Accumulate Sasken Communication: Edelweiss

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Edelweiss research has recommended to Accumulate Sasken Communication .

 

Edelweiss research report on Sasken Communication Technologies

 

We attended the recently held analyst meet of Sasken and came back reiterating our earlier thesis of focusing on long term horizon. Over the short to medium term, we remain cautious on account of consolidation phase in the Network Equipment Manufacturers (NEMs) segment, where signs of revival in growth are lacking. Also, the products segment is still awaiting the spiral growth in royalty revenues, hurdled by delay in handset launches.

 

We expect the royalty revenues flow to remain slow during the current year. However, a higher proportion of license fee is expected to bring the products segment to a break-even level in FY08. Sasken is more susceptible to appreciation in INR due to high offshoring and US concentration, which makes the risk-reward ratio unfavourable at this point in time. Some of the key initiatives taken by Sasken to mitigate the above-mentioned concerns and sustain margins at the current level include: improving the billing rate, increased proportion of fixed price contracts, increasing utilisation with focus on quality, reducing the average compensation cost, and introducing newer pricing strategies.

 

We remain cautious on the company over the short to medium term and would look for early signs of consistent performance to reiterate our long term positive view on the company. We believe in the near term the stock will be under pressure and may see a 10% correction from the current levels. We continue to maintain our estimates for FY08, with net profits of INR 443 mn, translating into EPS of INR 15.5 and FY09E EPS of INR 27.7. At a CMP of INR 335, the stock trades at a P/E of 21.6x and 12.1x and EV/EBITDA of 10.5x and 5.9x our FY08E and FY09E estimates, respectively. We maintain our 'ACCUMULATE' rating on the stock.

 

Key takeaways:

 

Trends in business segments that Sasken addresses on the services side  

 

Networks Growth challenged 

 

During the current year, growth in this segment is expected to be sluggish on account of the ongoing consolidation- reorganisation, and portfolio optimisation. Companies such as Nokia-Seimens and Alcatel-Lucent are rationalising their multiple product lines, and are expected to take at least a quarter to finsalise their business plans and fix the R&D budget New business model evaluation - Companies are evaluating new business models of partnering with the third party vendors for their R&D spends. They are also looking at vendors to own the product lines for ongoing up-gradation and maintenance.

 

Partnering aggressively 

 

Due to the consolidation in the networks space the five tier I players control almost 70% of the global market. Other niche players such as Airvana, Sonus, Ciena, Juniper, and Tellabs are to be seen partnering aggressively. This trend is very much positive for third party software vendors such as Sasken.

 

Valuations

 

The products business is continuing to lose money due to delay in the launch of handsets; at the same time, consolidation in NEMs could take longer than expected, delaying the growth on the services side. Coupled with above mentioned factors appreciation of INR will have substantial impact on the financials of the company. We remain cautious over the short to medium term and would follow the signs of consistent performance to reiterate our long term positive view on the company. We maintain our EPS estimates of INR 15.5 and INR 27.7 for FY08 and FY09 respectively. At a CMP of INR 335, the stock trades at a P/E of 21.6x and 12.1x and EV/EBITDA of 10.5x and 5.9x our FY08E and FY09E estimates, respectively. We continue to maintain our 'ACCUMULATE' rating on the stock.