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Tulip Telecom (TTSL IN) Rating:1
2Q FY11 results preview: focus on traction in fibre-optic network services
What has changed?
• Tulip Telecom (Tulip) is scheduled to announce its 2Q FY11 results on 12
November 2010. Our focus areas would be client traction levels for its fibreoptic
network and progress with various government projects.
Impact
• Our expectations. We forecast a net profit of Rs669m for 2Q FY11 (up 4%
QoQ, and 29% YoY), driven by a 3% QoQ rise in revenue to Rs5.4bn. We
expect the EBITDA margin for the quarter to be stable on a quarter-on-quarter
basis, and forecast EBITDA of Rs1.5bn for 2Q FY11.
• We are looking for an update on fibre-optic network services. Tulip
upgraded the ‘last mile’ connections recently for its fibre network extensively in
50 cities, and we are trying to assess the traction the new services are getting
from new and existing clients. Fibre-optic network revenue accounted for 25%
of Tulip’s 1Q FY11 revenue, and management has guided for a 70:30 mix in
favour of revenue from the fibre-optic network over the long term. We believe
that the fibre-optic network will allow Tulip to expand its target market in the
data-connectivity segment.
• Order inflow from the power sector has been strong. Tulip has won
restructured-accelerated power development reforms programme (R-APDRP)
projects in the states of Uttarakhand and Punjab, taking its total number of such
projects to four, worth Rs2.1bn. We look forward to hearing about the progress
on these projects, as well as that of the state-wide area network (SWAN)
projects.
Valuation
• Our six-month target price of Rs230 is based on a DCF valuation methodology.
At our target price, the stock would trade at a PER of 9.4x our FY12 EPS
forecast.
Catalysts and action
• We maintain our 1 (Buy) rating. Our expectations factor in strong revenue and
profitability growth, driven primarily by a higher proportion of revenue coming
from providing higher bandwidth services to its large client base. We forecast
revenue and EPS CAGRs of 18% and 15%, respectively, for FY10-13.
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