[T.S.R:14718] Sasken Communication Technologies Ltd

ICICI Direct - pick of the week     Sasken Communication Technologies Ltd. (SASCOM)

By Srishti Anand, Ankita Somani

Green shoots in telecom to augur well… Sasken Communication is a mid-sized IT company focused on services relating to telecom handset and equipment manufacturers. The company is an embedded communications solutions company that helps businesses across the communications value chain to accelerate product development life cycles. Sasken offers a unique combination of research and development consultancy, wireless software products and software services and work with network OEMs, semiconductor vendors, terminal device OEMs and operators across the world. Software services business as growth and profitability driver The management has guided for a strong growth of 18-20% in revenues with plans for hiring 750 people on a net basis. It foresees utilisation remaining in the 80% range despite strong additions. This extrapolates to strong revenue growth of 21% in FY11 in its software business. Also, the company expects billing rates to inch up by 2% for this business and expects clients to offshore more work to drive cost efficiencies. They have guided for EBITDA margins to remain at 18-20% in FY11 even after adjusting for wage hikes as well as US$/INR assumption of Rs 45. Thus, on the back of green shoots seen in telecom client's business, client budgets are outlined to be flat with more emphasis on offshoring. At the net profit level, the deep in the money hedges of US$48 million with booking rate of 48INR/US$ will bolster profitability. Adjacent business to aid growth The company is confident of increasing the share from its adjacent business i.e. automotives, utilities and industrial segment from almost nil to 10-12% of revenues in FY11. Thus, improving scale will help the company to turn this business EBITDA neutral in FY11 itself. Marquee clientele Sasken has a marquee clientele across its business segments from Nokia and Sony Eriksson in the handset segment, Avaya and Nortel in telecom equipment manufacturers and Toshiba, LG in consumer electronics.

Year ended Rs. cr year   2010/03 2009/03 var % Sales Income   401.51 479.75 -16.31 Other Income   6.35 2.88 120.24 Expenditure   314.03 347.73 -9.69 Interest   0.00 0.00 0.00 Gross Profit   93.82 134.90 -30.45 Depreciation   21.29 27.86 -23.58 Tax   14.43 19.34 -25.39 PAT   76.03 25.75 195.30 Equity   27.11 27.11 0.00 OPM (%)   21.79 27.52 -5.73 GPM (%)   21.79 27.52 -5.73 NPM (%)   18.93 5.36 13.57   since no matching quarter data is found, so no quarter comparison has been shown

Key Financial Ratios   2009/03 2008/03 2007/03 2006/03 2005/03 EPS 9.50 8.73 13.38 4.62 12.88 CEPS 19.77 19.33 21.65 11.06 21.46 Book Value 156.09 149.90 146.81 133.85 83.46 Dividend/Share 4.00 4.00 3.00 3.00 3.00 OPM 14.60 12.52 16.16 13.65 15.35 RONW 6.08 1.91 8.15 5.02 12.92 Debt/Equity 0.00 0.00 0.00 0.00 0.00 Ratio 2.41 3.27 3.13 3.40 2.77 Interest Cover 0.00 0.00 99.66 21,059.20 77.43

Financials:

Valuation The stock is currently trading at very cheap valuations of 5.6x and 5.3x its FY10 and FY11E EPS of Rs 27.8 and Rs 33.3, respectively. With revenue growth of 21% CAGR over FY10-FY12E profitability landscape looks promising compared to other midcap IT stocks. Thus, we recommend it as Pick of the Week and value it at 6.2x FY11E EPS with 10% upside from current levels with a time frame of three months.

technical analysis   Technical outlook: The stock is in a strong uptrend consistently forming higher top and higher bottom on the daily chart. It has been consolidating sideways in the range of 180-200 levels for the last five weeks, thus forming a strong base for a fresh up move in the coming weeks.  During the recent consolidation the stock has taken support at the 100 days simple moving average (SMA), which is currently at 185 levels.  Among momentum oscillators, the daily RSI is exhibiting positive divergence and the daily MACD has given a positive crossover from the oversold territory suggesting build-up of momentum on the upside.