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Sasken – More Challenges Ahead

April 23, 2008

Merill Lynch [ML] in a report has retained a Sell on Sasken despite strong Q4 given likely risk to FY09 guidance as macro environment amongst two of its segments – semiconductor and telecom OEMs (62% revs) – remains challenging and we see downside risk to management’s margin target of 300-500bps improvement in margins.

4Q revenues grew by 11% qoq, 7% ahead of MLe, driven by robust 103% yoy growth in product business. EBITDA margins improved by 772bps driven by 318bps improvement in services margins and 38% EBITDA margins in product business. FY09 revenue guidance as business flows remain lumpy, as reflected in FY08, where revenue and margins came in lower than guidance.

Valuation at 10x FY09E looks rich, compared to peers such as MphasiS, KPIT,
Tech Mahindra which are trading at 12x for higher visibility and return ratios. Sasken is expected to report an EPS of Rs 19 for FY09. ML retains a SELL though BUY-Back of shares may extend some relief in the short term.

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