Sasken Communication Technologies: Riding The Mobile Wave 



It may seem that with the ongoing consolidation in the software services
area, the space for niche companies to survive and prosper would be shrinking.
However, size does have its own liabilities, especially in the high growth
sectors such as telecom, a number of small companies have thrived in an
environment that requires a strong domain focus and ability to handle smaller
clients. This is not something that majors would like to do and hence this space
remains one of the last bastions of the mid market players. As these companies
develop their knowledge about their customers and their businesses, we believe
that these companies could well transition into IP plays bringing value to both
their customers as well as their investors.

Among the companies that have focused on niche markets and developed strong
domain skills in specific verticals is Bangalore headquartered Sasken
Communications Technologies. This approach which has enabled the company to
command higher valuations than many larger companies.

FACT
SHEET

Website:
www.sasken.com
 
Ring Road, Domlur,
Bangalore 560 071, India
Tel: + 91 80 2535 5501,
Fax: + 91 80 2535 1133

Area
of Specialization:


Telecom software solutions
Consolidated
Revenues

(March 06): Rs
308.13 crores
Offices:
India, Canada, China,
Germany, Japan, Sweden, UK and the U.S.
Listing
(Stock Exchanges):
BSE
and NSE
Face
Value:

Rs 10
Current
Market Price:
Rs
393
52-Week
High/Low:
Rs
435/240
BSE
Code:
532663
NSE
Code:
SASKEN

Sasken is a provider of products, software and support services for the
communications industry. The company’s clients include terminal equipment,
network equipment manufacturers, semiconductor vendors as well as telecom
operators. Sasken provides both services and products in the embedded telecom
space and its client list includes customers like Nortel, Nokia and Motorola
among others. Established in 1989 by Rajiv Mody at San Jose along with two other
co-founders, the company is currently headquartered in Bangalore, with offices
in Canada, China, Germany, Japan, Sweden, UK and the US with 2,500 people. The
company’s equity stands at Rs 27.9 crore. Promoters hold 27.1%, institutional
investors hold 44.7% while the public holds 28.1%.

Services currently constitute almost 96% of the company’s revenues.
Services provided by the company focus on product engineering in the wireless
space. The services cover development, maintenance and upgradation of the
product portfolio of its customers across different stages of the product life
cycle as well as network engineering services. The company also offers its own
products mainly for the terminal end equipment segment. These products are built
in partnership with other semiconductor companies and used by mobile phone
manufacturers. 

Consolidated revenue for the financial year ended March 2006 grew by 27.4% to
Rs 308.1 crore from Rs 241.7 crore achieved in the previous year. Software
Services revenue constituted 91% of the company’s revenues and grew by 26.9%
over the previous year. Sasken’s product business showed a decline due to the
fact that majority of the revenues are milestone based and most of the products
are under different stages of development. The company also entered the area of
network engineering services for telecom operators in India. The company hopes
to extend this service to overseas customers after gaining expertise from Indian
markets. Consolidated profit after tax increased during the fiscal ended 2006 by
0.6%, from Rs 22.7 crore to Rs 22.9 crore.

During fiscal 2006, the company began investing on a new product line, called
the “Integrated Solution” and amounts invested in the product line have been
capitalized. As a result, software product revenues declined to Rs 27.5 crore
during the year ended March 31, 2006 from Rs 33.9 crore during the year ended
March 31, 2005. The company successfully completed its IPO and raised Rs 130
crore by the issue of 5,000,000 equity shares of Rs 10 each at a price of Rs 260
per share. The issue was oversubscribed by about 76 times. The issue was
primarily used to set up infrastructure facilities for software development
adjacent to existing offices. 

Sasken announced encouraging results for the first quarter ended June 30,
2006. The consolidated revenue stood at Rs 91.1 crore, in comparison to Rs 67.7
crore for the same period last year, an increase of 35% y-o-y. Operating income
for the quarter was Rs 13.0 crore, an increase of 68.9% y-o-y. Net profit for
the same period stood at Rs 8.6 crore, as compared to Rs 4.7 crore, an increase
of 81% y-o-y.

During the quarter, Sasken announced the acquisition of Chennai-based
Integrated Softtech Solutions (isoft Tech), a 110 people company. The deal would
add a Chennai development center to its already existing facilities in Bangalore
and Pune, and will be funded from the $20 mn it raised through a private
placement prior to its IPO.  It also
announced the 100% acquisition of Finland-based Botnia Hightech Oy (Botnia), a
provider of wireless R&D and testing services. Botnia Hightech is a supplier
of hardware, software, mechanical design and testing services to leading mobile
handset vendors.

Consolidated
Financials

Year ended 30th
March

2004

2005

2006

2007*

Revenues

166.1

241.7

308.1

373.2

Other Income

1.3

3.6

6.4

6.0

Operating Profit

27.5

35.5

48.1

71.5

Operating Profit Margin
(%)

16.6

14.6

15.6

19.1

Profit After Tax

18.3

22.7

22.9

37.3

Equity Capital

15.1

16.8

27.9

27.9

EPS (Rs)

11.5

12.8

9.0

13.3

*Projected
Note: All figures in Rs crore unless indicated otherwise. All figures
are rounded-off

The employee strength increased to 2,897, a net increase of 322 in this
quarter. Revenue contribution from the top five customers stood at 76.7% for Q1
of FY 2007 in comparison to 76.3% for Q4 in FY 2006.

The company is confident of maintaining the revenue growth and margins from
the services segment while product revenues are expected to improve only in
fiscal 2008 that would significantly change the operating margins.

Sasken shares now trade at Rs 390 discounting its estimated EPS for FY 2007
by 29 times indicating the high valuation accorded to this high growth niche
company despite its small size. Most other software companies of this size would
be typically trading at less than 15 times next year earnings. We believe that
the company is enroute to a strong revenue growth coupled with improving margins
as the product revenues come onstream from FY 2008 onwards. The stock however,
is fully priced in the current context and is unlikely to move ahead of its
peers in the near term.

MARKET OUTPERFORMER.

Sushanto Mitra
The author is the director, Techcap India
sushanto@techcapIndia.com
The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here

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