Hughes Software: Buy on declines

Krishnan Thiagarajan

Recommendation: In line with the hammering of the technology stocks across the board in the Indian markets over the past fortnight, the stockprice of Hughes Software Systems has also suffered a sharp fall.

Over this period, the stock has declined by around 25 per cent.

Considering the long-term potential of the communication industry; the company's strong affiliation to its parent, Hughes Network Systems (HNS); its expertise in communication technologies and its product and service offerings, Hughes Software has the potential to offer value to shareholders from a medium-term perspective.

Investors can capitalise on the sharp slide in prices to build exposures in the stock. Any further declines (the current price is Rs. 2,656) linked to the broad market may be used to build exposures. At the current market price, the stock trades at a price earnings multiple of 142 times its per share earnings of Rs. 18.72 in 1999-2000.

Suitability: As one of the major telecom software players in the country, Hughes Software appears poised to reap the benefits of growing integration between the information technology and telecom sectors. As ``convergence'' becomes the buzzword in the IT sector, Hughes Software presents a good opportunity for investors to diversify their investment across a few top quality convergence stocks. Although the risks associated with investments in the IT sector are high, the scope for growth of the telecom sector makes Hughes a good pick for the medium term.

Prospects: The move towards higher bandwidth applications in an era of broadband access and the increasing role of software in communication facilities offers plenty of opportunity for players such as Hughes Software. The company has three main streams of revenues. The first -- outsourcing work for its parent, HNS, a unit of the $6.4-billion Hughes Electronics Corporation, accounted for nearly 54 per cent for 1999-2000, down from around 73 per cent in the previous year. In the fourth quarter, this contribution was down to 42 per cent. Over the last few quarters, the contribution from non-HNS outsourcing work has increased steadily, which is good from the long-term perspective.

Second, its product portfolio which contributed around 20 per cent of the total revenues in the first half of 1999-2000, leaped to 31 per cent in the fourth quarter. It accounted for 20 per cent of the total revenues in 1999-2000. With at least three major products -- ProtoQuick, IntelliQuick and MultiQuick -- in its portfolio, future contributions from the products division may continue to be strong.

Third, Hughes Software has established a dedicated Internet and e-commerce development centre at Bangalore to target the high-growth e-commerce solutions and applications market. The revenues from the Internet/e-commerce business contributed 14.7 per cent of revenues in the fourth quarter.

Background: For the year ended March 31, 2000, Hughes has recorded a 57 cent growth in income from operations and a 112 per cent rise in sustainable post-tax earnings (after adjusting for extraordinary income and tax thereon). For the fourth quarter, income from operations has grown by 84 per cent and sustainable post-tax earnings by 265 per cent. It has also maintained its operating profit margins at 38.4 per cent in 1999-2000 vis-a-vis the previous year.