Sonata Information Technology: Year of De-risking

The fact that it is country's largest software distribution house, didn't
quite help Sonata Information Technology Ltd (SITL) maintain the growth momentum
that it had built up between 2000 and 2003. On the contrary, last fiscal,
company's revenues slipped by 14% as it clocked Rs 142 crore as against Rs 164
crore in 2002-03. However, its services business posted a strong 61% revenue
increase, taking the figure to Rs 11.82 crore.

This dip in the topline, company asserts, was a result of the conscious
de-risking of its business. Its focus got directed towards products capable of
offering high margins and not necessarily high value. This was inevitable also
to an extent as the profitability in its mainstay business of Microsoft, Oracle
and IBM dwindled to low-single digit figures, even as these three contributed
65% to the turnover.

It got aggressive on 'push products' and channeled its resources better
to sell solutions from principals like Data Direct, Business Objects, and so on.
It also signed up with Red Prairie for its warehouse management solutions and
Geac for business performance management solutions-both very niche offerings
with lucrative returns. And keeping a strong eye on profitability, it has
recently signed up with Mercury Interactive as well for its Business Technology
Optimization products.

Realizing that channel defaults could deplete its bottomlines, SITL got
strict on credit and offered the same only to 42 of its selected partners. For
others, transactions were largely based on financial instruments. Over the
years, the company has also differentiated itself by engaging in the projects
where its products were being sold into. This gave it a better understanding of
customers' requirement and also the flexibility of being selective on picking
the orders. It was also particularly benefited by the RTGS (real-time gross
settlement) directive by RBI, as a good amount of its business happened due to
projects in the banking segment.

It made its business services division strong and developed practices in the
field of ERP and CRM. It also got involved in many ISV-related initiatives of
Microsoft and Oracle.

With distribution business getting increasingly burdened with margin
pressure, it would now require a fresh re-thinking and innovative strategy on
SITL's part to display good toplines as well as profitability. Something, that
Sonata Software's (of which SITL is a subsidiary) shareholders too would be
expecting.