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Tulip Telecom
Key takeaways from mgmt call on data-centre acquisition
Ambitious plans to grow data-centre business. Tulip has acquired
SADA IT Parks Pvt. Ltd., which owns a data centre (DC) facility
(comprising land and a building capable of hosting a DC) in Bangalore, for
`2.3bn. Tulip plans to further invest `6.7bn to set up a 0.9m sq ft DC, the
largest in India and third largest in the world.
Banking on growth in DC market. Management said that demand in the
non-captive DC market is expected to grow from 2m sq ft in 2009 to 8.8m
sq ft in 2014. On setting up the new DC, Tulip’s capacity would expand to
1m sq ft, from 0.1m sq ft currently. Management said that revenue from the
new DC would start flowing in 6-9 months from now; it expects annual
revenue of `10bn and EBITDA margin of over 50% on reaching peak
utilization, which may take 3 years.
Investment and funding plans. To acquire SADA, Tulip paid `2.3bn
from its cash reserves. It plans to invest an additional Rs6.7bn in the next
three years (`3.1bn in the first year) to set up and expand the DC. Capex
would be met from external funding (debt and equity) of `3.6bn and internal
accruals of the DC subsidiary. External funding would include equity funding
of `2.5--3bn from a suitable partner at the subsidiary level. Tulip’s leverage is
unlikely to increase materially from 2QFY11 levels (D/E of 1.1x).
Bold plans but comes with mounting risk profile. We believe that the
proposed DC could be a significant growth driver for Tulip (could account
for ~25% of overall revenue in 3-4 years) given the robust outlook for the
DC market in the country. However, we believe it increases Tulip’s risk
profile due to the scale of project. While we do not see financial leverage as
an issue, huge capex (outlay is ~75% of our current capex forecasts for the
next 3 years) would delay free-cash flows and depress valuations in case of
execution slippages (e.g. delays in utilization ramp-up). We maintain a Buy on
Tulip (strong growth outlook/attractive valuations), but are more cautious
than earlier. Risks: [1] Disallowance of bandwidth cost deduction by govt. for
computation of license fee. [2] Execution issues in DC business.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tulip Telecom
Key takeaways from mgmt call on data-centre acquisition
Ambitious plans to grow data-centre business. Tulip has acquired
SADA IT Parks Pvt. Ltd., which owns a data centre (DC) facility
(comprising land and a building capable of hosting a DC) in Bangalore, for
`2.3bn. Tulip plans to further invest `6.7bn to set up a 0.9m sq ft DC, the
largest in India and third largest in the world.
Banking on growth in DC market. Management said that demand in the
non-captive DC market is expected to grow from 2m sq ft in 2009 to 8.8m
sq ft in 2014. On setting up the new DC, Tulip’s capacity would expand to
1m sq ft, from 0.1m sq ft currently. Management said that revenue from the
new DC would start flowing in 6-9 months from now; it expects annual
revenue of `10bn and EBITDA margin of over 50% on reaching peak
utilization, which may take 3 years.
Investment and funding plans. To acquire SADA, Tulip paid `2.3bn
from its cash reserves. It plans to invest an additional Rs6.7bn in the next
three years (`3.1bn in the first year) to set up and expand the DC. Capex
would be met from external funding (debt and equity) of `3.6bn and internal
accruals of the DC subsidiary. External funding would include equity funding
of `2.5--3bn from a suitable partner at the subsidiary level. Tulip’s leverage is
unlikely to increase materially from 2QFY11 levels (D/E of 1.1x).
Bold plans but comes with mounting risk profile. We believe that the
proposed DC could be a significant growth driver for Tulip (could account
for ~25% of overall revenue in 3-4 years) given the robust outlook for the
DC market in the country. However, we believe it increases Tulip’s risk
profile due to the scale of project. While we do not see financial leverage as
an issue, huge capex (outlay is ~75% of our current capex forecasts for the
next 3 years) would delay free-cash flows and depress valuations in case of
execution slippages (e.g. delays in utilization ramp-up). We maintain a Buy on
Tulip (strong growth outlook/attractive valuations), but are more cautious
than earlier. Risks: [1] Disallowance of bandwidth cost deduction by govt. for
computation of license fee. [2] Execution issues in DC business.
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