Sasken Communications

Technologies Ltd
Initiating Coverage Sasken Communications Tech. Ltd
Recommendation BUY Snapshot
Sasken Communication Technology Ltd (Sasken) is an embedded
CMP (14/01/2010) Rs. 196
communications solutions company that helps businesses across the
Sector Information Technology communications value chain to accelerate product development life
Stock Details cycles through a unique combination of research and development
consultancy, wireless software products and software services.
BSE Code 532663
Sasken employs more than 3,200 people operating from state-of-
NSE Code SASKEN the-art research and development centers in India, Finland, Mexico
Bloomberg Code SACT IN and the US. Over the years Sasken has grown organically as well as
Market Cap (Rs. cr) 531 inorganically by acquiring stakes in several small companies.
Free Float (%) 72
52- wk HI/Lo 203/41
Key Positives
Avg. volume BSE (Monthly) 447759  Strong growth in Handset segment with the increasing
Face Value Rs.10 subscriber base in the emerging markets and the growing
popularity of smart phone devices is expected to boost the
Dividend payout 40% demand for outsourcing of R&D activities which will positively
Shares o/s (Crs) 2.71 impact the company’s future growth prospect.
Relative Performance 1Mth 3Mth 1Yr
Sasken 11.7% 25.1% 262.2%  Constant focus for acquisition has enabled Sasken to register
strong growth over last few years. The recent acquisition of
Sensex 2.4% 1.6% 86.9% Ingenient Technologies Inc (Ingenient) will not only provide fuel
400 to the company’s top-line growth but will also provide it an
entry into consumer electronics sector.
200
 EBITDA margin is expected to improve in future with the cost
control measures through managing employee strength and
0 reduction in SG&A expenses.
14/01/2009 29/07/2009
Sasken  Effecting hedging strategies to partially mitigate the impact of
INR appreciation against US dollar in near term thereby
Shareholding Pattern as of 30/09/2009 ensuring steady revenue top-line.
Promoters Holding 27.9%
Valuation & Recommendation
Institutional (Incl. FII) 10.4% At the current market price of Rs 196 per share, Sasken is currently
Corporate Bodies 7.8% trading at a PE of 9.24x at FY 2010 estimated EPS and 8.94x at FY
Public & others 53.9% 2011 estimated EPS, which looks quite attractive. Based on our EPS
Ashish Khetan – Research Analyst (+91 22 3027-2259) estimate of Rs. 27.17 for FY 2011 and a target PE multiple of 10.00x
ashish.khetan@nirmalbang.com we arrive at a target price of Rs. 272 per share for Sasken indicating a
Aditya Powani – Research Associate (+91 22 3027-2241) upside of 39% from the current levels. We recommend a BUY rating
aditya.powani@nirmalbang.com on the stock with a long term view.

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. Ltd
Company 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 $1.45
mn. 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)

6%

21%
26%

47%

North America EMEA India APAC

Source: Company data

Sasken has relationships with some of the world’s leading Network OEMs, Semiconductor Vendors,
Initiating Coverage Sasken Communications Tech. Ltd
Satellite 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 a
favoured partner of choice for leading handset manufacturers around the world.

Sasken offers GSM / GPRS / EDGE and WCDMA protocol stacks, which are pre-integrated and
proven 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 significantly
from around 40% in FY 2004 to 10% in FY 2009.
Initiating Coverage Sasken Communications Tech. Ltd
Telecom Software Services

Sasken provides services, solutions and technologies to customers across the telecommunications
value 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.

Services offered

Terminal Semiconductors Network Equipment Service

Devices manufactures Providers

Technology for IC Design services Outsourcing of Suite of services:

protocol stacks, Licensable IP Service Offerings: Testing
multimedia services 2G Consultation &
codecs, development
middleware Network
frameworks engineering services

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.
Initiating Coverage Sasken Communications Tech. Ltd
Network Equipment Manufactures

Sasken provides advanced technology solutions for network equipment providers who design,
manufacture, supply and integrate equipment for telecommunication networks. Sasken provides
services 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)

5.1% 0.1%

Telecom Software
Services

Telecom Software
Products
94.8%
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. Ltd
Historically 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
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%

20.0%
10.0%
0.0%
Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10
Onsite Offshore
Source: Company data

Utilization Rate

Sasken’s utilization rate has remained in more than 70% historically and increased sharply in Q1FY
10 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%.

82.0%
80.0%
78.0%
76.0%
74.0%
72.0%
70.0%
68.0%
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. Ltd
Major 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. Ltd
Industry 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)

2,000

1,500 683
652
597 620
570 594
1,000 349 376
308 326
277 295 181
131 146 164
103 115
500
528 557 578 605 636 672

0
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. Ltd
are 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. Ltd
Investment 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. Ltd
is 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 reducing
hiring 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 significantly
particularly 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.
54
52
50
48
46
44
42
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
Source: Bloomberg, Nirmal Bang Research
Initiating Coverage Sasken Communications Tech. Ltd
Joint 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. Ltd
Recent 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 ea rch & Devel opment 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 & Admi ni ns tra ti on exp 11.8 15.1 -21.9% 15.3 -22.7%
Sel l i ng & Marke ti 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%
Depreci a ti on & Amorti za ti on 7.3 8.8 -16.3% 10.3 -28.9%
Interes t 0.8 0.8 -2.3% 1.0 -20.2%
Excha nge ga i n/(l oss ) (net) -0.1 10.5 N/A -13.6 -99.3%
Other i ncome 1.5 1.4 9.9% 1.4 11.7%
Prov for di mi nuti on i n val ue
of i nv. (net of revers a l s) -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 ta xes 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. Ltd
Peer 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
Polari s 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 Basis
Source: Company Data, Capital Line, Nirmal Bang Research
Initiating Coverage Sasken Communications Tech. Ltd
Valuation & Recommendation

We expect the company’s adjusted EPS to increase marginally from Rs 21.21 in FY 2009 to Rs 21.91
in 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 multiple
considering 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
900

800

700

600

500

400

300

200

100

0
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 re venues 297.6 373.7 438.4 394.0 437.6 468.3
Res ea rch & 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 trati on e xp 59.5 65.5 63.5 51.4 56.2 60.1
Sel ling & Ma rketi ng e xp 24.7 30.1 28.7 11.3 14.9 14.7
EBITDA 75.8 79.2 163.8 114.6 137.7 155.9
margin 15.9% 13.9% 23.5% 20.1% 21.3% 22.3%
Depreci ati on & Amorti za ti on 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
Excha nge 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
Excepti ona l Item 0.0 0.0 15.2 0.0 0.0 0.0
Provi si on for di minuti on i n va l ue
of i nv. (net of revers a 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 lity 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:Depreci ation 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 Liabilities & 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 lity 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 2012E
Profit Before Tax 54.3 56.8 70.8 88.7 109.9 127.6
Plus Depreci ation 24.0 28.0 30.6 31.6 34.3 37.1
Amortization 2.7 13.8 6.8 0.0 0.0 0.0
Impairment loss 0.0 0.0 15.2 0.0 0.0 0.0
Interest 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 0.0
Foreign 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) i n current liab and prov 12.2 7.7 14.7 (5.0) 16.8 13.1
Others 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)
Capatalizing 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 0.0
Investment 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 0.0
Proceeds 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 0.0
Proceeds from govt subsidy 0.3 (0.3) 0.0 0.0 0.0 0.0
Net Proceeds from Long-Term Borrowing 77.8
Lease 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 0.0
Dividends paid (incl di vidend 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 0.0
Cash 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 43.5

Beginning Cash Balance (including bank guarantees) 16.5 35.0 57.1 117.2 152.0 186.8

Ending Cash Balance 34.6 56.9 117.2 152.0 186.8 230.3

Source: Company data, Nirmal Bang Research
Initiating Coverage Sasken Communications Tech. Ltd

Ratio Analysis
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 Margi n 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 Ratios
Sales 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 Ratios
PE 14.19 9.24 8.94 7.21 6.21
P/BV 1.22 1.10 1.00 0.90 0.80
EV/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 Data

BV 160.83 178.13 195.36 217.85 244.70
EPS 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
Source: Company data, Nirmal Bang Research
 Initiating Coverage Sasken Communications Tech. Ltd
Note

Disclaimer
This Document has been prepared by Nirmal Bang Research (Nirmal Bang Securities PVT LTD).The information, analysis and estimates
contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This
document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is
meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the
contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or
omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang
Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or
its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this
document.