The Hindu Business Line : Hughes Software: Hold

SHAREHOLDERS can stay invested in the Hughes Software Systems' (Hughes) stock in the light of the improved earnings performance and guidance. However, investors who had entered the stock at the sub-Rs 200 levels can contemplate partial profit-booking.

Guidance heads up: Following an encouraging first quarter performance for 2003-04 and a robust order pipeline, Hughes Software Systems' (Hughes) senior management has revised upwards the management guidance for the year.

Despite admitting that the telecom environment continues to remain hazy, Hughes has raised the guidance:

Sales growth guidance rose from 35-40 per cent to 55-60 per cent. The revised sales target for the year now stands at Rs 341.6 crore to Rs 352.6 crore, a 6-7 per cent sequential (quarter-on-quarter) growth starting with 2003-04 first quarter.

Profit-after-tax growth guidance rose from 40-45 per cent to 60-70 per cent. The revised profit-after-tax for the year now stands at Rs 60.64 crore to Rs 64.43 crore, a 0.5-2.5 per cent sequential growth starting with 2003-04 first quarter.

These guidance growth rates for the year have been reckoned from a smaller base as 2002-03 proved to be an indifferent year for Hughes on two fronts.

First of all, for 2002-03, Hughes' sales fell by 6.2 per cent to Rs 220.4 crore and post-tax earnings at Rs 37.9 crore dipped sharply by 21 per cent over the previous year.

Second, Hughes also failed to meet the sales and profit-after-tax projections made for the year.

Given the strong order backlog, it was obvious that the first round of financial guidance provided by Hughes' management was conservative.

Actually, the profit-after-tax projections were pegged slightly higher than the annualised profits of the fourth quarter of 2002-03, and the profit-after-tax margins at 17.8 per cent was sharply lower than the actuals of 21.6 per cent for that quarter.

Hence, a possible revision in guidance was always on the cards, except that the timing was uncertain. Since the revised guidance was announced within a quarter, the moot point is: Is this revised guidance achievable in the light of the hazy outlook for the telecom sector?

As far as sequential sales growth projections of 6-7 per cent are concerned, they seem realistic as the order pipeline for Hughes continues to remain robust at the end of the first quarter of 2002-03.

In addition, Hughes has also claimed that in this quarter, it has significantly expanded its relationships with its prime non-HNS (Hughes Network System) customers such as NEC, Lucent, Nokia and Johnson Controls.

Since these are blue-chip clients, they are expected to provide greater stability to the company's revenue stream.

However, since the capital spending on telecom remains fairly murky, it may be important to track the sustenance of order flows and possible billing rate pressures from these clients.

At the same time, the revised post-tax earnings guidance also seems reasonable as it continues to place the net profit margin in the 17.7 per cent to 18.3 per cent bracket.