Hold Flextronics Software Systems

About the company's valuations, the report says,

"The telecom industry is on a revival path and the resultant increase in spending should benefit FSS’ professional services and products divisions positively going forward. Also, we expect the Flextronics association to be beneficial for the company. We maintain our price target of Rs.625. However, the price movement will depend more on the shareholders’ response to the de-listing offer made by Flextronics. We believe that there is limited downside from the current levels and recommend a Hold on the stock, with potential upsides coming from acceptance, if any, by Flextronics of a higher price (than Rs.575 per share) discovered in the reverse book building process."

About the company's itself and its first quarter results review, the report says,

"Revenues during the quarter fell sequentially by about 4% led by lower revenues from the erstwhile parent, Hughes Network Systems, HNS, and also lower product revenues. The lower revenues from HNS resulted in a 2% de-growth in the overall services revenues."

"The fall in HNS revenues (extent of fall not known) was due to the delays in the execution of the SpaceWay project, post the change in the ownership of HNS. Going forward, revenues from HNS are expected to remain flattish, according to the management."

"On the non-HNS business front, FSS has further strengthened its relationship with Tier I clients like Nokia, Lucent and Alcatel. Also, Tier II clients like Polycom and Oki are ramping up."

"Product revenues, which are inherently volatile, fell by 11% quarter-on-quarter, qoq to Rs 50 million. Licence revenues were lower due to several roll-outs at the clients’ end being in process and which could be completed in the ensuing quarters."

"The company is adopting new systems of billing clients, which would translate into more sustained annuity type revenues. One of the modes of billing is the subscription based billing wherein Hughes will get revenues in line with the increase in the number of subscribers. The above-mentioned mode of billing will be applicable for contracts with Telecom Service Providers."

"The integration process with Flextronics is progressing along expected lines and the company has won orders from Flectronics and its client."

"FSS has licensed its IP phone kit to Flextronics. On the other hand, it has provided embedded software services to a printing/imaging major in Europe."

"FSS hopes to increasingly leverage on its association with Flextronics to increase revenues and also get more value addition in products."

"Flextronics, FSS’ parent, plans to de-list the HSS stock from the bourses and has offered to buy back the shares from the minority shareholders at a maximum price of Rs.575 per share."

"We now expect the company to achieve revenues of Rs 5.77 billion in FY06 with a PAT of Rs 1.27 billion. The EPS for FY06E works out to Rs 37.5. We had earlier estimated the FY06E earnings at Rs 40 per share."