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Need to resolve pending issues for rerating
Action/valuation: Maintain Buy but TP reduced to INR150
Following recent 3Q results and Tulip’s announcement on debt funding for
the data center, we maintain our Buy rating with a reduced TP of INR150
but note that there are still some pending concerns which need to be
resolved for a re-rating to occur. Tulip’s core domestic trends have been
resilient, but the stock has underperformed the market significantly by
22% since 2011, and 3% YTD. Tulip’s current P/E of 5x is a 40-50%
discount to its historical average now. Key overhangs include:
Tulip’s debt levels have been a concern to the market and continue to rise
on account of rising working cap requirements and the investment in the
DC. The timing of events such as monetising its stake in the QCOM JV
remains uncertain and thus concern around leverage could remain, in our
view. Tulip’s FCCB are due for redemption in August (c.US$140mn
including yield) – it expects to have refinancing approvals by FY12, which
when completed should alleviate some investors’ concerns.
Tulip’s move to secure debt financing for the data center highlights
some challenges in finding an equity partner on the right terms, which
was the initial focus, and has been pursued for over six months now; we
believe this could further stretch the balance sheet in the near term.
Order ‘visibility’ on DC has improved to 225k sqft (175k sqft previously);
however, it could still take 2-3 quarters for rev trajectory to become visible.
Recent 3Q results for core business came in below expectations, and
management expects some slowdown in 4Q as well.
3Q results
ABOVE OR BELOW EXPECTATIONS? Revenue and EBITDA are 5-6% below our
expectations.
WHAT DO THE RESULTS MEAN?
• Both revenue and EBITDA saw a 2% q-q decline this quarter and hence are below our
and the market’s expectations. Management has alluded to headwinds from the macroeconomic
environment for this sequential decline in the core business. Management
expects these could continue into 4Q, and we expect they could even persist into
FY13F, in our view, and keep a lid on operational surprises.
• The stock has underperformed on account of other concerns – and we believe
resolution of these issues is key for the shares to re-rate.
- Tulip’s leverage has been a key concern for the market, and net debt has risen
from INR15bn in 4Q11 to INR21bn 3Q12. This is driven by higher capex
requirements (given investment in the data center) and working capital needs
(net working capital outflow in 9M12 was INR3.5bn vs INR2.2bn in FY11).
Timing of liquidity events and subsequently, deleveraging appear uncertain at
the moment.
- Moreover, redemption of FCCBs is due in August 2012 (c.US$140mn, including
yield) and with the rupee depreciating, has been a key overhang for the stock.
Tulip expects to have approvals in place to refinance the same by FY12 – this
should alleviate investors’ concerns.
ANY CHANGE TO GUIDANCE?
• Slight change in order book target on the new data center from 25% of usable space by
FY12 to 15-20% of usable space by FY12.
• Capex of INR4bn for core business in FY13 and INR2.25bn for the data center.
• Growth for FY13 for core business could be in the 15-20% range, but dependant on
macro.
KEY NUMBERS
• On a y-y basis, revenues grew 14% to INR6.9bn, although slowing down from previous
quarters. YTD, revenue growth of 20% is still in line with our full-year growth estimates.
• EBITDA rose 16% y-y to INR2bn. Margins improved modestly by 10bps q-q to 29%.
YTD, margins of 28.7% is tracking broadly in line with our estimates.
• On the data center, management notes order visibility to the tune of 225k sqft (vs 175k
sqft). Nevertheless, it needs to lock in these orders and see revenue contribution
filtering through for investors to feel more comfortable around this project.
EARNINGS REVISIONS
We lower our earnings estimates for the core business by 9-18%, to account for slower
revenue growth in FY12-14F, higher D&A and higher interest expense to account for
cost of debt post refinancing of FCCBs. We also increase the working capital needs for
this business based on current trends – in 9M12 working capital outflow was INR3.5bn.
(These estimates are for the core business and do not include contribution from the data
center.)
We value the data center on a stand-alone basis and factor 50% of our preliminary
valuation estimate into our target price. Our TP for Tulip following revisions moves
downwards to INR150.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Need to resolve pending issues for rerating
Action/valuation: Maintain Buy but TP reduced to INR150
Following recent 3Q results and Tulip’s announcement on debt funding for
the data center, we maintain our Buy rating with a reduced TP of INR150
but note that there are still some pending concerns which need to be
resolved for a re-rating to occur. Tulip’s core domestic trends have been
resilient, but the stock has underperformed the market significantly by
22% since 2011, and 3% YTD. Tulip’s current P/E of 5x is a 40-50%
discount to its historical average now. Key overhangs include:
Tulip’s debt levels have been a concern to the market and continue to rise
on account of rising working cap requirements and the investment in the
DC. The timing of events such as monetising its stake in the QCOM JV
remains uncertain and thus concern around leverage could remain, in our
view. Tulip’s FCCB are due for redemption in August (c.US$140mn
including yield) – it expects to have refinancing approvals by FY12, which
when completed should alleviate some investors’ concerns.
Tulip’s move to secure debt financing for the data center highlights
some challenges in finding an equity partner on the right terms, which
was the initial focus, and has been pursued for over six months now; we
believe this could further stretch the balance sheet in the near term.
Order ‘visibility’ on DC has improved to 225k sqft (175k sqft previously);
however, it could still take 2-3 quarters for rev trajectory to become visible.
Recent 3Q results for core business came in below expectations, and
management expects some slowdown in 4Q as well.
3Q results
ABOVE OR BELOW EXPECTATIONS? Revenue and EBITDA are 5-6% below our
expectations.
WHAT DO THE RESULTS MEAN?
• Both revenue and EBITDA saw a 2% q-q decline this quarter and hence are below our
and the market’s expectations. Management has alluded to headwinds from the macroeconomic
environment for this sequential decline in the core business. Management
expects these could continue into 4Q, and we expect they could even persist into
FY13F, in our view, and keep a lid on operational surprises.
• The stock has underperformed on account of other concerns – and we believe
resolution of these issues is key for the shares to re-rate.
- Tulip’s leverage has been a key concern for the market, and net debt has risen
from INR15bn in 4Q11 to INR21bn 3Q12. This is driven by higher capex
requirements (given investment in the data center) and working capital needs
(net working capital outflow in 9M12 was INR3.5bn vs INR2.2bn in FY11).
Timing of liquidity events and subsequently, deleveraging appear uncertain at
the moment.
- Moreover, redemption of FCCBs is due in August 2012 (c.US$140mn, including
yield) and with the rupee depreciating, has been a key overhang for the stock.
Tulip expects to have approvals in place to refinance the same by FY12 – this
should alleviate investors’ concerns.
ANY CHANGE TO GUIDANCE?
• Slight change in order book target on the new data center from 25% of usable space by
FY12 to 15-20% of usable space by FY12.
• Capex of INR4bn for core business in FY13 and INR2.25bn for the data center.
• Growth for FY13 for core business could be in the 15-20% range, but dependant on
macro.
KEY NUMBERS
• On a y-y basis, revenues grew 14% to INR6.9bn, although slowing down from previous
quarters. YTD, revenue growth of 20% is still in line with our full-year growth estimates.
• EBITDA rose 16% y-y to INR2bn. Margins improved modestly by 10bps q-q to 29%.
YTD, margins of 28.7% is tracking broadly in line with our estimates.
• On the data center, management notes order visibility to the tune of 225k sqft (vs 175k
sqft). Nevertheless, it needs to lock in these orders and see revenue contribution
filtering through for investors to feel more comfortable around this project.
EARNINGS REVISIONS
We lower our earnings estimates for the core business by 9-18%, to account for slower
revenue growth in FY12-14F, higher D&A and higher interest expense to account for
cost of debt post refinancing of FCCBs. We also increase the working capital needs for
this business based on current trends – in 9M12 working capital outflow was INR3.5bn.
(These estimates are for the core business and do not include contribution from the data
center.)
We value the data center on a stand-alone basis and factor 50% of our preliminary
valuation estimate into our target price. Our TP for Tulip following revisions moves
downwards to INR150.
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