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Hughes Software: Growth from all quarters - Views on News from Equitymaster
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  • Oct 11, 2002

    Hughes Software: Growth from all quarters

    Hughes Software (HSS) has reported better than expected quarterly results. The company after a poor 1QFY03 seems to have made some amends in 2QFY03. Hughes has reported a 10% growth in topline (QoQ) and a significant 89% growth in net profit.

    On a YoY basis, the company reported a 6% dip in topline, but managed a respectable 32% bottomline growth. On a half yearly basis, Hughes logged in a 15% dip in topline and nearly 50% decline in net profit YoY. The poor 1QFY03 showing has affected the overall 1HFY03 performance.

    The jump in bottomline is due to the fact that the company has written off Rs 46 m towards bad debts in 1QFY03, thus lowering the net profits for the quarter. Excluding the write off, the net profits have actually declined by 8% sequentially. This is due to higher taxes and lower other income. Software companies across the board have been seen a steep fall in other income due to the rupee appreciating against the dollar. The forex rate fluctuations have adversely affected software companies, as a majority of them derive almost all their revenues from exports.

    (Rs m) 1QFY03 2QFY03 Change 1HFY02 1HFY03 Change
    Net Sales 474 521 9.9% 1,170 995 -15.0%
    Other Income 25 18 -28.0% 70 43 -38.6%
    Expenditure 387 420 8.5% 859 807 -6.1%
    Operating Profit (EBDIT) 87 101 16.1% 311 188 -39.5%
    Operating Profit Margin (%) 18.4% 19.4%   26.6% 18.9%  
    Interest - -   - -  
    Depreciation 52 52 0.0% 101 104 3.0%
    Capitalization of product development expenses 37 35   - 72  
    Profit before Tax 97 102 5.2% 280 199 -28.9%
    Extraordinary items (46) -   - (46)  
    Tax 7 19 171.4% 30 26 -13.3%
    Profit after Tax/(Loss) 44 83 88.6% 250 127 -49.2%
    Net profit margin (%) 9.3% 15.9%   21.4% 12.8%  
    No. of Shares 33.3 33.3   33.3 33.3  
    Diluted Earnings per share* 5.3 10.0   15.0 7.6  
    P/E Ratio   15.1     19.7  
    (* annualised)            

    HSS after two quarters (4QFY02 and 1QFY03) of decline, saw revenues from parent HNS grow sequentially. However, the most positive aspect of the result is that revenues from non-HNS clients have grown by a robust 17%. One concern with the company has been its ability to get business. In FY02, revenues from non-HNS clients grew by a small 15%, while revenues from its parent had grown by 38%. However, the company has performed excellently in getting business from sources other than its parent. The product sales that have shown extreme volatility in the past grew by 6% QoQ.

    (Rs m) 1QFY03 2QFY03 Change
    HNS 147 31.0% 151 29.0% 2.8%
    Others 209 44.0% 245 47.0% 17.4%
    Products 119 25.0% 125 24.0% 5.5%

    At the current market price of Rs 151, the stock is trading at a P/E multiple of 20x its 1HFY03, annualised earrings. While the valuations are on the higher side, the stock could be considered as a long-term (five year) investment opportunity considering its service offerings. The company provides software and services to telecom companies. Going forward Hughes is likely to see better times ahead due to increased demand for its products and services. However, the significant volatility in earnings seen in the past and the management failing to provide visibility regarding the earnings makes the investment proposition a very risky one. Further, if the software development expenses that are being capitalized are written off, it will reduce the earnings of the company by more than half. This makes the investment even more risky.



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