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Hughes Software: Parental blues in 4Q

Apr 22, 2002

Hughes Software after much ado (2 downward revisions in earnings guidance), finally closed FY02 with an 18% growth in topline. The company’s major clients are telecom equipment manufacturers, the group that has been hardest hit in the technology meltdown. Consequently, Hughes Software’ topline showed a subdued growth.

(Rs m)3QFY024QFY02ChangeFY01FY02Change
Sales 599 580 -3.2% 1,985 2,349 18.3%
Other Income30326.7% 110 132 20.0%
Expenditure4114140.7% 1,264 1,684 33.2%
Operating Profit (EBDIT)188166-11.7%721665-7.8%
Operating Profit Margin (%)31.4%28.6% 36.3%28.3% 
Interest -      
Depreciation55550.0% 149 211 41.6%
Profit before Tax163143-12.3% 682 586 -14.1%
Tax1816-11.1% 51 64 25.5%
Extra-ordinary income/(expense) - -   (2) -  
Profit after Tax/(Loss)145127-12.4% 629 522 -17.0%
Net profit margin (%)24.2%21.9% 31.7%22.2% 
No. of Shares (eoy) (m)33.333.3 33.333.3 
Diluted Earnings per share*17.415.3 18.915.7 
P/E (x)  19.2    18.7  

The net profits declined by 17% for FY02. The decline was due to operating margins heading south, on account of lower contribution to revenues from the high margin products sales. During the year, revenues from HNS grew the strongest at 38%. Non-HNS services revenues also grew, albeit at a subdued 15%. The company reported a 3% decline in product sales for the fiscal FY02 that was responsible for margins heading south.

Growth (QoQ)FY011QFY022QFY023QFY024QFY02FY02
HNS Services23.3%8.3%8.0%12%-15.8%38.1%
Non-HNS Services156.1%5.1%-6.3%-15%0.0%15.1%
Total revenues85.0%2.3%-15.5%12%-3.2%18.3%

For 4QFY02, the company reported a mixed performance. The revenues declined by 3% sequentially, while drop in net profits were steeper at 12%. Trouble during 4QFY02 came from an unexpected quarter. The revenues from parent Hughes Network Systems (HNS) declined by 16% sequentially. This decline was on account of completion of certain fixed price projects. While there was no growth in service revenues from non-HNS clients, the product sales grew by a strong 18% sequentially in 4QFY02. This growth was due to of increased sales of its frameworks. Framework sales account for about 50% of the total product revenues. During the quarter, HSS added 9 new customers for products and one customer for Services. The list of clients added during the quarter includes OKI Electric and Efficient Networks (part of Siemens Group) as product customers. HSS saw an expansion of its relationship with Ascom, JCI, NEC and Nokia.

% Contribution of revenuesFY011QFY022QFY023QFY024QFY02FY02
HNS Services36%36%46%46%40%42%
Non-HNS Services36%37%41%31%32%35%
Operating Profit Margin36%34%17%31%29%28%

For FY03, the company has indicated a topline growth of 15%. This growth is expected primarily from volume increase as the company witnessing considerable pricing pressure. The growth in net profits is expected to be around 30%. However, what has caught the markets fancy is the fact that the company in venturing into the BPO (business process outsourcing) space. In 3QFY02, to de-risk its business model the company had entered TSP (Telecom Service Providers) space. Going further the company has decided to enter into the BPO space. This will be an independent operation. Thus, Hughes Software is likely to create a subsidiary.

At the current market price of Rs 293, the stock is trading at a P/E multiple of 19x its FY02 annualised earnings. The stock is likely to witness further buying due to the speculation in regarding its BPO initiative. The valuations are likely to improve the based on its guidance for FY03 that also factor in an improvement in operating margins.

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