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Tulip Telecom Ltd (TULP.BO)
Alert: Data Centre Acquisition: Ramp-up Will Take Time but Revs to Provide Stability
Acquisition provides additional revenue stream — Tulip today announced
acquisition of a data centre facility in Begaluru (Bangalore) for Rs2.3bn. The
consideration is for a potential 900k sq ft. of space (12x the largest running facility
in the country currently) taking its combined space to ~1m sq ft. It claims annual
revenue potential of Rs10bn (40% of current revenues) with 50% EBITDA margins
at peak utilisation level (90%), which it expects to touch in the next 3 years.
Funding details — Apart from the Rs2.3bn cash outflow, Tulip will have to invest
an additional Rs6.3bn over the next 3 years (Rs600m to make it operational; 60%
of Rs6.3bn in the first year). The company plans to bring in an equity partner at the
subsidiary level to keep debt/equity at ~1.25x. However assuming full debt
funding, FY12E Net debt/EBITDA deteriorates to 1.7x (0.8x currently); high though
not uncomfortable.
Long term contracts = stable revenues — Typical data centre contracts are for
5-7 years and as a result provide a high degree of revenue stability. A 30%
utilisation will help the company achieve EBITDA break even which it claims will
occur in a year (Rs450-675m losses in the 1st year though).
Maintain Buy — The company has started to benefit from fiber in terms of scale
economies and higher profitability. Revenues from data centre, though may take 1-
2 years to ramp-up, will help improve the company’s revenue visibility. The stock is
trading at 9.5x FY12E PER (adjusted for acquisition-related cash loss, higher
depreciation and lower interest income), relatively cheap given medium-term
growth potential. Disruptive pricing from new competition in data connectivity and
slower ramp-up in data centre revenues are key downside risks.
Tulip Telecom Ltd
Valuation
We set our 12-month target price at Rs1,120 based on 10x Sep-11 P/E. We prefer
P/E over discounted cash flow (DCF) as: 1) nature of the business (both VPN and
NI) results in low revenue visibility beyond 1-2 years; and 2) it plans to expand in
new services like Managed services and to start supplying bandwidth to state
electricity boards as part of the APDRP scheme; the size of these opportunities is
a difficult variable to estimate over a longer time frame. The target P/E is at a
discount to P/Es of other capex-leverage companies that are comparable in terms
of EPS CAGR and ROE despite medium term growth potential. The target multiple
is also at a discount to the broader market.
Risks
Our quantitative risk-rating system, which tracks 260-day share price volatility,
assigns a High Risk rating to Tulip. We, however, believe that a Medium risk rating
is more appropriate given Tulip's presence in the high growth segment of data
connectivity (IP VPN) with increasing IT budgets of corporates /Government, its
strong market position and headstart over larger telcos in the rural areas,
notwithstanding risks of adverse regulatory changes, technology obsolescence
and growing competitive intensity as it starts to compete with larger operators.
Other company-specific risks include management's ability to augment bandwidth
and make necessary changes in organization structure to effectively handle rapid
growth in scale and scope of operations and any value destructive acquisition.
These risk factors could impede the stock from reaching our target price.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tulip Telecom Ltd (TULP.BO)
Alert: Data Centre Acquisition: Ramp-up Will Take Time but Revs to Provide Stability
Acquisition provides additional revenue stream — Tulip today announced
acquisition of a data centre facility in Begaluru (Bangalore) for Rs2.3bn. The
consideration is for a potential 900k sq ft. of space (12x the largest running facility
in the country currently) taking its combined space to ~1m sq ft. It claims annual
revenue potential of Rs10bn (40% of current revenues) with 50% EBITDA margins
at peak utilisation level (90%), which it expects to touch in the next 3 years.
Funding details — Apart from the Rs2.3bn cash outflow, Tulip will have to invest
an additional Rs6.3bn over the next 3 years (Rs600m to make it operational; 60%
of Rs6.3bn in the first year). The company plans to bring in an equity partner at the
subsidiary level to keep debt/equity at ~1.25x. However assuming full debt
funding, FY12E Net debt/EBITDA deteriorates to 1.7x (0.8x currently); high though
not uncomfortable.
Long term contracts = stable revenues — Typical data centre contracts are for
5-7 years and as a result provide a high degree of revenue stability. A 30%
utilisation will help the company achieve EBITDA break even which it claims will
occur in a year (Rs450-675m losses in the 1st year though).
Maintain Buy — The company has started to benefit from fiber in terms of scale
economies and higher profitability. Revenues from data centre, though may take 1-
2 years to ramp-up, will help improve the company’s revenue visibility. The stock is
trading at 9.5x FY12E PER (adjusted for acquisition-related cash loss, higher
depreciation and lower interest income), relatively cheap given medium-term
growth potential. Disruptive pricing from new competition in data connectivity and
slower ramp-up in data centre revenues are key downside risks.
Tulip Telecom Ltd
Valuation
We set our 12-month target price at Rs1,120 based on 10x Sep-11 P/E. We prefer
P/E over discounted cash flow (DCF) as: 1) nature of the business (both VPN and
NI) results in low revenue visibility beyond 1-2 years; and 2) it plans to expand in
new services like Managed services and to start supplying bandwidth to state
electricity boards as part of the APDRP scheme; the size of these opportunities is
a difficult variable to estimate over a longer time frame. The target P/E is at a
discount to P/Es of other capex-leverage companies that are comparable in terms
of EPS CAGR and ROE despite medium term growth potential. The target multiple
is also at a discount to the broader market.
Risks
Our quantitative risk-rating system, which tracks 260-day share price volatility,
assigns a High Risk rating to Tulip. We, however, believe that a Medium risk rating
is more appropriate given Tulip's presence in the high growth segment of data
connectivity (IP VPN) with increasing IT budgets of corporates /Government, its
strong market position and headstart over larger telcos in the rural areas,
notwithstanding risks of adverse regulatory changes, technology obsolescence
and growing competitive intensity as it starts to compete with larger operators.
Other company-specific risks include management's ability to augment bandwidth
and make necessary changes in organization structure to effectively handle rapid
growth in scale and scope of operations and any value destructive acquisition.
These risk factors could impede the stock from reaching our target price.
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