Sasken's overall revenue increased 5%QoQ to USD30.6mn, in-line with expectation, but IT services revenue continues to decline. Products revenue increased ~61%QoQ. Lower forex and higher taxes led to flattish growth in PAT to Rs157mn and EPS of Rs5.5.

IT services revenue declines, products surge

Revenues rose 3.4%QoQ to Rs1,383mn due to increase in products segment, which saw higher royalty revenues. IT services declined 3.5%QoQ to Rs1,159mn. EBITDA margin expanded 140bpsQoQ to 19.4% due to higher product revenue (has higher margin). Lower forex gain of Rs3.7mn compared to Rs13mn in Q2, and higher taxes of 25.8% (15.7% in Q2). Tax was higher due to closure of Mexico office, which led to reversal of deferred tax assets.

Products revenue up but not sustainable

Products revenue increased ~61%QoQ to Rs216mn. Revenue from royalties was up due to renewal in licenses but the performance is unlikely to sustain. The management expects a run-rate of USD2-2.5mn from this segment, going ahead.

Clients move to low cost locations

Top clients moved their projects towards offshore locations, which hurt the top-line growth. Top 5 clients grew 6.3%QoQ and top 10 clients grew 5.5%QoQ.

Attrition rate still very high, utilisation decline

The attrition rate (annualised) declined 240bpsQoQ to 34.8%, which is still very high. The utilisation rate also declined further by 290bpsQoQ to 62.4%. Added 401 employees on gross level to take the total headcount to 3,477.

VALUATIONS AND RECOMMENDATION

The clients continue to move to offshore which makes the topline to miss its revenue guidance of 5-7%YoY for FY11. As expected the revenue guidance declined but profitability increased. Sasken is struggling to find avenues to grow revenues. There are opportunities in handset segment with more smartphones selling in the end market, semiconductor clients are also expected to revive. Sasken has cash and equivalents of Rs2,110mn (Rs74 per share). At CMP of Rs161, the stock is trading at 6.1x FY11E earnings. Maintain `BUY' recommendation with a target price of Rs200.