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Hughes offers huge potential - Views on News from Equitymaster
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  • Sep 8, 2000

    Hughes offers huge potential

    Today the communication landscape is changing very rapidly. Hughes Software Systems Ltd. (HSS) is among the few niche product companies in the world that caters exclusively to the communication industry. The company provides value added services in the communications software market.

    Change is the only constant thing in the communication industry. For one, through the power of communications software, the voice network is now able to carry data. Further with the explosive growth of Internet and newer switching technologies, the communications industry is experiencing convergence of technologies. The industry is thus facing an explosion of demand for the need to integrate today's traditional networks into the next generation networks. It is estimated that the communication software industry will record a CAGR of more than 25% in the next few years. Secondly, wireless connectivity has become a major component of the communication industry and is changing the way business is done with a marked shift towards mobility.

    HSS is a niche player in the communications software industry and is bound to benefit from the demand explosion. Its parent company, Hughes Network Systems (HNS), has in fact pioneered many technologies currently in use including the VSAT satellite networks, high capacity digital cellular and wireless, and commercial packet switching.

    The company’s revenue mix showed a marked improvement as the share of revenues from Non-HNS clients improved considerably. Another interesting point was the revenues from products increased to 26% in 1QFY01 (9% in 1QFY00) as more products shared a taste of success. Some of the company's products include ProtoQuick, IntelliQuick, MultiQuick, RightServe etc.

    Financial Performance
    (Rs m) FY99 FY00 % Change
    Gross sales 685 1,073 56.7%
    Total revenues 698 1,207 72.9%
    Total expenditure 421 661 56.9%
    Operating profit 263 412 56.4%
    Depreciation 120 119 -1.3%
    Interest 3 0 -
    Profit before tax 154 428 178.5%
    Tax 1 51 4443.7%
    Profit after tax 147 377 157.1%
    Number of shares (m) 6.3 16.6  

    Key Ratios
    (Rs m) FY99 FY00
    Operating profit margin 38.5% 38.4%
    Effective tax rate 0.7% 11.9%
    Net profit margin 21.4% 35.1%
    Fully diluted EPS 8.8 22.7

    HSS’ huge investment in R&D and strong parentage of HNS would also ensure growth for the company. It might also benefit from strong plans of Hughes Telecom to build telecom infrastructure. Though the company continues to focus on the communication industry, it is also expanding its Internet and e-commerce business, which would provide a good vertical domain de-risking in time to come. Further, the geographical customer base of Hughes is also quite diversified.

    At the current market price of Rs 2,866 HSS is trading at 129 times its 1QFY01 annualised earnings. Currently the high valuations in the software industry are accorded to the companies with high profitability and high growth rates. Although the valuation of HSS appears a bit high, it is justified considering the future growth potential of the company.



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