Hughes: Would it find a way? - Views on News from Equitymaster

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Hughes: Would it find a way?

Mar 11, 2004

One Indian software company that was hit the hardest in the slowdown that engulfed the entire industry in the past two years was Hughes Software Systems (HSS). HSS provides solutions (both products and services) in the telecommunications space and has bore the brunt of the pressure on technology spending. The pressure was more imminent on the company as it provides services in the (telecom) R&D space where clients are the first to cut their budgets, largely because these are related to new initiatives. Let us discuss HSS' performance in the past few years and see where it is headed in the future.

* Equitymaster estimates

The graph above is indicative of the volatility that has marked the performance of Hughes in the past four years. While much of this pressure could be attributed to the decline in technology spending towards telecom solutions, another reason for this was the fact that HSS was concentrated in providing solutions only to technology OEMs (like Lucent and Cisco) that were the worst hit. Now, as the company has de-risked its offerings into providing services to telecom service providers and BPO services (5% of revenues), we can assume that the performance would attain some stability in times to come.

Also, HSS is consistently trying to reduce its dependence on its parent, Hughes Network Systems by increasing targeting other non-HNS clients. As a matter of fact, the HNS contribution, which was around 75% of HSS' revenues in FY98, has now dropped to 22% levels. Even in its BPO venture, where the company started as an exclusive service provider to HNS, now it is in talks with non-HNS clients as well. This is a good sign.

At the current price of Rs 617, the stock is trading at a P/E multiple of 27.3x our estimated FY04 earnings. In 3QFY04, the management gave a guidance of 106%-114% and 62%-64% growth in profits and revenues for FY04 respectively. Notably, this guidance has been revised for four times in consecutive quarters. However, we believe that rather than pointing fingers at the management for their inability to project performance even for the near future, one must understand that the telecom industry is going through a rapid transition at present. And this has made it quite difficult for solution providers to chart out a clear course of action. However, as the dust settles down, and that HSS reaps rewards of being a niche player in this high barrier industry, the company performance would attain some stability. However, much would then depend on how the company leads its way through the changes that is transforming the technology space of the present.

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