Sonata Software Ltd (NSE: SONATSOFTW) Q2 2025 Earnings Call dated Nov. 06, 2024
Corporate Participants:
Samir Dhir — Managing Director and Chief Executive Officer
Jagannathan Chakravarthi Narasimhan — Chief Financial Officer
Analysts:
Rakesh Agarwal — Analyst
Mihir Manohar — Analyst
Dhiraj Dave — Analyst
Amit Chandra — Analyst
Suraj Malu — Analyst
Chirag Kacharia — Analyst
Harsh Chaurasia — Analyst
Prolin Bharat Nandu — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to Sonata Software Limited Q2 FY ’24, ’25 Investor Conference Call. [Operator Instructions] I now hand the conference over to the management from Sonata Software Limited. Thank you, and over to you, sir.
Samir Dhir — Managing Director and Chief Executive Officer
Thank you, moderator. This is Samir here from Sonata Software, and I have the management team along with me on this call. We all welcome you to this conference. Today, we will share our strategy, the progress we have made in the recent quarters, our strategic plan and the financial results for the quarter Q2 FY ’25 that ended on September 30, 2024. I thank you for joining us today. We appreciate your valuable time and support.
It is my pleasure to share our progress regarding our vision and growth for Sonata despite the macroeconomic challenges and geopolitical issues, which are resulting in a slowdown that they’re expending across some of our verticals. I’ll update you on our strategic goals and post that, we will discuss our progress in Q2 FY ’25.
So, let’s talk about our goals and strategy first. As you know, our objective is to be one of the fastest-growing modernization engineering firms powered by our unique Platformation framework. We aim to achieve revenue of 1.5 billion by the end of FY ’27 at — for the international business at an EBITDA of low-20s. From a growth point-of-view, we outlined a few critical bets.
Number-one, we will continue to win large deals, multiple large deals, building on a successful track-record. If you recall in H1 of this fiscal year, we have closed six large deals. We will deepen and diversify our partnership with [Technical Issue] US and other partners and continue to build new logos working alongside with them and really create the next $10 million, $25 million, $50 million, $100 million clients for Sonata through that channel.
Third, continue to scale the business through deeper capabilities, build-out on delivering M&As and diversify our client base by successfully integrating them. And we want to achieve these goals in our four focus verticals, which is healthcare, life sciences, banking financial services, retail manufacturing, distribution and technology, media and telecom. And in the five geographies, which are North-America, UK, Europe, India and Australia. Leveraging our differentiated lightning tools, IP and offerings, we are steadfast in our pursuit of our 1.5 billion goal, assuring our clients of our commitment to their modernization needs.
With that, let me provide you update on the large deals first. Our large deal pursuits are a significant part of our strategy with 49% of our active pipeline dedicated to these high-value opportunities across all our verticals. 36% of our large deal pipeline are with Fortune 500 clients. I’m delighted to share three significant wins we had in Q2 with all of you.
The first one is with one of the top financial corporations in the US. Sonata has been chosen as a strategic partner to deliver its data modernization program, including migration from to Netezza to Snowflake. This is a key multi-year data and cloud modernization program for this large US bank, which is in the top-10 of the US banks.
The second large deal is with a US technology giant, Sonata will enable an optimum global delivery model to deliver on AI, cloud and data services from our global delivery centers, including in India, Mexico and Malaysia. We are absolutely thrilled about this win. The third win is with a client in a — who is a leader in a personal facility in food-safety systems, Sonata will be a strategic partner for designing, building, managing and continuously modernizing their consumer-facing automation platform using a combination of Microsoft, Android and iOS technologies.
Apart from these three wins, we also had two strategic midsized deals and I’m happy to share a summary of them, while they are mid-sized deals, but they’re also net-new logos for Sonata. The first one is our client in an Australia-based — is an Australia-based reseller — wholesaler. We have been awarded a multi-year data modernization program as a strategic partner. And to note, this is our largest TCB-based Microsoft Fabric win in the data transformation space to date. We’re very excited about this one.
And the second mid-size deal is for our client in the — which is a leading foodservice company in the US. Sonata has been awarded their multi-year ERP modernization and integration program. This is the second logo we closed in the quarter, which is also a midsized deal. We are excited that our differentiated capabilities are now helping us win new logos along with midsized deals.
With that, let me provide you an update on AI, which is our strategic bet. If you recall, we had talked about the fact that 20% of our revenue will come from AI-enabled services by end of CY ’27. We have now 67 million of our pipeline across 110 customers and are very excited about the new wins that we have won in the quarter.
Happy to share with you, we closed a very large pharma customer as our net-new client using our GenAI capabilities in the course of the quarter. In addition, we exceeded our order booking AI in the quarter compared to Q1 quarter.
We are enabling our clients to leverage AI in three ways; number one, driving efficiencies for them; number two, driving higher consumer experience and modernizing their sales platforms; and number three, driving innovative business models for them for better outreach for a larger number of consumers to increase their revenues.
For one of the healthcare clients, we’re harnessing the power of AI to ensure comprehensive and representative demographic coverage in clinical trials. Our clients aim to eliminate bias from the sample of people covered during clinical trials. We’re using AI to ensure regulatory compliance for the customer. Our Harmoni.AI infrastructure is critical to our recent deal wins and subsequent AI model implementations. By leveraging Harmoni.AI across multiple clients, we enabled GenAI driven engineering scale and test acceleration. Our teams are truly at the forefront of this technology revolution. With some of the healthcare life sciences and banking customers, we’re making significant progress in implementing GenAI using small language models for cost-efficiency, which also results in fine-tuning of their cloud spend and we’re also implementing agentic AI approach in these clients.
We have invested in AI cross-functional org led by Sharmila Sherikar to drive AI across Sonata and partner with technology, delivery, sales to accelerate our GTM efforts across our partnership, research and continue strategy refinement in GenAI. Approximately 83% of our engineering [Technical Issue] are now GenAI trained, which is a significant increase from 67% that we shared with you last quarter. This improvement demonstrates our unwavering commitment to upskilling and the immense potential AI has across our operations and our customer operations.
With that, let me provide you an update on the scale that we’re building. For our investment verticals, which are healthcare, life sciences and banking, they now contribute 32% of our revenue, which is up from 13% ten quarters back. Let that sink in. HLS and BFS have now contributed 32% of revenue, which was about 13% ten quarters back. So, our strategy to invest in these verticals has really paid dividends quite significantly for us in our growth journey.
These verticals added nearly 18% of our client revenue, which did not exist 2.5 years back. We expect our invest verticals of healthcare and life sciences and banking to reach together about 250 million revenue in three to five years from now. We are very excited about the growth that we’re seeing in front of us in these two verticals. The following key bits are helping us scale our offerings on in the modernization stack.
Number one, on the cloud and data, we have continued to progress in the cloud and data pipeline, which is now 51% of our overall pipeline. To remind you, this pipeline was about 15% of our pipeline about 2.5 years back, has now jumped to 51% of our pipeline. We’re seeing an increased demand for our data-driven deals. This has now grown more than 120% over the previous year. So, we had 120% increase in our order book in data-driven deals y-on-y. Our revenue from data modernization has grown-up from 13% to 23% in the last 10 quarters. Very excited about the progress our teams are making in our growth journey from a data modernization perspective.
Number two, Microsoft Fabric, which is a strategic bid we made working with Sonata and we are a featured and launch partner for Microsoft Fabric with — from Microsoft perspective, which is a data analytics platform for the EZ Off [Phonetic] AI and went to GA in November ’23. Since its launch, we have witnessed a significant pipeline build of our Fabric, which is now a 91 million pipeline across 110 clients of Sonata. We’re very excited again with the Fabric progress — progress we’re making on the Fabric platform working alongside with our partners.
Microsoft Dynamics, which has been the core pillar of our growth for many, many years. In Q2 FY ’25, we won one large deal with a telecom — with a high-tech customer and one midsized deal with a retailer. During the quarter, we witnessed continuous modernization success and we now seeing green shoots in the CE space, Dynamics CE space to take-out the competing SaaS platforms and the Power Platform space to take-out competing RPF platforms for our customers. We are very excited again on our growth in Dynamics CE and power platform combined.
Our second business continues to deliver solid performance quarter-on-quarter and in this quarter delivered an ROCE of 78.4% in Q2. On a normalized basis, it will be 45.2%, but we had some exceptional item in the quarter. So, we got 78.4% ROCE in the quarter.
Now, coming to the awards. We were recognized as a major contender by Everest Group for our low-code application development area and we were recognized by HFS as the Fastest Six service provider from a growth point-of-view in Q2 over FY ’24. Very excited about our progress in our capability build and the fact that we are the Fastest Six growing company in the market today.
Update on talent. Sonata University has been at the forefront of our capability build initiatives and it saw increased usage of an acquisition of new skills such as GenAI. Our active headcount in the quarter increased to 6,900 people, which is compared to 6,619 a quarter before. So, we added about 250 people net in the quarter. The last 12 month — trailing 12-month attrition was at 13% and our gender diversity is at 31%. We continue to make good progress on our gender diversity initiative.
In the course of the quarter, we also implemented salary increase for the junior management effective July. We are planning to implement another increase for our mid and senior management effective Q3. In addition to that, we continue, even in these times, on our campus hiring programs [Technical Issue] and we onboarded 150 campus grads during the course of the quarter. Gives you — goes on to show that we have continued to build-up scale in the current environment as well.
With that, let me provide you an update on the Q2 FY ’25 performance. The key outcomes for the Q2 FY ’25 despite the industry headwinds. For the international business, our revenue grew 2.3% quarter-on-quarter, much in-line with our forecast that we gave at the beginning of the year of 1% to 3% growth. We came in at 2.3%. We had a very strong order booking of 1.23 book-to-bill for the international business.
In Q2 FY ’25, we won three large deals and six midsize deals. We now have — and this is a very noticeable achievement, we now have eight clients which do more than 10 million revenue on a run-rate basis annually for Sonata now. That number was about four less than two years back.
Our EBITDA remained at 18.2% in Q2. Our utilization remained steady at 87%. For the SITL business, the domestic business, our gross contribution in the business grew 2.5% sequentially.
Operator
Ladies and gentlemen, the line for the management has been disconnected. Please stay connected while we reconnect the management back. Ladies and gentlemen, we have the line for the management reconnected. Yes, sir. Please go ahead.
Samir Dhir — Managing Director and Chief Executive Officer
Apologies for the snafu. I just want to conclude. I want to take this moment to thank all our Sonatians globally for their commitment, hard work and the quality of outcomes they deliver to our clients day-in and out. We’re very proud of our team members. Thank you to Team Sonata.
With that, let me turn it to Jagan for his comments on our financial performance. Jagan?
Jagannathan Chakravarthi Narasimhan — Chief Financial Officer
Okay. Thank you, Samir, for the overview. Good morning, good afternoon, good evening all. Let me start the update on International Business Services for Q2 2025. In International Services, the dollar revenue grew — revenue was $84.6 million with quarter-on-quarter it grew by 2.3 percentage and year-on-year by 4.6 percentage. In rupee terms, the revenue stood at INR707.9 crores, which was 2.9% quarter-on-quarter growth and year-on-year 5.7%. In constant-currency terms, revenue grew by 1.5% quarter-on-quarter and 3.7% year-on-year.
Now, the comment about the profitability in International Business, the EBITDA before forex and other income stood at 18.2 percentage against 18.7 percentage in Q1 2025. The major reason for this was that salary increase given during this quarter had impact by about 1.1 percentage. However, we were able to compensate that through the savings in operational improvements and also SG&A leverage what we got during this quarter. Hence, our EBITDA came back — dropped only by 50 bps in this quarter. The PAT for international business stands at INR62.2 crores. It had a 4.4% de-growth and quarter-on-quarter from the last quarter.
The growth driven by the main top clients there, Microsoft, [Indecipherable] and Quant customers. In international services, the Q2 ROCE stood at 20.3 percentage, Q1 was 18 [Technical Issue] and Q2 RONW stood at 23.5% compared to 21.6 quarter.
Now, the update about the domestic business. Log [Phonetic] contribution in Q2 stands at INR70.2 crores, grew by 2.5% quarter-on-quarter or 12.4% year-on-year. PAT for domestic business in Q2 was INR44.3 crores, grew by 9.5% quarter-on-quarter and 9.5% year-on-year. The DSO for domestic business stood at 35 days same as last quarter. The ROCE in domestic business is 45.2% compared to 4.6 percentage last quarter. The reported ROCE was much higher due to one-time changer impact that happened during this quarter.
The DSO of the international business continued to stand at 45 days. About — comment about the consolidated business, PAT at consolidated business stood at INR106.5 crores, growth of 0.8 percentage quarter-on-quarter and 14.3 percentage degrew by year-on-year. The consolidated EPS for the quarter stood at 3.84 per share compared to 3.81 per share last quarter. At consol level, quarter-on-quarter 225 [Phonetic], ROCE stood at 24.7 percentage and RONW stood at 28.4 percentage.
Now, the comment about the cash flow. This quarter, there were major moveents on the cash payout. The first one was earn-out [Phonetic] paid to Quant, the second payment to Quant in this — after the acquisition. This was about INR116 crores was paid on the encore [Phonetic], we paid as a third year and final earn-out payment of INR59.4 crores. We have also had a — we have also paid the incentive on the increments for the — for the employees during this quarter. We had repaid the company loan to the extent of INR48.9 crores during this quarter. We also had the final dividend payout for the shareholders in this quarter. The benefit for us was we had a decent amount of IT refund [Phonetic] coming for us, which, again, still old assessment pending [Phonetic] for us.
Moving to some other important operating metrics. The total headcount moved from 6,619 in quarter one to 6,908 in quarter two, net headcount addition of 289. Utilization of Q2 stood at 87% compared to the same level of Q1 ’25. We have added eight new customers in Q2. Top-10 clients contributed revenue-share of 63 percentage compared to 50 percentage last quarter. Number of clients more than 3 million, run-rate in Q2 is 22 customers compared to 21 last quarter. The vertical mix for Q2 is as follows; TMT is 32%, retail manufacturers is 31 percentage, SLS is 10%, BFS is 22 percentage and emerging is 5%.
Revenue by top go-to-market was data became 23%, Dynamics is 23% and cloud is 41%. The Q2 order booking stood at INR104 million, which is 1.2 times of the international service [Indecipherable]. This is a book-to-bill. Our international services continue to have a good cash collection of about $86.7 million in this quarter.
In summary, we continue to remain optimistic about the long-term growth prospects and thank you all for your — for attending this call.
With this, I hand over the call to the moderator for question-and-answer.
Questions and Answers:
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rakesh Agarwal from Rakesh Mangal & Company. Please go-ahead.
Rakesh Agarwal
Yes, good evening, sir. Am I audible?
Samir Dhir
Yes.
Rakesh Agarwal
Yes. Sir, what is the reason for degrowth in domestic business? This is 21% reduction. Quarter one is INR1,849 crores whereas quarter two is INR1,461 crores?
Jagannathan Chakravarthi Narasimhan
Yes. We have always mentioned to you that domestic business, you all should not see that turnover. We should always consider the gross contribution. Gross contribution has actually grown from INR68.5 crores to INR70.2 crores this quarter. The turnover depends on the contract, what we sign and contract what we close. Some of these contracts may be large, some contracts may be less. So, please don’t see the revenue or turnover of this business, just see, measure it only about — on the absolute amount of gross contribution.
Rakesh Agarwal
Okay. But sir, please, I don’t follow it. Can you throw some light on why? Even if the revenue headwind drops [Phonetic], how this gross contribution has been increased?
Jagannathan Chakravarthi Narasimhan
No, that’s what. It depends upon the — what is the kind of deals we have. In this quarter, we have couple of deals where the gross contribution percentage was better for us. Average, we run between 3.9 to 4.1 percentage of the gross contribution as a percentage of revenue. But some of these deals we had a higher gross contribution in this quarter. Hence, the gross contribution amount grew, but turnover need not grow for that.
Rakesh Agarwal
Okay. Okay.
Jagannathan Chakravarthi Narasimhan
We’ll have a bumpy rate in that in terms of turnover.
Rakesh Agarwal
Got it. Got it. And what is the revenue impact of this new three deals, major three deals we have entered or finalized this quarter and two major three deals and international three deals and two deals? What is the revenue — coming revenue impact?
Jagannathan Chakravarthi Narasimhan
No, these deals are large deals for us and definitely this will have — these are all deals or — normally, all the large deals are between three to five years time-frame. So, with the large deals coming in, we will have a good impact on the revenue growth in the coming quarter, but may not be immediately. All large deals will take a little time of transition because most of the deals have transition impact also. Once the transition has done, the revenue will become a normalized mode on the revenue transition. We cannot particularly give out a particular contract. We don’t disclose that, but will have a positive impact on our revenue growth.
Rakesh Agarwal
Thanks, sir. But when we are expecting this will impact our revenue? What is — from which quarter?
Jagannathan Chakravarthi Narasimhan
No, I have mentioned it. It depends on each of these contract and what is the tenure of the contract, what is the complexities of the deal and all these things. So, on a very, very large deal, mega deals — we generally give how much quarter — how much impact will happen and which quarter the flow will happen, normalized revenue flow will happen. These are all large deals, regular large deals. There will be more-and-more large deals, always we win two to — three to four deals every quarter. Hence, I cannot specifically tell about how much impact that [Indecipherable] will happen. This will continue our process of winning the large deals and it will continue to help us to grow the revenue quarter-on-quarter.
Rakesh Agarwal
Okay. Okay. Thank you, sir.
Operator
Thank you. The next question comes from Mihir Manohar from Carnelian Asset Management. Please go ahead.
Mihir Manohar
Yes, hi. Thanks for giving the opportunity. Am I audible?
Jagannathan Chakravarthi Narasimhan
Yes.
Mihir Manohar
Yes, sure. Samir, I largely wanted to understand having the deal pipeline overall, which has been there, quite good. I mean, cloud data pipeline or even on the MS Fabrics and Dynamics side, the buildup is have been quite strong. You mentioned 51% of our pipeline is now cloud EBITDA versus 15%, which was, let’s say, two, three years back. But how should we see this particular part of the business translating into revenue growth? Should we see, I mean, the historical growth rate that we used to have 3% to 5% of the growth, which was like one of the top quarter growths among the industry. Should we see that growth coming back given the deal wins which have happened in the pipeline, which you said? That was my first question.
Samir Dhir
Sure. Do you want to answer this first or do you want to complete all your questions?
Mihir Manohar
I mean, maybe — I’m okay with anything.
Samir Dhir
Okay. So, let’s answer this first. So, there are two things happening in the market, Mihir. So, these deals that we are winning are helping us incrementally take our revenue up. If you recall, we had said when we had a degrowth quarter in Q4 that first-half of the year, we’ll see 1% to 3% growth, in the second-half will be better than the first-half. I think these deals are all adding up to us to deliver a better second-half of the fiscal year compared to what we had in the first-half of the year. So, that’s point number one.
Point number two, as you know, there are headwinds in the market right now, especially in the retail and manufacturing side, because that’s about 30% of the business which is under pressure because of the industry headwinds. So, these deals are actually in some ways offsetting the pressure that is getting created [Technical Issue] and have Sonata deliver higher than industry — average industry growth rates that we’re talking about. So, that’s a two-way to think about it. Our second-half will be better than the first-half comparatively. And second, it’s also offsetting us to take the headwinds from the retail and the manufacturing sector and offset that downswing.
Mihir Manohar
Sure. Sure. And I mean, on this deal side, how should we see these deals from a margins perspective, given the fact that this I think will be more in the discretionary side of data, cloud and everything. So, how should we see margins from there?
Samir Dhir
So, if you think of the midsized deals, they are at par with our standard margins of the company. They are overall at par and they will start at par and they will stay at par. Then some of the large deals, while their overall margin profile in the term of three or five-year will be at par with the company. For the first few quarters, there might be some impact because we are ramping-up, et-cetera. But in general, there’s not any negative headwind expected from any of these large deals. The one that we announced in May-June timeframe had an impact and we told you guys that, that will have an impact in Q2, Q3 and Q4, but that’s already baked into our numbers, right? Now, these deals we don’t expect to have any significant impact even in the short-run. They will probably be at par or slightly accretive.
Mihir Manohar
Sure. Sure. My second question was on the finance cost. I mean, you have given [Phonetic] a very good bifurcation [Phonetic] of the finance costs in the presentation at this time. So, I mean, if I can get an understanding as to how should one see each of these components of the finance cost for the balance part of the year because I believe the unwinding, we were expecting that unwinding to come down and even the interest on acquisition is going to come down. So, how should we see these three components for the balance part of the year?
Jagannathan Chakravarthi Narasimhan
So, this unwinding has already come down. If you see in the Investor Day, in Slide number 24, we have given it, how much is the unwinding has come down compared to Q1 and last year, what was the Q2 number and what is the Q2 number. It has come down already. And the unwinding will get — next year when the next payment happens, it will be fully closed — it will fully disappear there. Interest cost on acquisition are — loan what we have. It’s SOFR plus what we have taken with the margin from the bank. So, SOFR will — SOFR’s quarterly reset, hence it will come down from next quarter by 50%. Once it starts coming in, our interest cost also will start coming down.
Mihir Manohar
Okay. So, I know when are we going to repay the loan which we have taken for acquisition, what is the exactly challenge that we are facing there?
Jagannathan Chakravarthi Narasimhan
The loan what we have taken till now will be repaid by financial year ’27.
Mihir Manohar
Okay. Okay. And the INR10 crores, should we building [Phonetic] INR5 crores from next quarter onwards [Indecipherable] figure?
Jagannathan Chakravarthi Narasimhan
It is already there. You are talking about interest cost, right?
Mihir Manohar
Interest on acquisition loans.
Jagannathan Chakravarthi Narasimhan
Interest on acquisition loans is not INR5 crores. It is interest on deferred consideration that has come down by INR5 crores from Q1 to Q2, Q4 to Q1, Q1 and then Q2 has already come down.
Mihir Manohar
Sure, sure. And just last question —
Jagannathan Chakravarthi Narasimhan
Interest on loan will come down by 50 basis-points, but that impact will happen from Q3.
Mihir Manohar
Okay. So, 50 basis-points would be, I mean, INR2.5 crores kind of a reduction, INR2 crore, INR2.5 crores per quarter.
Jagannathan Chakravarthi Narasimhan
50 basis-point on the loan amount, loan amount was 75 million, we are repaying that. Now, whatever was outstanding on the interest cost will come down. It will not have a 50 basis-point impact on profitability. I’m talking about interest-rate, SOFR plus margin — the SOFR is coming down by 50 bps.
Mihir Manohar
Understood, sir. And just my last question was on the annual quarterly variation. I mean, I understand that you are a small company when we see the international business. But however the quarterly variation for us across verticals — I mean, across segments, like say AT&T [Indecipherable] other exploits, when we compare that to others. I think we have a 5%, 15% growth last quarter, this quarter, 40% growth. So, why there is such a stark variation which is there for us, not [Indecipherable]?
Samir Dhir
So, let me take that, Mihir. I think it’s really a function of the deals that we are pursuing. See, on a small base, we’re close to mid or large deals. We see a very strong percentage jump. And that’s what is really happening. And I think that’s part of the strategy we’re building out because we want to build scale in these. But if you look at a slightly longer duration, Mihir, which is what I shared earlier, our healthcare and banking business together were about 13% of our business 10 quarters back. They’re about 32% of our business now.
So, over the last 10 quarters, as Sonata has grown, these businesses have grown faster than the rest of the Sonata, which just gives you the sense of how this business is looking like for us. That’s why we are excited. And it was part of the strategy to diversify the business because retail manufacturing was about 30%, 35% of the business and that’s pretty much flat-line for last four months –four quarters. This is actually helping us offset that. But on a secular basis, we think this business will continue to grow faster than the rest of Sonata.
Mihir Manohar
Sure. Sure. And just one last follow-up. I mean, you mentioned second-half to be better than first-half. Given the dealings which are there, should we expect second-half to be substantially better than the first-half?
Samir Dhir
Well, it’s a relative word substantial, but we do expect second-half to be better than first-half. Look, let’s not forget that we still have some headwinds in the business because of retail manufacturing. But I think it will be — it will be better than the first-half. How better, we’ll report back when we come to the next quarter, Mihir.
Mihir Manohar
Surely, and that’s it from my side. Thank you very much.
Operator
Thank you. The next question comes from Dhiraj Dave from Samwad Financial Services LLP. Please go ahead.
Dhiraj Dave
Yes, hi. Can you — am I clear? Can you hear me?
Samir Dhir
Yes.
Jagannathan Chakravarthi Narasimhan
Yes.
Dhiraj Dave
Yes. So, one question. Basically, I have been a retail investor for almost like eight years with Sonata Software and this is the first time when the company is doing everything good, at least cash flow wise, acquisition wise, we had paid something which is incentive toward the companies which we acquired, we have paid to employees, but we find there is no dividend declaration. Is there any change in policy?
Jagannathan Chakravarthi Narasimhan
Yes. No change in policy as such, but Board, the Board have decided now to evaluate the dividend payment in the subsequent — in the coming quarters. The reason is because of the — our loan repayment and many other reasons are there, but the Board is going to keep — evaluate in the coming quarters.
Dhiraj Dave
Isn’t it sound something which is kind of when we were looking at acquisition funded by debt and we are paying incentives and we are paying increment when acquisition rate is 13% to employees, which is fine. We are a manpower company. We should pay. No denial to that part. We have liquidity and we are paying dividend in fact from the turnaround time. We have started paying two quarterly dividend. Today, we are in great shape and you are still deliberating. So, are you looking at acquisition or something that’s why you need to hold back the cash reserve? Otherwise it’s not making sense.
Jagannathan Chakravarthi Narasimhan
No, this is —
Dhiraj Dave
Why change the policy? In fact, there was no communication. If you check discussion sometime back, whatever last five, six quarterly discussion, I categorically asked there is any change in dividend payout policy, it was said no. It won’t increase because we have done acquisition, but it will be maintained. And basically, see, what happens is this gives discomfort to the investor community because we are used to certain kind of patterns with the company. And if we are changing that and without any communication, It is not fair, right?
Jagannathan Chakravarthi Narasimhan
No. Sir, this is not a change in the policy and the capital. [Speech Overlap]
Dhiraj Dave
Yes, there is no change, but the point is that you are doing back dated [Phonetic]. See, you are paying every six months and that was kind of — you are CFO, since how long Sonata has been paying six months dividend? It’s almost five, six years.
Jagannathan Chakravarthi Narasimhan
Everything is subjected to evaluation by the Board itself.
Dhiraj Dave
We know. We know that.
Jagannathan Chakravarthi Narasimhan
[Speech Overlap] And our strategic priorities, the decisions are taken at the Board level. This is not a [Speech Overlap] [Indecipherable]
Dhiraj Dave
But please pass on the feedback that investors have concern. At least, it should be communicated to the investors that henceforth they will be getting one dividend or whatever not, because IT companies generally have a tendency and good companies have a tendency. So, that’s fine, your Board have certain consideration. Second part is, I fail to understand that we did acquisition. We are paying incentive to acquisition company. We have IT refund, which is giving us a 10 crore of extra dollar income in the other income in the kind of thing, which was not there in last quarter. And despite that, we find IT revenues — all this revenue growth and all that is coming, why there is no cash flow or cash growth?
In fact, you see the condition of company, we have INR700 crores cash and marketable equivalent, which is reduced to INR500 crores. So, why that is happening? See the growth, it’s fine to talk about all these big numbers. Why you are not saying that we will be paying X amount of dividend or we’ll have a free cash flow target. Why to look at growth, if growth is not that — at remunerative? In fact, if you look at the 10 quarters result, the dividend has been paid, it will remain same. For last 10 quarters, it was INR7.5 or something, it has remained that only.
So, all this growth, while it makes sense for all the stakeholders, as a financial investor, it doesn’t make sense for me. It is fine. We have to look at long-term growth. I appreciate all that. But at the same time, you need to balance all stakeholders with growth and cash-flow distribution and free cash flow need to talk into consideration. We can’t stay in isolation. Okay, we’ll grow 1.5 billion, what’s the point? Your margins are coming under pressure if you look at IT service business or Indian national [Phonetic] market.
Even that is the reason given by Samir that we have got 30% retail and manufacturing, which has a headwind, but you’ve got BFSI, which has increased by 6% and healthcare also increased by that. So, basically what it means is that we have taken a lower-margin business, or we have some onetime cost in building up for this scale. So, if that is the case, please explain that. What is the kind of one-time cost about the new deals, which will help us over a period of time? Because that will help us elaborating because for last four quarters, we have been constantly getting that things will improve, things will improve, things will improve, but we don’t find any kind of results.
Jagannathan Chakravarthi Narasimhan
Yes, sir, we take your feedback, We have explained to you about the margin in the large deals that three quarters — three to four quarters impact will be there because we are doing an investment and we have also done a rebadging of people on-site that impacts our margin. And we also told about salary increase in this quarter because we are an employee-oriented company, we need to compensate our employees. So, considering these two, we have — we have — and we told about the impact on margin till Q4 of this year.
Secondly, when the acquisition happens, we’ll happily disclose what is the total acquisition price and what is the amount we have to pay and based on what is the performance. We have also given a clear clarity last December when there is a — we exceeded the performance against the earn out condition. We have given all the details of that. We are giving breakup of all these payouts in our investor deck every quarter. We have taken your input, sir. Thanks for your input. We will definitely discuss — take up and discuss internally, sir.
Operator
Thank you. The next question comes from Amit Chandra from HDFC Securities. Please go ahead.
Amit Chandra
Yes, sir. Thanks for the opportunity. Sir, my question is on the demand environment. You mentioned that we have won some large deals. The three large deals in the quarter and the large deal pipeline continues to remain strong. But especially, we have also maintained our long-term FY ’27 target of 1.5 billion, 500 million for the IT services business, but that actually assumes a significant acceleration in our revenue growth from what we have been doing in the last two, three quarters. So, if you can explain how the large deals will help us in achieving that? And also, your comments on post the like US elections is now behind, how the — how the demand environment is shaping up, especially after the elections? And in terms of the ask rate for achieving the 1.5 billion, is it — like is it totally organic or is there some inorganic component also into it?
Samir Dhir
Yes, let me take that. I think there are multiple parts to your question. So, let’s just talk about the macroeconomics. I think like we said earlier, the industry that we service, four industries we service, it is duality in those two regions. So, for example, healthcare and banking are doing well for us. Retail and manufacturing is not doing that well for us because the — because of the current consumer spend related discretionary spend slowdown that has had. And high-tech, while the large client has done well for us, but the other part of the high-tech has not done that well for us. So, that’s really a two-parts of the equation that we are — that we are balancing out right now.
As far as the large deals, how they’re helping us. Really, like I said earlier, it’s helping us offset some of the reductions that we’re seeing in retail manufacturing side. These deals are helping us compensate and still deliver 2% plus type of growth that we just announced in this most recent quarter. That was the second part of the question, right? Amit, what’s the third part of the question, can you just quote? I think I missed one part of the question.
Amit Chandra
No, in terms of after the US elections, do you see some changes that would help us?
Samir Dhir
Look, it’s very, very, very recent right now, but if you look at all the industry analysts forecast, they’re all talking about US inflation will still be high go-forward as well. Very early to say whether that will happen or not, but pre-election results — till yesterday, the messaging was the industry inflation will be high. So, all consumer-facing industries, retail and manufacturing included. We don’t think there’ll be any uptick for the at least two, three quarters. But our diversification strategy to help grow in banking and healthcare is really what is offsetting that slowdown.
Amit Chandra
Okay. And on the margins, on the margins part, obviously, we had the impact of wage hike, but there was also the impact of rebadging from the large deal that we won last quarter. So, like, if you can quantify the impact of what was the rebadging? And has the rebadging has been completed or is it still like work-in progress?
Samir Dhir
Amit, rebadging is fully baked-in into our current quarter. So, all rebadging is fully behind us. It’s fully baked into the quarter numbers now.
Amit Chandra
Okay. And with the margin aspirations, obviously, what we have is of like low-20s and we are currently at 18%, 18.5%. So, the margin expansion like mostly will happen with these large deals coming? Or is there some, like, more headwinds that are still there in terms of margins? And also, if you can also explain the Quant seasonality because the Quant is having overall like better margins. And in terms of seasonality, quarter three is around [Phonetic] the strongest quarter for Quant. So, how do you see the margins and the growth along with the in — like, in the context of Quant?
Samir Dhir
Yes. So, let’s talk about the seasonality of Quant and I’ll come to the margins right after that. So, the Quant is, the current quarter, the Q3 quarter is one of the stronger quarters and the Q4 is the weakest quarter in the year. So, it’s a tale of two cities. So, Q3 will be very strong for them and Q4 will be muted for them. So, that’s how we see the business, which is what we have shared with you earlier also and now we’re reinforcing that point.
So, we’re not worried about the current quarter, but we do expect Q4 will be soft, but they will come back in — on track in Q1 again, which is our April, June quarter. That’s how the revenue cycles work. And the reason that — the way it works better because they work largely in the banking space and the new year contracts generally take effect from January and they don’t get signed till end of January and then the ramp-up of the new deals takes time. So, really the full-quarter impact comes in April timeframe. That’s how the Quant business cycle works. I hope that answers the one part of the question.
Second part of your question from about 18.5% or so of our EBITDA to getting to 20%. I think there are two levers at play and we talked about it earlier also. So, we expect close to about 0.5% to slightly more come back as we get over the large deal hump that we have invested in for the next two quarters. I think Jagan talked about it earlier. At the end of Q4, we expect those large related investments to come out of the business and we’ll be back on track nearly about 60 to 70 bps coming back from the large deal impact.
And the second, the wage hike we have done has a cumulative factor of about a 1%, 1.1% somewhere in that zone and that takes us typically about two quarters to recover that. So, by end of quarter four, early part of quarter one, we should be able to get to our aspirational number that we have always talked to you guys about.
Amit Chandra
Okay. So, like, just to understand, obviously, when we acquired Quant, it was a very-high margin business. And after we have seen very strong growth coming from Quant and most of the deals that we are winning is Quant led. So, despite that, the margins have come off, let’s say, significantly from, say, 22% to 18%. So, is it fair to assume that the — I know the core margins, which was ex-Quant has actually come down, like, quite substantially?
Samir Dhir
So, let me just qualify some of the statements you made. So, while Quant has been a significant growth driver, the deals that we announced even today, they are — not all of them are Quant. In fact, a vast majority of them are not Quant related. So, the retail deal we just talked about, the Fabric deal we just talked about, the high-tech deal we talked about, they’re all in the organic business. Just to clarify that point first.
Having said that, in the base business, the organic Sonata business, largely, the wins are happening in the healthcare, life sciences and the high-tech space. We have not seen any big wins in the retail space after the large — the mega-deal we announced maybe a year and a half back. So, that’s on that point.
On the margin side, if you go back, we had an EBITDA of about 22%. We diluted the EBITDA by about 2% to 3%. And we had shared with you guys because we want to invest in the newer capabilities. And what are these newer capabilities? We want — we invested in Fabric. We invested in AI. We invested in leadership in sales across the geographies. We invested in newer areas within Microsoft stack, vis-a-vis Power Platform and within Dynamics also in the CE side.
So, we made some strategic bets to invest in these areas because the F&O space was working well for us, but we wanted to open up new doors from a growth investment perspective. So, part of that 22% to dilution of 50% was a very planned dilution. The other 2% that we diluted was because of large deals which fully to recover by Q4 and Q1 timeframe.
Amit Chandra
Okay, sir. Thank you and all the best for the coming quarters.
Samir Dhir
Thank you.
Operator
Thank you. [Operator Instructions] The next question comes from Suraj Malu from Catamaran. Please go ahead.
Suraj Malu
Hello, sir. Sir, I just want to clarify one thing like since there is a seasonality from Quant side, so the ideal way to look at the business is Y-o-Y right? Because if I — for example, if I look at the revenue from top-10 clients, it has grown 29% Q-o-Q, but Y-o-Y it is 8%. So, just want to confirm the right way to look at it.
Samir Dhir
Yes. No, I think your point is absolutely right, Suraj. The way to look at the business is Y-o-Y basis, not only Quant, even for Sonata also. But I think on the top-10 clients, Suraj, keep in mind that the top-10 clients that we had last year are not the same this year. We have had new additions in that mix. We have added new customers in that mix and some of the older clients of Sonata are no longer in the top-10 because they have fallen off the run-rate basis.
If you recall, some time back, I just shared with you that about eight customers are more than 10 million in Sonata now on a run-rate basis. So, our mix of top-10 is changing. So, the Y-on-Y is not a like-to-like comparison to what you’re seeing Y-on-Y basis, not an apple-apple comparison because the base clients are different now.
Suraj Malu
And one thing, just wanted to understand on the sharp increase in employee expense, like, because for the past two quarters it will look like it has jumped like 10%, 11% Q-o-Q. So, just want to understand the split, like, how much is due to wage hike? And, like, what is the reason for such higher jump?
Jagannathan Chakravarthi Narasimhan
Look, I have explained to you the wage hike has impacted about 1.1% of the EBITDA level for us this quarter.
Suraj Malu
But then, like, if you can explain, like, why is that? In the absolute terms, the increase in employee expense?
Jagannathan Chakravarthi Narasimhan
So, the absolute number, it’s difficult to share details on this. This is confidential numbers now, Suraj. But what happened is it had a 1.1% EBITDA level for us. Normally, the total increase with the lower, with junior management, mid-management and senior management will be 1.6 to 1.75 percentage every year. This year, we have done only junior management now, hence it is 1.1 percentage of the EBITDA.
Suraj Malu
And the balance impact will be in the next quarter as you had mentioned?
Jagannathan Chakravarthi Narasimhan
Yes, balance impact will be in the next quarter exactly.
Suraj Malu
Okay. Thank you, sir.
Jagannathan Chakravarthi Narasimhan
Yes.
Operator
Thank you. The next question comes from Chirag Kacharia from Ashika Institutional Equities. Please go ahead.
Chirag Kacharia
I have couple of questions. Hope I’m audible to you. So, in second-half, you mentioned your expectations to be better than H1. So, which vertical you think to drive better performance in comparison to H1? And second, what for low impact you are expecting in fourth-quarter? Yes.
Samir Dhir
Yes. I think the — Chirag, I will take the first part, Jagan will take the second part. On the vertical side, we are expecting — continue to expect our healthcare business will grow. We are expecting the banking business to grow. So, those are the two businesses from a vertical perspective, we think the growth will come from. In addition, from a geography perspective, we think the US geography will grow probably faster than the other geographies as well. So, that’s the two-ways to think about from a growth perspective.
As far as the furloughs are concerned, Jagan, you can take that.
Jagannathan Chakravarthi Narasimhan
The furloughs will have a very, very minimal impact for us. We do have an impact, but it’s not going to be a very substantial impact for us because most of our customers except for one or two customers in the banking space, it is not expected to have much bigger impact from the other customers for us.
Chirag Kacharia
And from capability perspective, as you mentioned that we are investing and there will be some margin price from [Indecipherable] perspective. So, in H2, the margin pressure will on lower side or will we — one should consider margin rate similar to what we have witnessed in H1?
Jagannathan Chakravarthi Narasimhan
Okay, I didn’t get your question. Can you repeat your question?
Chirag Kacharia
What I’m asking, in H2, the margin band will remain in the same range like H1 or slightly better than H1?
Jagannathan Chakravarthi Narasimhan
So, Q3 will have an impact of salary increase also. We will have some impact on the Q3, but definitely operational improvement will also come in there. We will have an improvement in the second-half as a whole compared to H1, but to reach back to the early ’20 levels, what we were mentioning, we may take — it may happen only the Q1 of next year.
Chirag Kacharia
And at consol level, what basis-point margin impact you’re expecting due to wage hike in the third-quarter?
Jagannathan Chakravarthi Narasimhan
This quarter it was 1.1 percentage. Normally, the total impact in a year will be about 1.6 to 1.75 percentage on the total increase, on a normal year when the increments are given. This balance impact will come in the Q3. We are yet to finalize the total number, but that means that around that number can happen.
Chirag Kacharia
Okay. Thank you.
Jagannathan Chakravarthi Narasimhan
So, mid-managers and senior managers. Yes.
Chirag Kacharia
Okay.
Operator
Thank you. The next question comes from Harsh Chaurasia from Vallum Capital. Please go ahead.
Harsh Chaurasia
Hello, am I audible?
Samir Dhir
Yes.
Harsh Chaurasia
Thank you for giving me this opportunity. So, sir, I have two, three questions. So, basically, first is, when I see your retail vertical, it has been degrowing from last couple of quarters. I know there is a business condition, but when you speak about your deal pipeline, sir, can you give us some idea about, like, what percentage of the deal pipeline is contributed by retail and manufacturing? So, what I’m implying is, so when the overall business condition improves, the — our run-rate in the PLC growth will be much faster than our peers? This is my first question.
And my second question is basically from a margin perspective, so, just — this is a clarification. So, when I see you on a Y-o-Y basis, your cloud and IMS revenue has been the major contributor in the international business. So, are we doing a lot of pass-through revenue type of deals which is impacting our margins?
And third is basically, when you say the 22% to 20% margin dilution was planned. So, can you give the breakup of 200 bps, which you have invested in the business? So, like, what has been the investment on the large deal side and on the geographical expansion side from that perspective?
Samir Dhir
Sure. Multiple parts to the question. So, on the retail large deals, they are pretty much in-line with other verticals, Harsh. However, the difference in retail and other verticals is that we are seeing closures in other verticals. We’re not seeing the closures come through in the retail vertical and manufacturing vertical. The clients are delaying the decisions, the cycles are longer. Our ability to close is limited, not because of our capabilities, but just because of where the business cycles are with customer. They are putting — they’re delaying every quarter — the next quarter, the discretionary expense side of the equation. So, from a pipeline perspective, do we have the same pipeline as other verticals? The answer is yes from a large deals point-of-view. But are we seeing closure? The answer is no. Okay, that’s the first part of the question.
The second part of the question where we have grown in the cloud, I think it’s largely on the data on cloud. These are not pass-through deals. These are all data enabled deals through the cloud platform, which are hybrid deals which have some component of cloud and some component of data inside it. But these are not pass-through deals by any measure. They are not the impact from a dilution perspective. The only dilution we have in the business from a gross margin perspective is because of the large deal we’ve already shared with you guys. That will continue for two, three quarters and then we get normalized again.
And the third part — point of your question about from 22% to 20%. That investment was baked-in, if you recall. Even two years back we shared with you, is largely in the capability side of the company because we are trying to create new capabilities of GenAI, Fabric, newer sales team members in some of the geographies that we invested in, especially in Europe, especially in the banking and healthcare vertical, especially in the newer area that we outlined to you as part of our strategy. So, that’s where the investments of 2% has gone in from 22% to 20%, which is our target, end-state, we want to get to from a margin point-of-view.
Harsh Chaurasia
Got it, sir. Thanks. Thank you very much.
Operator
Thank you. The next question comes from Prolin Bharat Nandu from Edelweiss Public Alternatives. Please go-ahead.
Prolin Bharat Nandu
Yes. Hi, team. Thank you for giving me this opportunity. A couple of questions and let me start with where the previous question ended on this 200 bps investment that we had done two years back. Now, if I see we have already been won a mid-size or, not a large deal, but a decent-sized deal in data fabric as well. And AI is something that we have been investing in. We have been winning deals in BFSI domain as well. So, when do you think that this 200 bps of investment we will recover? I mean, would it be ’26 or when do you think this — we can plowback some of the margin, some of the investment that we have made?
Jagannathan Chakravarthi Narasimhan
Yes. This is Jagan here, Bharat. So, this investment will continue for two to three years, another at least three years time, Bharat. The reason is because we have to bring in a scale for continuing the growth that can come in for the business. Secondly, there are some big technology changes and opportunities that are unfolding in front of us. Unless we invest and bring the scale to this, we may not be able to capture the opportunity for growth that is in — that is in the market — that can emerge in the market in the coming future. So, we have to continue to invest this 2% and take at least for three years, we may not be able to recover this.
Prolin Bharat Nandu
Sure. Jagan, you mentioned on this technology change, right? So, what we have typically seen is that whenever technology change has happened, it happened at DevOps at that time. Whenever the implementation happened or whenever the benefits of that technology change or percolated down to IT services company, it become more of a commodity, right? Everybody started doing it.
And right now also the same thing is happening. Everybody is talking about AI, right? In some sense. And investment there and deal wins also happening. So, do you think that this AI and we talk about Harmoni, we talk about our very esteemed partnership with Microsoft. Do you think that, that will give us an advantage and going-forward when it comes to the GenAI service part of the GenAI thing? Would it accrue to only a few players or all these service players will benefit? And there, how do we differentiate ourselves versus the rest of the pack?
Samir Dhir
So, let me take that. I think, look, for every time there is a technology change that has happened in the market, there are two, three companies which gain disproportion [Technical Issue] if you go back 15 years back, you can see when the digital came, few companies came from behind and took the marketplace. Of course, everybody got a part of it, but some companies benefited more from this than the others. And what we are trying to do in the modernization space is exactly that. We’re trying to capitalize that investment. It’ll at large will depend upon how well we execute as a team in the company.
From the excitement perspective and the opportunity perspective, it is in fact absolutely there, but we have to execute well. We made the investment. We are executing to our strategy. And some of these journeys are not very linear. So, some quarters will be better than the other, some years will be better than the other, some years will be worse than the others. We are building a long-term business and we believe what our teams are doing is really the right thing to do from building a long-term viable business out. And as you know, Sonata has missed many, many waves of growth and we really want to make sure that the AI wave that is in front of us, we capitalize on that as we move forward.
Prolin Bharat Nandu
Sure. Thank you. Just one last point. So, just to conclude, right? I mean, our top-quartile growth is something that we want to come back to in second-half of FY ’25 and the margin that we were, let’s say, before the start of this year, 20 odd percent is something that we aspire to reach in Q1 FY ’26. Is that the fair conclusion on growth and margin?
Samir Dhir
Let me just qualify a little bit. I think we will have a better second-half than the first-half. We will not end-up in the top-quartile just in the second-half. It might be H1 of next fiscal year, but time will tell how we deliver to that but that’s how our current calibration, but second-half will be better than first-half for sure from a growth perspective. As far as the margin is concerned, Jagan said, by end of Q4 or Q1 timeframe, we do expect to be 20% EBITDA company.
Prolin Bharat Nandu
Great. Thanks a lot, Samir, and all the very best.
Samir Dhir
Thank you.
Operator
Thank you. As there are no further questions from the participants, I now hand the conference over to the management for closing comments.
Samir Dhir
Well, thank you for — all of you for joining us today and listening to the prepared comments from the management team and for your questions. We just thank you for your continuous support and cooperation with Team Sonata, and we take this opportunity to thank all the Sonatians globally for their untiring efforts to scale the company. Thank you all.
Operator
[Operator Closing Remarks]