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Tulip Telecom: Catapults to world’s third largest data centre
Tulip Telecom announced the acquisition of Bangalore-based SADA IT
Parks Pvt Ltd that owns a data centre facility for | 230 crore through its
100% subsidiary Tulip Data Centre Pvt Ltd. The data centre is spread
across 9 lakh sq ft. Tulip claims a revenue potential of | 1000 crore with
50% EBITDA margin with peak utilisation level expected to be achieved
after three years of operation. Tulip would be required to invest | 900
crore (inclusive of | 230 crore already spent to acquire the facility) in the
facility. Of this, it expects to invest 60% in the first year itself and the
rest in two subsequent years. The business would provide a substantial
and stable revenue stream once full capacity comes on stream, as the
contracts span over five to seven years. However, in the initial phase, it
would be a drag on the profitability as the management expects the
venture to post cash loss of | 50-70 crore in the first year of operation.
ƒ Stable source of revenues
The company expects an additional revenue stream of | 1000 crore
with an EBITDA margin of 50% once the data centre achieves peak
utilisation level (expected to be reached within three years of
commencing operations). Generally, data centre contracts range
from five to seven years and have high degree of stickiness. Hence,
this would provide a stable revenue stream for Tulip. Management
expects EBITDA breakeven at 30% utilisation level. However, it also
expects to post cash loss of | 50-70 crore in the first year of
operation. This would be a drag on profitability in the short run.
Valuation
The recent acquisition would provide additional revenue visibility and
high profitability in the long run. However, it would dampen the
bottomline in the initial period and this may take about two years to
ramp up. At the CMP of | 169, the stock is trading at 9.5x FY11E diluted
EPS of | 17.9 and 7.8x FY12E diluted EPS of | 21.6. We are confident
about the long-term prospects of the high growth data centre business.
We maintain our target price of | 216, valuing the stock at 10x FY12E
EPS. This implies 28% upside. We rate the stock as STRONG BUY.
ƒ Funding and investment
The company plans to invest | 900 crore in the next three years in
the facility. Of this, | 230 crore has already been spent in acquiring
the facility. Tulip Telecom would invest | 310 crore more in the first
year (| 60 crore to make the facility operational) and the rest in the
next two years. Capex would be funded through a mix of debt and
equity from external funding of | 360 crore and internal accrual of |
270 crore. It plans to bring in a strategic investor at the subsidiary
level to maintain the debt/equity at the current 1.25x level.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tulip Telecom: Catapults to world’s third largest data centre
Tulip Telecom announced the acquisition of Bangalore-based SADA IT
Parks Pvt Ltd that owns a data centre facility for | 230 crore through its
100% subsidiary Tulip Data Centre Pvt Ltd. The data centre is spread
across 9 lakh sq ft. Tulip claims a revenue potential of | 1000 crore with
50% EBITDA margin with peak utilisation level expected to be achieved
after three years of operation. Tulip would be required to invest | 900
crore (inclusive of | 230 crore already spent to acquire the facility) in the
facility. Of this, it expects to invest 60% in the first year itself and the
rest in two subsequent years. The business would provide a substantial
and stable revenue stream once full capacity comes on stream, as the
contracts span over five to seven years. However, in the initial phase, it
would be a drag on the profitability as the management expects the
venture to post cash loss of | 50-70 crore in the first year of operation.
ƒ Stable source of revenues
The company expects an additional revenue stream of | 1000 crore
with an EBITDA margin of 50% once the data centre achieves peak
utilisation level (expected to be reached within three years of
commencing operations). Generally, data centre contracts range
from five to seven years and have high degree of stickiness. Hence,
this would provide a stable revenue stream for Tulip. Management
expects EBITDA breakeven at 30% utilisation level. However, it also
expects to post cash loss of | 50-70 crore in the first year of
operation. This would be a drag on profitability in the short run.
Valuation
The recent acquisition would provide additional revenue visibility and
high profitability in the long run. However, it would dampen the
bottomline in the initial period and this may take about two years to
ramp up. At the CMP of | 169, the stock is trading at 9.5x FY11E diluted
EPS of | 17.9 and 7.8x FY12E diluted EPS of | 21.6. We are confident
about the long-term prospects of the high growth data centre business.
We maintain our target price of | 216, valuing the stock at 10x FY12E
EPS. This implies 28% upside. We rate the stock as STRONG BUY.
ƒ Funding and investment
The company plans to invest | 900 crore in the next three years in
the facility. Of this, | 230 crore has already been spent in acquiring
the facility. Tulip Telecom would invest | 310 crore more in the first
year (| 60 crore to make the facility operational) and the rest in the
next two years. Capex would be funded through a mix of debt and
equity from external funding of | 360 crore and internal accrual of |
270 crore. It plans to bring in a strategic investor at the subsidiary
level to maintain the debt/equity at the current 1.25x level.
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