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Hughes Software: Robust performance - Views on News from Equitymaster
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  • Apr 14, 2003

    Hughes Software: Robust performance

    Hughes Software has posted a strong fourth quarter in FY03. The revenues have grown 12% QoQ, while a steep growth in other income has helped the company post a 21% sequential rise in net profits. Excluding the jump in other income the sequential growth in net profits would still have been a healthy 16%.

    For the full year FY03, the company posted a 27% dip in net profits and a 6% decline in revenues. This is due to a disastrous performance in 1QFY03. During this quarter the company had seen revenues from its parent decline 37% sequentially and the revenues from its products business had fallen 27% QoQ.

    (Rs m) 3QFY03 4QFY03 Change FY02 FY03 Change
    Net Sales 571 637 11.6% 2,349 2,204 -6.2%
    Other Income 19 28 47.4% 132 89 -32.6%
    Expenditure 423 482 13.9% 1,684 1,711 1.6%
    Operating Profit (EBDIT) 148 155 4.7% 665 493 -25.9%
    Operating Profit Margin (%) 25.9% 24.3% 28.3% 22.4%
    Interest - - - -
    Depreciation 51 51 0.0% 211 206 -2.4%
    Capitalization of product development expenses 30 27 -10.0% - 129
    Profit before Tax 146 159 8.9% 586 505 -13.8%
    Extraordinary items - - - (46)
    Tax 32 21 -34.4% 64 80 25.0%
    Profit after Tax/(Loss) 114 138 21.1% 522 379 -27.4%
    Net profit margin (%) 20.0% 21.7% 22.2% 17.2%
    No. of Shares 33.3 33.3 33.3 33.3
    Diluted Earnings per share* 13.7 16.6 15.7 11.4
    P/E Ratio 11.9 17.3
    (* annualised)

    To counter the slowdown in revenues from its clients, mostly equipment manufacturers, the company was looking at broadening its service offerings and hence its client base. The strategy seems to be paying off as Hughes Software recently bagged a large outsourcing deal from Lucent in the maintenance space.

    (Rs m) 3QFY03 4QFY03 Change FY02 FY03 Change
    HNS 159 19.6% 166 26.0% 4.1% 987 42.0% 639 29.0% -35.2%
    Others 267 51.0% 331 52.0% 24.1% 822 35.0% 1,036 47.0% 26.0%
    Products 145 29.5% 121 19.0% -16.6% 540 23.0% 507 23.0% -6.2%
    BPO 19 3.0% - 22 1.0% -
    Total 571 100.0% 637 100.0% 11.6% 2,349 100.0% 2,204 100.0% -6.2%

    The growth in FY03 was largely due to the companyís effort to de-risk the revenue concentration from its parent HNS. Infact, in 4QFY03 while the revenues from its parent continued to show stable growth, it was the revenues from non-HNS clients that jumped 24% sequentially. The company saw an expansion in relation with clients like Lucent, Nokia, NEC and Johnson Controls. These are the top five clients for the company. For FY03, revenues from non-HNS clients was the only segment that showed growth, while both products and HNS revenues declined.

    During the quarter the company added 7 new clients. The highlight of the performance was the significant orders from Cisco and Avaya in the products space. Higher contribution of products to the revenues will help the company post better margins. The business process outsourcing (BPO) segment, clocked revenues of Rs 22 m in first year of operations.

    For FY04, the company expects a steep 35% to 40% growth in revenues and an even higher 40% to 45% growth in net profits. The management in the recent past has given steep revenue guidance and then has had to revise it. Thus, considering the tough business environment meeting this guidance could be an uphill task. In FY04, we expect a 23% growth in revenues and a 19% growth in net profits.

    At the current market price of Rs 197, the stock is trading a P/E multiple of 15x our FY04 estimated earnings. Based on the managementís guidance, valuations work out to be even lower at 12x. While we believe that there is a tremendous growth opportunity in waiting for the company, because of a broader service portfolio and changing focus, the impact of the majority stake in Hughes Electronics being acquired by News Corp. is still unclear. The stock is likely to witness swift northwards movement due to the strong performance and guidance for FY04, retail investors could wait till the impact of stake sale becomes clear.



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