A mixed set

Hughes Software disappoints, while Mastek seems to have bounced back

Results announced by information technology firms on Monday were a mixed bag. Mastek, which was having a terrible time in the past few quarters, bounced back smartly with double-digit sequential revenue growth.

On the other hand, Hughes Software Systems, which had had a wonderful run till the nine months ended December 2003, reported a lacklustre performance in the March quarter.

Hughes' revenues grew just 3.9 per cent sequentially in the March quarter, compared to double-digit growth in the previous quarter.

Revenue growth was pulled down by a 15 per cent sequential fall in revenues from HNS (parent) - it must be noted here that effective December 2003, there has been a change in ownership at HNS's end.

This seems to have affected business coming from HNS. Non-HNS services revenues continued to grow at a steady rate - last quarter, they grew 9.3 per cent.

But what's worse is that operating margin fell almost 500 basis points to 25 per cent. This led to a 11.3 per cent decline in net profit sequentially.

One of the reasons for the drop in margins was the near four per cent appreciation in the rupee last quarter, which hit the company to the tune of Rs 2.6 crore (net loss), compared to a forex gain in the December quarter.

Besides, the variable pay component was higher last quarter by around Rs 1.3 crore. Finally, the December quarter results included a one-time royalty payment relating to the Spaceway project, owing to which margins were higher than usual (since royalties flow straight into the bottomline). But the sequential drop in net profit was not received well by the markets - the stock fell over six per cent on Monday.

Importantly, for the full year, the company has done exceedingly well - revenues grew 63 per cent and net profit more than doubled. This is, however, well priced into the stock, which has risen almost 300 per cent since last year.

Moreover, one cannot expect a repeat of last year's performance - the company expects growth in FY05 to be in the region of 25-30 per cent.

Mastek nearing earnings goal

Mastek's been among the worst performing IT stocks in the past year. About a year ago, the company's stock price had halved because of shocking results which meant that the company wouldn't meet its guidance for FY03.

Since then the stock has drifted even lower, especially because of the company's muted guidance for the year ended June 2004, in which it said that revenues would grow 21 per cent but earnings would fall 31 per cent.

The saving grace is that the company looks set to meet its earnings target for the year, after a dramatic turnaround in performance in the quarter ended March 2004.

At the end of the six months ended December 2003, it seemed almost impossible for Mastek to meet the guidance, since it would have to grow earnings at 114 per cent each quarter in the next two quarters to meet the target.

Mastek has announced a 145 per cent sequential jump in earnings in the March quarter, giving reason to believe that the company may come close to meeting its FY04 guidance. This prompted a seven per cent jump in Mastek's share price on Monday.

Revenues grew 10.5 per cent sequentially and operating margin jumped over 600 basis points leading to the gigantic jump in earnings. This is a complete contrast compared to the performance in the first six months till December - such volatility is typical of Mastek, which gets a big chunk of revenues from large one-time projects.

Once a project is executed, the company needs to bag another order of a similar or larger size to maintain revenue growth. For quite some time, projects were getting delayed which led to a drop in revenues, but last quarter some of the delayed projects got back on track.

However, on the revenue guidance for FY04, the company has gone way off mark. In order to meet the original target, it would have to grow revenues by 60.8 per cent in the June quarter on a sequential basis. Mastek itself now expects revenues to grow between three and five per cent in the June quarter.

With contributions from Mobis Philipose