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Tulip Telecom May 23rd 2012 CP

Tulip Telecom May 23rd 2012 CP

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Published by Cen Par
Research Report
Research Report

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Published by: Cen Par on Jul 24, 2012
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EQUITY RESEARCH REPORT
Tulip Telecom Ltd.
NSE: TULIP; BSE: 532691ISIN: INE122H01027; Reuters: TULP.BO; Bloomberg Ticker: TTSL:IN
Target Price: Rs. 170 by June 2013
Potential Upside: 48%+ in 1 year; Rating: Buy
Originally Prepared on May 23rd 2012 Quote: Rs. 70Updated on July 20th 2012, Current Market Price: Rs. 115
Century Partners
For Queries Kindly Write To: Century.Partners03@gmail.com
 
Tulip Telecom (BSE: 532691) Century Partners; MN
Sector: Telecommunications- Service
Prepared on: May 23rd 2012, Quote: Rs. 70; Rating: Buy
Updated on Jul 20th 2012, Current Market Price: Rs. 115; Re-Rating: BuyHead Office: New Delhi, India; Established: 1992
Recommendation: Buy, Target Price: Rs. 170 by June 2013
We believe considering the Margin Of Safety of 48%, present price per share of 
Tulip Telecom Ltd.
atRs. 115 (Jul 20th, 2012) is undervalued by a considerable margin to it's Intrinsic Value of Rs. 170.
We think in an emerging market like India there is lot of room for growth in the Enterprise Data Services(EDS) segment just to come at par with the global benchmark. Tulip Telecom's able management haspositioned itself well to take advantage of this growth opportunity.
Conversions: $1 = Rs. 55; Rs. 1 Crore = $181,000; 1Cr = 10 million, 1 Lakh = 100,000
Intrinsic Value(from DCF Analysis):Rs. 170Margin of Safety: 48%Risk: LowCurrent Price:Rs. 115Avg. Daily Volume: $1mm+52 Week Range:Rs. 70 - Rs. 167Market Cap:Rs. 1730 Cr($314million)Revenues 2011:Rs. 2350Cr ($427mm)EPS: Rs. 21.74P/B: 1.13P/E: 5.5(Avg. P/E of Last 6 years: 10)EV/EBITDA: 4.9(Avg. EV/EBITDA of Last 6 years: 7) Margins(EBITDA: 29%,PAT: 13%)Debt/Equity: 1.44EBITDA 5Yr. Avg.:15%ROE: 26% Div & Yield:Rs. 1.54 (1.34%)Total Income 5Yr.Growth Rate: 18%Current Ratio: 2.04 Quick Ratio: 3.63Book Value/Share:Rs.105ROCE: 20%Share Holding:Promoters Holdings: 69.9%Institutional:20.3%
 
INVESTMENT THESIS
We think that Tulip Telecom has placed itself into a leading position by becoming a Enterprise Data Servicesprovider from Enterprise Data Connectivity provider. Tulip Telecom being the Asia's largest Data Center andowning the largest fiber last mile network (4,000 kms) in the country provides the company a big competitiveadvantage over it's competitors.Managements drive to shift product mix to Data Connectivity with Fiber Opticshas helped the company in improving EBITDA Margins. Acquisition of Data Center (0.9million sqft) inBengaluru during Feb 2012 is going to improve margins when operating close to its peak Capacity Utilizationby next year. In the Connectivity Segment Company's Business Model is to purchase bandwidth in bulk at alower per unit cost, deploy Economies of Scale as more customers opts for connection on Fiber Optics andhence improve their margins.Tulip Telcom has diverse but well balanced product mix which is visible fromcompany's recent quarters financials, Data Connectivity formed ~ 64% of total revenues, Managed Services(including Data Center) formed ~ 27% whereas Network Integration contributed ~ 9% to total revenues. Onvaluation front company is selling at a significant lower multiples relative to it's historic average and peers.Both the undervalued part combined with high growth opportunity in this space makes it a good investmentopportunity for investors.
Catalyst:
Qualcomm’s BWA venture (in which Tulip holds 13% stake) has been allotted Spectrum. This will helpto bring in an operator partner to roll-out the network & enable stake sale in the venture by Tulip. Sopossibility of unlocking value in Qualcomm venture and ability to bring in a strategic partner at the Data Centrelevel can act as a trigger.With an experienced management and company's strong & diverse revenue streams and present undervaluedstatus leads us to provide a Buy Rating on Tulip Telecom Ltd. with a one year time horizon.
RISKS
If India's economy slowed down that may lead to reduced customer spending and can affect company'srevenues in the short run.The management is in advance stage of deal closures with the bankers and is confident to raise funds for theAug 2012 redemption of FCCB. Ability of the company to get the debt at reasonable rate is going to be of importance in avoiding higher interest rate cost and maintaining a stable capital structure.

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