Sasken files red herring prospectus

Firm may treble headcount, target tier-1 customers, boost modem sales

Sasken Communication Technologies has filed its draft Red Herring Prospectus (RHP) with the Securities Exchange Board of India, the stock market regulator in the country, for an initial public offer (IPO) of its equity shares, to be listed on the stock exchanges in Mumbai.

Sasken aims to raise "over Rs 100 crore" via the offer, chairman and chief executive officer, Rajiv C Modi, has said.

The announcement comes on the heals of a fresh round of investments in the firm, this time by MVC VI & FVCI Limited, a firm in which New Enterprise Associates, a US based venture fund has an interest. MVC has taken an eight per cent stake in the firm for $9 million, according to the RHP. This brings the total venture funding in Sasken to about $26 million to date.

The telecom R&D outsourcing partner to global hardware firms will issue 50 lakh shares of face value of Rs 10 each. This constitutes 18.17 per cent of the fully diluted post-issue paid-up capital of the firm, the RHP says.

Of these, 45 lakh (16.36 per cent) will be set aside for the public and offered entirely through book building. The rest will be reserved for the firm's employees. Enam Securities has been chosen as the book running lead manager for the offer.

The firm's promoters intend to use money raised through the offer to both increase overall business and boost the share of its products division in revenues and profits.Currently, telecom R&D services is the mainstay of Sasken's revenues and profits. The expansion could entail trebling headcount to over 3,000.

The filing of the prospectus coincides with the visit, to the firm, of the top executive of a key investor: Canadian telecom equipment maker Nortel Network's chief executive officer, Bill Owens, spent time at Sasken's Bangalore facilities recently.

Last month, Nortel invested $10 million in Sasken for a 14.34 per cent stake in the telecom software maker's fully diluted equity, according to the RHP. Sasken planned to use the investment to fuel its growth through acquisitions, the firm said in a release.

At the time, Nortel and Sasken agreed to continue an existing relationship in which Sasken deployed Nortel's networking solutions. Sasken, which offered telecom R&D outsourcing services, had worked with Nortel since 1991. It now worked on supporting Nortel's GSM digital wireless and enterprise communications solutions, it had said.

"India is an important market for Nortel," Brian McFadden, chief research officer at Nortel, had said," and Sasken has played a key role in Nortel's R&D and market success."

McFadden had said strengthening the relationship was "an investment in our future, and provides Nortel with a stronger foothold to serve our customers in India and the Asia Pacific region."

Following Nortel's investment, Sasken became the first venture in which Nokia Growth Partners, Finnish cellphone maker's new mid to late stage $100 million venture fund, invested. The venture fund picked up a 2.67 per cent stake in Sasken, for $3 million, the RHP says.

Again, Rajiv C Modi, Sasken's founder and chief executive officer, said the firm would use the money for working capital and business expansion, including potential "merger and acquisition activities."

Intel Capital, a venture arm of computer chip maker Intel Corp., was the other major investor in Sasken, having invested some $4 million to date. It is not clear if Intel stayed invested in Sasken.

For the year to December 2004, Sasken earned profits after taxes of Rs 12.4 crore on total income of Rs 167 crore, Neeta Revankar, the company's chief financial officer said. The company's net worth as on March 31, 2004 was Rs 113.75 crore.

The revenues were split 85:15 between services and products. Sasken provides embedded R&D outsourcing services, including contract R&D, testing and certification of hardware and software that go into various telecom gear.

On the products front, which is currently losing money, Sasken sells "protocol stacks" that go into mobile phone handsets and reference designs for digital subscriber link modems.

The "stacks" are the bridge between the phone's user interface and its hardware," G Venkatesh, the company's chief technology officer said.

On the modem, "We build both the software and the hardware architecture of silicon that goes into the modem. A DSL modem maker liked our product and has licenced it to make the boxes," Venkatesh said. Sasken had taken on competition in Europe, to sell its products, and was succeeding, Modi said.

The company's investments in R&D averaged some $1 million a year, he said. Sasken had no specific aim to increase revenues from any one business, services or products but a goal to ramp up overall business.

This included boosting margins on the revenue fronts, by targetting more tier-I customers and increasing royalty per unit shipped in the case of moblie phones and DSL modems.

Some two million modems had been shipped with Sasken's products in them and 20 different mobile phone handsets had its protocol stacks in them, Venkatesh said.