Sasken Communications – UPDATE… (BSE: 532663; NSE: SASKEN)

Wow!!! We like this! While the prices of real estate in Bangalore have stabilized, why has Sasken communication gone up in Value?
For starters, the stock is up > 60% since we last wrote about it last month. Yes we agree that the stock was close to 80% down from its 52wk high, but what the heck!
Wasn’t it a golden opportunity to average out to a decent price and maybe exit at the next up move if you felt skittish? We hear people screaming out “Falling Knife” and won’t fall for that one. Well that’s where those who test the business model WIN.

IT is the next in thing…
Well, we are not saying this. Its’ the GURUS who are saying it. We always maintained this ever since we starting writing on it late in 2007. (Refer: Ab kya hoga?)

We believe that the long term IT story is pretty strong. Margin may come under pressures, business model will change, and the sector will look more like cyclical over a decade from now and probably there will be a shakeout with some bruised and battered companies.
The trend could also change, slower growth, more controlled performance, steady dividends and yes acquisitions. Finally there will be winners.

Let get fundamental…

1. There are a few things that we look at in a company when we invest into it (at least this is the philosophy that we believe in).
2. Is the company in a domain in which it has a first mover advantage?
3. As a result has the company able to maintain a top slot in the sector?
4. Are there catalyst that we dethrone the company in the near future?
5. Is the business model in for a fundamental change in the future/is threatened by forces (external or internal)?
6. Is the company favorite / dumped by the street for a longer lengths of period in time (in simple terms – valuations)
   

The results are good or bad?

Sasken reported Q4FY 2008 numbers yesterday and while we see them in the comfortable, the street seems to be reiterating its SELL mantra. We believe that the street has got it right as far as next 2-3 quarters are concerned.

Citi (analyst Surendra Goyal, a good friend of ours) has a SELL report in the market reiterating very valid concerns in the short term. But we disagree with him certain macro fears he puts forth.

Metrics would continue to drag, performance might be subdued and risk could look overwhelming. We believe the opportunity might come over a longer period (12-18 months) is

1. Telecom space (where the company operates) improves as a result of continued penetration in the domestic and Asian markets. We would see revenue growth steady and continuous
2. Margins hitting bottom and then reverting back to saner levels of higher double digits (possibly mid-teens).
3. Employee costs stabilizing over the next 18 months as a result of overall lackluster employment opportunities

Sasken for now has done two important things to keep nervous investors some comfort.

a) Given a 40% dividend on a INR 10 FV share. This translate into a dividend yield of little under 3%, so this is a positive, a minor one you would say. But we conclude a positive nevertheless.
b) Sasken board has approved for a buyback upto INR 40 crores, an authorization for buying shares upto INR 260 / share. CMP at around INR 144. We believe that even though this also will not really lift EPS materially. The signal from management at the moment is the company is undervalued. We believed this for the last 3-4 months.

Time to speculate, then?

Well we believe that there will be lots of activity in this counter from now on. The triggers are the buyback, dividend stripping and bullish traders getting in the make a quick buck while the undertone is positive.

The safety net is therefore stronger than before. However, we think that investors should look at this counter only for a fundamental story rather than a speculative opportunity.

Easier said than done.

We think we could see this counter moving up nicely to around INR 220-240 effortlessly. So a good 40-50% from here in the next 3-6 months. Over a longer term however, we continue to maintain that the upmove could be a lot more painful than it appears. Investors who entered this counter at various levels starting at INR 300-400 price band have caught a falling knife and made a few deep cuts to themselves.

But were they intelligent enough to buy some more when it reached INR 86 (all time low) a few weeks ago?

We don’t know that for sure.

Until next time….

Sasken CT Realty Ltd.

We know anything with a suffix - realty, developers, real estate has been shunned over the past few weeks in the markets. But we have a deal for investors, or rather a game...
Suppose you were asked to play a game which in which INR 5,000 is deposited into your account. If you win (of course after a length of time during play) you could win big time. You could get twice, thrice or even four/five times worth what you bid. Incase you lose, however, you will get the INR 5,000 deposited into your account and nothing else...

There will be NO catch in this game. No you would ask, who the hell will sponsor such a game. Well, for one, there are enough people willing to give away free money in the market. Especially the stock market. Anyways, lets get back to out game.

Is it possible to find such an investment in the market. I think we have found one. It's name is Sasken CT (Realty) Ltd.
Weird, isn't it? What do you get when a cross a IT company with a real estate player. The idea would, according to market pundits, would be a disaster. We are no pundits. Coming back to Sasken CT Realty.

This company is a IT (rather a communication vertical player) company, which according to us is available for free in this market. Please explain, you would say.

Let's therefore get our arms around what we mean....

The background:
1. 52 Wk high @ around > INR 500 sometime in mid-2007
2. 52 Wk low @ INR 86.5 on 19 Mar 2008 (could be tomorrow, day - after.....)
3. Revenues - 9M FY 2008 - 412 crores with a operating margin of 4.5 %
4. Revenue mix - US constitutes only around 30% of FY 08 mix EMEA > 50%
5. Cash flow positive.
6. Has net cash of around INR 10 crores
7. Enterprise value - INR 240 Crores
8. Institutional holding @ 30% with average price of acquisition > INR 300 (holding period >1 Yr)

We'll stop at that. You can buy this company tomorrow @ INR 240 crores from the market. Keep this datapoint in mind.

We looked at the Q3 FY 2008 income statement and balance sheet. Go ahead and take a look:

http://www.sasken.com/results/Q3FY08/Sasken_Q3FY08_Media_Release.pdf

Break - up value of this company:
Net Cash - INR 10 crores
Receivablies - INR 112 crores
Land - INR 180 crores ( two buildings - 1. Domlur, which is close to city center & 2. on route to Electronic city). Combined sq feet of > 5,25,000 and we value it at INR 3500/sq ft
Total value - > INR 300 crores

We would like to discount this value by 10%. Even after this, we have INR 30 crores surplus.

So the deal is, forget IT man - lets buy it break it up and make cash instantly without having to worry about running and understanding the business, you see.

However, we believe that, Sasken with all the people who run it are more than capable to generate a long term sustainable multi million $ profit enterprise.

We believe that the street has gone overboard in taking a very pessimistic view (resulting from the US slowdown) on some valuable companies and here we would like to twist the term of Alan Greenspan. We call this kind of moments as - Rational Antipathy. Or simply put - Seeming display of rationality in hammering the good guys...

Financial analysts would go only by numbers, so let us throw them in as well - Sasken trades at
1. 0.6 x PEG with a 7.5 x 1 yr forward Price / Earnings
2. 0.5 x Price / Sales (or INR 130 sales per share)
3. 4.5% Dividend Yield (We've now started of talking about dividend yield on IT companies.....When was the last time that happened)
4. 0.6 x Price / book (or INR 140 BVPS, we really like this - our original premise of selling the land.. Wow)

To quote Warren Buffett, "We simply attempt to be fearful when others are greedy
and to be greedy only when others are fearful."

Are you ready to play this game, and yes we can rename this company to Sasken CT Realty Ltd. by appointing the best lawyers and consultants and paying them their worth.

Are you game???

P.S: If you are still digesting what it's all about - BSE ticker 532663.