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Hughes Tele: Positive numbers - Views on News from Equitymaster
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  • Oct 24, 2002

    Hughes Tele: Positive numbers

    Hughes Tele announced its second quarter results recently. After having extended its service to nine more cities in Maharashtra, the company's revenues and operating profits have been consistently improving each quarter that is reflected in its financials. However, subscriber addition per quarter even on a smaller base seems to have slowed down off late.

    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Sales 615 864 40.5% 1,160 1,643 41.6%
    Other Income 72 18 -75.0% 156 46 -70.5%
    Expenditure 597 693 16.1% 1,122 1,339 19.3%
    Operating Profit (EBDIT) 18 171 850.0% 38 304 700.0%
    Operating Profit Margin (%) 2.9% 19.8%   3.3% 18.5%  
    Interest 195 164 -15.9% 360 320 -11.1%
    Depreciation 247 298 20.6% 475 585 23.2%
    Profit before Tax (352) (273) - (641) (555) -
    Extraordinary items (15) (15) - (30) (30) -
    Tax 0 - - 0 - -
    Profit after Tax/(Loss) (367) (288) - (671) (585) -
    Net profit margin (%) -59.7% -33.3%   -57.8% -35.6%  

    Telecom revenues in 2QFY03 and 1HFY03 have increased by 41% and 42% respectively on the back of incremental addition in subscriber base. Till 1HFY03, Hughes Tele's basic subscriber base has touched 185,000, which is 7% higher when compared with 1QFY03. When compared with last six quarter average, per quarter addition in subscriber base seem to have slowed down in 1HFY03. But the company's concentrated effort in targeting high usage customers that are typically corporates and SSIs is reflected in higher average revenue per user (ARPU) of Rs 18,681 per annum. Just to put things in perspective, MTNL's ARPU is in the range of Rs 11,500-Rs 12,250 per annum. The encouraging aspect of the 2QFY03 performance is the rise in ARPU.

    Key indicators…
    Particulars 1QFY03 2QFY03
    No. of subscribers (nos) 172,108 185,000
    Per quarter addition in subscribers (nos) 12,108 12,892
    Revenues per quarter (Rs m) 779 864
    Revenue/subscriber (Rs)* 18,105 18,681
    Market cap/subscriber (Rs)** 47,358 44,058
    Market cap/sales (Rs)** 2.6 2.4
    (*on annualised revenues, **on current price)

    Like any commodity sector, as capacity utilisation increases, fixed costs are spread over a wider volume base and as a result operating margins tend to increase. The 2QFY03 and 1HFY03 performance of Hughes Tele also has to be viewed in this context. After a period of stable growth in subscriber base on account of the roll out of its network in Mumbai and nine other cities, we expect growth in number of subscribers to increase at a faster rate in the future. Players like Hughes Tele, due to their technological advantage, are also in a position to gain market share in the corporate segment, that adds significantly to the bottomline. A combination of both the aforesaid factors will drive profitability at the operating level for the company in the long run.

    Increased cash flow from operations and a lower interest regime could have enabled the company to retire part of its debt and refinance some high cost funds in 1HFY03. As a result, interest outgo has also declined. As far as the stock price is concerned, even after this continuation in operating margin improvement in the last three quarters, loss at the net level is affecting sentiment. The open offer date for Tata's raising the stake in Hughes Tele expired on September 24, 2002. If media reports are to be believed, the Tata's have received good response for the same. In the long run, synergies between Hughes Tele and the Tata's are numerous and one cannot rule out the possibility of consolidation within the group to exploit benefits.



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