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Initiating coverage (Mid-cap)
Tulip Telecom Ltd Pure play on data services….
INR: 881 BUY
Tulip Telecom Limited, (Tulip) is a leading data services provider. The Company’s product portfolio includes network integration, and data services. We believe Tulip’s focus on the domestic industry will insulate it to a slowdown in the US, which could continue to diminish its peers growth in international markets. Moreover, the company stands to benefit from the government focus on improving inter-state connectivity. We Initiate coverage on Tulip with a BUY recommendation giving a 12 month price target of Rs 1,019, representing an upside of 16% from current levels. Investment Rationale Increased thrust on domestic network development by the government: The government’s allocation of Rs 800 crore towards the improvement of inter state connectivity by developing a SWAN in 20 states is expected to augur well for Tulip, which has already received 4 contracts worth Rs 270.7 crore. The company is expected to potentially target additional orders amounting to Rs 530 crore subject to successful execution. Growth in internet usage to boost data volumes: TRAI’s recent recommendation on internet telephony to allow VOIP bodes well for telecom data service providers such as Tulip Telecom. Internationally, VoIP has emerged as a cost effective means of communication for enterprises (especially BPO companies) and we expect this trend to continue to drive the domestic markets. Tulip Telecom’s revenue contribution from this segment has increased from 36.1% in Q2FY07 to 66.7% in Q1FY09 Bundling of services: Tulip has launched managed services portfolio which include both video and data centre services. The internet data centre market in India is anticipated to grow ~200 mn by FY2009, while video conferencing market is expected at ~25 mn. The company is planning to spend Rs 80 crore for setting data centers in 4 cities to provide bundled services. This will enable Tulip to provide end-to-end services.
Price Outlook: 1,019
Shares outs (Cr) Equity Cap Mkt Cap (Rs. Cr) 52 Wk H/L (Rs) Avg Vol (1yr avg) Face Value (Rs) Bloomberg Code
September 30, 2008
2.9 29 2,555 1,225/ 750 15,591 10 TTSL IN
Market Info: SENSEX NIFTY
165 145 125 105 85 65
- 12,596 - 3,850
Share Holding pattern (%)
Particulars Foreign Institutions Govt Holding / Promoter Other Corp Holding Public Total 30.06 24.3 2.5 69.0 1.5 2.7 100 31.03 23.5 2.9 69.0 1.8 2.9 100 Chg 3.5 -13.1 0.0 -17.6 -4.9
Financials and Valuation:
At CMP of Rs 881 Tulip trades at 12.6x its TTM EPS of Rs 70.15 and 9.2x its FY09E EPS of Rs 95.6. We recommend a BUY on the stock with a price target of Rs 1,019 which would discount its FY09E EPS by 10.7x. Financials Net sales Other income Total income EBITDA (incl OI) Net profit EPS EBITDA margin Net profit margin FY2007 840.8 2.4 843.1 136.3 99.7 36.0 16.2% 11.9% FY2008 1,216.4 23.1 1,239.5 268.7 187.5 64.6 22.1% 15.4% FY2009E 1,698.1 25.4 1,723.4 394.1 277.2 95.6 23.2% 16.3% FY2010E 1,995.2 30.0 2,025.2 478.9 340.5 117.4 24.0% 17.1% Analyst Kevin Trindade firstname.lastname@example.org ℡ +91-22-6696 5572 Ravi Dodhia email@example.com ℡ +91-22-6696 5536 Maulik Patel firstname.lastname@example.org ℡ +91-22-6696 5572 www.krchoksey.com ℡ +91-22-6696 5555 +91-22-6691 9576
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.................. 5 Domestic Leased Circuits (DLC) ............................................................................................................................................................................................................................................................... 3 Industry overview............................................................ 6 Business segmentation ............................................................................................................Tulip Telecom Ltd Index Business description ....................................................................................................... 15 Financial overview ................................................................................................... 13 Key operating metrics ............. 4 International Private Leased Circuits (IPLC) .................. 6 Network integration ........................................................................................................................................................................................ 3 Investment rationale ................ 9 Outlook .......... 5 Bandwidth Demand ............................................................................................................................................... 10 DCF Valuation .................. 14 Key risks .................................................................................................... 14 Relative valuation .......................................... 6 Corporate network / Data services .................................................................................................................................... 4 VPN ....................... 14 Valuation and recommendation ........................ 7 Result overview ............ 16 2 KRC Equity Research .....................................................
involves facility management and security services to Indian corporate customers and Internet/data connectivity in rural areas. the government allocated Rs 800 crore towards the development of Government allocated Rs 800 crore towards development of SWAN statewide area networks (SWAN).7%. while in the telecom space the company’s product portfolio includes AT&T and Vodafone. Network integration services include designing and developing networks for its clients and the provision of multi-point wireless applications. retail. we expect the company to win additional contracts subject to successful execution. operations and maintenance of network equipments. Tulip has technical expertise in this segment and is expected to be better placed to win a major portion of the new orders. and inter-state connectivity which is the primary business domain of Tulip. Project Adhaar. It also includes the designing and implementation of local and wide area networks.72 crore and would be implemented on a BOOT model for a period of 5 years. and manufacturing. respectively in FY2008. Having already won the contracts in Assam.Tulip Telecom Ltd Business description Tulip Telecom Limited (Tulip). In the BFSI space. Increased thrust on domestic network by the government In March 2008. telecom. the Haryana state wide area network was implemented and delivered in FY08. The implementations for Assam and West Bengal SWAN are in full swing and recently it won SWAN project worth Rs 95 crore in Madhya Pradesh. across verticals such as BFSI. Tulip is the market leader in the VPN segment in FY2008 with a market share of 28%. Data Services. installation. ahead of its nearest competitor Sify. making it the first complete SWAN to be handed over to the government. The scalability and high capacity of the network is expected to provide the Government of 3 KRC Equity Research . Bloomberg and Kotak Securities. We believe Tulip is largely immune to a slowdown in the US as it primarily caters to domestic data connectivity and network integration. state data centres and citizen centers and the goal of connecting 20 states by FY2012. clients include HDFC Product portfolio includes Network Integration and data services Network covers more than 1. with 21. voice and video required for various e-governance initiatives. Tulip's network covers more than 1. It also announced projects to improve broadband connectivity in rural areas. The project deal value amounted to Rs 57. A key characteristic of Tulip is the quality of the network that it has been successful in providing to the interiors of many states. Tulip was awarded the contract to develop the Assam state wide area network in January 2008. logistics.000 cities and towns. the government is concentrating on improving domestic networks. Moreover. Haryana. Madhya Pradesh and West Bengal. Business World awarded Tulip Telecom the 79th rank amongst India’s best performing mid-sized companies and the 4th largest network integrator by Voice & Data magazine in their Networking Masters Issue. We expect this project to boost network integration and data connectivity revenues as the network would support data.000 cities and towns Bank. its primary service. Reliance Communication and Bharti Airtel are the third and fourth largest operators with 21% and 12% market share. This project involved the supply. formerly Tulip IT Services Limited. which was the leader in FY2007. Market leader in VPN segment Market share of 28% in FY2008 According to a Frost and Sullivan report. is a leading data services communication provider. Investment rationale Tulip is a market leader in a niche segment which has witnessed robust growth (~125% growth from 400 in FY2005 to 900 in FY2008) due to increase in IP/VPN market.
7% in Q1FY09. over 2008-2013.Tulip Telecom Ltd Assam with an integrated backbone for common citizen services. Packets constructed in this connection are encapsulated with some other base which is then transmitted across the network between the computer and server. VPN market is expected to grow at a CAGR of 14% p. This technology is based on the idea of tunneling. like traditional leased lines or remote access servers. Bundling of services Tulip has launched managed services portfolio including video and data centre services to become an end-to-end service provider. Delhi. The company also plans to cover major cities like Mumbai.500 crore by 2012. integration of data bases of various departments. The drive to improve data connectivity amongst banks. while video conferencing market is expected at ~25 mn and is anticipated to grow at a CAGR of 20% over the next 3 years. significantly lower than developed economies service providers such as Tulip Telecom. Based on increased usage from Banking and Financial Services (BFSI) and IT/ITeS sectors. remove custom and excise duty on broadband equipment. data and video connectivity. online monitoring of various schemes. We expect Tulip to derive incremental revenues from IT/ITES and BFSI companies (BPO clients). which is significantly lower than developed economies like the US and China with 71. Industry overview VPN A virtual private network (VPN) is a network that uses a public network. retailers and manufacturers augurs well for the data segment for Tulip Telecom whose revenue contribution from this segment has increased from 36. which involves establishing a network connection. such as the Internet. It also received ILD license which will be used for international voice. The company is planning to spend Rs 80 crore for setting data centres in 4 cities. this segment is expected to grow considerably.2%.800 crore in 2006 to ~Rs 3. Bangalore.2%.a. which use VoIP based services extensively. The internet data centre market in India is expected to grow ~200 mn by FY2009. over 2008-2013 The VPN market is expected to grow at a CAGR of 14% p.1% in Q2FY07 to 66. International market for connectivity is expected to witness significant growth from Rs 1. 4 KRC Equity Research . VoIP has emerged as a cheap and effective means of communication for enterprises and we expect this segment to continue to grow. A key advantage of this technology is that it offers a unique channel for traffic with significantly lower capital overheads. It is then de-encapsulated on the receiving side. to provide remote offices or individual users with secure access to their organization’s network at a lower cost than other alternatives. Hyderabad.a. industry experts believe that the government needs to reduce service tax and license fees on broadband services. In order to boost internet usage. Growth in internet usage to boost data volumes TRAI’s latest policy update to permit the internet telephony bodes well for telecom data Internet penetration of 5. We believe these diversification plans will enable Tulip to provide bundle of services to clients and to strengthen its position in the market. Chennai and Kolkata through optical fibre to provide high bandwidth connectivity. Internationally. etc.9% and 19% respectively. Internet penetration in India is currently at 5.
Domestic Leased Circuits (DLC) Government opened up competition in the DLC market in its National Telecom Policy in 1999 by allowing private players to offer telecom data services. The demand for DLC would however be adversely affected by the increasing adoption of VPN. The government granted licences to Internet Service Providers (ISP) to set up international gateways in 2000. fibre or wireless networks. video conferencing etc. Bharti Airtel. Except Data Access. With the growth in outsourcing to India in both IT and ITeS sectors. Bharti and Reliance have emerged as the market leaders in the DLC market. Tata Communications. Limitations of using VPN • VPN requires detailed understanding of network security issues and careful installation to ensure sufficient data security on public network like the internet • Reliability and performance of an internet based VPN is not under direct control of organization. but is dependent on an ISP and quality of services provided by them. Since then.Tulip Telecom Ltd Advantages of using VPN VPN provides cheaper network than traditional ones • Lower network expenses when compared to traditional routed networks over dedicated facilities • • Rapidly link enterprise offices. especially in BFSI and manufacturing sectors. Reliance Communications and Data Access. operators like BSNL. In 2007. international bandwidth in India is provided by 4 players – Tata Communications. other operators have submarine cables to deliver IPLC connectivity. IT/ITeS companies and public sector companies. to share network infrastructure with other service providers. satellite or both. 5 KRC Equity Research . Currently. MTNL. IPLC market is expected to increase at a CAGR of ~12% over 2008-2013. We expect this to play a lead role in reducing price of DLC with customers having more choice to select the service provider. voice. IPLC market is expected to increase at a CAGR of ~12% over 2008-2013 The IT/ITeS industry is one of the most bandwidth intensive sectors. Demand for DLC is expected to grow at a CAGR of 9% over 20082013 The demand for DLC is expected to grow at a CAGR of 9% over 2008-2013 driven by demand from telecom operators. Reliability and performance of an internet based VPN is not under direct control International Private Leased Circuits (IPLC) IPLC is a point-to-point circuit used for international connectivity which can be provided through submarine cables. when it comes to international connectivity. small-and-home-office and mobile workers Allows customization of security and quality of services as needed per specific applications • Allows service providers to introduce additional services such as bandwidth-on –demand over the same network • Different bandwidths can be assigned for different applications such as data. Attempts to match equipments may cause technical problems and might not ensure cost savings. TRAI made it mandatory for all DLC service providers with copper. • VPN products and solutions from different vendors have not always been compatible due to issues with technology standards.
Subsequently in the consumer sector.000 Source: Company.000 5.92 mn compared to 2. and the emergence of voice over IP (VOIP) as a telecommunications service is becoming increasingly popular.364 15. The government plans to increase the total number of internet subscribers to 20mn by FY2010 from the current levels of 11 mn.6 mn in FY2007. KRC Research Bandwidth Demand After the burst of the dot-com bubble.195 10. driven primarily by digital entertainment content and applications.858 10% 5% 0% -5% -10% Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 DLC subscribers q-o-q grow th 15. Business segmentation Network integration Tulip provides an end-to-end turnkey approach to establishment of network of all sizes.876 18. has aided the demand growth for bandwidth. Globally. The network value chain consists of • • • • • Network design and consulting Product selection and supply Project management Integration and implementation Network maintenance and management Current business environment requires real time data communication between various locations spread across different geographies.000 20% 15% 20. downloading of music and online gaming applications are still in the formative stages of development and are expected to increase consumer bandwidth demand in the future.596 16.000 14.287 20. 6 KRC Equity Research . the increase in Internet and broadband subscribers. The internet and broadband market grew 162. the telecom environment was characterized by a huge surplus of network capacity. The total broadband subscribers in India as of FY2008 was 3.983 21.058 18. Internet video content. inter-player network traffic characterized by high-bandwidth based file sharing.359 cr supported by increasing purchasing power. IPTV.925 20. Tulip’s expertise in these areas has resulted in huge wins in this area.000 18.6% y-o-y to Rs 5. It enjoys strong relations with more than 100 leading IT vendors backed up with strong processes.Tulip Telecom Ltd Exhibit: DLC subscriber growth 25.
Tulip is actively targeting this opportunity and is in the process of bidding for such contracts. Rural Connectivity Rural networks are currently used for interregion video conferencing.9 960.006. is expected to be the key focus area in FY2009. Exhibit: Rural network connectivity Source: Company. which represents over 70% of the population. The enterprise equipment market grew by 27% y-o-y to Rs 13.0 690. Tulip’s rural networks are currently used for inter-region video conferencing.1 1. Clients are able to manage their entire IP systems involving voice and video conferencing using this setup.994 cr during the same period. carrying voice calls and imparting education in rural areas. telemedicine and imparting education Tulip is a leader in providing rural connectivity services which have wider coverage and the ability to extend wireless links to the remotest parts of the country.0 508.5 bn of this investment.000 community service centres in rural India with broadband connectivity in FY09.Tulip Telecom Ltd Exhibit: Network Integration Ranking Rank 1 2 3 4 5 Company Wipro Infotech HCL Comnet DataCraft HCL Info Tulip Revenue 1. July 2008 Corporate network / Data services Enterprise IP Connectivity Tulip provides IP connectivity solutions to corporate Tulip provides IP connectivity solutions to Corporates to power their ERP/CRM and other applications. New initiatives like high grade radios and solar panels have enabled them to provide robust connectivity where power might be a problem. tele-medicine. The rural population. The private sector is expected to contribute $1. The Ministry of Communication and IT has announced plans to garner $2 bn to setup 112. distributors and roaming executives can also safely access their company applications in a fully encrypted form.089. KRC Research 7 KRC Equity Research .210 cr in FY2008.9 Source: Voice and Data. In comparison. the carrier equipment grew by 32% y-o-y to Rs 56. Tulip follows different modules for connecting different locations like channel partners.
Tulip has made a market in the 'last mile' segment and developed its business around it.300 locations. Tulip plans to set up data centres in Bangalore. Tulip also entered into a partnership with OEM’s like Nokia which will use their services to provide mobile telecom services to rural areas for its wireless village project. has a poor layout due to the vast and geographically dispersed nature of cities and has capacity for additional growth. Provider of Last Mile connectivity The last mile is the final leg of delivering connectivity from a communications provider to a customer. visual communications. The entire Network Infrastructure is designed to ensure the following: Highest redundancy level to ensure no single point of failure Highest level of scalability End to end security assurance Flexibility in solution design. this helps to provide connectivity in short time frames and overcome the shortcomings of the copper-based last mile provided by incumbent service providers. security services. The company has earmarked ~$40 Mn (Rs 168 crore) for the acquisition of US based telecom operator given the attractive valuations of US companies. storage and other infrastructure management services. around $20 million (Rs 80 crore) for setting up data centres and an equal amount towards the construction of the statewide area networks (SWAN) project. Infrastructure Tulip’s MPLS IP service is built completely using carrier grade switching infrastructure and is the only network in the country that is MPLS-enabled till every last Point of Presence on the network in over 1. A majority of Tulip’s network have the last mile on wireless broadband. It creates its own infrastructure and is able to provide customized connectivity solutions to its customers. It is also planning to include convergence solutions. Chennai and Hyderabad and its Delhi data centre is already operational. The company has also allocated ~ Rs 240 crore for expanding its network. Bangalore. This project is being conducted across the Asia Pacific region and will provide cost-effective opportunity for local entrepreneurs.Tulip Telecom Ltd Managed Infrastructure Services These services include managed data center services. implementation and expansion Best in class implementation Time Frames Best in class network quality parameters FCCB of $150 mn raised to fund acquisition and network expansion Tulip raised $150 Mn via FCCB for network expansion and international acquisition Tulip raised $150 Mn (Rs 630 crore) via foreign convertible currency bonds (FCCB) at a premium of 34%. microfinance entities and telecom operators. Tulip has made a market in the last mile segment and developed its business model around it 8 KRC Equity Research . A substantial portion of the Tulip network in Class B and lower cities. which is based on copper or fibre infrastructure. and remote enterprise connectivity. The entire network uses Fiber on the backbone and Wireless on the access layer. A wide variety of technologies are usually employed due to the high cost of wires and cables and the cost of providing information capacity. Chennai and Hyderabad Tulip is setting up data centres in Mumbai.
6% 97.550 sq. With an enabled connection speed of 64 kbps each centre has space of 2MB and a minimum download of 500 MB.9 64. Tulip has provided these facilities at a discount of 20%-40% to leased line intercity circuits. KRC Research FY2007 840.216.000 families in rural areas and microfinance facilities in the remote villages. video-conferencing in remote areas. KRC Research The company has enabled wireless connectivity in some of the remote villages in Punjab.2 136. and content distribution. Thus each such kiosk set up by Tulip caters to 1.500 households.5 843. multi layered access networks and the large numbers of points of presence provides availability of the internet in the most difficult terrains. Tulip’s connectivity network provide facilities at 20-40% discount to leased line tele-education. km and over 600. Result overview Financials Net sales Other income Total income EBITDA (excluding OI) Net profit EPS EBITDA margin Net profit margin Source: Company. We believe the redundant backbone.8 2.4 23.5 268.0% 97.Tulip Telecom Ltd Other communication technologies involve satellite links to power video conferencing.239.1 22.4 94. healthcare-posts.7 185. telemedicine.8% 47. Assam which is difficult to connect through leased lines. The base stations using Wi-Fi and a Wi-Lan technology have been deployed for the network.5 16.1% 15.6 32. internet telephony.550 sq. rural online banking.2% 11. The company’s wireless network covers 3.000 -1.0% 96.km and 600. Exhibit: Last Mile connectivity Source: Company. The company has facilitated education centres.000 families.3% % change 44.2% FY2008 1.2% 9 KRC Equity Research . The cost of setting this network is also extremely high.7% 837. Tulip’s network has managed to provide telemedicine Company’s wireless network covers 3.1 1.
1% y-o-y growth to Rs 221. the company expects ARPU to decline slightly going forward. the company witnesses strong growth in connect additions in the third and fourth quarters Net profit increased 96. Network integration business has shown marginal growth of 3.0% over the next 2 years on the back of expansion of data services to corporate clients in both urban and rural areas.216 crore. while Data services recorded robust 110. Telecom service revenues contributed ~8% of revenues while Tier 1 cities contributed ~40%. and two in Mumbai).117 in FY2008. of 127% y-o-y to 117.6% y-o-y to Rs 1698.5 crore. The company has completed installing the state-wide area network (SWAN) in Haryana. This revenue growth was mainly due to an increase in connections (connects).9 crore in Q1FY09 on account of strong growth in number of connects. Revenues in Q1FY09 increased 56.6% y-o-y to Rs 1.750 which is expected to be offset by decline in net realization per connects. Network integration services grew marginally due to increased concentration in data services VPN’s contribution to topline increased from 36.6% y-o-y to Rs 185.9 crore.698. Chennai and Hyderabad during FY09. Net profit margin was at 15. Top-line for FY2009 is expected to grow 39.Tulip Telecom Ltd In FY2008.7 crore implying an EBITDA margin of 22. This is in addition to the three existing data centres (one in Delhi. Other highlights VPN segment (data services) contribution increased to 66.1% in Q2FY07 to 66. The company received licences to provide WiMAX services in 100 cities. Due to logistic License to provide WiMAX services in 100 cities difficulties the timeline for rollout of these projects may be extended. EPS was reported at Rs 64. The company plans to utilize approximately Rs 600 crore raised during FY09 by FCCBs towards the projects in West Bengal and Assam.1% in FY2008. This will be a key technological advantage as the demand for broadband services increases. Operating margin in Q1FY09 was flat at 20. We expect net connects to increase 73.3% in PAT margin improved 40 bps y-o-y to 13.1 crore in FY2009 We expect revenue growth of 28.68% y-o-y to Rs 1.8% in Q1FY09 as increase in interest expenses was offset by decline in income tax expenses. however it declined 170 bps q-o-q due to a seasonal decline in quarterly connection additions. Three additional data centres will be set up Bangalore.1% y-o-y to 202. VPN’s contribution to top-line increased 1.3%.1 in FY2008. 10 KRC Equity Research .1 crore due to increased contribution from data services segment.8% in Q1FY09 FY2008.2% y-o-y to Rs 110. The company typically reports low revenues in Q1 followed by improving performance in the 3 subsequent quarters due to seasonality. and is planning on rolling out networks in West Bengal and Assam. EBITDA margin expanded by ~590 bps y-o-y in FY2008 EBITDA recorded impressive 97% y-o-y growth to Rs 268. In general.0% from FY2008 to FY2010 Top-line expected to grow 39. The robust EBITDA margin expansion of ~590bps was supported by decline in employee and other operating expenses.6 crore in Q1FY09. While the ARPU levels were flat mainly due to low competition. total income increased 44.7% in Q1FY09 segment. Outlook Top-line expected to grow at a CAGR of 28.711 bps y-o-y to 66.7% during Q1FY09. Net profit margin improved 40 bps yo-y to 13.7% in Q1FY09 due to the unique business model of the company.3% y-o-y to Rs 332.
500 1.000 500 0 FY2007 FY2008 Revenues Source: Company.Tulip Telecom Ltd Exhibit: Revenue growth 2.500 2.1% in FY2008 to 66. KRC Research 70% 60% 50% 40% 30% 20% 10% 0% FY2009E FY2010E y-o-y grow th Operating margin expected to improve 110 bps y-o-y in FY2009 Operating margin anticipated to expand 191 bps by FY2010 Operating margin is expected to improve 110 bps y-o-y to 23.0% in FY2010 supported by increased contribution from data services segment.2% in FY2009.2% in FY2009 due to increased contribution from high margin data services business.000 1. KRC Research 30% 22% 16% 23% 24% 479 394 15% 269 136 10% 5% 0% FY2009E FY2010E EBITDA Margin 25% 20% 11 KRC Equity Research . Exhibit: EBITDA growth 600 500 400 300 200 100 0 FY2007 FY2008 EBITDA Source: Company. We expect the operating margin to improve to 24. Contribution from data service is expected to improve from 54.
6 in FY2009. Net profit margin is expected to improve 90 bps y-o-y in FY2009 as anticipated higher interest expenses is expected to be offset by decline in depreciation expenses as a percentage of sales. while diluted EPS is expected at Rs 82.5 in FY2009 profit margin of 16.Tulip Telecom Ltd Basic EPS to grow at a CAGR of 34.2 crore implying a net Diluted EPS expected at Rs 82. Basic EPS is expected at Rs 95. Exhibit: Net profit growth 400 350 300 250 200 150 100 50 0 FY2007 FY2008 PAT Source: Company.5 due to issue of FCCB in FY2007.3%.8% from FY2008 to FY2010 Net profit for FY2009 is expected to grow 48.0% y-o-y to Rs 277. KRC Research 18% 17% 15% 11% 187 16% 277 341 16% 14% 12% 10% 8% 6% 94 4% 2% 0% FY2009E FY2010E PAT Margin 12 KRC Equity Research .
8 990.403.8 71.0 194.239.6% 2.029.5 153.109.8% 6.4 722.7 1.9 3.822.7 722.5% 1.6% 250.4 FY10E 2.6% 12.4 1.8% 12.6% 11.047.9% 5.9 -91.0% 1.3 846.4 706.723.0% 1.7 1.1 180.112.325.0 593.612.025.Tulip Telecom Ltd DCF Valuation (All figures in Rs cr) Net Sales EBITDA Net income Cash taxes from operations Total assets Debt Net worth Free Cash Flow (FCF) analysis NOPLAT Depreciation and amortization Change in working capital Capital expenditure UFCF PV of UFCF Present value of terminal cash flow Perpetual growth rate WACC Assumptions and target price: WACC Risk free rate Equity risk premium Beta Cost of equity Cost of debt Tax rate Tax adjusted cost of debt Debt/capital ratio WACC Sensitivity analysis: Terminal growth rate 31.2 24.2 1.098.6 2.016.3 107.127.7 FY12E 2.9 45.9 20.1 2.5 1.0% 11.935.9 6.5% 1.4 3.021.4 18.8% 10.458.5 1.2 478.1% 44.3 2.170.5 266.3 885.3 62.8 41.510.6 1.3 3.9 1.0 -319.9% 10.6 939.912.55 10.5 31.5 956.909.3 0.3 369.5 1.4 394.4% 11.1 1.0 593.1% 12.8 194.419.0 166.144.4 FY08 1.4 951.254.3 635.2 156.0 209.2 1.935.444.3 1.7 2.6 1.7 52.4 225.870.8 91.019.061.8 1.7 905.6 976.186.0% 1.8 67.2 2.0 -361.1 277.0% 79.8 506.8 36.8 54.8 4.0 -397.4 1.003.6 1.5 FY13E 2.339.2 2.6% 575.8 916.5 268.2 2.0 453.3 1.3 978.5 556.479.0 -344.2 1.3 660.4 395.7 162.4 520.9 FY11E 2.0 -288.2 118.4 963.062.9 -194.0 1.4 3.021.6 5.9 49.075.4 8.003.1 49.7 FY09E 1.7 187.9 145.2 1.4 13 KRC Equity Research .2 928.034.7 874.5 41.9 340.1 DCF Valuation Sum of PV of UFCF PV of terminal value EV Debt Minority interest Cash and cash equivalents Net equity value Shares outstanding (cr) Target price (Rs) 3.3 447.1% WACC 11.
5 11.5 3.081 2.206 2.974 3.6 7.6 5. The steady growth in revenues (CAGR of 28% in FY08-10) and expanding EBITDA margin (190 bps in FY08-10) due to a changing business mix are key positives in our view.3 10.9 15.9 MTNL 84.1 4.2 12.1 32. the recent issuance of US$50 mn will support future capital expansions till FY09.0 21.1 Tata Com.9 2. KRC Research Valuation and recommendation Strong revenue growth and expanding operating margins are key positives for the company Our rating of Tulip Telecom is supported by increasing broadband penetration and the company’s large network of last mile connectivity. KRC Research Mar-08 117.306 3.1 19.0 0.362 2.5 22.811 1.100 85 17. of Pop’s per city POP's added during the quarter No.4 1. of connects Cities No.7 125 856 Dec-07 93.3 1.7 1.731 3.1 39.200 98 23. of connects per city Connects added during the quarter Points of Presence (PoP) No. Market leadership in data services with a market share of ~28% License to provide WiMAX services in 100 cities Superior operating margins compared to peers 14 KRC Equity Research . of clients Source: Company. The company is trading at a TTM P/E of 12.6x and has a premium valuation based on the following points. 471.376 800 64 16.4 350 536 Relative valuation Company CMP (Rs) OPM (%) NPM (%) P/E (x) Tulip 881.6 Tulip is available at reasonable valuation compared to peers P/BV (x) EV/Sales (x) EV/EBIDTA (x) MCap/Sales (x) Source: Company.4 1.8 125 744 Mar-07 51.117 1.Tulip Telecom Ltd Key operating metrics Parameters No.4 0. In addition.9 9.
7 276. The perception of the SME segment as a profitable market by larger telecom operators could increase pricing pressures over the next few quarters. Bharti Airtel and BSNL in the Data Connectivity business could impact Tulip’s profitability and market share.8 Weighted price 501. We recommend a BUY on the stock with a price target of Rs1.2x its FY09E EPS of Rs 95.1 241.019 which would discount its FY09E EPS by 10.003.6. At CMP of Rs 881 Tulip trades at 12. Increases in working capital subsequent to the foray into the SWAN business.Tulip Telecom Ltd Valuation method Target price using DCF Target price using P/E Target price using EV/EBITDA Weighted average target price (Rs) Current price (Rs) Upside from current levels Weights 50.0% Target price 1.104.6x its TTM EPS of Rs 70.2 1. giving an upside potential of 16% operational metrics and robust performance in Q1FY09.0% 25. Key risks Entry of integrated telecom players in data business might impact profitability and market share The entry of integrated telecom service providers such as Reliance Communications.0 881.6 964.7x.15 and 9.7% We therefore believe the company looks attractive at current price levels given its strong Target price of Rs 1.0% 25.4 1.019. 15 KRC Equity Research .0 15.019.
9 120.4 -6.0 3.723.6 187.3 67.9 227.9 24.8 34.3 639.4 368.9 146.6 0.5 139.0 216.3 448.2 29.4 233.89 EPS growth rate FY07 840.4 722.0 4.2 593.9 139. OI) Interest Gross Profit Depreciation Profit Before Tax Tax Profit after Tax Equity Capital (Rs Crore) Face Value Basic EPS FY06 508.2 54.698.9 Valuation parameters Diluted EPS (Rs.7 394.4 6.4 -133.7 0.7 340.4 18.0 416.6 -177.61 55.197.9 333.0 219.7 -220.7 1.1 25.7 49.1 3.1 54.9 478.4 201.8 11.1 64.7 -351.7 -47.0 -91.4 49.0 9.6 387.3 20.4 1.0 -847.6 123.9 34.3 36.5 42.9 174.2 -59.7 238.3 5.3 139.0 17.9 52.1 640.2 -259.7 441.6 61.8 1.47 47.4 202.5 535.2 22.052.7 385.9 0.9 478.7 379.0 970.4 -6.4 23.0 9.2 705.6 199.2 0.995.7 848.2 29.3 12.1 29.0 49.5 FY06 FY07 FY08 FY09E FY10E Cash Flow Statement FY06 FY07 FY08 FY09E FY10E Key ratios Operational Performance (%) FY06 FY07 FY08 FY09E FY10E Cash flows from operating activities (CFO) Net profit before tax Depreciation & amortization Others Operating Profit Change in working capital CFO Less: Income tax Net CFO (A) 56.7 -13.6 1.8 14.9 133.0 1.8 75.0 2.9 419.8 46.0 15.7 104.1 -79.0 -6.0 94.7 25.1 2.6 32.8 17.2 20.329.8 26.9 364.8 262.7 -34.8 92.60 82.7 394. OI) EBIDTA (incl.5 6.9 -75.7 141.1 269.2 333.4 27.0 584. loans & advances Inventories Sundry debtors Cash and bank balance Loans and advances Total current assets Sundry creditors Other provisions Total loans and advances Net current assets Total assets 26.6 33.1 1.033.2 25.2 -32.9 59.3 268.9 364.5 80.0 61.9 17.2 40.9 -95.1 90.6 2.9 1.1 48.2 1.1 10.5 -32.0 10 64.9 2.9 1.4 61.9 149.6 71.6 0.2 509.4 20.7 79.2 23.6 21.8 45.0 2.8 Cash flows from investing activities (CFI) Sale of Fixed Assets Sale of investments Net CFI (B) -60.9 59.0 10 117.1 -194.7 121.0 13.9 201.6 0.) RONW (%) Cash flows from financing activities (CFF) Long term borrowings Others Net CFF (C) Net increase in C&CE (A+B+C) Opening C&CE Ending C&CE 0.3 -97.3 16.2 106.4 535.6 55.3 138.3 21.4 -134.3 29.3 25.7 19.3 18.1 36.2 10.74 98.7 -336.9 1.6 -2.4 29.Average (x) EV/Sales (x) EV/EBITDA (x) Market Price / BV (x) 56.1 20.7 141.4 5.6 5.5 234.7 345.5 739.396.5 29.1 18.8 19.4 1.2 199.6 59.2 66.1 Financial Performance Debt / Equity (x) Debtors period (days) Creditors period (days) Inventory period (days) 0.8 -4.3 387.7 17.5 29.3 1.8 242.7 11.7 69.1 28.2 891.6 883.3 56.6 36.30 22.6 403.8 2.7 50.0 917.5 706.6 47.2 29.8 7.3 114.89 16.9 295.97 FY10E 1.3 34.2 2.2 2.5 -48.6 169.0 20.8 2.2 30.3 9.0 10 16.0 7.4 9.3 5.8 1.1 22.7 64.9 956.7 116.019.7 29.339.2 296.6 444.9 1.0 10 95.9 48.0 693.1 194.7 EBITDA Margin (incl OI) PBT Margin Net Profit Margin 13.3 70.9 10.8 379.4 50.1 1.1 333.5 39.83 Balance Sheet Sources of Funds Equity capital Reserves Loan funds Total capital employed Applications of Funds Gross block Accumulated depreciation Net block Capital Work in Progress Current assets.6 16 KRC Equity Research .5 99.025.8 245.6 -653.3 12.8 295.6 Market Data P/E Ratio .7 250.4 23.4 29.9 66.1 4.0 82.7 593.2 14.3 145.4 29.9 ROCE (%) 16.3 15.5 94.444.58 FY08 1.5 108.0 18.1 101.09 FY09E 1.) Cash EPS (Rs.0 41.3 49.9 5.0 820.027.1 13.7 -288.239.4 414.3 24.6 262.5 49.546.0 21.5 1.9 41.61 32.8 4.6 -170.7 19.4 -319.6 16.6 268.4 843.4 103.0 315.7 618.0 29.8 39.3 145.8 1.7 35.2 138.9 310.0 10 32.5 29.9 -31.2 27.1 0.3 23.1 1.444.4 28.7 3.9 37.0 22.019.216.8 49.2 277.6 186.4 137.3 72.1 11.Tulip Telecom Ltd Financial overview Profit and Loss Statement Net Sales Other Income Total Income Raw materials Purchase of finished goods Employee expense Other expense TOTAL EXPENDITURE EBIDTA (excl.1 733.6 27.6 58.2 0.9 136.5 187.7 45.42 101.9 110.3 133.0 157.8 -171.0 16.
Mumbai – 400 058. Branch Office: ABHISHEK.Tulip Telecom Ltd Rajiv Choksey Anuj Choksey Alok Agarwal Co-Head Institutional Equities Co-Head Institutional Equities Head Research rajiv. All opinion for buying and selling are available to investors when they are registered clients of KRC Investment Advisory Services.choksey@krchoksey. Further.com +91-22-6653 5135 +91-22-6696 5500 +91-22-6696 5502 Tulip Telecom 1200 1100 1000 900 800 700 Rating Buy BUY Appreciate over 15% Appreciate upto 15% Depreciate upto 10% Depreciate over 10% Accumulate/Hold Reduce N ov-07 Jan-08 Jun-08 Oct-07 Mar-08 Apr-08 May-08 Sep-07 Feb-08 Jul-08 Aug-08 Sep-08 Dec-07 Sell Other Stocks in the sector under our active coverage: Telecom Date 30 July 2008 29 July 2008 25 July 2008 18 July 2008 Company Reliance Communications Idea Cellular Bharti Airtel TTML Type of Report Result Update Result Update Result Update Result Update Recommendation Buy Hold Buy Hold Price 436 88 805 23 Target Price 508 100 955 26 ____________________________________________________________________________________________________________ Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. Dalia Industrial Estate. Kisan Ratilal Choksey Shares & Sec Pvt Ltd.krchoksey. Phone: 91-22-6633 5000. does not bear any responsibility for the authentication of the information contained in the reports and consequently. While the information contained therein has been obtained from sources believed to be reliable. Fax: 91-22-6691 9576. Registered Office: 1102. 17 KRC Equity Research . As per SEBI requirements it is stated that. and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation. Link Road. Fort.choksey@krchoksey. Fax: 91-22-6633 8060. Ltd.com Kisan Ratilal Choksey Shares and Securities Pvt. Kisan Ratilal Choksey Shares & Sec Pvt Ltd.com anuj. Stock Exchange Tower. Dalal Street.com Visit us at www. Phone: 91-22-6696 5555. Andheri (W). __________________________________________________________________________________________________________ Please send your feedback to krc. KRC Research Reports only provide information updates and analysis.. 5th Floor. investors are advised to satisfy themselves before making any investments. is not liable for any decisions taken based on the same.agarwal@krchoksey.. Mumbai – 400 001.com alok.research@krchoksey.
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