Sasken Communications Technologies Ltdrakesh-jhunjhunwala.in/wp-content/files/Sasken_IC_14Jan10.pdf · Telecommunication Union (ITU), Third Generation Partnership Project (3GPP).

Sasken Communications Technologies Ltd

Initiating Coverage Sasken Communications Tech. Ltd

Recommendation BUY SnapshotSasken Communication Technology Ltd (Sasken) is an embedded communications solutions company that helps businesses across the communications value chain to accelerate product development life cycles through a unique combination of research and development consultancy, wireless software products and software services. Sasken employs more than 3,200 people operating from state-of-the-art research and development centers in India, Finland, Mexico and the US. Over the years Sasken has grown organically as well as inorganically by acquiring stakes in several small companies.

Key Positives

Strong growth in Handset segment with the increasing subscriber base in the emerging markets and the growing popularity of smart phone devices is expected to boost the demand for outsourcing of R&D activities which will positively impact the company’s future growth prospect.

Constant focus for acquisition has enabled Sasken to register strong growth over last few years. The recent acquisition of Ingenient Technologies Inc (Ingenient) will not only provide fuel to the company’s top-line growth but will also provide it an entry into consumer electronics sector.

EBITDA margin is expected to improve in future with the cost control measures through managing employee strength and reduction in SG&A expenses.

Effecting hedging strategies to partially mitigate the impact of INR appreciation against US dollar in near term thereby ensuring steady revenue top-line.

Valuation & RecommendationAt the current market price of Rs 196 per share, Sasken is currently trading at a PE of 9.24x at FY 2010 estimated EPS and 8.94x at FY2011 estimated EPS, which looks quite attractive. Based on our EPS estimate of Rs. 27.17 for FY 2011 and a target PE multiple of 10.00x we arrive at a target price of Rs. 272 per share for Sasken indicating a upside of 39% from the current levels. We recommend a BUY rating on the stock with a long term view.

CMP (14/01/2010) Rs. 196Sector Information Technology

Stock Details BSE Code NSE CodeBloomberg CodeMarket Cap (Rs. cr)Free Float (%)52- wk HI/LoAvg. volume BSE (Monthly)Face ValueDividend payoutShares o/s (Crs)

532663SASKENSACT IN

53172

203/41 447759

Rs.1040%2.71

Relative Performance 1Mth 3Mth 1YrSasken 11.7% 25.1% 262.2%Sensex 2.4% 1.6% 86.9%

0

200

400

14/01/2009 29/07/2009Sasken

Shareholding Pattern as of 30/09/2009

Promoters Holding 27.9%Institutional (Incl. FII) 10.4%Corporate Bodies 7.8%Public & others 53.9%Ashish Khetan – Research Analyst (+91 22 3027-2259)[email protected] Powani – Research Associate (+91 22 3027-2241)[email protected]

Year Net Sales Growth % EBITDA Margin % PAT EPS PE P/BV ROE %FY 2008A 570.2 19.5% 79.2 13.9% 39.38 13.80 14.19 1.22 8.6%FY 2009A 697.8 22.4% 163.8 23.5% 57.50 21.21 9.24 1.10 8.8%FY 2010E 571.2 -18.1% 114.6 20.1% 59.41 21.91 8.94 1.00 11.2%

FY 2011E 646.4 13.2% 137.7 21.3% 73.65 27.17 7.21 0.90 12.5%

Initiating Coverage Sasken Communications Tech. LtdCompany Background

Sasken, incorporated on 13 February 1989, is an embedded communications solutions company, that helps businesses across the communications value chain accelerate product development life cycles through a unique combination of research and development consultancy, wireless software products and software services. Sasken offers a unique combination of research and development consultancy, wireless software products and software services, and works with Network Original Equipment Manufacturer (OEMs), Semiconductor Vendors, Terminal Device OEMs and Operators across the world. In addition to being directly involved in the development of a variety of technologies, Sasken is a member of premier technology bodies including International Telecommunication Union (ITU), Third Generation Partnership Project (3GPP).

Over the years Sasken has grown organically as well as inorganically by acquiring stakes in several companies. In 2006, Sasken acquired iSoftTech Private Limited, a Chennai based company, for $1.45mn. In 2006, Sasken also acquired Finland based Botnia Hightech Oy (now Sasken Finland) for around $46 mn. Recently on 27 October 2009 Sasken acquired certain assets from Ingenient Technologies Inc, USA. As a part of the agreement Sasken will acquire the product portfolio as well as certain customer contracts and certain assets of Ingenient.

Sasken operates with more than 3200 employees from state-of-the-art research and development centers in Bangalore, Pune & Chennai in India and onshore centers in Kaustinen, Tampere, Oulu & Turku in Finland and Monterrey in Mexico. Sasken is also present in Shanghai (China), Ottawa (Canada), Nice (France), Frankfurt (Germany), Kanagawa (Japan), Lund (Sweden), Guildford (UK) and Boston, Dallas & Santa Clara (USA). Sasken derives around half its revenue from Europe, Middle East, and Africa (EMEA) region. It generates around 21% revenues from North Americas.

Revenue by Geography (Q2 FY10)

Source: Company data

Sasken has relationships with some of the world’s leading Network OEMs, Semiconductor Vendors,

21%

47%

26%

6%

North America EMEA India APAC

Initiating Coverage Sasken Communications Tech. LtdSatellite Communication Equipment Vendors and all of the top 5 handset vendors in the world.Sasken operates its business through its various subsidiaries.

Sasken Network Engineering Ltd. Sasken Network Solutions Inc, USA Sasken Communication Technologies Mexico S.A. de C.V. Sasken Communication Technologies (Shanghai) Co. Ltd. Sasken Communication Technologies Oy and Sasken Finland Oy Sasken Inc. USA and Sasken Japan KK.

Business Model

Sasken business can be divided into three segments.

Telecom Software Products

The Products Division of Sasken offers software solutions to its customers that encompass all sub-systems of the mobile phone. Telecom Software Services that are related with Intellectual Property based product offerings are considered part of the Telecom Software Products segment.

With more than 50 models and over 50 million handsets shipped to date and with leading Semiconductor Manufacturers offering Sasken IP as a preferred solution, Sasken emerges as afavoured partner of choice for leading handset manufacturers around the world.

Sasken offers GSM / GPRS / EDGE and WCDMA protocol stacks, which are pre-integrated andproven on semiconductor platforms. The completeness, architectural scalability and flexibility of the stacks enable swift porting to newer silicon architectures. Sasken also offers multimedia application suite which is a complete range of compelling multimedia applications and codes that enable handset manufacturers to bring out sharply differentiated products in a cluttered marketplace.

Over the years, Sasken’s revenue from Telecom Software Products has come down significantlyfrom around 40% in FY 2004 to 10% in FY 2009.

Initiating Coverage Sasken Communications Tech. LtdTelecom Software Services

Sasken provides services, solutions and technologies to customers across the telecommunicationsvalue chain. Sasken provides services to large network equipment manufacturers (both wireless and wireline), semiconductor manufacturers supplying to the telecom market, wireless terminal product vendors and test and measurement equipment providers, worldwide.

Terminal Devices

Sasken provides one-stop software solution for 2G, 2.5G and 3G technologies, offering a range of platform-independent, standards-compliant wireless protocol stacks, multimedia codecs, middleware frameworks and applications to enhance product line and provide with a distinct time-to-market edge. Sasken’s stacks and multimedia solutions are optimized to many, leading industry platforms; its unique architecture enables easy customization to other platforms as well.

Semiconductors

In the semiconductor industry, Sasken provides innovative IC design services and licensable IP and services in wireless and Digital subscriber line (DSL). Sasken offers end-to-end solutions in wireless communications with core competencies in wireless technology, broadband technology, signal processing, multimedia and IC design.

Sasken offers world-class IC design services in the areas of Application-Specific Integrated Circuit(ASIC), Field-Programmable Gate Array (FPGA) and IP design, hardware modeling, system validation and SoC verification. Sasken provides high quality, cost effective solutions in front-end design, physical design and circuit design.

Sasken’s array of licensable solutions in the areas of DSL, 3G/UMTS (Universal Mobile Telecommunications System), GSM-GPRS help companies leverage the vast experience gained over the years to meet their business goals and objectives.

Services offered

Service Providers

Technology for protocol stacks, multimedia codecs, middleware frameworks

Semiconductors Network Equipment manufactures

Terminal Devices

Outsourcing of Service Offerings: 2G

Suite of services:TestingConsultation &developmentNetwork engineering services

IC Design servicesLicensable IP services

Initiating Coverage Sasken Communications Tech. LtdNetwork Equipment Manufactures

Sasken provides advanced technology solutions for network equipment providers who design, manufacture, supply and integrate equipment for telecommunication networks. Sasken providesservices across the lifecycle of network equipment, from feasibility and design studies, R&D, system verification, network optimization to systems support and maintenance and ultimately product out phasing. It offers operators with end-to end-solutions and technologies that help improve efficiency and service levels towards their customers.

In its effort to offer total product lifecycle management to Network Equipment Manufacturers (NEM) and solutions to Service Providers (SP), Sasken Network Engineering Limited, a 100 % subsidiary of Sasken Communication Technologies, provides Engineering Services for planning, deployment and operating wireless networks. Sasken acquired the assets and resources of Blue Broadband Technologies in 2004, a Mumbai based company which was engaged in the business of providing network engineering services since 2002.

Service Providers

Sasken’s solutions are designed to help meet the operator’s market needs, by addressing the requirements at the technology and service delivery end. The various suite of services offered include:

Handset and application testing services High-End Consultation, development and customization services Network Engineering services.

Segment Revenues (Q2 10)

94.8%

5.1% 0.1%

Telecom Software Services

Telecom Software Products

Automotive, Utilities & Ind

Source: Company data

Telecom Software services contribute maximum to the company’s top-line. Historically, company used to generate more revenues from software products. Over the years, Sasken’s revenue from Telecom Software Products has come down significantly from around 40% in FY 2003 to 10% in FY 2009 and declined further to 5.1% in Q2 FY10.

Initiating Coverage Sasken Communications Tech. LtdHistorically Sasken has generated approximately 40% of its revenues from Onsite locations. Sasken’s revenues from onsite has declined sharply during last few quarters reflecting lower spending and cost cutting measures by its customers. However, going forward we expect the company’s revenues to increase from onsite activities with the acquisition of Ingenient which operates in the US.

Revenues Mix

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10Onsite Offshore

Source: Company data

Utilization Rate

Sasken’s utilization rate has remained in more than 70% historically and increased sharply in Q1FY10 and Q2FY 10 reflecting cost cutting strategy adopted by the company. Going forward, the management expects the utilization rate to remain in the range of 75-80%.

68.0%

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

82.0%

Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10

Utilization Rate

Source: Company data

Initiating Coverage Sasken Communications Tech. LtdMajor Subsidiaries

Sasken’s Finland Subsidiary

Sasken Finland Oy (Sasken Finland) is one of the company’s onsite delivery subsidiaries. This subsidiary operates with around 300 employees in Finland, Sweden, Denmark and Germany, and offers Hardware, Software, Mechanical Design and Testing Services to leading mobile handset vendors in Europe. The company also offers tailor-made turnkey solutions. Its services can be applied in R&D projects, subprojects, tester design, as well as in cost reduction. Sasken Finland complements Sasken communication software solutions and capabilities, which can be leveraged to serve customers worldwide.

The international Sasken group creates work opportunities for its Finnish employees in Finland and abroad. Sasken Finland includes subsidiaries Botnia Hardware Oy and Ionific Oy, which are being merged with the parent. For the year ending 2009 Sasken Finland reported revenues of Rs 152.13 Crs and a net profit of Rs 14.32 Crs.

Sasken’s subsidiary in Mexico

Sasken Communication Technologies, S.A. de C.V (Sasken Mexico) is the company’s development center located in Mexico. Sasken employs more than 100 employees on this onsite location. Sasken Mexico is the second largest subsidiary for Sasken in terms of generating revenues. For the year ended FY 2009 Sasken Mexico reported a turnover of Rs 38.73 Crs and a Profit after tax of 3.44 Crs.

Sasken Network Engineering Limited

Sasken Network Engineering Limited, a 100 % subsidiary of Sasken, provides Engineering Services for planning, deployment and operating wireless networks. It provides a one stop solution for all engineering services required during the pre deployment, deployment & post deployment phases of a wireless network roll-out. Sasken acquired the assets and resources of Blue Broadband Technologies in 2004, a Mumbai based company which was engaged in the business of providing network engineering services since 2002. For the year ended FY 2009 Sasken Network Engineering Limited reported a turnover of 23.87 Crs and a net profit of Rs 1.22 Crs.

Initiating Coverage Sasken Communications Tech. LtdIndustry Analysis

The global IT industry’s revenues increased 5.6% y-o-y to US$1,560 bn in 2008 (Source: CRISIL). Going forward, the IT industry’s revenues is expected to grow at a moderate growth of 3.5% y-o-y in 2009 on the back of lower IT spending by the clients owing to the slowdown. However, with the economic recovery the demand for IT is expected to increase rapidly in the long term. CRISIL expects the global IT spending to increase at a CAGR of 5.2% over 2008-2012.

Global IT spending forecast (figs in US$ bn)

528 557 578 605 636 672

103 115 131 146 164 181277 295 308 326 349 376570 594 597 620 652

683

0

500

1,000

1,500

2,000

2007 2008 2009E 2010E 2011E 2012E

Hardware Software ITES-BPO IT Service

Source: International Data Corporation, CRISIL

The BFSI industry is the largest vertical accounting for approximately 40% of the India’s total IT-ITeS exports in FY 2009. In IT services, the telecom vertical constitutes a significant percentage of IT spends. The telecom vertical is expected to have contributed around 19% of the Indian IT-ITeS exports in FY 2009. There are several Indian companies that focus on telecom sector.

Aricent, Sasken and Tech Mahindra Ltd are few companies having significant exposure to telecom. In addition, Infosys Ltd, Tata Consultancy Services Ltd, Wipro Ltd and HCL Technologies Ltd also have a strong presence in telecom vertical.

The telecom services space witnessed a net subscriber addition of around 58% CAGR during 2004-2009 & stands at 525.69 mn at the end of the October 2009. The telecom vertical’s contribution to total domestic IT Services stands around 10%.

As per the CRISIL report dated November 2009, IT service revenue in India from the telecom vertical is expected to grow at 16% CAGR over the next 5 years. The growth is expected considering a 15%-16% CAGR growth in subscriber base over the next 5 years as well the entry of new telecom operators who would need to invest huge sums on IT infrastructure & services.

Network Equipment Outlook

The Network Equipment industry has witnessed a slowdown over the last couple of years with decline in demand due to cost cutting by larger players. We also saw consolidation taking place as Nortel decided to exit and sell off its telecom assets to its rivals. In terms of technology, investments

Initiating Coverage Sasken Communications Tech. Ltdare being made in WiMax & LTE RAN Equipment. Advanced mobile entertainment applications, such as Internet Protocol television (IPTV) and high-speed mobile Web with music and movie download capabilities are driving the need for high-quality mobile broadband services. This has led to emergence of two new technologies, Mobile WiMAX and Long Term Evolution (LTE), in the mobile broadband space, and each poses unique opportunities as well as challenges for equipment suppliers and network operators. Looking at the opportunity Sasken has made investments on WIMAX/LTE.

Handset Segment Outlook

The outlook for Handset segment remains positive with the increasing subscriber’s base in the emerging markets and the growing popularity of smart phone devices. With new players like Apple and Google entering the smart phone space the competition is expected to only increase further.With four smart phone operating systems vying for market share – Symbian, Windows Mobile,Android and Apple’s OXS the market is expected to get further fragmented. Due to increased demand for handsets with more advanced features and smart phones, the R&D spend by leading handset players has increased over last few years despite of the global recession. Going forward, R&D expenses in this segment are expected to remain high which will force the leading handset manufacturers to outsource R&D activities in order to maintain their costs. Sasken is well placed to take advantage of these increased R&D outsourcing spends as it has preferred vendor status with all the leading handset players.

Semiconductor Segment Outlook

Semiconductor industry saw considerable consolidation and exit of few players from the semiconductor space last year leaving the original players stronger like Qualcomm and more space for players like Infineon and Broadcom to grow.

Sasken has already made inroads into Qualcomm and Infineon & expects the existing relationship to enable the company to grow further in the future years. Sasken has complementary capabilities which it intends to leverage to follow its semi partners when they decide to diversify into newer verticals like consumer electronics, automotive, healthcare, etc. The company is strongly entrenched with the leading players across multiple capabilities which could help them scale up when the industry recovers.

Initiating Coverage Sasken Communications Tech. LtdInvestment Rationale

Increase in Global IT spending in telecom sector to boost company’s growth prospect

With the expected improvement in the global economy and increased client spending on IT we expect the demand for IT products and services to remain high in the long term despite the short term challenges. In the Indian Economic Summit on 10 November 2009, NASSCOM’s president said that NASSCOM expects the Indian IT sector to grow at 4%-7% during FY 2010. However, NASSCOM expects the IT sector to return to double digit growth from 2010 which the industry has witnessed over last few years. Moreover, NASSCOM expects the IT industry to grow at a CAGR of 14% for next 10-12 years and expects it to reach US$225 bn by 2020 from US$50 bn at the end of 2009.Moreover, IT spending in telecom vertical is expected to grow at a CAGR of 15-16% over next 5 years providing significant growth opportunities to companies which serve in this vertical. We believe that Sasken being one of the niche players in this market will be able to take the advantage of these opportunities and expand its business.

Transformation into services company to enable steady cashflows

Historically, Sasken used to derive significant proportion of its total revenues from software products. Revenues from products remained at 40% of total revenues in FY 2003 and FY 2002. The company used to get one time revenues by signing licensing deals with the customers and thereby providing significant proportion of revenues upfront at the beginning of the contract. However, company shifted its business model from licensing to royalty linked deals which we believe would enable steady revenues and cash flows in the long term. The shift from licensing deals to royalty resulted in lower upfront revenues and hence impacted company’s revenue during FY 2005 and FY 2006. At the same time company began focusing on IT services business which again provides stable revenue growth and cash flow. We believe this strategy has worked well for the company and has enabled it to grow rapidly in the services segment over last few years and reducing the volatility in revenues which can arise from one time revenue from licensing deals.

Acquisitions to augment top-line growth

Sasken has always thrived on inorganic growth to supplement its organic growth. Over the last few years Sasken has acquired many small companies. Sasken acquired iSoftTech Private Limited (a Chennai based firm) in June 2006 and also acquired 100% stake in Botnia Hightech (now Sasken Finland) headquartered in Kaustinen, Finland during September 2006, with other offices in Tampere, Oulu and Turku in Finland. This acquisition gave Sasken strong foothold in Finland.

Sasken has recently acquired certain assets of Ingenient Technologies Inc (Ingenient) in Q3 FY10. Ingenient is a global provider of embedded multimedia software solutions to multinational companies ranging in size from tier I OEMs to high-tech startups. Ingenient’s software solutions enable the creation, delivery, management and presentation of rich multimedia content.Ingenient’s best-in-class multimedia solutions combined with Sasken’s global reach and India based development centers will enable the company to offer a compelling portfolio of value added solutions to its customers across the globe. Ingenient currently have 11 customers and 8 royalty yielding customers. Sasken has not disclosed the price for acquisition which it will pay. The acquisition is expected to add US$8-10 mn revenues to the company’s topline over next one year.This acquisition will contribute to both Sasken’s product and services revenues. Although Ingenient

Initiating Coverage Sasken Communications Tech. Ltdis not a profit generating company it will provide significant synergy benefits to the company in the long term as the acquisition will provide best-in-class multimedia codec’s in audio, video, and image which are being used currently in various chipsets. Moreover, Ingenient have leading customers across the globe in the consumer market as well as on the enterprise market, both in Japan, Korea, and in the US. Going forward, we believe that this acquisition will positively impact the company’s performance.

Margins expected to increase going forward

Sasken’s EBITDA margin has been increasing gradually over the last few years reflecting the strong growth in top-line and cost control measures. Sasken has effectively managed its cost by reducinghiring over last couple of quarters while the attrition rate has remained high. In FY 2009, Sasken’s EBITDA margin increased to 23.5% as compared to 13.9% in FY 2008 driven by top-line growth and cost controlling measures. We expect the EBITDA margin to fall in FY 2010 due to a very sharp decline in the top-line on back of lower R&D spent by the company’s customers. However, going forward with the increase in demand we expect the company’s revenues to increase significantlyparticularly in the software services business. This coupled with cost control measures are expected to boost the company’s margins over next couple of years.

Diversifying into Automotive and Consumer Electronic verticals

Currently Sasken generates majority of its revenues from telecom sector and is thereby highly dependent on the growth in telecom sector. Over the few years, company has made efforts to reduce its dependence on telecom sector by entering in Automotive and Utilities sector through its subsidiaries and acquisition of Ingenient.

Hedging strategies

Revenues of IT companies are adversely impacted due to appreciation of INR against US dollar. INR has appreciated sharply over last few months and its constant appreciation is expected to hurt the top-line of IT players in FY 2011. In this scenario, Sasken is well placed as compared to some of the peers as company has entered into hedging contracts at a rate of Rs. 49.3 for FY 2011 to the extent of US$47 mn (34%-36% of the company’s expected top-line for FY 2011). This will partially mitigate the impact of appreciation of INR in FY 2011.

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54

Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Source: Bloomberg, Nirmal Bang Research

Initiating Coverage Sasken Communications Tech. LtdJoint Ventures to benefit in the long run

In June 2007, Sasken and IDG Ventures formed a joint venture company called ConnectM Technology Solutions Pvt. Ltd. (“ConnectM”) in Bangalore. ConnectM intends to explore and focus on end-to-end cycle development and sustenance to the Transportation, Industrial, Utilities and Enterprise markets enabled by Machine-to-Machine (M2M) communications. Through ConnectM, Sasken plans to leverage its expertise to address corporate customers in Transportation, Utilities, Industrial, Enterprise markets. As the addressable market is expected to scale to US$13 bn by 2010 ConnectM is expected to play a significant role in the growth of Sasken in the long term.

Risks & Concerns

Slow recovery in the economy will keep IT spending subdued

We expect that the recovery in the global economy will create strong growth opportunities for the company and increased IT spending will lead to higher top-line growth for the company. However, if the economy remains under pressure or the pace of recovery is very slow then it will adversely impact the IT spending budgets of the clients and would thereby lead to lower growth of the IT industry. This would hamper the company’s top-line and margin growth and would lead to a deviation from our estimates.

High Client Concentration

Sasken generates approximately 65%-75% of its revenues from top 5 clients and approximately 80-85% of its revenues from top 10 clients. If the company stands to lose any of its major client, its revenues and margins will be adversely impacted. Moreover, Sasken gets approximately 10-11% of its revenues from Nortel which filed for Chapter 11 bankruptcy protection earlier this year. Recently, Avaya has acquired the Nortel’s business which might impact the company’s revenue generating capacity from Nortel’s business in the long term. The Management of Sasken believes that this won’t impact company’s top-line for FY 2010. However, Sasken is in talks with Avaya and plans to continue the work it is doing for Nortel in the enterprise area. However, if these talks do not materialize, Sasken’s top-line can be easily impacted by 10-12% which could lead to a significant deviation from our estimates.

High exposure to telecom

Sasken generates more than 90% of its revenues from telecom vertical and is therefore highly exposed the volatility in the sector. Although company has started to make efforts to diversify its business vertical through entering into automotive and consumer electronic segments, the contribution from these segments remains very negligible to the company’s top-line. If the economy fails to recovers and the impact of financial crisis intensifies further the company’s customers will tend to further cut down their R&D activities which will negatively impact the growth prospects for the company and thereby will lead to a deviation from our estimates.

Initiating Coverage Sasken Communications Tech. LtdRecent result highlights

Sasken’s reported revenues declined 2.7% q-o-q to Rs. 135.7 crs in Q2 FY10 primarily due to decline in revenues from services segment. On a y-o-y basis, revenues were down by 23.0% reflecting significant decline in revenues from both products and services on the back of lower spending by customers.

Sasken’s EBITDA increased from Rs. 24.0 Crs in Q1 FY10 to 26.2 Crs in Q2 FY10 due to decline in G&A expenses with the decrease in number of employees. Consequently, EBITDA margins improved to 19.3% in Q2 FY10 as compared to 17.2% in Q1 FY10.

Sasken’s net profit declined to Rs. 16.4 Crs in Q2 FY10 as compared to Rs. 20.2 Crs in Q1 FY10 despite an improvement in EBITDA. This decline in net income is primarily due to Foreign Exchange loss which stood at Rs. 0.1 Crs in Q2 FY10 as compared to a gain of Rs.10.5 Crs in Q1 FY10.

Income Statement (in Rs Crs.)

Q2 FY10 Q1 FY10 Q-o-Q Q2 FY09 Y-o-Y

Revenues 135.7 139.5 -2.7% 176.3 -23.0%

Cost of revenues 94.9 97.8 -3.0% 113.1 -16.1%

Res earch & Development exp 0.0 0.0 N/A 0.9 N/A

Gros s profi t 40.8 41.7 -2.1% 62.3 -34.5%

General & Admini ns trati on exp 11.8 15.1 -21.9% 15.3 -22.7%

Sel l ing & Marketi ng exp 2.8 2.6 11.3% 5.8 -51.5%

EBITDA 26.2 24.0 8.9% 41.1 -36.4%margin 19.3% 17.2% 23.3%

Depreciation & Amortization 7.3 8.8 -16.3% 10.3 -28.9%

Interes t 0.8 0.8 -2.3% 1.0 -20.2%

Exchange ga in/(l oss ) (net) -0.1 10.5 N/A -13.6 -99.3%

Other income 1.5 1.4 9.9% 1.4 11.7%

Prov for diminuti on in value

of inv. (net of reversa ls) -0.4 0.0 N/A 0.0 N/A

Income before taxes 19.9 26.3 -24.5% 17.6 12.8%

margin 14.6% 18.9% 10.0%

Income taxes 3.5 6.1 -42.4% 7.2 -51.5%

Net income 16.4 20.2 -19.1% 10.4 57.7%

margin 12.1% 14.5% 5.9%

EPS (Diluted) 5.81 7.34 -20.8% 3.64 59.6%Source: Company data, Nirmal Bang Research

Initiating Coverage Sasken Communications Tech. LtdPeer Comparison

The company has reported strong sales growth in FY 2009. We are comparing Sasken with Mindtree Ltd, HCL Technologies Ltd (HCL Tech), Tech Mahindra Ltd (Tech Mahindra) and Polaris Software Laboratories Ltd (Polaris) based on the size of the company or their operations although none of these companies are directly comparable to Sasken as they serve many industry verticals as compared to Sasken which operates vastly in telecom vertical. Sasken PE, EV/Sales multiples are lower than the peer group since they are significantly larger and well established players as compared to Sasken. However, still based on PE and P/BV multiples Sasken looks fairly attractive as compared to some of its peers.

Company Sales M. Cap EV Price EPS PE RONW EV/ S EV/ EBIDTA P/ BV

(Rs Crs) (Rs Crs) (Rs Crs) (x) (%) (x) (x) (x)

Sasken 628.6 531.2 552.1 196 20.21 9.70 10.5% 0.88 4.05 1.02

HCL Tech 11,292.2 25,370.1 28,796.2 378 18.50 20.43 20.6% 2.55 11.50 4.21

MindTree 1,321.5 2,694.7 2,601.2 688 34.24 20.09 24.2% 1.97 8.28 4.87

Tech Mahindra 4,438.0 13,257.1 12,718.9 1087 61.81 17.58 38.8% 2.87 10.82 6.82

Polaris 1,373.7 1,861.9 1,415.8 189 13.81 13.66 16.2% 1.03 5.75 2.22

Industry Average 16.29 22.1% 1.86 8.08 3.83*TTM BasisSource: Company Data, Capital Line, Nirmal Bang Research

Initiating Coverage Sasken Communications Tech. LtdValuation & Recommendation

We expect the company’s adjusted EPS to increase marginally from Rs 21.21 in FY 2009 to Rs 21.91in FY 2010 despite weak performance on the top-line. Going forward, we expect strong top-line growth in FY 2011 driven by anticipated increase in R&D activities by the customers of the company coupled with the acquisition of Ingenient Technologies. Moreover, expect the company’s EBITDA margins to increase over next couple of years reflecting the cost cutting measures adopted by the company. Consequently, we expect EPS to increase 23.4% in FY 2011 to Rs 27.17.

Initially, after the listing of the company’s IPO, its PE multiple was trading in the range of 30.0x-40.0x. Later, the Sasken’s multiple fell and was trading in the range of 20’s after the company shifted its focus from being a products player to a service provider. However, after the financial meltdown and global slowdown the multiple declined very sharply. Currently Sasken’s multiple is trading at a PE multiple of around 9.70x (TTM basis). Going forward, we expect the company’s PE multiple to increase given the anticipated growth rate and the multiple garnered by the other industry players. Our target PE multiple of 10.0x is at a significant discount to peer group multipleconsidering the scope of business of the company as compared to its peers. Based on the target PE of 10.0x and our estimated FY 2011 EPS of Rs 27.17 we get a target price of Rs. 272 for Sasken which represents a 38.6% upside from the current levels. We recommend a BUY rating on the stock with a long term view.

P/E Band

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Mar-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09

Sasken PER - 5 PER - 10 PER - 20 PER - 30 PER - 40

Source: Nirmal Bang Research

Initiating Coverage Sasken Communications Tech. Ltd

Income Statement (in Rs Crs.)FY 2007 FY 2008 FY 2009 FY 2010E FY 2011E FY 2012E

Revenues 477.1 570.2 697.8 571.2 646.4 698.9

Cos t of revenues 297.6 373.7 438.4 394.0 437.6 468.3

Res earch & Development exp 19.6 21.6 3.4 0.0 0.0 0.0

Gross profi t 160.0 174.8 256.0 177.3 208.8 230.6

Genera l & Adminis tration exp 59.5 65.5 63.5 51.4 56.2 60.1

Sel l ing & Marketing exp 24.7 30.1 28.7 11.3 14.9 14.7

EBITDA 75.8 79.2 163.8 114.6 137.7 155.9margin 15.9% 13.9% 23.5% 20.1% 21.3% 22.3%

Depreci ation & Amortization 26.7 41.8 37.4 32.0 34.3 37.1

Interes t 4.5 4.0 3.8 3.2 2.6 1.7

Exchange ga in/(l os s ) 2.3 18.0 -42.6 3.4 0.0 0.0

Other i ncome 7.4 5.4 7.2 5.8 9.1 10.6

Exceptiona l Item 0.0 0.0 15.2 0.0 0.0 0.0

Provi si on for di minution i n va l ue

of i nv. (net of reversa ls ) 0.0 0.0 1.2 0.0 0.0 0.0

Income before taxes 54.3 56.8 70.8 88.7 109.9 127.6

Income taxes 10.1 17.4 28.5 29.3 36.3 42.1

Net income 44.3 39.4 42.3 59.4 73.6 85.5

margin 9.3% 6.9% 6.1% 10.4% 11.4% 12.2%

Adjusted Net income 44.3 39.4 57.5 59.4 73.6 85.5

margin 9.3% 6.9% 8.2% 10.4% 11.4% 12.2%

Adjusted EPS (Diluted) 15.76 13.80 21.21 21.91 27.17 31.54 Source: Company data, Nirmal Bang Research

Initiating Coverage Sasken Communications Tech. Ltd

Balance Sheet (in Rs Crs.)

FY 2007 FY 2008 FY 2009 FY 2010E FY 2011E FY 2012E

Sources of Funds

Share capi tal 28.5 28.6 27.1 27.1 27.1 27.1

ESOP oustanding 1.7 5.2 2.7 2.7 2.7 2.7

Reserves 391.5 425.0 453.1 499.8 560.7 633.5

Share Holders Funds 421.8 458.8 482.9 529.6 590.6 663.4

Borrowings 91.9 87.6 63.7 47.7 31.7 15.7

Deferred Tax Liabi li ty 0.1 0.0 0.0 0.0 0.0 0.0

Total Liabilities and Equity 513.7 546.5 546.6 577.3 622.3 679.1

Application Of Funds

Gross Fixed Assets 417.6 459.1 499.1 539.1 584.1 629.1

Less:Depreciation 123.0 152.6 182.7 214.3 248.6 285.6

Net Fixed Assets 294.5 306.5 316.4 324.8 335.5 343.5

Capital WIP 5.0 0.7 3.4 0.0 0.0 0.0

Capitalized software product costs 33.3 21.2 0.0 0.0 0.0 0.0

Investments 36.8 26.6 20.2 20.2 20.2 20.2

Deferred Tax Assets 0.6 1.3 2.2 2.2 2.2 2.2

Curent Assets, Loans & Advances

Cash 34.9 56.9 117.2 152.0 186.8 230.3

Receivables 110.8 133.3 139.0 122.2 136.5 147.5

Other Current assets 75.5 89.9 85.9 88.5 90.5 97.8

Total Current Assets 221.2 280.1 342.0 362.7 413.7 475.7

Current Liabil ities & Provisions

Creditors 35.4 29.1 41.8 42.7 48.6 52.0

Provisions 27.6 41.7 43.0 38.6 47.9 55.6

Liabi li ty for Forward Cover Contracts 0.0 0.0 28.7 28.7 28.7 28.7

Deferred Revenues 0.0 2.0 2.9 2.9 3.1 3.6

Advance Received from Customers 1.1 0.4 3.8 0.0 0.0 0.0

Others 13.8 16.8 17.3 19.7 21.0 22.5

Total Curr.Liabs & Provisions 77.8 89.9 137.5 132.6 149.3 162.4

Net Current Assets 143.4 190.1 204.5 230.2 264.4 313.29

Total Assets 513.7 546.5 546.6 577.3 622.3 679.1 Source: Company data, Nirmal Bang Research

Initiating Coverage Sasken Communications Tech. Ltd

Cash Flow Statement (in Rs Crs.)Cash Flow FY 2007 FY 2008 FY 2009 FY 2010E FY 2011E FY 2012EProfit Before Tax 54.3 56.8 70.8 88.7 109.9 127.6

Plus Depreciation 24.0 28.0 30.6 31.6 34.3 37.1

Amortization 2.7 13.8 6.8 0.0 0.0 0.0Impairment loss 0.0 0.0 15.2 0.0 0.0 0.0Interest Expense 4.5 4.0 3.8 3.2 2.6 1.7

Other Income (7.3) (3.0) (3.7) 0.0 0.0 0.0Foreign Exchange Adjustments (5.5) 6.1 20.4 0.0 0.0 0.0

Dec/Inc in S.Debtors&W.I.P (23.0) (22.5) (5.8) 16.8 (14.3) (11.1)Dec/Inc in Loans and advances&Other CA (21.7) (15.9) 2.4 (2.6) (2.0) (7.4)Increase (Decrease) in current l iab and prov 12.2 7.7 14.7 (5.0) 16.8 13.1Others 0.7 3.6 4.8 0.0 0.0 0.0

Total Tax paid (12.0) (19.0) (27.3) (29.3) (36.3) (42.1)Cash Flow from Operations 28.8 59.5 132.9 103.4 111.1 119.0

Purchase of Fixed assets and tangibles Net (27.2) (24.2) (27.9) (36.6) (45.0) (45.0)

Capatal izing of software Development exp (14.8) 0.0 0.0 0.0 0.0 0.0

Sale / (Purchase ) of Investments, Net 155.7 12.7 4.8 0.0 0.0 0.0

Interest & Other Received 0.4 0.6 3.2 0.0 0.0 0.0Investment in Subsidiaries (197.8) 0.0 0.0 0.0 0.0 0.0

Cash Flow from investing (b) (83.7) (10.9) (19.9) (36.6) (45.0) (45.0)

Proceeds from Issue of Shares 10.0 1.1 0.0 0.0 0.0 0.0Proceeds from ST Loan and Bridge Loan 147.5 4.6 0.0 (16.0) (16.0) (16.0)

Repayment of ST Loan and Bridge Loan (149.0) (15.2) (26.9) 0.0 0.0 0.0Proceeds from govt subsidy 0.3 (0.3) 0.0 0.0 0.0 0.0

Net Proceeds from Long-Term Borrowing 77.8Lease finance charges (4.5) (4.0) (3.8) (3.2) (2.6) (1.7)

Buyback of Shares 0.0 0.0 (15.5) 0.0 0.0 0.0Dividends paid (incl dividend tax) (9.6) (13.3) (13.4) (12.7) (12.7) (12.7)

Increase/(Decrease) in Working Capital Loan 1.4 0.0 0.0 0.0 0.0 0.0Cash Flow from Financing 74.0 (27.1) (59.6) (31.9) (31.3) (30.4)

Effect of exchange rates (1.0) 0.4 6.6 0.0 0.0 0.0

Net Cash Flow 19.1 21.5 53.5 34.9 34.7 43.5Beginning Cash Balance (including bank guarantees) 16.5 35.0 57.1 117.2 152.0 186.8

Ending Cash Balance 34.6 56.9 117.2 152.0 186.8 230.3Source: Company data, Nirmal Bang Research

Initiating Coverage Sasken Communications Tech. Ltd

Profitability Ratios FY 08 FY 09 FY 10 E FY 11 E FY 12 E

Gross Margin 30.7% 36.7% 31.0% 32.3% 33.0%EBITDA Margin 13.9% 23.5% 20.1% 21.3% 22.3%Adjusted PAT Margin 6.9% 8.2% 10.4% 11.4% 12.2%

RoNW 8.6% 8.8% 11.2% 12.5% 12.9%

Growth RatiosSales 19.5% 22.4% -18.1% 13.2% 8.1%EBITDA 4.5% 106.8% -30.0% 20.2% 13.2%

Adjusted PAT -11.1% 46.0% 3.3% 24.0% 16.1%

Valuation RatiosPE 14.19 9.24 8.94 7.21 6.21

P/BV 1.22 1.10 1.00 0.90 0.80EV/EBIDTA 7.11 2.79 3.55 2.59 1.90

M.Cap/Sales 0.98 0.76 0.93 0.82 0.76

Per Share DataBV 160.83 178.13 195.36 217.85 244.70EPS 13.80 21.21 21.91 27.17 31.54

Cash per share (excl Debt) N/A 27.16 45.93 64.64 86.61

Ratio Analysis

Source: Company data, Nirmal Bang Research

Initiating Coverage Sasken Communications Tech. LtdNote

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