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Hughes Software dips on revenue concerns

NetScribes/Ganesh Ramamoorthy

Concerns of falling revenues from the main product business and dipping operating margins have dragged down the share price of Hughes Software System (HSS) by more than 16 per cent in the last two weeks.

On Thursday, opening from its previous close of Rs 927.85 on the Bombay Stock Exchange (BSE), the HSS scrip shot up to Rs 940 in early trades. However, the scrip crashed during the afternoon session to close at Rs 904, down Rs 23.85 with over 63,000 shares traded on the BSE. At its current level, the scrip is down 18.2 per cent from its month's high of Rs 1,105.40 on November 8.

"The scrip is reacting negatively to growing concerns that the company is not able to generate higher sales," said an analyst with a Bombay-based securities firm.

Its products include ProtoQuick, a protocol stack for wireless networks; IntelliQuick for networking and service nodes; SwiftBill, an electronic bill payment; RightServe for targeted Web banner advertising services and MultiQuick for voice over Internet Protocol (VoIP).

As is evident from the previous quarter's results, Hughes Software has been consciously shifting its focus from services to products. But analysts say the product model is a high-risk, high-growth strategy and investors ought to be conscious of the risks involved.

"Though the pay-offs are fairly large in this model, especially in the high-growth telecom sector, it also requires constant monitoring of the demand for products. If the model is not generating more revenues, then it is time the company took stock of its strategy," the analyst said.

Hughes Software is also said to be facing problems in the resale of its products and components. While company officials could not be reached for comment, analysts say the concerns are justified.

The company operates in the hi-tech products segment as well as in IT services. While this minimises risk by not making Hughes totally dependent on any product, analysts say it also exposes the business model to high volatility in earnings if either division fails to perform.

For the first six months of 2000-01, products contributed 29 per cent to the total revenues, up from 10 per cent in the corresponding previous period, while services made up the remaining. Hughes is targeting a revenue mix of 50:50 from the products and services business by 2002.

Another concern is the pressure on operating margins. Margins for the quarter ended September 30, 2000 dropped to 33.4 per cent from 39 per cent in the previous corresponding quarter.

Even as these concerns continue to haunt the scrip, analysts say the scrip's valuation at its current level is fully justified. "The premium is justified given the position Hughes enjoys in the telecom sector," said an analyst with K R Choksey Shares and Securities. "Right now, the sentiment towards the scrip is weak and this could bring some short-term downsides in the stock. But, in the medium term, the scrip is still a good buy."

Future valuations will, however, hinge on the success of the product business, say analysts. "The growth in its product sales has to be monitored. Chances of a better performance are high, given its past track record," said the analyst at K R Choksey.

At the current market price of Rs 904, the scrip is trading at a forward earnings multiple of around 60 times. Infosys, Wipro, VisualSoft and HCL Tech are trading at a forward earnings multiple of 82, 107, 26 and 33 respectively.

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