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Hughes Tele: All round performance

Jul 18, 2002

Hughes, the private basic service provider in Maharashtra and Mumbai, continues to record impressive performance. There has been a sharp rise in profits at the operating level, which could be on the back of higher capacity utilisation and consequent benefits of economies of scale.

(Rs m)1QFY021QFY03ChangeFY02
Sales 545 779 42.9% 2,525
Other Income 84 28 -66.7% 241
Expenditure 525 646 23.1% 2,451
Operating Profit (EBDIT) 21 133 547.8% 74
Operating Profit Margin (%)3.8%17.1% 2.9%
Interest 165 156 -5.6% 723
Depreciation 228 287 26.0% 1,077
Profit before Tax (288) (282)-2.2% (1,485)
Extraordinary items (15) (15) - -
Tax 0 - - -
Profit after Tax/(Loss) (303) (297) - (1,485)
Net profit margin (%)-55.6%-38.1% -58.8%

The number of basic subscriber lines grew by 106% to 172,108 at end of the first quarter of the current fiscal as compared to 83,522 in 1QFY02. The sequential growth in basic lines was 8% i.e. 12,608 lines were added in 1QFY03. The sequential addition is comparatively lower than per quarter addition of around 15,000 lines in FY02. This, despite a wider coverage of more than 10 cities in Maharashtra and Goa as compared to 1QFY02. Hughes Tele had a 6% market share in the Mumbai basic telephony segment as of FY02. However, of the new connections added in FY02 in the Mumbai circle, the company had a 40% market share.

Revenues from telecom services has increased sharply by 43% to Rs 779 m. This despite a steep decline in domestic and long distance telephony tariffs, which goes to show the benefits of higher usage clients. Besides, its broadband services have also commenced in a smaller way and as a result one could expect higher revenue growth in the future. The highlight of Hughes Tele's first quarter performance is the spurt in operating margins. As the company increases coverage and subscriber base rises, automatically, it derives the benefits of economies of scale i.e. more lines operating within more or less the same capacity. This could be the key reason for the rise in margins.

Key indicators...
No. of subscribers (nos) 83,522 172,108
Per quarter addition in subscribers (nos) 15,000 12,108
Revenues (Rs m) 545 779
Revenue/subscriber (Rs)* 26,101 18,105
Market cap/subscriber (Rs)* 110,207 53,482
(*on annualised revenues)

There has been a notable rise in depreciation charges during the quarter as it also includes charges for previous years to the tune of Rs 40 m. The company has taken advantage of low interest rate regime and higher cash flow to lower interest outflow. Though net loss has come down only marginally, this has come even after a considerable fall in other income.

Tata Teleservices had entered into an agreement with the promoters of Hughes Tele to pick up 51% stake in the company in June 2002. Consequently, Tata Industries and Tata Power have made an open offer to the public for increasing their stake in Hughes Tele further by 20% at Rs 7.1 per share. The date of opening of the offer is August 26, 2002 and ends on September 24, 2002. The open offer price is a 9% premium to the spot price of Rs 6.5 per share. Whether one should accept the open offer or not depends on various factors like clarity on integration of operation with Tata Teleservices. But Hughes has a stiff task ahead and it has to accelerate its expansion in order to attain a critical mass. The company had targeted a subscriber base of 200,000 by FY02, which it failed to meet. To that extent, keeping all these factors in mind, the risk profile of the company is on the higher side.

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