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Hughes Tele: The broadband play

Mar 27, 2001

Hughes Tele.com Limited (HTL), the private sector basic service provider in the state of Maharashtra & Goa, has reported a less than projected sales for the third quarter ended 31st December 2000. But given the scalability of its state-of-art infrastructure and its aggressive marketing efforts, prospects are rosy.The company, during its Initial Public Offering (IPO), had projected a sales growth of Rs 1,858 m for FY01 out of which it has managed to achieve just Rs 936 m (50%) in the first nine months of the current year. This was primarily because of delay in clearance for laying optic fibre cable, which has resulted in lower volume growth. Nevertheless, HTL has targeted more than 65,000 connections by March 20001 (by FY04, the company hopes to provide 400,000 connections) and is in line for achieving the target.

Way below targets…
(Rs m)Projected3QFY019mFY01
Sales 1,858 339 936
Other Income - 178 178
Expenditure 1,660 437 1,087
Operating Profit (EBDIT) 198 (98) (152)
Operating Profit Margin (%)10.7%-28.9%-16.2%
Interest (net) 1,134 12 271
Depreciation 1,275 186 506
Profit before Tax (2,210) (119) (751)
Other Adjustments - - -
Tax - - -
Profit after Tax/(Loss) (2,210) (119) (751)
Net profit margin (%)-119.0%-35.1%-80.3%
Capex 9,360   5,360

Other income includes credit of operations support fees of Rs 174 m and earnings of Rs 216 m on short-term investments of surplus funds, which are non-recurring. HTL had projected a gross profit of Rs 198 m (including other income) for FY01 but has managed to achieve Rs 26 m (13%) for the first nine months of the current year. The sharp rise in expenditure is understandable as the company is expanding its operations, which also requires incremental staffing (as of 31st March 2000, the employee strength was 500).

The company has earmarked Rs 19 bn as capital expenditure over the next four years i.e. FY01 to FY04. These are primarily for purchase, installation and expansion of switches and for further developments of operation support systems (billing systems and collection facilities).

It is also in the process of laying fibre optic and broadband microwave networks across Mumbai and other cities like Pune, Nashik and Goa. This will enable the company to provide broadband access to corporates, business customers as well as the retail users, thereby making it possible for them to transmit voice and data for broadband application and services.

This is critical for basic service provider as value-add services are the key to success for telecom companies in cities like Mumbai where tele-density is higher. One of such services, which the company believes would boost revenues, is Centrex (this is an effective alternative to the conventional private branch network (PBX) systems, which will reduce the number of direct lines required for any customer).

However, HTL is reworking its strategy on the Internet Service Provider (ISP) front and hopes to provide Internet connectivity as well as other value-add services like Virtual Private Networks (VPN) by December 2001.

The stock is currently trading at Rs 9 against the offer price of Rs 12. HTL hopes to achieve break-even by FY04 (it is already EBDIT positive). Moreover, other services like ISP and Wireless in Local Loop (WiLL) will provide impetus to the company’s topline. As the company’s main customers are corporates and business customers, its average revenue per line (ARPU) is Rs 40,000 p.a. currently, which is significantly higher than its competitors. Perhaps the only apprehension is that HTL is highly capitalized (equity base is Rs 15.5 bn). So growth in profit will be diluted to a large extent.

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