Hughes Tele.com offer fails to enthuse analysts

NetScribes/Ganesh Ramamoorthy

With Hughes Tele.com expected to record negative cash flows for the next four years, analysts are not recommending the stock to retail investors.

The company entered the capital markets on Tuesday to raise Rs 7.49 billion through the book-building route. The equity raised will part-finance projects that include installing a state-of-the-art fibre optic network to support high-bandwidth applications for its corporate customers in Bombay and Pune.

With the company having cut its projected growth in customer base for the current fiscal, analysts are not really impressed with Hughes Tele.com's offer. "The project will not be viable for the next two years at least. So there is no real benefit for a retail investor, who is looking for a good investment opportunity," Sandeep Shenoy, an analyst with Asit C Mehta Brokerage said.

Hughes Tele.com's Rs 34.85-billion fibre-optic telecom project will record negative cash flows over the next four years. The company is expected to post a net loss of Rs 2.21 billion on a total income of Rs 1.85 billion for the financial year ending 2001. The company, however, hopes to make an operating profit of Rs 1.98 billion this fiscal.

For the year ended March 31, 2000, the company had posted a net loss of Rs 2.7 billion on a total revenue of Rs 640 million

"In a capital-intensive project such as this, the break-even takes place in about 4-5 years after the commercial operations begin. But we won't have to infuse any additional funds because the project cost already has allocated Rs 2.67 billion (net of subscriber deposits) towards funding cash losses during the implementation phase," said Deepak V Dutt, chief financial officer, Hughes Tele.com.

But what is puzzling analysts is how the company will achieve the required subscriber growth, to break-even in four years. "It's not sure if the company will break-even in four years, given the competition it will face," said an analyst with a Bombay-based securities firm.

Hughes Tele.com currently has over 27,000 lines spread over Bombay, New Bombay and Pune servicing primarily corporate customers. The company plans to have about 390,000 lines by year 2004. With the government planning to open up basic services market to more private players in consultation with TRAI, more private operators are expected to bid for the Maharashtra circle.

"The initial network roll-out and marketing efforts are focussed on large corporate and commercial customers. So, the target markets and client segments for new players are more or less the same as Hughes, meaning the competition will be more intense," the analyst said.

Further, the margins are expected to come under more pressure as TRAI revises the tariff structure for local calls periodically. By the company's own admittance, Hughes will lose about Rs 60 million due to the new tariff order issued by TRAI during the current fiscal.

"In all, the project is laden with risks, and there is little possibility of any good returns for the first four years," Shenoy said.

The Rs 34.85-billion project (debt:equity of 1.24:1) will be financed through various means. The equity portion will include existing promoters' contribution of Rs 6.67 billion and additional equity of Rs 8.86 billion, to be raised through IPO including promoter contribution of Rs 1.37 billion. Debt comprises rupee debt of Rs 8.54 billion and 10.78 billion of vendor debt. Around Rs 3.89 billion is expected to be generated internally.

Hughes Tele.com is promoted by Hughes Electronics Corporation (26.65 per cent), Alltel Corporation of US (13.35 per cent), Ispat Group Industries of India (51 per cent), and Kellerton Venture Corporation (9 per cent).

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