Tulip Telecom: Initiate OW: The benefits of a high fibre diet:: HSBC Research,

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Tulip Telecom (TTSL)
Initiate OW: The benefits of a high fibre diet
 Well placed to ride growth in enterprise data; we forecast a
three-year EPS CAGR of 19%
 Change in business mix implies margin expansion as
management monetises previous capex
 Initiate OW with a TP of INR235, implying 9.4x FY12 PE


Niche player thinking big. TTSL offers domestic and international corporate data services
and leads the Indian market in providing remote offices with secure access to their
organisations’ networks (known as Virtual Private Connectivity). After investing heavily in
fibre optic connections, the company is now focusing on high volume, high revenue markets in
bigger cities rather than the low volume, low revenue business of providing bandwidth in
smaller towns. TTSL has 1,600 clients, accounting for 90% of India’s top 500 companies.

Time to sell its new capacity. TTSL should benefit from robust growth in the enterprise data
market. The company is starting to sell access to its new fibre capacity after rolling out
4,000km of fibre across c300 cities in the last 18 months. It should also continue to benefit
from increased government spending on large IT projects. Now that the fibre build-out is
complete, margins should improve as capex falls; we forecast a three-year EPS CAGR of 19%.

Benefits of fibre. The company generates 25% of its revenue from fibre and aims to raise this
to 70% by 2012. Despite its late entry into the big business/urban market, TTSL should benefit
from: a) acquiring new, larger clients; b) upgrading existing subscribers; c) large companies
needing alternative back up systems (e.g. fibre as well as wireless). But competition is
increasing and we expect TTSL’s share of the important market that covers corporate Internet
services and moving data between network nodes (Multiprotocol Label Switching) to fall from
c30% to c27% by FY13. This should be offset by TTSL’s ability to provide a wider range of
products in the overall enterprise data market through its fibre network.

Valuation and risks. TTSL has underperformed telecom peers on concerns about revenue
visibility, increased competition and emerging technologies. We believe the concerns are
overdone as the company’s fibre and wireless capabilities should deliver growth. We derive
our target price of INR235 using a SOTP approach using a mix of PE and DCF. Our TP
implies a FY12 PE of 9.4x (18% discount to its three-year average PE) and EV/EBITDA of
c5.7x. Key downside risks: stronger than expected competition and lower corporate spending.