Hughes Software: A recap - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Hughes Software: A recap

Sep 25, 2003

Among all Indian software companies that have borne the brunt of the slowdown in global technology spending, there is one company that has been relatively harder hit. We are talking about Hughes Software Services (HSS), and in this write-up, we would discuss as to what went wrong, how has HSS performed in the changed scenario, and what does the future hold for the company. The problem started way back in 1996, when the US government introduced its telecom bill that allowed new companies, in addition to the existing telecom service providers (also known as Independent Local Exchange Carriers (ILECs)), to provide local telecom services. These new companies were called Competitive Local Exchange Carriers (CLECs), and they were to lease lines from the ILECs to offer value-added services in the telecom segment. In return for these leased lines, the CLECs were liable to pay the ILECs around US$ 20 per line. Now the problem arose when this deregulation led to an incessant growth of companies ‘arising from nowhere’ to provide services in the high-technology telecom space.

As more and more of these companies (providing services in the high-technology telecom space) came into picture believing that the existing and new service providers would buy new technology from them, there was a sporadic growth in new technology offerings (like VoIP) that caused a sort of disruption in the existing business of telecom service providers, thus leading to their downfall. Also, a sudden surge in the number of technology providers led to broadband capacities being built up in such a quantum that caused a demand-supply mismatch, leading to prices falling rapidly.

Failing to generate much business, the CLECs were not even in a position to pay the ILECs the required US$ 20 per leased line. Over that, as the overall economic environment weakened, the sales cycle for technology providers (like Lucent and Cisco) and outsourcers like HSS lengthened and many projects were moved indefinitely to the future, thus causing greater troubles for companies in this space. Furthermore, telecom service providers across the globe invested heavily in 3G licenses, putting severe pressure on their balance sheets, thus denting their financial performance, and consequently leaving them with lesser resources to expend on developing new technologies. This further impacted the topline of companies like HSS.

Also for HSS, the problems lay (and still lies) in the fact that its clients traditionally have been OEMs (original equipment manufacturers) for the telecom industry (like Cisco, Nortel, Motorola, etc.). These clients, as mentioned above, had significantly ramped up capacity during the tech boom, and as a part of a secular slowdown in global technology spending, they, already having excess capacity, cut down their costs, thus impacting suppliers like HSS.

A look at HSS’ performance of the last nine quarters, as shown in the graph above, gives a clear indication of the pressure the company has been going through. However, while a clear picture regarding the revival of the global telecom industry has still not emerged, the current trend indicates a cautious return towards investments led by broadband services and adoption of mobile applications. Also, outsourcing is gaining prominence as clients (global telecom service providers and OEMs) are outsourcing their non-core R&D and maintenance activities to companies like HSS. As an example, HSS recently signed an outsourcing contract with Lucent to provide software development and maintenance support for the latter’s selected wireless products.

On the valuations front, at the current market price of Rs 372, the stock is trading at a P/E of 20x its FY04 earnings guidance (at 60% EPS growth). The telecom space where HSS provides its solutions has been, and continues to be, highly volatile. However, as a strategy of derisking its business model, the company has initiated steps into the BPO segment (where it entered in FY03) and has increased its focus on providing solutions to telecom service providers (who are exploring new revenue streams through value-added services).

How successful the company is in these endeavors would take some more time to get cleared. However, with a focus on continuously upgrading its offerings (through rational investments in R&D and creation of IPRs), the company is poised for better times ahead, given that the global spending on technology rises and improvement in the global telecom industry takes place. Till then, it should be a cautious wait and watch policy for investors.

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

  

More Views on News

If You had Invested Rs 1 Lakh in TCS in 2011, this is how Much You Would have Today (Views On News)

Nov 30, 2021

Did TCS perform better than the market and its peers?

India's Top 4 IT Companies are Struggling. Here's Why... (Views On News)

Oct 22, 2021

As attrition rates are unbelievably high, top Indian IT companies are going for big-ticket raises, and much more hiring this year.

Infosys had an Exceptional Quarter Buoyed by Huge Deal Wins. Revenue Guidance Boosts Stock (Views On News)

Oct 14, 2021

Infosys raised its forecast for annual revenue growth to 16.5-17.5% from the earlier 14-16%, predicted in July 2021.

Info Edge: The Anatomy of an Indian Internet Behemoth (Views On News)

Oct 2, 2021

Info Edge is very popular in the Indian startup ecosystem due to its active participation in funding events.

This Indian Company is Tapping into the Huge Autonomous Driving Opportunity (Views On News)

Sep 14, 2021

Despite many challenges, Indian companies and startups have not shied away from entering this space.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 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