HUGHES SOFTWARE SYSTEMS: Numbers Tell only Half the Story

Going by the modest 10% growth in Q4 sales over the preceding quarter, Hughes

Software Systems’ (HSS) results look quite ordinary. However, what is

significant in these results is that Hughes has added 15 new customers during

the quarter and reduced its dependence for business from its group companies at

a time when the entire IT services sector is reeling under the fears of a

slowdown.

We

believe that HSS will eventually overcome the temporary slowdown considering the

vast upgradation of network being undertaken by OEMs. The shift from

circuit-switched network to packet-switched network offers immense opportunity

for companies like HSS, which has been working in the IP and VoIP area.

Confident about the growing opportunities in these areas, the company plans to

increase its workforce from 1,200 to 2,000 during the current fiscal.

HSS reported 86% growth in revenues to Rs 21.08 crore in the fourth quarter

with net profit doubling to Rs 22.10 crore in the same period. Interestingly, of

the 15 clients added in the last quarter, 14 clients are in the products

segment. Among the new clients that were added in the quarter were Johnson

Controls, Sun Microsystems, Nokia, AudioCodes, Motorola and Adax.

In the full year ended March 2001, HSS’ revenues grew 85% to touch Rs 198.5

crore with the net profit rising from Rs 31.5 crore to Rs 62.9 crore. HSS’

dependence on HNS has reduced considerably over the past three years with

revenues falling from 84% of the total revenues three years ago to 36% in the

current year. While revenues from non-HNS clients stood at 36%, those from

products were 28% of the total revenues of March 2001. HSS expects HNS revenues

to grow by 20%, and more than 70% growth from non-HNS customers. Its products

revenues could spring a surprise as its royalty-based sales strategy delivers

results from next fiscal.

Although the share price rose sharply after the announcement of the results,

we believe that there remains strong upside potential from the current levels.

Any downside from current levels provides good opportunity for the investors. At

the time of writing this article, HSS was trading at Rs 712 discounting the

projected March 2002 EPS by 23 times and March 2003 EPS by 13 times. Accumulate.

Sushanto Mitra is the founder

of Technology Capital Partners

The views reflected here are of the author and not of this publication. No

liability is accepted for losses based on the information presented here.