The Hindu Business Line : Hughes Software: Hold/Avoid fresh exposures

THE Hughes Software (Hughes) stock has appreciated by over 30 per cent since end-January. On January 9, when Hughes unveiled its earnings performance for the third quarter ended December 31, 2002, the stock was trading at around Rs 170. Despite a good quarter-on-quarter performance, the stock was hammered at the bourses for nearly three weeks. It dipped to around Rs 130 in late January. Since then, the stock has been on an upward journey, bolstered by some favourable news in end-February.

Hughes announced late last month that it had struck a multi-year outsourcing relationship with Lucent Technologies, for software development and maintenance support in the wireless space. Adding Lucent to other marquee names in its client list is slated to further enhance its strength and credibility in the telecom arena. Though the value of the deal cannot be quantified, it may be reasonable to assume that it will provide the much-needed stability to Hughes' revenue stream.

Suitability: In the light of the recent uptrend, is it an opportune time to take fresh exposures in Hughes? It may seem premature at this stage. Basically because the beleaguered telecom sector is still in the process of restructuring and consolidation. It appears that this process may take at least three quarters or the end of 2003 to run its course. Until that happens, the scope for any sustainable revival in capital spending may remain bleak.

Concerted attempts are being made by Hughes to diversify its revenue streams. Its recent entry into BPO (business process outsourcing) space testifies to this trend. Despite these attempts, Hughes will primarily remain a telecom play in the near to medium term. As long as the telecom vertical dictates its revenue/earnings stream, it may be advisable for investors to wait for the earnings performance of the fourth quarter before taking fresh exposures in the stock. However, existing investors with a high risk appetite may stay invested to capture any near term value gains in the stock.

Financials: For the third quarter, Hughes has recorded a 9.6 per cent sequential rise in revenues to Rs 57.1 crore and a robust 37 per cent growth in post tax earnings to Rs 11.4 crore. The operating profit margins have also shown a sharp improvement over the past two quarters to the current levels of 26 per cent. But it is still considerably lower than the 30-40 per cent level touched in the previous years.

Prima facie, this performance seems good, but it is relatively weaker than the earnings numbers in 2001-02. And for that matter, 2001-02 was a sluggish year for Hughes as the telecom meltdown starting exerting its influence on post tax earnings in the second half of the year. So, jumping to any conclusions based on financial performance alone may be premature and waiting for the fourth quarter performance may be a prudent course.

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