Hughes Tele: A story sold early…

Hughes Tele.com Ltd. (HTL) is the competitive local exchange carrier (CLEC) in the Mumbai and Maharashtra & Goa circles. The company launched its IPO in September '00 at Rs 12. Currently, the scrip is trading at a discount of 34% to the issue price.

Internationally, the stock markets have turned hostile towards telecom service providers. Stock prices and valuations have come crashing down, as companies' reel under heavy debt burden, which were taken onto the books to help finance forays into 3rd Generation (3-G) services. Also, at home, the regulatory environment is in a state of transition leading to the lack of clarity on the eventual competitive landscape.

Wireless in Local Loop (WiLL), which will enable fixed service providers (FSPs) to offer limited mobility in their circle of operations has been embroiled in controversy. The cellular lobby alleges that such services tantamount to FSPs making a back door entry into the cellular space. Consequently, the matter was referred to the TDSAT (Telecom Disputes and Settlement Appellate Tribunal) and is still pending. However, recently, the PMO requested the matter be referred to the Group on Telecom and Information Technology (GoTIT), which is to decide on the fate of WiLL by April 30. A decision against WiLL will be a big blow to the FSPs.

Consequently, these factors could have played on the valuations of existing FSPs. At the current price of Rs 7.9, HTL is trading close to its book value, which could be the guiding signpost for valuations until the company breaks even.

During the IPO roadshows, the company indicated to break-even by FY04. Further, it expects to have a customer base of 400,000 subscribers by this period. Although the company is aggressively expanding its network in the island city of Mumbai it has missed its revenue target of Rs 1,858 m indicated at time of the IPO.

(Rs m)	Projected	9mFY01
Sales	1,858	936
Other Income	-	178
Expenditure	1,660	1,087
Operating Profit	198	(152)
OPM (%)	10.7%	-16.2%
Interest (net)	1,134	271
Depreciation	1,275	506
Profit before Tax	(2,210)	(751)
Other Adjustments	-	-
Tax	-	-
Profit after Tax/(Loss)	(2,210)	(751)
Net profit margin (%)	-119.0%	-80.3%

The company's revenue / subscriber and market cap / subscriber exhibit large divergence. This is due to a market cap / sales of 9.9x, which is significantly higher than MTNL. Going forward to 2004, the company with a subscriber base of 400,000 and the IPO price of Rs 12 the market cap / subscriber works out to Rs 46,590. This is near the average revenue per user (ARPU) of Rs 45,600 indicated by the company at time of the IPO.

		MTNL	HTL
CMP	Rs	129	8
No. of shares	m	630	1,553
Turnover	Rs m	58,395	1,245
Market Cap	Rs m	81,270	12,269
BVPS	Rs	130.1	8.1
M Cap / Sales	x	1.4	9.9
Price / book value	x	1.0	1.0
No. of subscribers*	nos	3,763,530	67,000
Revenue / sub	Rs	15,516	18,580
M Cap / sub	Rs	21,594	183,115
* estimates

Consequently, any uptrend in the counter will be very gradual and depend on the company meeting its target of 400,000 subscribers by 2004. However, NTP '99 (New Telecom Policy) has opened up basic services to unlimited competition, which could impact the company's ARPU and or margins if new players enter HTL's circles. Nevertheless, it could take anywhere between 30 to 36 months for a new player to set up the requisite infrastructure. In such case the ARPU of the company could stand protected till 2004.

A strong driver for revenue growth could be WiLL. Also, the company plans to offer various value-added services like pre & post paid cards, toll free numbers and virtual private networks. The company has also obtained a category-A ISP license. It seems that the success of these additional services will prove to be the kicker for growth and the stock.