Hughes Tele: Enabling communication through differentiation - Views on News from Equitymaster

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  • Aug 25, 2001 - Hughes Tele: Enabling communication through differentiation

Hughes Tele: Enabling communication through differentiation

Aug 25, 2001

This company is one of the first entrants in the Indian private basic telecommunication segment and is backed by one of the pioneers in telecom technology in the world. Hughes Tele.com, though a slow starter, has emerged as one of the key players in the basic telephony segment. Hughes Tele.com, incorporated in 1995, is engaged in the business of providing conventional voice and data services. It commenced its operations by providing fixed line telephony services in the Mumbai Telecom Circle (MTC) (Navi Mumbai and Pune in the last quarter of 1998 and Mumbai in the first quarter of 1999). The company has been granted license for establishing, maintaining and operating basic telephony services in Mumbai, Maharashtra (including the state of Goa). The company as revenue share would be paying a sum of Rs 13.9 billion over a period of 15 years. The company primarily targets the high value business segment, multi-line residential segment and Public Call Offices (PCO). All of these share a common characteristic i.e. higher usage and consequently higher average revenue per line.

The potential of the Mumbai Telecom Circle (MTC) cannot be understated. It is one of the highest revenue-earning circle for Department of Telecommunication (DoT) and Mahanagar Telephone Nigam Limited (MTNL) (the combined revenue is estimated to be Rs 45 bn). Since Hughes Tele.com holds the license for this circle, it has an excellent opportunity to cater one of the fastest growing circles in the country. And the company has been doing it in style.

During its Initial Public Offering (September 2000), the company had 22,000 subscribers. In the first quarter of the current financial year, the company had 85,000 subscribers and it has targeted a subscriber base of 200,000 by March 2002. It seems to be well on target. Initially when it started providing basic services, MTNL (the PSU basic service provider in Mumbai) had lost significant market share to Hughes Tele.com. The company managed to add high value clients like Leela Kempinsky, Oberoi, Godrej, Microsoft, IBM, McKinsey and Essar, to name a few.

Since Hughes primarily targets the corporate customers, average revenue per subscriber (ARPUs) are also on the higher side. The ARPU of Hughes Tele.com is around Rs 25,655 as compared with MTNL’s ARPU of Rs 12,000. And the most promising aspect is the rise in ARPU in 1QFY02. To put things in perspective, the ARPU for 1QFY02 was Rs 25,655 as compared to the ARPU of Rs 18, 564 for FY01.

Improving financials...
(Rs m)1QFY011QFY02ChangeFY01
Sales 300 545 81.7% 1,392
Other Income 6 84   558
Expenditure 350 525 49.8% 1,964
Operating Profit (EBDIT) (50) 21   (572)
Operating Profit Margin (%)-16.7%3.8% -41.1%
Interest 173 165 -4.7% 1,284
Depreciation 156 228 46.4% 727
Profit before Tax (374) (288)-22.8% (2,025)
Extraordinary item (14) (15)3.8% (64)
Tax - 0   (1)
Profit after Tax/(Loss) (388) (303)-21.8% (2,088)
Net profit margin (%)-129.3%-55.6% -150.0%
Market cap/sales*  6.4   10.0
Market cap/subscriber  164,435   186,360
Revenue/subscriber*  25,655   18,564
(*annualised sales)    

The results are encouraging if one were to look at the first quarter performance of the company. The company has achieved cash break-even in the second year of operation itself. Operating profit for 1QFY02 stood at Rs 21 m as compared with a loss of Rs 50 m in the corresponding period of the previous year. It has rapidly rolled out its broadband fiber optic network and currently serves over 85,000 subscriber lines in 8 cities - Mumbai, Navi Mumbai, Pune, Nasik, Nagpur, Panaji (Goa), Kolhapur and Ahmednagar. Services in 2 more cities - Sangli and Aurangabad are expected to commence shortly.

Hughes has also received the Category ‘A’ Internet Service Provider license and has already commenced providing Internet services. Since basic telephony alone does not ensure success, the company aims at providing various value-add services. These services include broadband connections for high-speed data and Internet access, data application services like web hosting, Virtual Private Networks (VPN) and VSAT connectivity. Hughes is also slated to offer Advance Intelligent Network Services (AINS) like calling card services, premium rate services and freephone services.

Things on the external front are also working in the company’s favour. TRAI has proposed the move into revenue sharing with effect from FY03, which would mean lower outflow as license fee for the company (it had to pay Rs 13.9 bn as license fee over a period of 15 years). The company (from FY03)has to pay just 12% of revenues as license fee (as it operated in ‘A’ circle).

However, the recent move by the company proves that concentrated players cannot survive in the long run. Hughes Tele.com and Tata Teleservices Limited have signed a Memorandum of Understanding (MoU) for a merger of basic telephony services of Hughes in MTC and of TTL in the Andhra Pradesh. This gives a back door entry into the Andhra Pradesh circle for the company and the merger could also benefit in terms of better economies of scale.

But one of the major advantages for Hughes Tele.com is the access to multi-end technology through Hughes Electronics Corporation, the parent company. However, the parent corporation (a subsidiary of General Motors) has been exiting from the telecom segment in recent times and it has also plans to sell Direct TV. Also, the growth in subscriber base has slowed down despite expansion of services in two more cities in the first quarter of the current year. As against an average of 20,000 new subscribers every quarter, in 1QFY02, subscriber base has increased by just 10,000, which is a cause of concern.

But given the fact that basic telecom in India is still at its nascent stage and its presence in one of the wealthiest city in India indicates a promising future. Also, both the technological and customer focus should clearly differentiate Hughes Tele as a basic service provider from competitors.

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