Sasken Communication Technologies The Rising Star

The Indian software industry is slowly but steadily
throwing up leaders who have grown by focusing on a particular niche and
building strengths in that area rather than trying to follow the leaders like
TCS, Wipro and Infosys who have over the years built skill sets across the
board. These niche companies have been able to survive the downturns better than
many of their peers as they have build a strong domain and customer knowledge
which ensure sticky customer relationships.

Such niche companies have come up in a number of areas such
as BFSI, Testing, Embedded Software and Engineering Software and have ensured
that mid sized software companies continue to flourish across economic cycles.
Among such focused companies is Bangalore based Sasken Communication
Technologies.

 Founded in
1989, Sasken was set up in the classical tradition of Silicon Valley startups,
in a garage in Fremont, California. Headquartered in Bangalore, with offices in
Japan, Europe, China, Canada and the US, Sasken is a SEM CMM level 5 company. It
is a provider of telecommunication software solutions and services to terminal
equipment manufacturers, network equipment vendors, semiconductor companies and
network operators around the world. Sasken delivers end-to-end solutions that
enable content delivery across different communication
networks. Sasken is a player in terminal equipment software such as
wireless protocol stacks, multimedia codecs, applications and middleware. Sasken
offers development services in wireless and enterprise voice markets, test and
measurement, optical networks and mobile Internet to network equipment
manufacturers. The company also licenses its silicon IP in wireless and ADSL as
well as provides design and development services to semiconductor companies. The
company's client list includes Nokia, Nortel and Motorola.

Sasken entered the capital market in August 2005 with a
public issue of 5,000,000 equity shares of Rs 10 each comprising of fresh issue
of 5,000,000 equity shares. The equity shares are listed on the Bombay Stock
Exchange (BSE) and the National Stock Exchange of India (NSE). The company
priced the issue at Rs 260 per equity share of face value of Rs 10, which was
oversubscribed 78 times. The proceeds of the issue would be used for creation of
campus for software development at Banglore and meeting issue expenses.
Sasken's current equity stands at Rs 27.8 crore with promoters holding 25.9%,
institutional investors holding 10.2%, the Indian public holding 17.2% and
others holding the balance 46.5%.

The company's business model is “hybrid”, which
involves a mix of software products and services. Its offerings in the services
segment are radio access network services (RANS), operations support systems (OSS)
services and network engineering services (NES). Sasken also offers other
services including maintenance and development services for enterprise voice and
data systems. While Sasken Communication Technologies offers RANS, OSS and NES
are offered through Sasken Network Systems and Sasken Network Engineering
respectively, the subsidiaries of Sasken Communication Technologies. The
products division of the company offers customers software solutions that focus
on mobile phone sub-systems. These include integrated solutions, specific
protocol stacks and application solutions.

Sasken licenses a range of multimedia applications and
Codec engines which perform on specific tasks on a given platform.

For the year ended March 31, 2005, the company reported
sales of Rs 241.7 crore, up 45% over the previous year. The profits stood at Rs
21.6 crore, up 18%. The margins of the company came down as it focused on
capacity build up leading to higher staff and administrative costs. We believe
this trend will continue for a while until the company reaches a critical mass.

In the recent past, the company lost an arbitration case
against UK based 3G.COM in a London court and had been ordered to pay $1.1 mn in
damages to 3G.COM. According to the company's press release, the tribunal has
ordered that the company shall pay 3G.com a sum of $1.1 mn for the damages,
$173,760 towards legal and other costs and has also ordered to bear the total
cost of arbitration amounting to $290,220.87.

The legal cost and negative growth in Income sequentially
impacted Sasken's performance in the third quarter ended December 2005. The
company reported consolidated revenues of Rs 75.9 crores for the quarter, as
compared to Rs. 86.3 crore in the second quarter, down 12% sequentially. The net
Income for the quarter was Rs 0.1 crore after providing for exceptional items.
The net profit excluding the exceptional items was Rs 6.9 crore, as against Rs
11.6 crore, a down 41% sequentially. The revenues from the software services
during the quarter amounted to Rs 68 crore, whereas that from software products
and Networking was Rs 2.1 crore and Rs 5.6 crore respectively. During the
quarter under review, the company's top five clients contributed 75% of the
total revenues.

Nortel, one of the largest and oldest customers of Sasken,
had invested approximately

$10 mn in the equity of the company. Sasken had also signed
a multi-year extension to existing services agreement with Nortel, under which
both will continue to partner in the development of software solutions for
Nortel. Nokia Growth Partners, a venture capital fund, has invested around $3 mn
in the company. Sasken plans to use the proceeds from the investments for
mergers and acquisitions. We believe the company will continue to show around
40% growth in the next couple of years, however, margins will remain lower than
some of the larger companies as Sasken is yet to reach a critical mass.

Sasken shares trade at of Rs 350 discounting FY 06 earning
per share (EPS) by 28 times and FY 07 EPS by 22 times which seems to be on the
higher side for a company of its size. However, given the niche focus of the
company and large growth expected in the telecom markets, we believe that the
shares will move along with the rest of the technology markets. Market
Performer.