This is an encouraging trend, as it follows a robust sequential growth of 20 per cent in the first quarter of 2003-04.

Bolstered by this strong performance, Hughes has further revised its post-tax earnings guidance upwards, while retaining the original sales guidance for 2003-04. The revised guidance is:

Based on the healthy order backlog and the financial guidance for the third quarter, Hughes is on track to achieving its sales guidance for the year. Hughes' top seven customers (its large accounts such as NEC, Nokia and Johnson Controls) accounted for about 90 per cent of its revenues.

For the second successive quarter, Hughes has added 14 customers in products and services. Despite this strong addition of clientele, the company has been conservative in retaining in sales guidance.

This is mainly attributed to the global telecom environment which continues to be hazy. In this environment, it may be prudent to remain conservative till firm signs of capital spending emerge.

Till then, cutbacks or freeze in capital spending may happen swiftly or billing rate pressure can rear its ugly head.

At the same time, it is encouraging to note that in this quarter, the product revenues of Hughes grew sequentially by 56 per cent. The management has indicated that royalties have contributed to a part of this growth. As a contributor to the revenues, the share of products rose from 14 per cent in the first quarter to 19 per cent in this quarter.

This is in stark contrast to the first quarter, in which professional services with a 34 per cent sequential growth helped drive revenues.

Since the dependence on revenues from its parent, Hughes Network Systems, has been coming down steadily, the rise in product revenues may be the right trigger necessary to balance the revenue contribution of Hughes.

Even this revised post-tax earnings guidance seems achievable as it places the net profit margin (NPMs) in the 19.3-19.6 per cent bracket, which is in line with NPMs recorded in the first two quarters of 2003-04. Based on the current visibility and order backlog, this revision seems justified.

Recommendation: At the current market price, the stock trades at a price-earnings multiple of almost 19 times its per share earnings of about Rs 20 for 2003-04. Shareholders can stay invested. But risk-averse investors can use every uptrend to liquidate their holdings in small lots.

Article E-Mail :: Comment :: Syndication