Sonata Software Navigates Headwinds with AI-Led Growth and Strategic Wins in Q3 FY26

Sonata Software Limited, a prominent modernization and digital engineering company, reported a resilient performance for the third quarter of fiscal year 2026, which concluded on December 31, 2025. Despite a challenging macroeconomic environment and specific client-related headwinds, the company showcased robust growth in key financial metrics and continued its strategic investments in AI and modernization. The consolidated revenue for Q3 FY26 stood at INR 3080.6 Crore, marking a significant 45.4% quarter-on-quarter (QoQ) growth and an 8.4% year-on-year (YoY) increase. The consolidated Profit After Tax (PAT) was INR 104.4 Crore, reflecting a 6.1% QoQ growth and an impressive 21.4% YoY growth on a normalized basis, even after absorbing a one-time impact of INR 31.3 Crore pre-tax due to labour code costs. Consolidated EBITDA reached INR 211.6 Crore, growing 3.7% QoQ, with the International Services segment achieving a notable 19.5% EBITDA margin, up from 17.3% in the previous quarter.

The company's performance was a tale of two segments, each contributing uniquely to the overall picture. The International Services business reported revenue of USD 82.3 million, translating to INR 738.6 Crore, with a modest 0.4% QoQ growth (0.3% in constant currency). This segment's EBITDA margin saw a significant improvement to 19.5%, driven by operational efficiencies, improved utilization (up to 90% from 87.3%), and a higher offshore revenue mix (63% from 53%). The vertical mix for International Services highlighted BFSI at 13% (INR 95.08 Crore), Emerging at 4% (INR 29.54 Crore), Retail and Manufacturing at 36% (INR 265.90 Crore), TMT at 31% (INR 228.97 Crore), and HLS at 16% (INR 118.18 Crore). The Domestic Business, on the other hand, demonstrated exceptional growth, with revenue soaring to INR 2345.9 Crore, a substantial 68.6% QoQ increase and 11.1% YoY growth. Its Gross Contribution grew by 10.8% QoQ to INR 76.1 Crore, and normalized PAT for the domestic business stood at INR 47.1 Crore, an 11.6% QoQ growth.

Note: Consolidated PAT shows a decline QoQ due to a one-time impact of labour code costs of INR 31.3 Crore pre-tax in Q3 FY26. Normalized PAT for Q3 FY26 was INR 127.5 Crore, showing 6.1% QoQ growth.

Strategic Pillars Driving Growth

Sonata Software's success is anchored on four strategic pillars. Firstly, scaling AI capabilities and continued investments in AI have been paramount. AI-led order booking now constitutes 14% of the total order book, up from 10% in the previous quarter, demonstrating strong market demand. The company has integrated its go-to-market strategy with CSP AI co-sell programs, leveraging Microsoft's new AI consumption model, and successfully closed two mid-size AI plus CSP deals. The launch of AgentBridge, a cloud-agnostic agentic AI platform, and partnerships with IISC and Wharton School for AI research underscore its commitment to AI leadership. Internally, AI is operationalized across functions, with 92% of the workforce and 80% of managers trained in AI.

Secondly, a relentless focus on large deal wins remains a cornerstone of its growth strategy, with 40% of the pipeline comprising large strategic opportunities. In Q3 FY26, Sonata secured two significant large deals: one with a Fortune 500 financial technology and payment solutions provider to modernize core digital wallet platforms, and another with a leading mortgage provider to modernize core platforms using automation and AI. These wins are expected to drive accelerated time to market, enhance consumer experience, reduce technical debt, and enable AI-driven insights.

Thirdly, scaling across strategic verticals, geographies, and talent has shown considerable progress. Investments in Healthcare and Life Sciences (HLS) and BFSI verticals are yielding results, now contributing 31% of total revenue, a sharp rise from 13% three years ago. North America business has also scaled significantly, representing over 70% of total revenue, up from 54% three years ago. The company maintains a healthy LTM attrition rate of 11% and 31% gender diversity, supported by continuous talent development through Sonata University.

Finally, the domestic business is undergoing a strategic transformation based on a three-pillar approach: expanding the Microsoft channel with a focus on the SMC segment and the new Sonata on Cloud (SOC) offering; partnering with other ISVs like Oracle, IBM, OpenTX, and Quest; and securing large system integration deals that integrate cloud providers with other platforms. This strategy aims to build a more diversified, resilient, and future-ready domestic business, with a target to return to YoY growth by Q2 FY27.

Navigating Headwinds and Future Outlook

Despite the positive momentum, Sonata Software faced headwinds from three of its top 10 clients. The largest BFSI client experienced organizational changes and budget constraints, leading to ramp-downs. The largest TMT client faced budget pressures, resulting in moderate near-term growth, though its engineering side is back to sequential growth. Most recently, an unexpected ramp-down occurred in a large retail client, with its revenue impact factored into Q4 numbers. Management expressed confidence that the growth from large TMT and healthcare deals, along with the newly announced large payment tech deal, will help offset these negative impacts.

Looking ahead, management guided for consolidated EBITDA to remain in the high teens to low 20s range, specifically calibrating it to an 18% to 21% range for the coming quarters. The company expects the current growth trajectory for International Services to continue for at least the next one or two quarters. The domestic business is projected to return to YoY growth by Q2 FY27. The retail segment, however, is expected to remain soft and under pressure for the next one or two quarters. Sonata Software remains committed to its quarterly interim dividend payout policy, reflecting disciplined capital allocation and shareholder value creation.

Conclusion

Sonata Software Limited's Q3 FY26 performance underscores its resilience and strategic clarity in a dynamic market. By leveraging its proprietary Platformation framework and making sustained investments in AI, the company is positioning itself as a differentiated modernization engineering firm. Despite navigating client-specific headwinds, Sonata's ability to secure large deals, scale key verticals, and drive operational efficiencies demonstrates its disciplined execution. The management's confident outlook, backed by a robust pipeline and strategic partnerships, suggests a continued focus on delivering long-term value to its clients, partners, and shareholders.