TULIP TELECOM LTD (TTL ) - Sifyim.sify.com/sifycmsimg/nov2009/Finance/14921270_Tulip... · 2009-11-26 · • Tulip Telecom Limited is a data telecom service and IT solutions provider

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Firstcall India Equity Advisors Pvt Ltd

TULIP TELECOM LTD (TTL)

BUY Target Price: Rs.1016.00

CMP: Rs.924.00 Market Cap.: Rs.26796.0mn.

Date: November 24, 2009

Key Ratios:

Particulars FY09 FY10E FY11E

OPM(%) 23 28 27

PAT Margin(%) 16 13 13

ROE(%) 56 37 29

ROCE(%) 26 37 35

P/BV(x) 6.02 3.79 2.70

P/E(x) 10.70 10.25 9.36

Key Data:

Sector Telecom

Face Value Rs.10.00

52 wk. High/Low Rs.1250.95/Rs.258.05

Volume (2 wk. Avg.) 18947

BSE Code 532691

SYNOPSIS • Tulip Telecom Limited is a data telecom service and

IT solutions provider.

• Tulip is India’s largest MPLS VPN player and has

been the front-runner in provisioning and managing

multi location wide area networks for various

industry verticals.

• During Q2FY10, Tulip completed its Phase-I, intra-

city fiber network expansion in top 10 CBD’s and has

begun phase-II rollout in additional 20 cities to be

completed by March-2010.

• During Q2FY10, Tulip repurchased FCCBs worth

US$12mn which resulted in savings of Rs74mn for

the quarter.

• Tulip has increased its focus on the data

connectivity business the share of this segment has

increased to 85% in Q2FY10 as compared to 68.4%

in Q2FY09.

• Company added 21,747 connections that led to a

10% growth sequentially.

• Tulip has completed the SWAN project for West

Bengal & SWAN for Assam is also on the verge of

completion.

• Company maintained its capex guidance of Rs3-4bn

for FY10E

• The topline of the company is expected to grow at

a CAGR of 22% over FY08 to FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]

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Investment Highlights

• Result Updates (Q2 FY10)

Tulip Telecom’s consolidated revenue for the quarter grew by 28% YoY to Rs 4910

million from Rs 3850 million. The VPN segment reported healthy growth on the back of

new client additions and connect growth. Revenues from VPN segment grew by 57%

QoQ to Rs 4180 million while revenue from Network Integration business de-grew by

37% QoQ to Rs 730 million. The contribution from data connectivity business increased

to 85% as against 69.5% in Q2FY09. The shift towards VPN segment is in line with the

company’s strategy to shift towards the higher margin business. Proportion of annuity

revenues on total revenues increased to 66.5% in Q2FY10, further strengthening the

revenue visibility.

Operating profit for the quarter was at Rs 1260 million, up by 56% YoY. The operating

margins improved by 476 bps YoY to 25.83% This was achieved by the company's focus

in corporate network / data services business which is a higher margin business. The

depreciation for the quarter was higher by 24% QoQ due to higher capex incurred.

Interest cost was higher by 18% QoQ largely on account of debt raised by the company

to funds it capex plans. The net profit for the quarter was higher by 3% QoQ to Rs 517.9

million from Rs 501.6 million.

During the quarter, the company saw good traction in Enterprise Data Services market.

The recurring revenues from clients improved by 11.5% QoQ to Rs 3260 million from Rs

2930 million while the installation charges increased by 20% to Rs 910 million from Rs

760 million. Tulip also saw strong earnings growth in the VPN segment. Tulips focus on

high margin VPN segment resulted in a significant 59% growth in revenues to Rs 4180

million from Rs 2630 million.

• Repurchases FCCBs worth US$ 12 mn

Tulip repurchased FCCBs worth US$12mn which resulted in savings of Rs74mn for the

quarter. Outstanding FCCB has reduced to US$97mn.

• Eyes US firm

Tulip Telecom plans to acquire an IT-managed services company in the US. . The

company has set aside Rs 200 crore for the acquisition and has appointed merchant

bankers to scout for a suitable firm in the US.

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• Order worth Rs 95 cr

Tulip Telecom bags order worth Rs 95 cr for Madhya Pradesh State Wide Area Network

(MPSWAN). The network will be established on the BOOT model. It also involves the

maintenance of the project for a period of 5 years.

• Focus on Corporate data services

The Company is planning to reduce its dependence on its network integration business

and focus on corporate data services that include managed services and data centres

business.

• Segment Revenue

Company Profile

Tulip Telecom Limited is a data telecom service and IT solutions provider that offers innovative

IP based infrastructural solutions to its customers. Tulip is India’s largest MPLS VPN player and

has been the front-runner in provisioning and managing multi location wide area networks for

various industry verticals.

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Tulip is a public limited company and is listed on the Bombay Stock Exchange and National

Stock Exchange in India. The company has displayed robust growth since its inception and its

IPO has been ranked as one of the top four IPO's in India, since 2005, by CNBC. With revenues

in excess of Rs 1614.40 Crores (USD 322 Million) in the financial year ending 31st March, 2009

and a market capitalization in excess of Rs. 2131.50 Crores (USD 426 Million as on 31st March

2009), Tulip is one of the largest corporate in its domain.

Tulip provides network integration (NI), corporate data connectivity (MPLS VPNs and Internet)

within and outside India, infrastructure management services and IT consulting services to

enterprises. Being the largest MPLS VPN Service Provider in India, Tulip has innovatively

deployed a countrywide network using wireless on the last mile and has successfully bridged

the large digital divide that existed in rural connectivity in India.

Global Industry Recognition

• Wins the State Wide Area Network (SWAN) projects of West Bengal and Assam.

• Successfully places maiden FCCB issue of the company for USD 150 million.

• Extended its MPLS/VPN network in over 1200cities.

• First Tier III Data Centre of the company started its operation at New Delhi.

Industry Solutions

• BFSI

• Defense

• Government

• Telecommunications

• IT/ ITES

• Enterprise

• Utilities

Subsidiaries

• Tulip IT Services Singapore Pte. Ltd.

• Tulip SWAN IT Services Ltd.

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Customers

Major Customers of the company are:

Telecom

Enterprises

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Business Areas

The Company operates under three main business segments globally. They are.

Services Offered:

Enterprise Solutions

• Connectivity Services

• IP VPN Services

• Hybrid VNO Services

• Application-Aware Services

• Ethernet Services

• Internet Access Services

• Private Line Services

• Managed IT Infrastructure Services

• Collocation Services

• Managed Hosting Services

• Managed Storage Services

• Managed Application Services

• Audio and Web Conferencing

Services

• Business Messaging & Collaboration

Services

• Hosted Contact Center Services

• Managed Voice Services

• Managed Security Services

• CPE-Based Services

• Cloud-Based Services

• Professional Services

• Professional Services Outsourcing

Service Provider Solutions

• IP Services

• Transit

• Content

• India IP Transit (ILL)

• Voice Services

• Transport

• Access Services

• VoIP Link

• Mobile Direct

• Mobile Services

• Signaling

• Roaming

• M-Commerce

• Enterprise Mobility

Business Areas

Network

Integration

Corporate

network

Managed

Services

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Retail Solutions

• Broadband Services

• Wi-Fi Services

• Net Telephony

• Global Roaming Coverage

• Mail Services

• Global Calling Cards True roots

Peer Group Comparison

Name of the company CMP(Rs.)

(As on Nov

24, 2009)

Market Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV (x)

Tulip Telecom Ltd 924.00 26796.00

86.39 10.70 6.02

Bharti Airtel 282.00 1070709.5 23.91 11.79 3.91

Idea Cellular 49.35 152989.7

3.78 13.06 3.08

Reliance Communications 174.45 358005.5 8.67 20.01 0.69

Key Concerns

• The most important factor which restricts the company’s revenue growth is the lack of

end user relationship.

• Absence of a subscriber base is looking to be a major threat to the future growth of the

company.

• The growth in traffic volumes is being an offset by the pricing pressure faced due to

increased competition.

• Increases in working capital subsequent to the foray into the SWAN business.

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Financials 12 Months Ended Profit & Loss Account (Consolidated)

Value(Rs.in million) FY08A FY09A FY10E FY11E

12m 12m 12m 12m

Description

Net Sales 12,189.80 16,144.03 19372.84 22278.76

Other Income 230.45 344.49 378.94 416.83

Total Income 12,420.25 16,488.52 19751.78 22695.59

Expenditure -9,733.18 -12,777.00 -14297.15 -16664.51

Operating Profit 2,687.07 3,711.52 5454.62 6031.08

Interest -258.32 -462.13 -693.20 -727.85

Gross Profit 2,428.75 3,249.39 4761.43 5303.23

Depreciation -418.14 -414.40 -1574.72 -1810.93

Profit before Tax 2,010.61 2,834.99 3186.71 3492.30

Tax -139.50 -329.71 -573.61 -628.61

Profit after Tax 1,871.11 2,505.28 2613.10 2863.68

Extraordinary Items 0.29 0.00 0.00 0.00

Net Profit 1,871.40 2,505.28 2613.10 2863.68

Equity Capital 290.00 290.00 290.00 290.00

Reserves 2,504.80 4,161.30 6,774.40 9,638.08

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 29.00 29.00 29.00 29.00

EPS 64.53 86.39 90.11 98.75

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Quarterly Ended Profit & Loss Account (Consolidated)

Value(Rs.in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E

3m 3m 3m 3m

Description

Net Sales 4677.38 4429.23 4910.49 5156.01

Other Income 579.10 271.27 36.63 40.29

Total Income 5256.48 4700.50 4947.12 5196.31

Expenditure -3674.94 -3343.30 -3641.93 -3841.23

Operating Profit 1581.54 1357.20 1305.19 1355.08

Interest -143.34 -158.16 -187.05 -196.40

Gross Profit 1438.20 1199.04 1118.14 1158.67

Depreciation -136.48 -352.69 -435.82 -479.40

Profit before Tax 1301.72 846.35 682.32 679.27

Tax -234.84 -95.92 -164.39 -101.89

Profit after Tax 1066.88 750.43 517.93 577.38

Net Profit 1066.88 750.43 517.93 577.38

Equity Capital 290.00 290.00 290.00 290.00

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 29.00 29.00 29.00 29.00

EPS 36.79 25.88 17.86 19.91

E=Estimated

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Charts

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1 Year Comparative Graph

TULIP TELECOM BSE SENSEX

Outlook and Conclusion

• At the current market price of Rs.924.00 the stock is trading at a P/Ex of 10.25x for

FY10E and 9.36x for FY11E.

• The EPS of the stock is expected to be at Rs.90.11 and Rs.98.75 for FY10E and FY11E

respectively.

• On the basis of price to book value, the stock trades at 3.79x and 2.70x for FY10E and

FY11E respectively.

• The company is now poised to increase its presence in the overall enterprise data

services market.

• The company has completed basic optic fiber network roll out in Delhi and Mumbai.

• Tulip has completed the SWAN project for West Bengal & SWAN for Assam is also on the

verge of completion.

• The company is in the process of completing its fourth Data Center in Bangalore. The

other data centers are in New Delhi, Mumbai and Navi Mumbai.

• The company witnessed a substantial increase in customer acquisitions across all

industry segments.

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• In next 2-year, it focus on retail and rural segment.

• Company will be looking for business which will assist in expansion of bandwidth

connectivity business.

• Company maintained its capex guidance of Rs3-4bn for FY10E and Rs3bn for FY11.

• The company to fully roll out and operationalise its optical fiber network in major cities

by the end of this fiscal. This would result in higher bandwidth usage by its client. The

fiber optic network would also increase the addressable market, thus providing the

company with additional scope of growth.

• We recommend a “BUY” on the stock with a target price of Rs.1016.00 for medium to

long term.

Industry Overview

Indian telecom is more than 165 years old, beginning with the commissioning of the first

telegraph line between Kolkata and Diamond Harbour in 1839. In 1948, India had 0.1 million

telephone connections with a telephone density of about 0.02 telephones per hundred

populations. As of June 2007, there were 225.21 million telephone (including cellular mobile)

connections in the country with a telephone density of 19.86 telephones per hundred

populations. Out of total 225.21 million telephone connections, 185.13 million (nearly 82

percent) connections pertained to wireless and mobile phones.

Telecommunications is one of the prime support services needed for rapid growth and

modernization of various sectors of the economy. It has become especially important in recent

years because of enormous growth of Information Technology (IT) and its significant impact on

the rest of the economy. India is perceived to have a special comparative advantage in IT and in

IT-enabled services. However, sustaining this advantage depends critically on high quality

telecommunication infrastructure. It is equally important to speed up structural changes in this

sector in line with trends in other countries to ensure that telecommunication services are not

only made available on the scale needed to sustain rapid growth in the economy as a whole but

also that their cost are in tune with the expectations of a modernizing economy.

Telecom sector is considered to be one of the most vibrant sectors with the highest growth rate

which has nearly more than 60 lakh customers added every month. Today the Indian

telecommunications network with over 270 million connections is the third largest in the world

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and the second largest among the emerging economies of Asia. Over the last few years the

sector has witnessed high growth rates. The current addition of about eight million lines per

month plus the telecommunications sector is on a strong footing to achieve the target of 500

million connections by 2010.

Year Ending Broadband Subscribers Internet Subscribers

2005 3 mn 6 mn

2007 9 mn 18 mn

2010 20 mn 40 mn

Source: Cris Infac, DoT

This industry offers a plethora of services. It is also easily accessible and easily available for

every individual today. One of the best advantages in this industry is its drastic reduction in

tariff compared to the prior periods. And it has a number of public as well as private sector

companies which give a world class service to their customers.

The major classes of services in this sector are:

Fixed – Copper, Optical Fibre, Wireless

Mobile – GSM and CDMA Based

Narrow band – Voice, Internet, Fax

Broadband – High speed Internet, Video

Key Indian Companies

• BSNL - Incumbent service provider and World's 7th largest Telecommunications

Company providing comprehensive range of telecom services in India

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• Services include Wireline, CDMA mobile, GSM Mobile, Internet, Broadband, Carrier

service, MPLS-VPN, VSAT, VoIP services, IN Services etc.

• MTNL - State owned operator covering the cities of Mumbai an Delhi

• Provides both fixed and mobile services

• Bharti Airtel - Integrated operator with presence in all segments

• Leads the mobile segment in the country

• Reliance Communications - Largest player in India in the CDMA segment

• Plans a GSM network

• Tata Teleservices - Integrated operator (with VSNL) with presence in all segments

• Provides CDMA services in 20 circles

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___________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for

the purchase or sale of any financial instrument or as an official confirmation of any transaction.

The information contained herein is from publicly available data or other sources believed to be

reliable but we do not represent that it is accurate or complete and it should not be relied on as

such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in

the information contained in this report. This document is provide for assistance only and is not

intended to be and must not alone be taken as the basis for an investment decision.

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TULIP TELECOM LTD (TTL ) - Sifyim.sify.com/sifycmsimg/nov2009/Finance/14921270_Tulip... · 2009-11-26 · • Tulip Telecom Limited is a data telecom service and IT solutions provider