TULIP TELECOM- Fibre business going strong: Edelweiss

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TULIP TELECOM
Fibre business going strong


􀂃 Impressive results; fibre business continues to gain traction
Tulip Telcom’s (TTSL) Q2FY11 results were above estimates in terms of revenues
as well as EBITDA margin. Revenues grew an impressive 11.4% Q-o-Q (highest
in the past six quarters), led by strong growth in the fibre business. Fibre
business contribution to revenues increased to ~30% from ~25% in Q1FY11,
implying an estimated 33.7% sequential jump in segmental revenues to INR
1.76 bn. EBITDA jumped 15.2% Q-o-Q, with EBITDA margin improving ~90bps
Q-o-Q and ~200bps Y-o-Y. We reckon the increasing proportion of the more
profitable fibre-business revenues in the revenue mix and scale economies in the
IP VPN business are driving EBITDA margin expansion for TTSL.


􀂃 Key updates
• TTSL incurred a capex of INR 2.36 bn in H1FY11, of which, ~75% was
deployed in the fibre business. Management reiterated its capex guidance of
INR 4.5 bn for FY11.
• Net debt increased to INR 11.9 bn from INR 9.6 bn in Q1FY11, with
gross debt up 11% Q-o-Q to INR 13.8 bn. Management indicated that its
overall cost of funds is below 8.59%.
• TTSL has won four projects to date to provide data connectivity services
under the Restructured Accelerated Power Development Reforms
Program (R-APDRP scheme) including Punjab, U.P., Gujarat and
Uttarakhand, of cumulative value of INR 2.08 bn. TTSL has commenced
execution on the U.P. project and revenues from the same are expected
mid-FY12 onwards. The company is likely to commence work on other
projects within a quarter. Revenues from these projects are spread over a
period of 3-5 years and carry higher-than-current blended margin of 27%.

􀂃 Outlook and valuations: Core business strong; maintain ‘BUY’
We remain positive on TTSL’s core business performance and believe its venture
into the fibre business bodes well for revenue growth/realisations and margins as
it taps the higher-bandwidth enterprise connectivity market requirements.
Recent government project wins for providing data connectivity and managed
services offer added visibility to TTSL’s wireless IP VPN business growth. We are
raising our earnings estimates by 6.6% and 9.6% for FY11 and FY12,
respectively, as traction in the fibre business has been stronger than anticipated.
Current valuations, at 8.9x FY11E and 7.8x FY12E, are attractive. We maintain
‘BUY/Sector Outperformer’ on the stock.