Sonata Software shows robust Q3 performance as mid-cap IT stock

Sonata Software delivered a steady Q3 FY26 performance as a mid-cap IT stock, supported by margin expansion, AI-driven deal wins, and improving medium-term revenue visibility

Sonata Software Ltd. delivered a resilient Q3 FY26 performance despite challenges from a few large clients and a cautious demand environment. Revenue grew marginally on a quarter-on-quarter basis, reflecting softness in select verticals, while profitability improved sharply. EBITDA margins expanded to nearly 19.5%, driven by higher utilization, an improved offshore delivery mix, AI-led productivity enhancements, and disciplined cost optimisation. These gains were achieved even after absorbing annual wage hikes and elevated cloud infrastructure costs, underscoring strong operational execution typical of a well-managed mid-cap IT stock.

Margin Expansion Driven by Efficiency and AI

Operational efficiencies played a key role during the quarter, with AI-led automation improving delivery productivity across projects. Better resource allocation and tighter cost controls further supported margins, offsetting external cost pressures. The ability to protect and expand profitability in a subdued revenue environment highlights the company’s focus on sustainable efficiency, an important trait investors often look for in a fundamentally strong mid-cap IT stock.

Platform and AI Strategy Shows Clear Traction

The company’s strategy of positioning itself as a modernisation engineering partner powered by platforms and artificial intelligence continues to gain traction. AI-led deals now contribute around 14% of the total order book, while cloud and data services account for nearly 50% of the active pipeline. This shift toward higher-value digital transformation engagements is improving deal quality and long-term revenue visibility, strengthening the structural outlook for the mid-cap IT stock over the medium term.

Large Deal Wins Support Medium-Term Visibility

Large deal momentum remained healthy, with two multi-year contract wins in the banking, financial services and insurance (BFSI) segment during the quarter. These deals are expected to ramp up gradually, supporting revenue growth over the coming periods. BFSI and healthcare continue to act as core growth drivers, benefiting from ongoing investments in system modernisation and digital platforms, while retail and certain telecom, media and technology segments remain soft due to client-specific budget cuts.

Stable Outlook Despite Near-Term Muted Growth

Geographically, North America now contributes more than 70% of total revenue, reflecting deeper client penetration and stronger account mining. Management expects near-term growth to remain muted for one to two quarters as large deals scale up, but remains confident of returning to year-on-year growth thereafter. With improving margins, a solid order book, AI differentiation, and disciplined execution, the outlook remains stable for this mid-cap IT stock, despite short-term revenue volatility and sector-wide uncertainty.