X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hughes Software: Bad start - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jul 18, 2002

    Hughes Software: Bad start

    Hughes Software (HSS) has made a terrible start to FY03. The company has posted an 18% sequential (QoQ) drop in revenues in 1QFY03. The drop in net profits is even steeper at 65%. Things look equally bad compared to 1QFY02. Revenues are down by 25% YoY and the bottom line has declined by a significant 76%.

    (Rs m) 4QFY02 1QFY03 Change
    Sales 580 474 -18.3%
    Other Income 32 25 -21.9%
    Expenditure 414 433 4.6%
    Operating Profit (EBDIT) 166 41 -75.3%
    Operating Profit Margin (%) 28.6% 8.6%
    Interest - -
    Depreciation 55 52 -5.5%
    Capitalization of product
    development expenses
    (37)
    Profit before Tax 143 51 -64.3%
    Tax 16 7 -56.3%
    Profit after Tax/(Loss) 127 44 -65.4%
    Net profit margin (%) 21.9% 9.3%
    No. of Shares (eoy) (m) 33.3 33.3
    Diluted Earnings per share* 15.3 5.3
    P/E (x) 34.8
    *(annualised)

    The dismal performance is due to revenues from its parent HNS falling steeply, 36% sequentially. The product sales were also weak and were lower by 27% compared to 4QFY02.

    On the brighter side, revenues from non-HNS clients grew by 12%. The company saw an expansion of its relationship with NEC & Nokia and bagged its first direct orders from the satellite segment (Thrane & Thrane and Inmarsat). According to the company, the contribution to revenues from Fortune 100 customers and Ďother well established companies increasedí. One of the imperatives for the company is to reduce its dependence on HNS. At least on this front the company performance has not disappointed. To diversify further, HSS has jumped onto the BPO bandwagon, and expects cash to flow in from next fiscal.

    While the management blames the advisory put out by various countries against traveling to India responsible for the poor performance, the poor health of the telecom sector is equally responsible. HSS derives almost all of its revenues providing software and services to telecom equipment manufacturers and service providers.

    Revenue mix
    (Rs m) 4QFY02 1QFY03 Change
    HNS Services 232 40.0% 147 31.0% -36.7%
    Non-HNS Services 186 32.0% 209 44.0% 12.4%
    Products 162 28.0% 119 25.0% -27.0%
    Total 580 100.0% 474 100.0%

    The company has made a change in its accounting policy. It has started capitalizing product development expenses. What this means is that the expenses for product development will not be written off as expense in the quarter in which they are incurred, but will be written off gradually over a period of time. This effectively results into lower expenses and therefore, higher net profits. Companies do this because they feel that benefits of expenses incurred in product development, will accrue over a period of time and thus, write off the expense gradually. Had the company not capitalized product development expenses this quarter, the sequential fall in net profits would have been steeper at 94%, instead of 65% that has been reported.

    At the current market price of Rs 184, the stock is trading at a P/E multiple of 35x its 1QFY03 annualized earnings. The stock price is likely to witness further decline on the back of the dismal performance. While the performance has some bright spots, what has eclipsed them is the way management has communicated. Missing earnings guidance so consistently only hurts the managementís credibility.

    To conclude, the company has performed in the area where it should have i.e. improving business from non-HNS clients. Also the downturn in the telecom segment is beyond the managementís area of influence. The fact remains that the telecommunication technology is changing rapidly and there is likely to be a demand for service providers like HSS. However, the biggest concern is the managementís changing tack on accounting policy. If at a later date, HSS decides to revert to its old policy of writing of product development expenses at one shot, then the numbers will look really ugly.

     

     

    Equitymaster requests your view! Post a comment on "Hughes Software: Bad start". Click here!

      
     

    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    HCL Tech: Ends FY17 on Expected Lines (Quarterly Results Update - Detailed)

    Jun 29, 2017

    Volvo partnership caps a good year for HCL Technologies.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    TRACK FLEXTRONICS SOFTWARE

    • Track your investment in FLEXTRONICS SOFTWARE with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    MARKET STATS