Buy Sasken Communication; target of Rs 392: Karvy

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Buy Sasken Communication; target of Rs 392: Karvy

Karvy Stock Broking is bullish on Sasken Communication and has maintained buy rating on the stock with a target price of Rs 390.

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Karvy Stock Broking is bullish on Sasken Communication  and has maintained buy rating on the stock with a target price of Rs 390.

Karvy Stock Broking firm research report on Sasken Communication

'Mobile' growth to power business Sasken's niche focus on the wireless telephony segment, offerings to different segments of the wireless ecosystem and strong relationships with Tier-1 clients are likely to drive growth in its Services Business. The Products Business, on the other hand, has good visibility in shipments and is likely to lead margin defence efforts through its royalty model. Excluding the losses in the Products Business, the stock effectively trades at around 13xFY2009E EPS. We expect products to show strong growth going forward. We 'Initiate Coverage' on the stock with a Buy and Target Price of Rs 392 based on a sum-of-the-parts valuation methodology. 

A strong focus on a niche area: Sasken is a niche company focussed on providing software solutions to the global telecom sector, with a focus on the wireless space. Worldwide cellular users are projected to hit 3billion by end-2007. The company's service offerings address different segments of the wireless ecosystem, namely Network Original Equipment Manufacturers (OEMs), Semiconductor Manufacturers and Terminal Device Manufacturers. Strong relationships formed with Tier-1 OEMs like Nokia, Nortel and Texas Instruments inspire confidence about strong growth of its Services Business. 

 Acquisition to strengthen portfolio of offerings: Sasken acquired a company called Botnia Hightech in FY2007, which is into hardware and RF design and testing. Through this, Sasken has expanded its service offerings for the fast-growing handset segment and also gets access to a Tier-1 client, Nokia, with whom it can significantly expand its engagements. 

Products Business to drive margin defence: Sasken's business model, encompasses both services and products. In its Products Business, the company develops software components that go into mobile phones. The business is royalty-based, with the company earning a certain amount per phone shipment on which its intellectual property (IP) is loaded. Thus, this is a highly scalable model. As a result, this business provides a strong lever for margin defence, given pressure that the Services Business is likely to face due to wage inflation. Industry outlook The global telecommunications sector can be broadly divided into 2 major segments - telecom service providers (TSPs) and telecom equipment manufacturers (TEMs). If we take a historical perspective, the TSP segment has been subject to high levels of regulation, with major companies typically being, by and large, state-owned entities. However, over the past few years, the sector has undergone a significant transformation, witnessing increasing levels of liberalization. Competition has increased in both the key segments of the TSP industry, namely fixed-line and mobile services. As a matter of fact, it has undoubtedly been the mobile segment that has transformed the industry, which has been driven by firms across the globle rolling out mobile telecom networks.

According to Datamonitor, an industry research firm, while the global fixed-line market is expected to grow at a compounded rate (CAGR) of 4.6% to hit US D696 billion by 2009, the global wireless market is expected to grow at a CAGR of 11.8% to hit US D970 billion by 2009. On the other hand, the global TEM market is expected to grow at a CAGR of 3.1% to hit USD 348 billion by 2009. Between 2000-02, this industry witnessed a global downturn, which adversely impacted TEMs, as there was an over-supply situation, with TSPs setting up capacities in anticipation of growth that did not materialise. This supply glut led to a slow-down in incremental demand for telecom equipment. Post-2002, however, the transformation in the TSP market led to a revival of demand for telecom equipment, with TEMs requiring to continuously upgrade their products to support networks capable of transferring voice and data traffic at rapid speeds (3G).