Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tulip Telecom Limited
Overweight
TULP.BO, TTSL IN
Delivering improvements; positive on data centre opportunity
Tulip’s Q3 results showcased reassuring trends of both continued
improvement in revenue growth and also margin expansion helped by an
increasing contribution from fibre to the business. We are not concerned
about the potential near-term impact to margins from the data centre
business as we don’t expect Tulip to incur large costs ahead of revenue.
We remain positive on the prospects of data centres in India and continue
to like Tulip’s diversification of revenue base. Reiterate Overweight.
• Revenue, margin trends better: Tulip has delivered an improvement in
the Y/Y revenue growth from 18.6% in Q1 to 19.2% in Q2 and now
20.3% in Q3. Contribution from fibre is now 40% of total orders (and
70% of new orders), up from 30% in Q2. The company is well on track
to achieve 2/3rd business contribution from fibre by end-FY12. This is
encouraging for margin trajectory which increased 55bp in Q3.
• Data centers consolidated, limited near term dilution: We have
incorporated estimates for TTSL’s new data centre business starting in
Q2 FY12. The impact to our FY12E revenue/EBITDA margin is +1.4%/-
60bp while our capex increased from INR 4.2bn to INR 7.3bn which we
expect will driven by external funding. We expect positive contribution
to margin from FY15 and note there is upside risk to our estimates. See
Table 2 for more. The company expects to announce an investor in 4
months and has visibility of ~16% capacity take-up by year-end FY12.
• Our Dec-11 price target is now INR 244 (vs. INR 230 earlier) implies
upside potential of 45%: TTSL trades at a 7.5x FY12 P/E, a 24%
discount to its three-year average P/E, and at a 6.2x one-year forward
EV/EBITDA, a 13% discount. We expect continued evidence of project
wins, stickier subs (government segment, increasing suite of services),
resilient margins, and declining capex intensity in the core business to
lend support to share price performance. A key risk to our PT is earlier
and/or deeper enterprise competition from BWA service providers.
Key takeaways from results and conf call
Update on Datacenter business
We have now consolidated estimates for Tulip’s Data Centre business into our
estimates. We expect this to impact numbers from Q2 FY12. We estimate 16% / 49%
/ 70% utilization for FY12/FY13/FY14 and a starting monthly base rental of INR
1200 per sq ft. We note there is upside risk to the rental assumption (ARPU) as the
company is able to up sell services in addition to capacity. Please see the table below
for further estimates.
• TTSL expects to announce a design partner in the next 3 weeks. Management
stated that it is in talks with global reputed vendors for design and
implementation.
• Investor can take 4 months. Tulip announced that an investor will be finalized
over the next 4 months. While it isn't clear if the investor will be a strategic or a
financial one, management highlighted that even if it is a financial investor, the
company would look for one with prior investments in data centers to leverage
their expertise and experience. The company expects a premium given the
investment opportunity.
• Management stated that demand for 75K sq. ft. is already in pipeline and expects
about 25K of demand in the next 6-9 months. This is on a base of 450K of usable
sq ft so implies a utilization of ~16% by end-FY11. Indications from the
company are for 220K for FY13 (implies ~50% utilization) and capacity by
FY14. Our assumptions are slightly lower here.
• Guidance from the company: In 3 years, at peak utilization, the potential revenue
is INR 10bn with an EBITDA margin of 50%. The company expects INR 9bn of
investment over 3 years with INR 2.3bn already done upfront for the SADA
property by Tulip Telecom. With 60% of this expected in the first year, and the
balance 40% expected more so in year 3 than year 2 – we estimate INR 2.3bn for
FY11, INR 3.1bn for FY12, INR 1.8bn in FY13 and the balance INR 1.4bn in
FY14.
• In January 2011, the company acquired a 900K sq. ft. data center facility in
Bangalore (South Indian city), valued at INR 2.3 bn. With 50% of the total area
spread across four towers will be the actual wide space available for commercial
allocation, forming it to be the largest data center of the country. The
management expects to facilitate it with 16K racks and meet Tier-4 requirements
of the customers.
We note that the risk of take-up and execution exists but we remain positive on data
centre prospects in general. We are positive on the prospects of data centre growth in
India and expect demand to be driven by growth in wireless data usage, the advent of
cloud computing, digitalization of government projects, enterprise data growth and
more. We note that our recent visit to Bharti’s data centre facilities in Bangalore
indicated that of the 30,000 sq ft of non-captive space, 90-95% was sold while 60%
was occupied and there was demand for more space. We also note that City Telecom
in Hong Kong is inviting content owners into its own data centers at cost in order to
drive demand for higher speed packages. The Data Center demand in India currently
stands at 3.7 million sq. ft. which is expected double in the next 3 years to ~7 million
sq. ft.
Drivers for FY12 growth
• Tulip Telecom is taking measures to build better relationship with the existing
customers. The management expects an increasing demand in enterprise data
connectivity in next 3-4 years leading to expected positive growth in coming
years.
• The company is seeing good traction in fiber demand and the management
expects revenue from international market to flow in with recently closed
Hutchison deal.
• Managed services are expected to help revenue growth. Management highlighted
an order win from BHEL for video conference facility as an example
• Government projects were highlighted as a potentially important growth driver
for FY12. Management stated that the pipeline here was “quite significant”. In
Q3 contribution from government projects was ~5-8% according to management
but this can increase to 15-20% 2 years away. The company is cognizant of the
working capital requirements linked to such projects (receivables of 4-5 months
vs. 3 months currently). These are flagged as high return projects given low
incremental investment required.
Other highlights
Capex: The capex for the period was reported to be INR 1,390mn, reaching INR
3.7bn for nine months. The company has provided a guidance of INR 4-4.5bn capex
for next year (excluding INR 3bn for data center which the company is looking for a
suitable partner.). The company expects to increase penetration within its existing
fibre cities and roll out to new cities based on demand. Management stated its focus
on sweating the current assets more.
Board approves 2.7 mn stock options under Employee Stock option scheme of
2011: The BoD approves a grant of 2.7mn shares under Employee Stock option
scheme for 2011 to retain and attract talent across all levels within the organization.
The grant would be based on the share price of Feb. 11, 2011 closing and will be
vested in four equal investments with a year from the launch of grant.
Forecast changes
We make marginal changes to our core business estimates but now incorporate the
data centre business. As a result our revenue estimates for FY12 and FY13 are
higher. We increase FY12 and FY13 revenue estimates by INR 656mn and INR
2,520mn of which 62%/90% is contributed by data center revenue in FY12/FY13.
But the core margin dilutes by 56bps and 131bps for FY12/FY13 due to the ramp up
phase of the data center business.
Valuation and rating analysis
Our Dec-11 price target is increased to INR 244, up from INR 230 earlier. We value
Tulip’s core business at INR 235 based on a full DCF analysis. We add INR 10/share
for TTSL’s 13% stake in the BWA JV with Qualcomm valued at INR 1,400 mn.
Table 6: Tulip Telecom: SOTP
INR million, year-end March
SOTP INR
Core valueA 235
Investment in BWA JV 10
Equity Value Per Share (INR) 244*
Source: Company reports and J.P. Morgan estimates.* decimal error
We highlight the following downside risks to our ratings and price target: [1] Earlier
or deeper competition from BWA winners like Reliance Industries in last mile
enterprise connectivity and/or increasing competition from traditional players like
Tata Communications, BSNL, Bharti, Reliance Communications; [2] Tulip having to
pay license fee for using the 3.3GHz band (currently unlicensed); [3] Continued
caution on spend by enterprises.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tulip Telecom Limited
Overweight
TULP.BO, TTSL IN
Delivering improvements; positive on data centre opportunity
Tulip’s Q3 results showcased reassuring trends of both continued
improvement in revenue growth and also margin expansion helped by an
increasing contribution from fibre to the business. We are not concerned
about the potential near-term impact to margins from the data centre
business as we don’t expect Tulip to incur large costs ahead of revenue.
We remain positive on the prospects of data centres in India and continue
to like Tulip’s diversification of revenue base. Reiterate Overweight.
• Revenue, margin trends better: Tulip has delivered an improvement in
the Y/Y revenue growth from 18.6% in Q1 to 19.2% in Q2 and now
20.3% in Q3. Contribution from fibre is now 40% of total orders (and
70% of new orders), up from 30% in Q2. The company is well on track
to achieve 2/3rd business contribution from fibre by end-FY12. This is
encouraging for margin trajectory which increased 55bp in Q3.
• Data centers consolidated, limited near term dilution: We have
incorporated estimates for TTSL’s new data centre business starting in
Q2 FY12. The impact to our FY12E revenue/EBITDA margin is +1.4%/-
60bp while our capex increased from INR 4.2bn to INR 7.3bn which we
expect will driven by external funding. We expect positive contribution
to margin from FY15 and note there is upside risk to our estimates. See
Table 2 for more. The company expects to announce an investor in 4
months and has visibility of ~16% capacity take-up by year-end FY12.
• Our Dec-11 price target is now INR 244 (vs. INR 230 earlier) implies
upside potential of 45%: TTSL trades at a 7.5x FY12 P/E, a 24%
discount to its three-year average P/E, and at a 6.2x one-year forward
EV/EBITDA, a 13% discount. We expect continued evidence of project
wins, stickier subs (government segment, increasing suite of services),
resilient margins, and declining capex intensity in the core business to
lend support to share price performance. A key risk to our PT is earlier
and/or deeper enterprise competition from BWA service providers.
Key takeaways from results and conf call
Update on Datacenter business
We have now consolidated estimates for Tulip’s Data Centre business into our
estimates. We expect this to impact numbers from Q2 FY12. We estimate 16% / 49%
/ 70% utilization for FY12/FY13/FY14 and a starting monthly base rental of INR
1200 per sq ft. We note there is upside risk to the rental assumption (ARPU) as the
company is able to up sell services in addition to capacity. Please see the table below
for further estimates.
• TTSL expects to announce a design partner in the next 3 weeks. Management
stated that it is in talks with global reputed vendors for design and
implementation.
• Investor can take 4 months. Tulip announced that an investor will be finalized
over the next 4 months. While it isn't clear if the investor will be a strategic or a
financial one, management highlighted that even if it is a financial investor, the
company would look for one with prior investments in data centers to leverage
their expertise and experience. The company expects a premium given the
investment opportunity.
• Management stated that demand for 75K sq. ft. is already in pipeline and expects
about 25K of demand in the next 6-9 months. This is on a base of 450K of usable
sq ft so implies a utilization of ~16% by end-FY11. Indications from the
company are for 220K for FY13 (implies ~50% utilization) and capacity by
FY14. Our assumptions are slightly lower here.
• Guidance from the company: In 3 years, at peak utilization, the potential revenue
is INR 10bn with an EBITDA margin of 50%. The company expects INR 9bn of
investment over 3 years with INR 2.3bn already done upfront for the SADA
property by Tulip Telecom. With 60% of this expected in the first year, and the
balance 40% expected more so in year 3 than year 2 – we estimate INR 2.3bn for
FY11, INR 3.1bn for FY12, INR 1.8bn in FY13 and the balance INR 1.4bn in
FY14.
• In January 2011, the company acquired a 900K sq. ft. data center facility in
Bangalore (South Indian city), valued at INR 2.3 bn. With 50% of the total area
spread across four towers will be the actual wide space available for commercial
allocation, forming it to be the largest data center of the country. The
management expects to facilitate it with 16K racks and meet Tier-4 requirements
of the customers.
We note that the risk of take-up and execution exists but we remain positive on data
centre prospects in general. We are positive on the prospects of data centre growth in
India and expect demand to be driven by growth in wireless data usage, the advent of
cloud computing, digitalization of government projects, enterprise data growth and
more. We note that our recent visit to Bharti’s data centre facilities in Bangalore
indicated that of the 30,000 sq ft of non-captive space, 90-95% was sold while 60%
was occupied and there was demand for more space. We also note that City Telecom
in Hong Kong is inviting content owners into its own data centers at cost in order to
drive demand for higher speed packages. The Data Center demand in India currently
stands at 3.7 million sq. ft. which is expected double in the next 3 years to ~7 million
sq. ft.
Drivers for FY12 growth
• Tulip Telecom is taking measures to build better relationship with the existing
customers. The management expects an increasing demand in enterprise data
connectivity in next 3-4 years leading to expected positive growth in coming
years.
• The company is seeing good traction in fiber demand and the management
expects revenue from international market to flow in with recently closed
Hutchison deal.
• Managed services are expected to help revenue growth. Management highlighted
an order win from BHEL for video conference facility as an example
• Government projects were highlighted as a potentially important growth driver
for FY12. Management stated that the pipeline here was “quite significant”. In
Q3 contribution from government projects was ~5-8% according to management
but this can increase to 15-20% 2 years away. The company is cognizant of the
working capital requirements linked to such projects (receivables of 4-5 months
vs. 3 months currently). These are flagged as high return projects given low
incremental investment required.
Other highlights
Capex: The capex for the period was reported to be INR 1,390mn, reaching INR
3.7bn for nine months. The company has provided a guidance of INR 4-4.5bn capex
for next year (excluding INR 3bn for data center which the company is looking for a
suitable partner.). The company expects to increase penetration within its existing
fibre cities and roll out to new cities based on demand. Management stated its focus
on sweating the current assets more.
Board approves 2.7 mn stock options under Employee Stock option scheme of
2011: The BoD approves a grant of 2.7mn shares under Employee Stock option
scheme for 2011 to retain and attract talent across all levels within the organization.
The grant would be based on the share price of Feb. 11, 2011 closing and will be
vested in four equal investments with a year from the launch of grant.
Forecast changes
We make marginal changes to our core business estimates but now incorporate the
data centre business. As a result our revenue estimates for FY12 and FY13 are
higher. We increase FY12 and FY13 revenue estimates by INR 656mn and INR
2,520mn of which 62%/90% is contributed by data center revenue in FY12/FY13.
But the core margin dilutes by 56bps and 131bps for FY12/FY13 due to the ramp up
phase of the data center business.
Valuation and rating analysis
Our Dec-11 price target is increased to INR 244, up from INR 230 earlier. We value
Tulip’s core business at INR 235 based on a full DCF analysis. We add INR 10/share
for TTSL’s 13% stake in the BWA JV with Qualcomm valued at INR 1,400 mn.
Table 6: Tulip Telecom: SOTP
INR million, year-end March
SOTP INR
Core valueA 235
Investment in BWA JV 10
Equity Value Per Share (INR) 244*
Source: Company reports and J.P. Morgan estimates.* decimal error
We highlight the following downside risks to our ratings and price target: [1] Earlier
or deeper competition from BWA winners like Reliance Industries in last mile
enterprise connectivity and/or increasing competition from traditional players like
Tata Communications, BSNL, Bharti, Reliance Communications; [2] Tulip having to
pay license fee for using the 3.3GHz band (currently unlicensed); [3] Continued
caution on spend by enterprises.
No comments:
Post a Comment