Sasken Communication Technologies, a telecom-focussed software vendor, recorded 4.9% q-o-q increase in topline for the recently concluded quarter, aided mainly by Rupee depreciation.
Its Services grew by just 3.7% q-o-q in rupee terms. However, in dollar terms, the business clocked a 2.7% q-o-q de-growth on account of the increasingly difficult business environment and continuing issues in the key networks business.
The Products Business grew 13.2% q-o-q in rupee terms. EBITDA margins rose by 155bp q-o-q, aided by the rupee depreciation.
However, forex losses to the tune of Rs13.6 crore (Rs7 crore in Q1FY09) led to bottomline for the quarter de-growing by 24.4% q-o-q.
Management has downgraded its guidance for FY09 for the services business, from 17-20% y-o-y growth in dollar terms to just 10% after factoring in a 15% de-growth in the key networks business.
We have downgraded our numbers for Sasken following this disappointing performance and consequently, our revised EPS estimates for FY09 and FY10 are 28% and 26% lower respectively, compared to our earlier estimates.
Given that top-tier software companies are trading at P/E ratios in the range of 7-11x FY2010E EPS, we expect mid-sized companies like Sasken to trade at 50-60% discount.
Consequently, even though at the CMP, the stock is trading at 5.1x FY2010E EPS, we believe such a discount is warranted and have given around 20% discount even to other mid-sized software companies like Tech Mahindra. We downgrade Sasken to REDUCE.