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Slowdown impacts business growth
Tulip Telecom’s Q3FY12 revenue was below our estimates. Revenue was up
13.9% YoY at Rs6.8bn vs our estimate of Rs7.4bn due to slowdown in business
activity. However, EBITDA margin was in line with our estimate at 29% during
Q3. We revise our revenue assumption downward to factor in the uncertain
economic environment in the country which has decelerated the growth
momentum of the company. However, visibility in data centre is improving
and the company has orders worth Rs6bn for 5 years which bodes well
considering that it is a business in the investment phase. We believe that
negatives in terms of FCCB payout due in Aug 2012 is factored in the current
valuation. We re-iterate Buy rating with a revised target price of Rs205,
implying EV/EBITDA of 6.1x and 5.5x FY12E and FY13E respectively.
Results below expectation: Q3 result came below expectation. Tulip clocked
13.9% YoY revenue growth to Rs6.8bn as against our expectation of Rs7.4bn.
However, the business mix in favour of fibre based services helped the
company maintain operating margin at 29% (in line with our estimates).
Higher interest expenses and tax rate led to a decline in net profit by 5.3% YoY
to Rs773mn during Q3.
Return ratios slipping q-o-q: While the EBITDA margin remains intact, return
ratios slipped quarter by quarter due to continuous capex for its data center as
well as the existing fibre based segment. Also, working capital pressure has
increased with the company beginning to implement R-APDRP projects. We
believe that lower asset utilization would temporary put pressure on return
ratios. The reduction in capex from FY13, lower interest rate and monetization
of investment in Qualcomm/stake sale in subsidiary would reduce interest
burden going forward and improve return ratios.
Traction seen in data center subsidiary: Tulip booked orders worth Rs6bn
for 5 years for 30,000 sq ft. Also, the estimated loss in subsidiary reduced to
US$3bn from earlier estimation of US$10mn for FY12. While the stake sale is
still away, the company has achieved financial closure for its funding
requirement of Rs5bn over a 3-year period. It has already got visibility of ~40%
of usable capacity.
Re-iterate Buy; despite reduction in estimates: We have reduced our
revenue estimates lower to take in the impact of Q3FY12 result and factor in -
1) the slower growth rate in Tulip’s business in Q3 due to weak economic
environment which reduces customer spending; 2) a shift in losses to FY13 for
data center business as the full year impact would be visible and higher
interest cost for FY13E. At the CMP, the stock trades at modest valuations of
4.4x FY12E EV/EBITDA and 5.2x FY12E earnings. We estimate 16% revenue
growth to Rs37bn over FY12-14E with EBIDTA margin of 29% despite the data
centre’s business losses. We expect lower return ratios on higher capex on
data centre which would continue for next 3-4 years. We re-iterate Buy rating
on the stock and revise target price to Rs205 to factor in earnings revision. Key
triggers for the stock would be: (1) monetization of investment in Qualcomm
business; (2) stake sale in data center subsidiary; and (3) higher-than-expected
growth in business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Slowdown impacts business growth
Tulip Telecom’s Q3FY12 revenue was below our estimates. Revenue was up
13.9% YoY at Rs6.8bn vs our estimate of Rs7.4bn due to slowdown in business
activity. However, EBITDA margin was in line with our estimate at 29% during
Q3. We revise our revenue assumption downward to factor in the uncertain
economic environment in the country which has decelerated the growth
momentum of the company. However, visibility in data centre is improving
and the company has orders worth Rs6bn for 5 years which bodes well
considering that it is a business in the investment phase. We believe that
negatives in terms of FCCB payout due in Aug 2012 is factored in the current
valuation. We re-iterate Buy rating with a revised target price of Rs205,
implying EV/EBITDA of 6.1x and 5.5x FY12E and FY13E respectively.
Results below expectation: Q3 result came below expectation. Tulip clocked
13.9% YoY revenue growth to Rs6.8bn as against our expectation of Rs7.4bn.
However, the business mix in favour of fibre based services helped the
company maintain operating margin at 29% (in line with our estimates).
Higher interest expenses and tax rate led to a decline in net profit by 5.3% YoY
to Rs773mn during Q3.
Return ratios slipping q-o-q: While the EBITDA margin remains intact, return
ratios slipped quarter by quarter due to continuous capex for its data center as
well as the existing fibre based segment. Also, working capital pressure has
increased with the company beginning to implement R-APDRP projects. We
believe that lower asset utilization would temporary put pressure on return
ratios. The reduction in capex from FY13, lower interest rate and monetization
of investment in Qualcomm/stake sale in subsidiary would reduce interest
burden going forward and improve return ratios.
Traction seen in data center subsidiary: Tulip booked orders worth Rs6bn
for 5 years for 30,000 sq ft. Also, the estimated loss in subsidiary reduced to
US$3bn from earlier estimation of US$10mn for FY12. While the stake sale is
still away, the company has achieved financial closure for its funding
requirement of Rs5bn over a 3-year period. It has already got visibility of ~40%
of usable capacity.
Re-iterate Buy; despite reduction in estimates: We have reduced our
revenue estimates lower to take in the impact of Q3FY12 result and factor in -
1) the slower growth rate in Tulip’s business in Q3 due to weak economic
environment which reduces customer spending; 2) a shift in losses to FY13 for
data center business as the full year impact would be visible and higher
interest cost for FY13E. At the CMP, the stock trades at modest valuations of
4.4x FY12E EV/EBITDA and 5.2x FY12E earnings. We estimate 16% revenue
growth to Rs37bn over FY12-14E with EBIDTA margin of 29% despite the data
centre’s business losses. We expect lower return ratios on higher capex on
data centre which would continue for next 3-4 years. We re-iterate Buy rating
on the stock and revise target price to Rs205 to factor in earnings revision. Key
triggers for the stock would be: (1) monetization of investment in Qualcomm
business; (2) stake sale in data center subsidiary; and (3) higher-than-expected
growth in business.
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