Sasken: Dream debut

Sasken lists at a valuation comparable to Infy

Even if it is evident that the markets are on a roll, Sasken's debut at Rs 460, a 76 per cent premium to the issue price, is stunning. What's more, it closed even higher at Rs 466.

The Bangalore-based company, which makes software for wireless, wireline and broadband operators, had priced its issue at Rs 260 "" the top end of the price band, raising Rs130 crore. In the band of Rs 230-260, the company was valued between 16.5 and 18.7 times its consolidated earnings per share (EPS) for March '05.

At Rs 460, the valuation is 32.8 times FY05 earnings. Compare this with Infosys' valuation of 34 times FY05 earnings.

Flextronics, the only comparable listed company in the space, trades today at 22.5 times. At the time of the issue, Flextronics traded at 19.4 times. In fact, Flextronics used to trade at a lower multiple, but commanded a higher valuation later because its parent had announced its intention to buy out minority shareholders.

While Sasken's top line grew at a faster rate compared with Flextronics' last fiscal, its net profit growth was much lower than that of Flextronics. More importantly, Sasken's net profit margin was much less compared with that of Flextronics. Also, since it caters to a single vertical, any downturn in telecommunications sector that it operates would leave Sasken vulnerable. Moreover, two of the company's clients account for 48 per cent of revenues.

While this could be interpreted to mean strong client relationships, depending on a few clients could also be cause for concern. Strategic investors such as Nokia (also a client) have bought into the company at Rs 223 a share. With this equity issue and with other private equity placements, Sasken's equity increases to 63 per cent, compared with March '05.

As such, earnings would need to grow by 63 per cent in FY06, if the EPS is to be maintained at last year's levels. For perspective, the company's net profit (as restated ) grew by 25 per cent in FY05 to Rs 17.9 crore.

Brent futures

The introduction of rupee-denominated Brent crude futures contract could be a key step to help small-end users of petroleum products manage their input costs better. Earlier, end-users of petroleum products had to get RBI permission for entering into similar contracts on overseas commodity markets, but this development simplifies the process.

Already, several user industries such as steel and FMCG have been grappling with rising input costs of furnace oil and polymer-based packaging materials.

Senior Ncdex officials explained that this futures contract would offer similar efficiencies in terms of pricing vis-a-vis the overseas counterpart. And given the high correlation between energy prices and Brent crude, even small Indian companies could leverage the relatively small contract size of 100 barrels to implement effective cost management strategies.

This implies that suitable hedging strategies could help user industries see an uptick in their operating margins in the medium term. Meanwhile, punters could also leverage the arbritrage opportunities between Ncdex Brent and its overseas counterpart.

The country imports a significant portion of its oil requirement from the Middle East and prices of varieties from this region such as Dubai / Oman have a close correlation with Brent prices. As a result, domestic oil and gas companies could also insulate themselves from sharp fluctuations in crude prices by utilising this rupee-denominated future contract.

Inflation

The year-on-year (y-o-y) rate of wholesale price index (WPI) was a higher-than-expected 3.01 per cent for the week ended August 27.

The y-o-y rates of price increase was negative in primary products, mainly owing to a sharp drop in the price of non-food items; the fuel group saw a y-o-y increase of 8.1 per cent; and the manufactured products index rose by 2.3 per cent. But perhaps the y-o-y data does not convey the true picture of the price rise """""" to offset the base effect, it may be more reasonable to take the data for the calendar year and annualise it.

If we compare the WPI as on December 25 with that of August 27, the annualised rate of increase for the all commodities index works out to 5.34 per cent; that for primary products is at 5.88 per cent; the fuel and oil index is up an annualised 8.32 per cent; and the manufacturing index has risen by an annualised 3.96 per cent.

What if we take the FY06? As a matter of fact, the all-commodities WPI remained at more or less the same level between August 28, 2004 (189.2) and March 6, 2005 (189.4), which means that the price rise has happened only in this fiscal.

If we take the rise in prices for the five months to end-august and annualise it, the increase in WPI works out to a high 6.96 per cent. The primary articles index rises an annualised 9.96 per cent, the fuel index rises by 14.28 per cent, while the manufactured products price index rises by an annualised 2.97 per cent.

Putting it differently, if prices rise at the same pace that they have so far risen in this fiscal year, that's the rise in the WPI that we'll see by end-March 2006.

(With contributions from Shobhana Subramanian and Amriteshwar Mathur)