Why Hughes Tele.com is attractive
Hughes Tele.Com has at last gone for an IPO of Rs.750 crore initiating with Book Built Portion contributing 90% of its offer at a floor price of Rs.12/-. Inspite of the strong support of the promoters, the company is coming out at a premium of just Rs.2/-. Consider this in contrast to the same Group's Hughes issue, which had come out at a price of Rs.630/- a share in October 1999. The bid price range of the same was Rs.480-630 per share.
Promoters
A look at the promoters of Hughes Tele.com.
Hughes Tele.Com, the license holder for Maharashtra telephony services, started its operations in 1998 as Hughes Ispat and was the second private telephony operator to enter the market. In May 2000, the company entered into an agreement with Lucent Technologies for a broadband telephone network. As per the agreement, Lucent will provide its technical expertise including switching centres, incorporating the 5ESS R switch, AnyMedia R Systems Access Systems, AnyMedia Optical Networking Units (ONUs), Intelligent Network (IN) software and service management systems, power systems and support services.
Hughes operates in the country’s most industrialized state of Maharashtra. MTNL, its competitor has been operating for the past 15 years and already has 2 million subscribers with a penetration rate of 18% as against national average of 2%. Almost 80% of MTNL’s revenues come from corporate sector despite accounting for just 15-20% of its subscriber base.
Inspite of MTNL's strong presence, Hughes could drag away majority of the former's customers. Out of 3.5 lakh high usage customers, Hughes could get over 27000 customers. Over the next two years, the company plans to expand its services to nine other cities in Maharashtra. The various services include: Web applications comprising high speed internet access such as xDSL, ISDN, leased lines, Virtual Private Networks, e-mail, conference etc. Hughes Tele.com is to offer broadband wired and wireless services using technology such as the "last mile'' optical fibre and is positioning itself as a single platform for all communications needs. It also plans to establish itself as a major internet service provider in the country and to become an Application Service Provider (ASP) for business customers.
Hughes is planning to provide optical fibre connectivity right up to the premises of its customers. This is expected to facilitate high speed communication, provide bandwidth on demand and offer more security to service users. With the e-com revolution yet to come in India, the company seems to be positioning itself on the right track. With the infrastructure in place and gamut of services on the offing, the customer base could rise exponentially.
The total project cost is estimated at Rs. 3,485.4 crores as per a detailed appraisal undertaken by ICICI. ICICI has sanctioned debt facility of Rs. 854.3 crores, of which Hughes took up Rs. 350 crores and the balance is being syndicated.
Now the financials. The company had posted a net loss of Rs.270 crore in FY2000, the total revenue for which period was just Rs.64 crore. The company expects to continue incurring losses for the next two years as it will continue expanding its operations. The expansion of the telecommunication infrastructure and development of its services requires significant capital expenditure. The extent of experiencing losses may be beyond the control of the company.
But investing in Hughes Tele.com confers some distinct fundamental advantages. Firstly, unlike MTNL which also operates in the Maharashtra circle, Hughes does not have to carry the burden of legacy networks. Secondly, its strategy of building a broadband optic fibre network will position it strongly in capitalizing on the convergence of voice and data. More importantly, the recent TRAI recommendation will reduce the license fee from 15% to 12% and also exempt Hughes from paying license fees till 2003.
Now for the most important point. If you are looking at Hughes Tele.com for making a quick buck forget it. Since it is likely to operationally break even only in 2002 and show net profits 3 years after that there is absolutely no short term upward potential for the stock. Most likely it is going to list in or around the issue price, most probably at a discount. Since there is a long term perspective in the stock, it may make sense to avail of section 88 benefit on this investment since the 3 year lock-in will not make much of a difference. Also the tax rebate under Section 88 will protect the investor from a downside risk to the extent of 20%. Go ahead and look at Hughes Tele.com seriously as a medium to long term investment. In the process also reduce your tax burden.
K.Venu Babu