Sasken

Investors with a two-year horizon can consider buying the shares of Sasken Communication Technologies (Sasken), a telecommunications software provider. Significant improvement in key operating and cost metrics and a general pick-up in the outlook for mobile handsets and semiconductors is likely to improve revenue and earnings growth. In addition, Sasken's acquisition of the key assets of a company in the US is expected to contribute significantly to revenues.



At Rs 184.4, the stock trades at six times its likely per-share earnings for FY-11. This is at a discount to most mid-tier IT players and telecom software providers.

In FY-10, Sasken's revenues fell by 17.7 per cent to Rs 574.2 crore, while net profits grew by 78.5 per cent to Rs 75.5 crore.

Like most niche providers, Sasken was hit hard by the global economic slowdown and a steep fall in capex and R&D spending of clients. This is reflected in the topline numbers of the company. In fact, most large- and mid-tier IT companies felt the heat in the telecom vertical. But Sasken managed the steep expansion in profits through a combination of forex gains and reduction in wages as well as selling and marketing expenses.

Consolidation of service providers, wherein clients rationalise the number of vendors they work with, is a phenomenon to reckon with for most IT players. Nevertheless, Sasken, with its niche focus, has been able to withstand this pressure and hold on firmly to its client base, which reflects strong execution capabilities.

Macro-environment

The telecom sector around the world faced a tough 18 months. Fresh capex was reduced, which meant that software vendors catering to telecom equipment manufacturers, chipmakers and even mobile service providers were affected.

The only silver lining was handsets and smartphone companies that grew even during the economic crisis. Symbian and Android operating system-based smartphones command a market share of 54.9 per cent according to a recent report from Gartner. This a key client segment that Sasken caters to and bodes well for revenues as sales improves for these clients.

World-wide, semiconductor capital equipment spending, in revival mode now, is projected to be in excess of $35.4 billion in 2010, up 113.2 per cent from 2009. The Semiconductor Industry Association (SIA) has projected a 28.4 per cent growth in worldwide chip sales to $290.5 billion in 2010.

All these facts suggest a strong revival in the macro environment and for vendors such as Sasken. The company expects its revenues to grow by 18-20 per cent in FY-11.

Healthy geographic-mix

The other key opportunity arises from the 3G and broadband wireless access (BWA) spectrum auction in India. Sasken derives 27 per cent of its revenues from Indian clients. The company is, thus, well-placed to cater to outsourcing opportunities arising from premium services such as 3G and BWA.

Sasken has a healthy geographic-mix with EMEA (Europe and Middle-Eastern Area) contributing 48 per cent and North-America (18 per cent of revenues) and the rest from the Asia-Pacific region. Despite the debt crisis in Europe, the company has witnessed an increase in the contribution from that region.

In October 2009, Sasken entered into an agreement with Chicago-based Ingenient Technologies that has allowed the transfer of customers, contracts and other key assets, including products and IP to itself. This ‘acquisition' has many advantages for Sasken. One, it allows it to tap adjacent vericals that use telecommunications such as consumer electronics, automotive electronics and satellite communications. Second, it gives it access to high-profile clients of Ingenient to Sasken. Third, although small, the acquisition is expected to contribute 10-12 per cent to Sasken's revenues this fiscal itself.

Operating metrics

Apart from a tight leash expenses, the company has improved on several key metrics.

The company has improved its offshore component of revenues from 65 per cent to 72 per cent in FY-10, thus optimising costs significantly. The company has indicated that there is scope for further improvement on this count.

Sasken has also managed to steeply increase the proportion of fixed-price deals to 23 per cent from a mere 9 per cent in FY-09. Fixed-price contracts ensure better realisations compared to time and material projects.

With an optimal utilisation level, the company appears well set to have significant growth in volumes. This goes well with the fact that the company expects a two per cent increase in its billing rates.

Risks

The company plans a wage increase; though the extent is not known, it could affect margins. Attrition at over 24 per cent, which is much higher than the industry, is a key execution risk.

via BL