Buy Tulip Telecom Ltd.

Target Price:-Rs 222
CMP :-Rs178.2

Tulip Telecom is ` 2500 crore (March 2010) company. It is the largest enterprise data connectivity service provider in India, also a leading network integrator & managed services provider to its customer across India, U.S and Middle East. It is operating with a customer base of 1800+ and having network presence in 1700 cities of India.

Currently, the stock is quoting at 9x on TTM
EPS of ` 20. We recommend BUY at current levels for 12 months price target of ` 222, an upside of 24%.

Conference Call Highlights
 Wireless VPN segment (data connectivity) is Tulip’s major business which contributes about 80% to its revenues and remaining 20% from data integration business. The management is focusing more on VPN business & receiving stable revenues from data integration segment. ARPU in data connectivity business is steady during recent quarters.

 The company earns its revenues from the segments (clients) like BFSI (40%), Enterprises (40%), Utilities (8‐9%), Government (2‐3%) and other telecom companies (8‐9%). Tulip has a wide network across India, opportunities, in the form of new telecom players wanting to lease circuits could be a key revenue generator for the company.

 The fibre business contributes 25% to its revenues and management is aiming to earn around 70% – 75% from fibre rollouts in next 2 years. Intra city fibre network has reached upto 6000 kilo meters covering more than 600 customers in 300 cities and more than 65% of its customers additions are new while the rest are wireless to fibre substitutes.

 Considering current scenario the management expects the operations to strengthen enhancing the efficiency and maximising revenues per customer. Tulip also got several orders, licence grants and strategic tie up which will further improve its position in Enterprise Data Connectivity market.

 Several new customers were added to the portfolio during the quarter including Adani Group, Asian Development Bank, GMR Group, Mudra Coats, Madras Cements, Max Bupa, One97 Communication etc. The company also added notable domestic and overseas clients on its ILD business and has strategy to have deeper client penetration and a more expansive engagement through multiple offerings.

 Tulip received Federal Communication Commission licence on July 7, 2010 which will allow its entry in US markets and will enhance company’s earnings in coming quarters. In last 18 months company has developed one of the best (last mile) integrated fibre networks in the country which has enhanced company’s end to end data connectivity service.

 Consolidated 2Q FY11 net sales were up 19.2% (Y‐o‐Y) at ` 585.3 crore mainly due to improved grip and growth in services delivered on both, high bandwidth fibre services and conventional wireless business segment. Fiber segment strongly contributed to the topline and company is well poised to improve its market share in enterprise data services / connectivity market by capturing business opportunities in fiber segment and also sustaining growth in wireless segment.

 Other income during 2Q FY11 was ` 1.4 crore compared to ` 0.7 crore (Y‐o‐Y). EBITDA during the quarter was ` 164.7 crore, 29.1% up (Y‐o‐Y) mainly due to shift in revenue mix with improving contribution from fiber business and also bulk purchase of bandwidth on account of fibre rolloutssupported EBITDA to rise. Moreover the increase in number of subscribers has enhanced the economies of scale reducing cost per subscriber.

 Consolidated 2Q FY11 net sales were up 19.2% (Y‐o‐Y) at ` 585.3 crore mainly due to improved gripand growth in services delivered on both, high bandwidth fibre services and conventional wirelessbusiness segment. Fiber segment strongly contributed to the topline and company is well poised toimprove its market share in enterprise data services / connectivity market by capturing businessopportunities in fiber segment and also sustaining growth in wireless segment.

 Other income during 2Q FY11 was ` 1.4 crore compared to ` 0.7 crore (Y o‐Y). EBITDA during thequarter was ` 164.7 crore, 29.1% up (Y‐o‐Y) mainly due to shift in revenue mix with improvingcontribution from fiber business and also bulk purchase of bandwidth on account of fibre rolloutssupported EBITDA to rise. Moreover the increase in number of subscribers has enhanced theeconomies of scale reducing cost per subscriber.

 Interest cost was flat 1.3% down at ` 18.96 crore, while company’s  overallcost of funds is below8.6%. PAT for 2Q FY11 grew by 59.6% (Y‐o‐Y) at ` 78 crore with quarterly EPS (adjusted for stocksplit) increasing substantially by 59.6% (Y‐o‐Y) at ` 5.4. Bottom‐line was improved as depreciationcost and interest cost remained flat at ` 41.95 crore and ` 18.96 crore respectively.

 Healthy growth reported in MPLS VPN on wireless led by client additions and new connects. Themanagement expects this segment to register stable growth given the numerous governmentinitiatives including upgradation by electricity boards, bandwidth required for SWAN networks,financial inclusion etc. During the quarter Tulip added new customers on wireless including IFFCOKisan Sanchar Limited, MAX BUPA Health, TTK Prestige Limited and others.

Tulip telecom has a better market share in enterprise data business in India and is market leader in Multiprotocol Label Switching (MPLS) used in creating virtual private networks (VPNs) with 29.7% domestic market share. Tulip faces stiff competition mainly from large telecom companies in enterprise data segment.

Capex Plans

 Capex guidance given for the full year is ` 450 crore to ` 500 crore out of which company had spent ` 204 crore in first 2 quarters. Total POP’s (point of presence) to be setup are one each in USA, London, Singapore and two in India at a normal expense of ` 15 crore which will act as gateways.

 Nominal capex will be required to rollout network for new R‐APDRP (Restructured accelerated power development and reform programme) projects in UP, Gujarat (Aug‐Sept 2010), Uttarakhand & Punjab by means of existing and new infrastructure to execute the order. The revenues for this bandwidth services are likely to start from 1Q FY12.

 Depending upon the demand scenario the company is planning conservative capex to enhance both fibre and wireless infrastructure in existing cities.

Recent Developments

 During the quarter Tulip telecom has won R‐APDRP project worth ` 50.15 crore from Uttarakhand and Punjab government with cumulative project value of ` 208.4 crore. (` 158.2 crore R‐APDRP project won in last quarter from UP and Gujarat government). The projects are spread over a period of 3 to 5 years and are expected to deliver reasonably higher return on investments as Tulip will use a combination of existing and new infrastructure to execute these orders, thus nominal capex will be incurred to roll‐out network.

 The board of directors have approved to raise around ` 1000 crore by way of fresh equity issue, bonds or through QIP route in one or more tranches. It does not include any payment to be made to Qualcomm as the payment has already been made for acquisition. The funds will be kept as reserve money as foreign exchange fluctuations should not affect its capex plans.

 Tulip Telecom has bought 13% stake in Qualcomm’s broadband venture in India for about ` 140 crore. Qualcomm has won licences in four circles, Delhi, Mumbai, Kerala and Haryana during BWA auction earlier this year. It will help the company to be a part of upcoming TD‐LTE (Time Division Long term Evolution–4G) action in fast‐growing Indian market and a better way for company to enter in retail market.

 Company has sub‐divided its equity shares from face value ` 10 per share to ` 2 per share. Management has seen good volumes and interest in stock from various categories of investors. Tulip telecom also received an order in ‘Managed Services’ segment for Gujarat SWAN valued at ` 25 crore to manage their network for a period of 3‐5 years. Managing SWAN project will earn incremental revenue on quarterly basis and the receipt has started from current quarter.

Key Risks to our Target:

 Stiff competition is expected in Fibre (VPN) segment in coming years as many other big telecom companies such as RCom, BSNL, and Tata Communication are setting up their feet.

 The company has not disclosed its cost details, capex details and segmentwise breakdown, which makes difficult to analyst its future growth.

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