The Hindu Business Line : Sasken Technologies: Invest at cut-off

INVESTORS with an appetite for risk can take exposurein the book-built public offering by Sasken Communication Technologies (Sasken). As a products-cum-services play focussed on the telecom vertical, Sasken will be appropriate for investors diversifying their existing IT portfolio and seeking returns over the medium term.

Bidding at the cut-off price in an offer that is fixed at a price band of Rs 230-260 per share would be appropriate. Though this will entail an upfront payment of Rs 260 per share, investors will remain eligible to pick up the offer even if the final price is fixed at a lower level. As Sasken is focussed on the high growth areas of wireless and broadband, the potential for topline and bottomline growth in the products-cum-services area is immense. As the product's contribution is yet to make a significant impact on revenues, there is scope for substantial growth on this front.

At a price band of Rs 230-260, the price-earnings multiple works out to 17-19 times the consolidated FY-05 earnings. This appears attractive for a products-cum-service company that stands at the threshold of good growth. The equity base would rise by about 60 per cent this year to Rs 27.5 crore. In the first tranche, the equity offer made to Nortel Networks Mauritius, Nokia Growth Partners LP and MVC VI FVCI in April has expanded the equity to Rs 22.5 crore. Equity to the two strategic investors — Nokia Growth Partners LP and MVC VI FCI — was at Rs 223. That this is close to the lower end of the price band of Rs 230 infuses confidence in the offer. The public offering will increase the equity to Rs 27.5 crore. Unless the products business starts contributing in a big way, earnings growth is unlikely to keep pace with the 60 per cent equity expansion. Hence, we would be more comfortable if the final pricing is fixed closer to the lower end of the price band, offering greater scope for capital appreciation in the medium term.

The principal risks to our recommendation will be an unanticipated downturn or slowdown in the telecom business and slower-than-expected contribution from the products business. While investing in this offer, investors will have to keep the following positive factors and risks in mind:

Encouraging hybrid model: The business model of Sasken, which focusses on products-cum-services in the telecom vertical, is sound as they complement each other. As the wireless data market is poised for rapid growth, the product offerings of Sasken in the area of wireless protocol stacks and application solutions hold promise. Similarly, Sasken's broadband product offering in the Digital Subscriber Line is advanced; the technology in this area has been deployed in the US and China. The share of products in consolidated revenues of Rs 242 crore is, however, low at 14 per cent in FY-05, declining from 25 per cent in the previous year; it is set to grow sharply in the coming years. The services model, which accounted for 86 per cent of revenues, caters to three principal segments: Network equipment manufacturers, semi-conductors and terminals, primarily in the wireless and broadband area, with whom Sasken has had long relationships.

Stability to revenue stream: Sasken's largest customer, Nortel Networks, has guaranteed a certain volume of business to the company and its wholly-owned subsidiary for a fixed period. This is expected to provide a degree of stability to revenue growth. This third-party services agreement was also accompanied by Sasken issuing shares to Nortel Networks Mauritius at Rs 141.6 per share.

High client concentration: The largest customer of Sasken contributed 28.8 per cent of revenues in FY-05, up from 27.3 per cent in the previous year. The top two clients accounted for 48.8 per cent of revenues, up from 41.3 per cent and the top five at 70.3 per cent, up from 57 per cent over this period. If any of these clients pass through a spending freeze or delay in IT spending, it will have a serious impact on growth. The risks may also be high, if any of its customers go through an organisational restructuring or acquisition overtures.

Competition in services/products: As 84 per cent of revenues are derived from services, the competition in telecom R& D services remains stiff from the likes of Wipro, Flextronics and TTPCom. This exposes the company to greater billing rate pressure and even loss of business to its competitors. In the products business, the steady state margins are not known yet.

As business is still in the investment phase, for FY-05, the products profit margin at 12 per cent was substantially lower than the services margin at 37 per cent. Since the company is also switching from a licence-fee based model to a royalty model, which has accounted for a fall in product margins, its implications on overall margins are still unclear.

Slowdown in telecom sector: As the telecom sector has enjoyed two years of strong growth, spending plans by its customers in the network equipment, semiconductor or mobile terminals will have to be tracked closely for incipient signs of slowdown. Though the impact of slowdown is unlikely to be as strong as the post meltdown phase in 2001, revenue and margin growth will be affected if there is an overall slowdown in development spends across this sector.

Offer details

Sasken will be raising Rs 115-130 crore through this book-built offer. A substantial portion of the offer proceeds is to be utilised towards setting up a campus at Bangalore. Thirty per cent of the offer size of five million shares will be available to the retail investors. The book running lead manager is Enam Financial Consultants. The stock will be listed on the NSE and BSE. The offer, which opened on August 11, closes on 17.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page