(Reuters)

Srini Rajam explains why the tiny software company he founded just four months ago — as tech stock prices were crashing — is now valued at $75 million.

The Bangalore-based company, Ittiam Systems Ltd, has produced nothing. But it has hired 40 software engineers, raised $5 million in venture capital and set to work on designing its first products — digital signal processors (DSPs).

“We believe the world is being reinvented,” says the former head of research and development for the Indian arm of the world’s largest DSP producer, Texas Instruments (NYSE:TXN – news).

“We clearly see DSPs as the core engine for the communications revolution and the Internet revolution itself.”

Bank of America Equity Partners must share that conviction. Late last year an Indian venture capital fund it co-owns paid $5 million for 20 percent of Ittiam.

A few months later, the Bank of America fund reportedly offered $5 million for another 6.6 percent, a price which values the bity Indian start-up at a staggering $75 million.

Ittiam is only one of a crop of companies set up in India’s high-tech capital of Bangalore, targeting the market for DSPs.

These are chips which transform — in real time — analog signals into digital form for use by electronic devices.

Their ability to perform tasks in real time makes them indispensable in products like cellphones and anti-lock brakes where delays cannot be tolerated.

Cost factors related to their architecture also make them common components in virtually every sort of electronic device from laptop computers, modems and digital cameras to telecom networking gear and medical imaging equipment.

Some $6 billion of DSP chips were sold globally last year, and the market is growing at about 35-40 percent annually.

“The world today is connected in many ways,” says Rajam, explaining the source of that explosive growth.

“There is cable, broadband, phone lines, optical fibre. Digital signal processors are needed to bring them together.”

Adds Biswadip Mitra, managing director of Texas Instruments India: “Since every form of communication is originally analog, a DSP is needed to transform the signal into digital form” for use in computerised, networked systems.

NIFTY CHIPS

Architecture gives DSPs two huge advantages over ASICs, or application-specific integrated chips, which can be built to perform the same functions.

“ASICs take one to two years to design. The big drawback is the entire chip has to be redesigned if anything changes, like a communications protocol,” said Rajam, 40, a graduate of the prestigious Indian Institute of Science in Bangalore.

With a DSP, only new software has to be written for insertion into the chip memory. The chips themselves are off-the-shelf models.

Using DSPs enable the makers of digital stereo equipment like MP3 players, for example, to avoid the risk of investing in an ASIC which could soon be rendered obsolete, while saving money by using chips made in huge volumes.

CHIPMAKERS VS CHIP PROGRAMMERS

Texas Instruments is the world’s largest producer of DSPs with about 45 percent of the global market, more than the combined shares of the next two largest, Analog Devices (NYSE:ADI – news) and Lucent Technologies Inc (NYSE:LU – news).

But the market for companies which write DSP software is wide open. Over 350 companies are engaged in the business, with none larger than $100 million in revenue, according to Rajam.

With its massive pool of software engineers and programmers, India is well placed to grab a large slice of the DSP software market, which is essentially a boutique industry.

Venture capitalists mention Sasken, Encore Technologies, Ionic Microsystems and i-nabling Technologies as promising Indian companies in the field.

All benefit from the big investment already made in training DSP programmers. Companies like Texas Instruments, Analog Devices and Motorola (NYSE:MOT – news) years ago lobbied India’s technical colleges to add DSP courses to their computer curriculums.

“The country today boasts of the highest concentration of DSP-literate programmers in the world,” says Shyam Banerji, the head of DSP product development at Texas Instruments India.

Overall, about 410,000 Indians worked in the software and services sector by the end of 2000. That number is expected to increase by a third within two years.