opportunities now constitute 14% of the order book, up from 10% in Q2. The company launched AgentBridge, a cloud-agnostic agentic AI platform, to automate internal functions and client solutions.
- Operational Efficiency: EBITDA improved by a gross 290 bps (net 220 bps after salary hikes) through “pyramid optimization” and increasing utilization to a record 90%. AI adoption is credited for maintaining output with a reduced headcount.
- Large Deal Focus: 40% of the current pipeline consists of large strategic opportunities. Two multi-year deals were closed this quarter, including a modernization contract for a Fortune 500 digital wallet platform.
Guidance & Outlook
| Metric | Guidance / Outlook | Commentary |
|---|---|---|
| EBITDA Margin | 18% - 21% (High teens/Low 20s) | Sustained range expected through operational levers and AI-led productivity. |
| Domestic Growth | YoY Positive by Q2 FY27 | Recovery timeframe for the domestic business following the loss of a major direct-billing client. |
| BFSI Growth | Sequential Growth in Q4 | New large deal wins in payment tech and mortgage will offset previous ramp-downs. |
| International Revenue | Steady Trajectory (Near Term) | Headwinds from 3 of top 10 clients likely to persist for 1-2 quarters before acceleration. |
Risks & Constraints
| Risk | Context |
|---|---|
| Client Concentration | Ramp-downs in 3 of the top 10 clients (BFSI, TMT, and Retail) significantly impacted international growth. The sudden retail client ramp-down will manifest more fully in Q4 results. |
| Domestic Structural Shift | Microsoft’s move toward direct billing for certain large accounts poses a risk to SITL’s traditional reseller model. Management is diversifying into other OEMs and System Integration to mitigate this. |
| Generative AI Deflation | Analysts expressed concern over AI reducing billable hours. Management noted that while 20% of clients seek efficiency gains, 80% prioritize speed-to-market, which preserves pricing power. |
Q&A Highlights
BFSI Vertical Performance
- Question: What caused the 60% YoY decline in BFSI revenue? (Amit Chandra)
- Answer: The decline was entirely due to a single large BFSI client undergoing organizational changes and budget constraints. Impact is now fully absorbed, and the vertical will return to growth in Q4 due to new wins (Samir Dhir).
Domestic Business Recovery
- Question: How can the domestic business return to growth after losing its largest client? (Ashis Dash)
- Answer: We have shifted focus to the SMC segment, non-hyperscaler partners (Oracle/IBM), and system integration deals with Cisco/Dell. These initiatives helped recoup losses faster than anticipated (Samir Dhir/Sujit Mohanty).
AI and Productivity
- Question: Is AI a threat to the IT services business model? (Vipulkumar Shah)
- Answer: We are not “losing sleep” because regulated industries (BFSI/HLS) have complex legacy code that AI cannot easily replace. AI actually levels the playing field for mid-sized firms like Sonata to win market share from larger peers (Samir Dhir).
Margin Sustainability
- Question: Can the 90% utilization and improved margins be sustained? (Dipesh Mehta)
- Answer: High 80s is our sustainable target. We used pyramid optimization and price increases to offset AI-related cloud consumption costs. Expect EBITDA to stay in the 18-21% range (Samir Dhir).
Key Takeaway
Sonata Software delivered a resilient Q3 FY26, characterized by significant margin expansion despite topline headwinds in its international business. Consolidated revenue grew 45.4% QoQ to ₹3,080.6 crores, primarily fueled by a strong domestic rebound. International margins reached a high of 19.5% through aggressive utilization (90%) and AI-led efficiencies, even after absorbing salary increments. While ramp-downs in three of the top ten clients (BFSI, TMT, and Retail) constrained international growth to 0.3% CC, the company secured two large multi-year BFSI deals and increased its AI-led order book to 14%. Management remains focused on its “Platformation” framework and expects the domestic business to return to YoY growth by Q2 FY27. Looking ahead, the company aims to maintain EBITDA in the 18-21% range while navigating near-term client-specific budget pressures.
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