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Hughes Soft's current price is a good level to exit given the uncertainties

Flextronics, the Singapore-based electronics manufacturing service provider, has acquired the entire 55 per cent holding of Hughes Network Systems (HNS) in Hughes Software Systems.

Reports suggest that a sale was on the cards after the change in ownership at HNS's end from Hughes Electronics to News Corporation in 2003.

The announcement, it seems, didn't exactly catch the markets unawares. The Hughes Software stock has risen over 10 per cent in the past week, even though the CNX IT index has fallen marginally. There wasn't anything unusual on the volumes front though.

In any case, the takeover does not result in big gains for investors, since the lower limit for the open offer price is Rs 547. This is just 5 per cent higher than the price at which the stock had closed on Monday.

But despite the low premium to current market prices, some analysts feel it makes sense for investors to tender shares in the open offer. At Rs 547, the stock gets a healthy valuation of 18 times estimated FY05 earnings.

This could be a decent level to exit given some of the uncertainties for the company under the new ownership. Hughes Network Systems, the erstwhile parent, still accounts for 20 per cent of the company's revenues, and this could get scaled down. Besides, the new parent isn't in the pinkest of health, having posted operating losses for two consecutive years.

From Flextronics' point of view, the acquisition not only widens its range of services, but adds value to its portfolio which is currently heavy on the commoditised hardware space.

With communications infrastructure and handheld devices accounting for over 50 per cent of Flextronics' FY04 revenues, Hughes' expertise in the software side of this space will help.

Despite the losses, it has cash of $615 million on its books, which is more than enough to fund the $308 million (including cost for open offer) acquisition of Hughes.

From a Hughes shareholder point of view, it's important to figure where the company fits in Flextronics' overall plan. For now, the Hughes management thinks the new parent will not affect its performance, as it has maintained its guidance for the year.

Larsen & Toubro

Larsen & Toubro reported an impressive 73 per cent jump in profit before for the March quarter. The company's cement business has been demerged and subsequently transferred to Ultra Tech CemCo Ltd. The performance of the cement operations last quarter would be reflected in the accounts of UTCC.

A more objective analysis of L&T's results for the March quarter vis-a-vis a year earlier, would be to exclude the cement's division performance in Q4 FY03 and instead focus on the company's key engineering and construction, electrical and electronics business.

The company's engineering and construction segment did extremely well last quarter. With domestic oil and gas major Oil and Natural Gas Corporation (ONGC) stepping up its oil exploration efforts, L&T has been able to capitalise on the opportunities created. Prominent orders included a contract of Rs 1006 crore from ONGC for design and setting up of nine well platforms.

Segment revenues rose 37 per cent to Rs 3124.44 crore, and segment profit jumped 50.6 per cent to Rs 345.21 crore. Although input costs, like that of steel, rose, improved design and planning of projects helped the company improve profit margins by 93 basis points last quarter. The order backlog for this division grew 24 per cent to Rs 16961 crore.

A revival of IT/ automation budgets by companies and overseas customers helped the company's electrical and electronics division. With numerous private sector companies setting up hospitals, demand has also been boosted for the company's medical equipment.

As a result, segment revenues rose 9.8 per cent to Rs 313.08 crore and segment profit rose 16 per cent to Rs 46.91 crore.

The company will be one of the chief beneficiaries of the revival of investment demand. Further, its efforts to get into more sophisticated engineering projects both in India and overseas would not only help it to move up the value chain but also grab a larger portion of the booming projects and turnkey business.

Also with reports that multinationals are keen to work jointly with the company in its electrical and electronics division, analysts expect this division to rapidly grow its revenues and profitability.

With contributions from Mobis Philipose and Amriteshwar Mathur