Tulip Telecom: Some recovery, not clear if out of woods yet: Nomura research,

Recovery in revenue growth to 8% q-q and margins to 27% (vs 26% in
the previous quarter) in this June quarter is a positive surprise, given
macro/competition headwinds the company has been facing in the past 2
quarters. Despite which, management notes that the near-term outlook
remains “mixed” suggesting that challenges could persist in the core
connectivity business. Moreover, take-up in the data center continues to
be slow (only 10%) while Tulip continues to make investments (INR2bn
for this year), which is a concern. Hence, we maintain Neutral. Tulip
recently announced that it is making progress on its FCCB redemption
(total amount of USD145mn). It has recently tied up USD80mn in debt,
while we believe the issue of fresh FCCBs for the remainder could still
be underway. The redemption date is only weeks away, and this is still a
concern and the stock could remain volatile ahead of this.

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Tulip’s June quarter revenue/EBITDA came in 8-18% above
our/consensus expectations.
What does the result mean?
 Operational trends improved in this quarter with revenue growing
8% q-q to INR7bn and EBITDA by 13% q-q to INR1.9bn. In past 2
quarters, revenue and EBITDA have declined sequentially due to the
slowing macro environment as well as competition which resulted in
downward pricing pressure. While this quarter’s result is a positive, we
believe challenges may not be at an end as yet. On a y-y basis,
revenues rose 10%, while EBITDA grew by 4%.
 Tulip announced another data center order for INR870mn over 3
years and for 10k sqft. Nevertheless, order inflow for the data
center is progressing well below expectations and Tulip has
locked in only 10% (or ~40k sqft) as of now. Moreover, revenues for
the data center were supposed to have begun to kick in, but it is not
clear if this is the case.
 FCCB refinancing/redemption appears to be under progress, but
isn’t completed yet. Tulip is now close to its redemption date in August
and the stock could remain volatile until fully completed. Current
gearing levels remain at 3x net debt to EBITDA.
Key numbers
 Sequentially, revenue grew 8% to INR 7.2bn while EBITDA grew 13%
to INR 1.9bn with 26.8% margins.
 Underlying NPAT was down 19% q-q to INR 547mn largely on account
of tax benefits in the previous quarter. It had a INR616mn one time
gain from the sale of its stake in the BWA venture with Qualcomm.
 81% of the new connectivity orders received were for fibre. Data
connectivity accounts for 59% of its total order input while managed
services accounts for 31%. It received a new DC order from the Indian
government for INR870mn for 10K sqft of space in this quarter.