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Tulip Telecom Limited Overweight
TULP.BO, TTSL IN
A 4th power project win; reiterate OW
• Another power project win: Tulip Telecom (TTSL) announced that it
had been selected by the Punjab State Power Corporation to supply,
install and commission MPLS VPN (Multi Protocol Label Switching
Virtual Private Network) and internet connectivity across towns within
the R-APDRP scheme in Punjab. The three-year project is valued at
Rs379.5MM. This is TTSL’s fourth Restructured-Accelerated Power
Development and Reforms Project (R-APRDP) win and, according to
management, the total value of these projects is now Rs2,084MM. We
believe such projects wins 1) result in a stickier customer base, and 2)
are end-to-end solutions so carry higher-than-group-average margins.
We expect these to start affecting results by 1Q FY12 (to June 2011) and
believe the company is well positioned to win more projects.
• Expanding addressable base; margin support: As TTSL’s fiber
network expands, we believe it is well placed for growth, driven by a 5x
increase of its addressable markets, change in mix toward high-margin
business, and decreasing capex intensity. We forecast 20% revenue
growth in FY11/12 and note that ~70% of TTSL’s revenue is recurring.
We note that a business mix shift alone could lift its margins by ~2pp,
while technology shifts could lend further support. We estimate a 2.2pp
margin expansion over two years.
• Reiterate Overweight: We expect continued evidence of project wins,
stickier subs (government segment, increasing suite of services),
resilient margins, and declining capex intensity to lend support to share
price performance. Our Dec-11 price target of Rs215 implies an
annualized upside potential of 17%. TTSL trades at a 7.4x FY12E P/E, a
25% discount to its three-year average P/E, and at 5.0x FY12E
EV/EBITDA, a 27% discount. We believe that the current valuation
reflects market concerns about increasing competition which we believe
are overdone. TTSL is better protected from the competition than is
currently reflected in the share price, in our view.
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