How I’m going to be valuing this stock
There are many methods that you can use to value a stock. Some people might spend time looking into every detail of a company, some people might buy a stock out of sheer luck. But how do you actually value a stock. The method I’m going to be using is quite simple. It’s called the 4M’s of the stock market.
- Meaning
- MOAT
- Management
- Margin of Safety
Meaning
For analyzing a company, one of the most important things is to understand what the company does. So let’s figure out what Sonata Software does.
Industry: IT Services & Consulting
Core Services: Azure Implementation, Digital Transformation.
Revenue Streams: Its main customers are from the North American markets, few from Europe.
Type of Stock: Sonata Software is mainly a growth stock, and not a dividend stock.
MOAT
MOAT is figuring out if the company has a sustainable competitive advantage. In simple words, if the company has a unique selling point so that it can sustain with all the other competition in the same industry.
- I think Sonata has a huge competitive advantage, as it has a long-term partnership with Microsoft, with it being integrated with Microsoft’s cloud, and AI. Overall it deeply specializes in tech. Its main advantage from Microsoft I assume would be the connections it can get from it.
- Sonata also maintains a low debt, and a high cash flow in their finances, giving them an upper hand compared to other competitors which may have high amounts of debts, which would limit their profits.
Management
CEO: Samir Dhir, with a background at Virtusa and other major tech firms.
CFO: Jagannathan C.N, with a long experience in finances across tech services.
Capital Allocation:
- High dividend payouts
- Reinvestments in AI, cloud capabilities.
Transparency: Consistent reporting, investor presentations, and analyst calls.
Margin of Safety
For margin of safety, we have to look at how the company is doing financially.
CMP: ₹347
PE Ratio: 22.7
Debt: Net debt reduced significantly.
Dividend Yield: 1.27%
ROE: 27.3%
ROCE: 29.1%
An ROE and ROCE above 25% indicates exceptional capital efficiency, a trait that helps for long-term compounding. The company is also reinvesting back into AI, and is keeping up with the technology that is showing up every day.
Conclusion
- Has a moderate but real MOAT, via its Microsoft partnership.
- Is led by proper management that reinvests smartly.
- Offers a solid margin of safety.
Overall, Sonata Software is a strong mid-cap growth stock that you can buy. While not the cheapest stock, it has high compounding potential, especially for the long-term investors who are willing to keep the stock.
Here is an earlier Analysis I made of Sonata when I was 8: https://www.youtube.com/watch?v=9jC30UWzitU
Thank you for reading my blog post. If I have done anything incorrectly, or if I can improve in any way, please suggest it in the comments.
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