Crisis-hit Sasken sees margins plunging

Crisis-hit Sasken sees margins plunging

Bangalore: Once touted as the next big thing in Indian information technology (IT) Sasken Communication Technologies Ltd has seen its stock plunge, profits decline and key executives depart in recent months in the wake of the credit crisis-induced economic slowdown that has affected telecom and semiconductor firms, its main customers.

Two weeks back, the company sent an internal mail to its employees announcing that two of its top officials—president and chief operating officer Kannankote Srikanth and senior vice-president (human resources) Hari Iyer were leaving the company. Chief marketing officer Swaminathan Krishnan left around six months ago.

Since January, the company’s stock has fallen 83.7% and closed at Rs55.45 on Tuesday, almost one-fifth of the Rs260 at which shares were sold to the public in September 2005. Shares of Sasken had made a debut on the Bombay Stock Exchange on 9 September 2005, at Rs400 a share. In the past year, the company’s net margin (the net profit expressed as a proportion of revenue) has almost halved from 10% to 5.8%.

Sasken’s troubles, analysts say, are representative of the fortune of the country’s IT companies that seek different models than the large IT firms such as Infosys Technologies Ltd and Tata Consultancy Services Ltd, which derive most of their revenue from services such as building software for specific applications. Sasken started life as a products company and has since grown into providing services, largely to equipment makers in the telecom and semiconductor businesses.

Also See Tough Times (Graphic)

While Srikanth could not be reached for comments, Iyer, who is serving out his notice period, said: “I don’t want to comment. It would be inappropriate at the moment for me to to say anything." Krishnan, who has taken over as the CEO and director of Bangalore-based The Institute of Finance and International Management Business School, continues to consult for the company as its spokesperson.

“We are trying to make an agile terms with the market requirements over the next 12 to 15 months. If a position doesn’t add value, the company has to reconsider it and (such a departure) has nothing to do with the individual," said Krishnan.

In a mail to Sasken’s employees in the mid of this month, a copy of which was reviewed by Mint, Rajiv C. Mody, chairman and CEO of the company said “as initial steps towards achieving this (the objective of building a lean and agile organization), K Srikanth and Hari Iyer will be leaving the company".

Mody himself will take charge of sales and marketing while chief financial officer Neeta Revankar will take on the responsibility of HR. According to an employee who did not want to be named given the sensitivity of the issue, a week later at a town hall meeting which was simultaneously phonecast, Mody announced that the company would cut more jobs. As of 30 September, the company had 3,637 employees.

Mody could not be reached for comments despite repeated attempts.

While Sasken’s net profit margin has declined, the company has also cut its research and development and sales expenditure (the first by 34%) in the second quarter of this financial year as compared with the first quarter.

Analysts say the company’s business model of selling key pieces of software to telecom equipment makers, including phone manufacturers, has suffered given consolidation in the business at least in terms of standards. Phone makers prefer Symbian, Windows or, the new Google Android software.

The company had also sold equity stakes to customers including Nokia Oyj, Intel Corp. and Nortel Networks Corp. either directly or through their venture capital arms. Many of these firms have since exited these investments. Intel Capital, which owned 7.77% of Sasken as of 30 September 2007 has exited the investment. Nortel Networks Mauritius Ltd which had a 11.51% stake as of September 2007 has reduced this to 9.51%. And Nokia, which had a stake of 2.16%, exited its investment in 2007.

Analysts also point to the flux in the semiconductor industry as another reason for Sasken’s falling fortunes. With demand for chips plunging, semiconductor firms such as Nvidia Corp., Applied Materials Inc. and Freescale Semiconductors have been revising downward their revenue and growth estimates, laying off people, or both.

An analyst from a Mumbai-based research firm, who has been tracking the company for more than two years, said Sasken’s business model is risky because around 65% of Sasken’s business comes from just five global clients. “(Too much) emphasis on one vertical—semiconductor and equipment manufacturing—is taking (its) toll. Also, the products business has failed," said the analyst, who spoke to Mint on condition of anonymity.

Products accounted for only 12% of Sasken’s revenue of Rs176.3 crore in the second quarter of this year. “The company will face issues in growth over the next two-three quarters at least," the analyst added.

In order to shore up its stock, Sasken announced on 21 April that it would buy back up to 9.45% shares at a maximum of Rs260.

Analysts say that with just Rs81 crore of cash and cash equivalents on its books as on 30 September, Sasken cannot buy growth as a way out of its troubles. They add, however, that the imminent launch of 3G (third generation or data rich telecom services) in India —licences are to be auctioned soon—could help the company that derived 22% of its revenue from the domestic market by offering products and services to telcos rolling out 3G networks.