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Revenue disappoints, but margin improvement continues
Tulip Telecom’s (TTSL) Q3FY11 results were below our estimates, but in line with
the Street’s estimates. In a seasonally strong quarter, consolidated revenue grew
at a tepid 3% Q-o-Q to INR 6 bn (~4% lower than our estimate), though the fibre
segment revenue continued to grow at a healthy pace (up 15% Q-o-Q) and
contributed ~33.5% to overall revenues. More than 40% of TTSL’s order intake is
now from the fibre business. The balance revenue (comprising NI and IP VPN
segments), at INR 4 bn, was flat Q-o-Q and down ~5.5% from Q4FY10 levels.
EBITDA margin continued to improve—up 55bps Q-o-Q and ~144bps Y-o-Y.
Key updates
• Net debt continues to rise, up from INR 11.9 bn in Q2FY11 to INR
12.4 bn in Q3FY11: This does not include the INR 2 bn debt raised by
TTSL for purchase of the Bengaluru data centre (TDCPL) in January 2011.
Higher working capital (WC) requirement was one of the reasons for
increase in debt this quarter. Management indicated that WC will continue to
rise going forward on account of bank guarantees when TTSL bids for
government projects and as the increasing revenue share of government
projects leads to rise in receivable days (expected to increase from <3
months to 4-5 months).
• TDCPL update: TTSL has already invested INR 2.3 bn (funded via cash and
internal accruals) in the SPV and it expects to sell 20-30% stake in it to a
private equity/strategic investor for INR 2.5-3.0 bn. Management indicated
that the company is already in talks with potential clients for sale of ~75k sq
ft capacity and expects to sell ~25k sq ft in the next 6-9 months.
Outlook and valuations: Attractive; maintain ‘BUY’
We believe the DC venture is a long-term strategic fit to TTSL’s existing business
and will enable it to gain higher wallet share of its existing clients. While our
current estimates do not include TDCPL pending some financial disclosures, we
have incorporated the INR 2 bn debt raised by TTSL for this SPV. Hence our
FY12 earnings estimate is lower by ~5%. TTSL’s management has stated that
TDCPL could post cash loss of USD 10-15 mn in the initial year of operation
(FY12). On a proforma basis (refer table 1 and 2), we estimate ~10.6% earnings
erosion for FY12 on account of TDCPL. Taking into account this potential
earnings erosion, the stock continues to trade at attractive valuations of 8.6x
FY12E. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on
the stock.
Company Description
TTSL’s principle business entails providing enterprise connectivity services through
wireless and fibre last mile network. It provides intercity and intra-city wireless IP VPN
connectivity to enterprises in over 1500 locations. In the last 18 months, TTSL has also
rolled out its own fibre network of ~6000 km spanning 50+ cities, with initial presence in
CBDs of ~250 cities. TTSL has also entered the ILD segment and is setting up six
international PoPs. It has also received the FCC 214 licence which will enable it to sell
data connectivity services in the US. Besides enterprise connectivity, TTSL provides
network integration and management services as well. In July 2010, TTSL acquired a
13% minority stake in a BWA JV with Qualcomm for INR 1.4 bn.
Investment Theme
We are positive on TTSL’s business prospects as an integrated provider of network
equipment and connectivity for enterprises. With a wide network footprint covering
urban & rural areas, we see continued traction in the IP VPN business driving revenue
growth and profitability for TTSL. The rollout of fibre network is expected to materially
enhance TTSL’s addressable market and ability to compete for high bandwidth
customers, thereby leading to higher realizations and better profitability.
Key Risks
Competition from larger integrated telecos like Bharti Airtel, Reliance Communications,
and BSNL is the key risk for TTSL. With the SME segment (currently the key market for
TTSL) being considered as a lucrative opportunity by large players, added competitive
pressure may increase the risk quotient for TTSL. Also, the emergence of new costeffective
and more efficient technologies may impact TTSL’s business, as adopting new
technologies or switching over to new service offerings may require significant capex
that may not be viable for TTSL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Revenue disappoints, but margin improvement continues
Tulip Telecom’s (TTSL) Q3FY11 results were below our estimates, but in line with
the Street’s estimates. In a seasonally strong quarter, consolidated revenue grew
at a tepid 3% Q-o-Q to INR 6 bn (~4% lower than our estimate), though the fibre
segment revenue continued to grow at a healthy pace (up 15% Q-o-Q) and
contributed ~33.5% to overall revenues. More than 40% of TTSL’s order intake is
now from the fibre business. The balance revenue (comprising NI and IP VPN
segments), at INR 4 bn, was flat Q-o-Q and down ~5.5% from Q4FY10 levels.
EBITDA margin continued to improve—up 55bps Q-o-Q and ~144bps Y-o-Y.
Key updates
• Net debt continues to rise, up from INR 11.9 bn in Q2FY11 to INR
12.4 bn in Q3FY11: This does not include the INR 2 bn debt raised by
TTSL for purchase of the Bengaluru data centre (TDCPL) in January 2011.
Higher working capital (WC) requirement was one of the reasons for
increase in debt this quarter. Management indicated that WC will continue to
rise going forward on account of bank guarantees when TTSL bids for
government projects and as the increasing revenue share of government
projects leads to rise in receivable days (expected to increase from <3
months to 4-5 months).
• TDCPL update: TTSL has already invested INR 2.3 bn (funded via cash and
internal accruals) in the SPV and it expects to sell 20-30% stake in it to a
private equity/strategic investor for INR 2.5-3.0 bn. Management indicated
that the company is already in talks with potential clients for sale of ~75k sq
ft capacity and expects to sell ~25k sq ft in the next 6-9 months.
Outlook and valuations: Attractive; maintain ‘BUY’
We believe the DC venture is a long-term strategic fit to TTSL’s existing business
and will enable it to gain higher wallet share of its existing clients. While our
current estimates do not include TDCPL pending some financial disclosures, we
have incorporated the INR 2 bn debt raised by TTSL for this SPV. Hence our
FY12 earnings estimate is lower by ~5%. TTSL’s management has stated that
TDCPL could post cash loss of USD 10-15 mn in the initial year of operation
(FY12). On a proforma basis (refer table 1 and 2), we estimate ~10.6% earnings
erosion for FY12 on account of TDCPL. Taking into account this potential
earnings erosion, the stock continues to trade at attractive valuations of 8.6x
FY12E. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on
the stock.
Company Description
TTSL’s principle business entails providing enterprise connectivity services through
wireless and fibre last mile network. It provides intercity and intra-city wireless IP VPN
connectivity to enterprises in over 1500 locations. In the last 18 months, TTSL has also
rolled out its own fibre network of ~6000 km spanning 50+ cities, with initial presence in
CBDs of ~250 cities. TTSL has also entered the ILD segment and is setting up six
international PoPs. It has also received the FCC 214 licence which will enable it to sell
data connectivity services in the US. Besides enterprise connectivity, TTSL provides
network integration and management services as well. In July 2010, TTSL acquired a
13% minority stake in a BWA JV with Qualcomm for INR 1.4 bn.
Investment Theme
We are positive on TTSL’s business prospects as an integrated provider of network
equipment and connectivity for enterprises. With a wide network footprint covering
urban & rural areas, we see continued traction in the IP VPN business driving revenue
growth and profitability for TTSL. The rollout of fibre network is expected to materially
enhance TTSL’s addressable market and ability to compete for high bandwidth
customers, thereby leading to higher realizations and better profitability.
Key Risks
Competition from larger integrated telecos like Bharti Airtel, Reliance Communications,
and BSNL is the key risk for TTSL. With the SME segment (currently the key market for
TTSL) being considered as a lucrative opportunity by large players, added competitive
pressure may increase the risk quotient for TTSL. Also, the emergence of new costeffective
and more efficient technologies may impact TTSL’s business, as adopting new
technologies or switching over to new service offerings may require significant capex
that may not be viable for TTSL.
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