Sasken Communication Technologies Ltd

BSE: 532663 | NSE: SASKEN | ISIN: INE231F01020 
Market Cap: [Rs.Cr.] 524.51 | Face Value: [Rs.] 10
Industry: Computers - Software - Medium / Small

Management Discussions
Management Discussion And Analysis Report

IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD -LOOKING STATEMENTS. THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TOCERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE REFLECTED IN THE FORWARD - LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH ADIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE AND ELSEWHERE IN THIS REPORT. READERS ARECAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD - LOOKING STATEMENTS, WHICH REFLECTMANAGEMENT’S ANALYSIS ONLY AS OF THE DATE HEREOF.

Company brief

With Product Development DNA at its core, Sasken has helped global leaders impelproduct development, commercialization, customization and maintenance. We are deeplyentrenched in verticals like semiconductors, consumer electronics, smart devices,automotive electronics, enterprises and network equipment.

Recent trends like mobility, social media, cloud, analytics and other technologies havespurred Sasken to make segue into independent software vendors, insurance and retailindustries. Today, our portfolio of offerings includes embedded R&D services,comprehensive testing services, IT infrastructure services and application development& data services.

Outlook

According to the International Monetary Fund (IMF), the economic outlook for 2014 -15will improve, owing to the recovery of advanced economies. Data suggests that there hasbeen a strong global growth since the second half of 2013 and will continue into 2014,buoyed by improved domestic demand in the developed economies and the Euro area turningthe corner from recession to recovery.

Global Engineering R&D (ER&D) has witnessed a compounded annual growth rate ofaround 10% in the last couple of years, as estimated by NASSCOM and Booz & Co. themotivation for outsourcing ER&D services is much stronger than before and has movedfrom cost arbitrage to one of collaborative development. Access to talent, localizationrequirements, the need for an ecosystem to innovate and local market access drive manyTrans National Corporations to both established local Global Innovation Centres and workwith outsourced India partners for product development and engineering services. Theverticals that have the highest propensity and maturity to outsource include automotive,consumer electronics, telecommunications and semiconductors.

Business environment

In less than seven years, smart devices have infused a new dynamism in the marketplace. From being a personal device, they have become the hub for social and businessinteractions. The centrality of smart devices in our lives is only going to increase withthe advent of wearables and the internet of things (IoT). Significant enhancements inseveral enabling technologies including processors, display, memory, imaging, sensors areexpected to make future smart devices offer functionality seen as only desirable todaybecome common place tomorrow.

The evolution of wireless networks and the robust application ecosystem will move smartdevices well and truly beyond the realm of mobility. The upsurge in data traffic hasresulted in wireless carriers investing in accelerating the deployment of 4G / LTEnetworks. The entrenchment of disruptive players who have cannibalized service providerrevenue by offering Over the Top services has pushed the need for operators to explore newsources of revenue through greater value add.

Automotive electronics continues to be the innovation driver in the automotiveindustry. Without exception, auto majors are bringing to market, new products that enhancedriver safety, passenger infotainment, navigation and connectivity. The automobile isincreasingly being viewed as a ‘network on wheels’. The convergence oftechnology is making it difficult to draw the line between smart devices and consumerelectronic products. Software platforms such as Android flourish on any conceivable devicecategory from smartphones, tablets, cameras, ruggedized devices, TVs and so on. Softwarehas taken centre stage in the consumer electronic devices space where merely havingsophisticated hardware is no longer sufficient. Without exception, consumer electronicproducts that win in the market place are supported by an application ecosystem. Theintegration of these devices as home and work to seamlessly share media, segregatepersonal and business content and comply with privacy and security norms will be the keydevelopment areas.

These trends largely auger well for a robust demand for engineering R&D serviceproviders, an area in which we have been specializing for over two decades now. Inaddition, technology is increasingly being viewed as a business enabler that cansignificantly shape the way an enterprise creates and distributes its products and engagesits employees and customers. The forces of digitization have emerged as a real gamechanger. Business boundaries have blurred and the ways in which enterprises create andappropriate value have changed beyond recognition. The nexus of these forces istransforming the IT landscape and placing new demands on the CIO. Therefore, we see thebroad basing of our market canvas to address the IT space as most appropriately timed.

Growth opportunities for Sasken

The global ER&D spending has been growing at a modest rate in the last five yearsdespite an uncertain economic environment. The rapid churn in technology makes itnecessary for companies to continually pursue innovation to retain their competitive edgein developed markets and gain entry into emerging markets. In addition to the traditionalsectors like automotive, consumer electronics, telecommunications and semiconductors thathave the highest propensity and requisite governance structures to outsource ER&Dservices, newer sectors like medical, energy and infrastructure are increasing theirER&D spends. What augers well for Sasken is ER&D spend is largely governed bytrends such as increasing software content in products and the need to providecommunications and connectivity as an integral part of multiple product categories. Theconvergence of technology has resulted in the ability to create smart devices that aremultifunctional and have become the hub of all our social and business activities. Allthese pointers indicate as to why industry observers have revised upwards, the estimate ofER&D spending and off-shoring to India.

Over the years, we have built a strong portfolio of offerings, invested in creating andconstantly building on our domain competence. These investments will help us respond tothe demands of customers who expect their partners to provide full product developmentcapability to design from products. Sustenance and maintenance of existing product linesare critical services that have been traditionally outsourced. Our testing practice whichhas a suite of test assets including test automation frameworks will be an invaluableresource for companies seeking to optimize the cost of maximizing their investmentsthrough the product development lifecycle. We are one of the early movers to identifytechnology as a key business enabler.

We have a long history of strong linkages with academia and industry bodies. Ourinternal systems have matured to foster asset creation, knowledge sharing and continuousimprovement. We have a number of initiatives that encourage our talent pool to keep pacewith state - of - the - art technology by actively experimenting with technologies thatwill shape today and the future.

In the course of this financial year, we have judiciously identified and embarked upona program to expand the portfolio of our offerings to cover IT services. We have attractedtalent from the best in the industry to build a suite of offerings including applicationand data services and IT infrastructure services, especially targeted at independentsoftware vendors and the retail and insurance industries.

We have also begun the process of expanding our portfolio of offerings to address newareas like:

• Application and data services

Application and data are at the core of today’s digital enterprise. We arebuilding solutions for customer segments in the insurance and retail industries that willleverage our deep embedded and devices expertise. Our offerings will address theapplication lifecycle of development - transformation - sustenance. Enterprisearchitecture is a core capability within the practice, enabling us to envision robust,scalable and optimized solutions to our customers’ problems. Our product developmentapproach to enterprise IT will enable us to build next - generation enterpriseapplications for our customers.

• IT infrastructure services

Today, IT occupies a key place in any enterprise and is increasingly seen as a businesspartner and not just a support function. However, the increase in complexity in the ITlandscape, the coexistence of cutting edge and legacy systems has brought about immensepressure to the CIO organization. Given the fact that IT services and applications aremission critical, businesses cannot afford any outage in these systems. Sasken is buildinga portfolio of transformation, cloud based services, automation amongst others in the ITinfrastructure space. We have a presence in telecom infrastructure domain and ITinfrastructure business for several years through our subsidiary Sasken NetworkEngineering Ltd. which we will leverage. We are establishing Centers of Excellence (CoE)that showcases our competencies in the automation and cloud space.

• Testing Services

Testing is termed to be "ITs Invisible giant" as it accounts for a fourth ofIT Spend. Hyper competition is driving organizations to deliver systems and platforms tocustomers faster without any compromise on quality. As testing is a highly specializedfunction, we have established a CoE that is dedicated to the Software testing market. Weare building on the wealth of experience we have obtained in successfully executing arange of testing services including, field and inter - operability testing (IOT),conformance, network simulation testing. Additionally, we have an automated test frameworkfor Android Conformance Testing including application and system testing. Our Testingpractise will add services like Cloud Based Testing, System and Product Testing. Theseservices will cover the need of ER&D services, Independent Software Vendors and theInsurance and Retail Industries.

With these services, Sasken is well poised to gain customers who are independentsoftware vendors, retail and insurance industries.

In summary, we are confident that we have the ability to be a mutually significantpartner to customers seeking to engage with us for a broad spectrum of ER&D and ITServices. Our governance practices, flexible engagement models, domain competency and ourability to adapt are our key differentiators. We have executed projects of both strategicand tactical importance for over 100 customers so far. With a clearly articulated strategyand a team in place, Sasken is poised to address opportunities from a much larger andevolving canvas that includes both ER&D and IT services.

For a more detailed summary of the business segments we operate in, please refer to theTechnology and Markets section.

Financial results for the Year Ended March 31, 2014

Particulars

Year Ended March 31, 2014

Year Ended March 31, 2013 Increase/ Decrease
(In Rs. lakhs) (%) (In Rs. lakhs) (%) (%)
Revenue from Operations 45,802.93 100.0 47,483.08 100.0 -3.5
Employee Benefits Expense 30,604.38 66.8 32,431.63 68.3 -5.6
Inventory Related Expenses 255.25 0.6 (9.00) 0.0 -2,936.1
Other Expenses 9,604.55 21.0 10,868.49 22.9 -11.6
Total Expenditure 40,464.18 88.3 43,291.12 91.2 -6.5
Profit before Interest, Taxes, Depreciation and Amortization 5,338.75 11.7 4,191.96 8.8 27.4
Interest & Borrowing Expenses 20.25 0.0 41.34 0.1 -51.0
Depreciation and Amortization Expense 1,254.22 2.7 1,941.45 4.1 -35.4
Other Income 3,152.97 6.9 1,763.70 3.7 78.8
Profit before Taxes 7,217.25 15.8 3,972.87 8.4 81.7
Income Tax Expense (Including deferred tax benefit and MAT credit entitlement) 2,070.08 4.5 776.94 1.6 166.4
Net profit for the year 5,147.17 11.2 3,195.93 6.7 61.1

Revenue from Operations

Consolidated revenues for FY 2014 were Rs.45,802.93 lakhs, a decrease of 3.5%, fromRs.47,483.08 lakhs in FY 2013.

Software Services revenues, Network Engineering Services revenues, Software Productrevenues and Automotive, Utilities and Industrial revenues net off inter segmentalrevenues were Rs.41,207.61 lakhs, Rs.2,457.29 lakhs, Rs.1,922.91 lakhs and Rs.215.12 lakhsrespectively, for FY 2014.

In FY 2014, in INR terms, Services revenue contributed 95.3% of the overall revenues.It was at Rs.43,664.90 lakhs as against Rs.44,511.94 in FY 2013, lower by 1.9%.

The services revenue by project type is as follows:

In %
Particulars FY 2014 FY 2013
Time and Material 80.2 77.5
Fixed Price 19.8 22.5
Total 100.0 100.0

As some large ownership projects have come to a closure in the current year, theproportion of fixed price projects has reduced compared to previous year.

Services revenue (including Network Engineering segment) derived from servicesperformed in development centers and customer locations in India are categorized asoffshore revenues and revenues from other locations are categorized as onsite revenues.During the year, the proportion of onsite work has been increased with a view to improvecollaborative efforts with the customer. The offshore - onsite mix of revenues was asfollows:

In %
Particulars FY 2014 FY 2013
Onsite 41.8 31.8
Offshore 58.2 68.2
Total 100.0 100.0

In FY 2014, in INR terms, software product revenue contributed 4.2% of the overallrevenues. It was at Rs.1,922.91 lakhs as against Rs.2,744.38 lakhs in FY 2013, lower by29.9%

Details of software product revenue was as follows:

In %
Particulars FY 2014 FY 2013
License fees 10.4 32.3
Royalties 33.3 63.1
Customization 56.3 4.6
Total 100.0 100.0

Product revenues are generally not predictable and significantly dependent on shipmentvolumes of devices of our customers.

Employee benefits expenses

Employee benefits expenses include salaries which have fixed and variable components,contribution to social security funds such as provident fund, superannuation fund,gratuity fund and other statutory schemes. It also includes expenses incurred on Employeestock compensation costs, staff welfare, recruitment and relocation.

The total employee costs for FY 2014 were Rs.30,604.38 lakhs compared to Rs.32,431.63lakhs in FY 2013 - lower by Rs.1,827.25 lakhs. In percentage terms, the cost in FY 2014 is66.8% of revenues, as against 68.3% in the earlier year.

The employee benefits cost has been lower in the current year as compared to previousyear on account of lower headcount. Further though the rupee depreciated by 10.3% duringthe year, the benefit of rupee depreciation is offset by increases in compensation andsignificant investments in leadership team during the later part of the financial year.The employee strength at the end of FY 2014 was at 1,906, which was lower by 385 employeesas compared to FY 2013 end. We had taken a conscious decision to monitor the demand,utilization levels, and appropriately accelerate hiring to ensure we are able to serviceall business requirements.

Employee stock option compensation cost (net) for the current year has been lower thanlast year on account of lower amortization rate and reduction in the outstanding optionsas some of them lapsed with efflux of time, without being exercised.

Inventory related expenses

Inventory related expenses include increase or decrease of work in progress,consumption of components and raw materials and purchase of traded goods.

In FY 2014, inventory related expenses are higher as compared to FY 2013 on account ofconsumption of inventory towards completion of some of the large fixed price ownershipprojects.

Other expenses

Other expenses for FY 2014 were Rs.9,604.55 lakhs as against Rs.10,868.49 lakhs for FY2013 - an decrease of Rs.1,263.94 lakhs.

During the year, we had consolidated some of the facilities to improve the spaceutilization, resulting in overall reduction in facility cost as compared to last year.However, the savings on account of this has been negated as there has been an increase inlegal expenses in the current year on account of an ongoing litigation. This litigationrelates to one of our non - Indian licensees having breached its obligations in the prioryear, inter alia, to report shipment and royalty numbers and to pay for the same. The saidlicensee has claimed non - usage of licensed IPR, while it continues to use the same.Break up of other expenses into major head is as follows:

Amount in Rs. lakhs
Particulars FY 2014 FY 2013
Facility costs 2,772.06 4,002.76
Outsourcing & Consultancy costs 3,440.93 2,795.22
Travel costs 1,774.77 2,287.75
Communication & IT costs 713.61 775.00
Training costs 208.47 261.19
Other costs 694.71 746.57
Total 9,604.55 10,868.49

Interest & Borrowing expenses

ConnectM, which is a Joint Venture of Sasken has borrowed from SVB Finance India Pvt.Limited, which is a Non Banking Finance Company (NBFC). The interest expense relates tointerest on secured long term borrowing from this NBFC.

Depreciation and amortization expense

Depreciation and amortization charge has decreased to Rs.1,254.22 lakhs in FY 2014 fromRs.1,941.45 lakhs in FY 2013. The depreciation has been lower as certain assets includingintangible assets have reached the end of useful life.

Other Income

Other Income comprises of Interest earned on Fixed Deposits, Dividend on Mutual Fundsincluding FMPS, Gain on sale of Investments, profit on sale of fixed assets, write back ofunclaimed balances and provisions, exchange gains and other miscellaneous receipts.

Other income was Rs.3,152.97 lakhs in FY 2014, an increase of Rs.1,389.27 lakhs overthe other income in FY 2013 amounting to Rs.1,763.70 lakhs. This increase is mainly onaccount of the volatile exchange rates in FY 2014, net exchange gains, were higher byRs.1,263.50 lakhs as compared to FY 2013. This increase is mainly on account of

• the favorable exchange rates due to depreciation of rupee against US Dollar inthe current year

• realization of dividend declared by subsidiaries from accumulated proits, at anexchange rate higher than at which they were earned. This is a non regular event andoccurs when there is significant difference in the exchange rate at which the profit isearned and repatriated from overseas subsidiaries.

We use a combination of foreign exchange forward contracts and foreign exchange optionsto hedge our exposure to movements in foreign exchange rates. We manage our foreignexchange exposures in line with our hedging policy which aims to ensure that foreignexchange exposures on revenue and balance sheet accounts are properly monitored and arelimited to acceptable levels.

Returns from our treasury investments in FY 2014 have been Rs.1,085.80 lakhs, higher byRs.55.20 lakhs as compared to FY 2013.

Income tax expenses

The tax charges vary depending on the mix of onsite revenues, offshore revenues,country of operations, nature of the transaction and revenues generated from units whichenjoy a tax holiday.

The income tax expense was Rs.2,070.08 lakhs in FY 2014, an increase of Rs.1,293.14lakhs as compared to the tax expense of Rs.776.94 lakhs in FY 2013. The tax charges arehigher in the current year, due to improved profitability, lower tax exemption for one ofthe SEZ on completing 5 years and tax on dividends received from overseas subsidiaries.

Profit after taxation

Consolidated Profit After Tax (PAT) has increased by 61.1%, to Rs.5,147.17 lakhs in FY2014 from Rs.3,195.93 lakhs in FY 2013. In absolute terms, the PAT increased byRs.1,951.24 lakhs in FY 2014. The PAT margins for FY 2014 were 11.2% as against 6.7% in FY2013.

FY14 FY13
(Amount in Rs. lakhs) (Amount in Rs. lakhs) Change over YTD FY13 (%)
Revenues 45,802.93 47,483.08 -3.5
Services 43,664.91 44,511.94 -1.9
Products 1,922.91 2,744.37 -29.9
Automotive, Utilities and Industrial 215.11 226.77 -5.1
EBITDA 5,338.75 4,191.33 -27.4
Services 5,929.45 3,057.63 93.9
Products (520.07) 1,285.08 -140.5
Automotive, Utilities and Industrial (70.63) (151.38) -53.3
EBITDA % 11.7% 8.9% -
Services 13.6% 6.9% -
Products -27.0% 46.8% -
Automotive, Utilities and Industrial -32.8% -66.8% -

EBITDA margins from Services business, in the current year, were 13.6% as against 6.9%in FY 2013. The increase in margins in FY 2014 was due to significant churn in the revenuevolumes. Our services utilization has improved from 69.5% in Q4 FY 2013 to 75.0% in Q4 FY2014. Interventions in the resource management process, favorable exchange rates andappropriate measures taken to control other expenses has helped us improve.

EBITDA margins from Software products, in the current year, decreased to -27.0% from46.8% in FY 2013. The investments in to newer products have been minimal and the royaltyfrom existing software products have gradually declined over time.

Financial Position

India Infoline Research
Particulars

As at March 31, 2014

As at March 31, 2013
(In Rs. lakhs) (%) (In Rs. lakhs) (%)
EQUITY AND LIABILITIES
1. Shareholders’ Funds
(i) Share Capital 2,127.76 4.3 2,095.99 4.2
(ii) Reserves and Surplus 38,269.66 76.9 39,830.73 79.1
(iii) Money received against share warrants 360.75 0.7 - 0.0
2. Share application money pending allotment - 0.0 30.16 0.1
3. Non- Current Liabilities
(i) Long Term Borrowings - 0.0 92.58 0.2
(ii) Long Term Provisions 770.97 1.5 706.26 1.4
4. Current Liabilities and Provisions
(i) Trade Payables 2,632.58 5.3 2,706.35 5.4
(ii) Other Current Liabilities 1,695.39 3.4 1,409.87 2.8
(iii) Short Term Provisions 3,925.16 7.9 3,491.02 6.9
Total 49,782.27 100.0 50,362.96 100.0
ASSETS
1. Non- Current Assets
(i) Net Fixed Assets including Capital Work- in- Progress 12,686.10 25.5 12,290.65 24.4
(ii) Non Current Investments 2,995.50 6.0 2,307.75 4.6
(iii) Deferred Tax Assets (net) 1,117.71 2.2 1,088.91 2.2
(iv) Long Term Loans and Advances 5,707.26 11.5 5,789.69 11.5
(v) Other Non Current Assets 93.46 0.2 166.16 0.3
2. Current Assets
(i) Current Investments 10,355.46 20.8 11,606.50 23.0
(ii) Inventories 209.39 0.4 345.42 0.7
(iii) Trade Receivables 9,276.07 18.6 9,023.67 17.9
(iv) Cash and Bank Balances 3,406.30 6.8 3,291.73 6.5
(v) Short Term Loans and Advances 1,795.44 3.6 1,788.07 3.6
(vi) Other Current Assets 2,139.58
No Related Research Found
Futures & Options Quote
Future Data Not present
Key Information

Key Executives:

Rajiv C Mody , Chairman and MD & CEO

G Venkatesh , Whole-time Director

Krishna J Jhaveri , Whole-time Director

Ashok Jhunjhunwala , Director


Company Head Office / Quarters:

No 139/25 Domlur Layout,
Ring Road Domlur Post,
Bangalore,
Karnataka-560071
Phone : Karnataka-91-80-39891122 / Karnataka-
Fax : Karnataka-91-80-39813329/25351309 / Karnataka-
E-mail : investor@sasken.com
Web : http://www.sasken.com

Registrars:

Karvy Computershare Pvt Ltd
Plot No 17-24 ,Vittal Rao Nagar ,Madhapur ,Hyderabad-500081

 
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