STOCK IDEAS –Tulip Telecom Limited

Tulip Telecom Limited

 

BSE Code: 532691

 

NSE Code: TULIP

 

Tulip Telecom Limited (formerly Tulip IT Services Ltd) is a data communication infrastructure and connectivity provider offering single stop solution for all data communication needs of modern day enterprises.

 

Business:

Incorporated in year 1992, Tulip has steadily diversified and enhanced its business model from being a reseller of software and hardware products to network integration and then to providing IP/VPN based wireless connectivity solutions and managed services. Today, Tulip is India's leading enterprise communications service provider with its data network having the largest reach of over 1250 locations in India.

Tulip has a national presence with over 2300 employees and over 950 customers across India from all vertical segments including banking, telecom, retail, manufacturing, services, education, healthcare, utilities and government.

 

Tulip's business can be classified into two principal segments - network integration (NI) and corporate data services (IP/VPN wireless connectivity). Going forward, Tulip will see the addition of revenue stream from Managed Services including Data Center and from value-added services.

 

Network Integration: Tulip is the fifth biggest player in the network integration space. This segment contributes around 46% to its annual sales revenues but the margins are less (around 7-8%) as this space is very competitive. As part of network integration services, Tulip develops and designs networks for its corporate as well as rural clients. The company also helps its clients in identifying and providing equipment for their networks by integrating and implementing their network rollouts, providing post-implementation network management and maintenance services. Tulip also provides remote management services through their own network operation centers, thereby providing significant cost and space savings to the clients.

 

Corporate Data Services: Tulip provides Internet protocol/Virtual Private Network (IP/VPN) based wireless connectivity services especially to corporate clients through its brand 'Tulip Connect'. Tulip with 28% market share is the largest player in the MPLS (multi-protocol label switching) and IP/VPN segment. This high margin segment (34%-38% operating margins) contributes to around 54% to its annual sales revenues.

Inter-city & intra city connectivity is provided through leased lines and fiber optic cables from multiple service providers while the critical last mile connectivity is through its own fiber/wireless broadband network. Tulip scores over its competitors who depend on last mile connectivity through copper and leased lines thereby helping the company to rapidly rollout its network over difficult terrains and in places where there are no copper lines, and with high uptime and low latency.

Tulip has put a big bet on MPLS network and sees addressable market opportunity of Rs. 4200cr. for this segment which would be the major growth driver going forward.

 

Managed Services and Data Centers: Tulip is looking to diversify further into high margin managed services and data centers business to de-risk itself from any significant competition in enterprises data connectivity segment which may come up from major telecom service providers.

Tulip has launched managed services portfolio including video and data centre services to become an end-to-end service provider. Tulip already has ILD license which allows them to address the needs of customers for international voice, video and data connectivity. Tulip currently has data centers in Delhi & Mumbai and plans to set up data centers at Bangalore, Hyderabad and Chennai. Though this segment is new, it would be a good potential revenue generator going forward.

 

Future plans : Tulip plans to acquire company outside India in the infrastructure management space that would enable it to offer remote infrastructure management services. This acquisition would expand the company's geographical reach along with international presence.

The company also plans to cover commercial hubs around 10 major cities like Mumbai, Delhi, Bangalore, Hyderabad, Chennai and Kolkata through optical fiber to strengthen its last mile capabilities and provide high bandwidth connectivity.

Tulip has received licences to provide WiMAX services in 100 cities and has commenced deployment of Wimax based radios at areas where higher bandwidth is required. This will be a

key technological advantage as the demand for broadband services increases.

 

Investment rationale:

Robust growth opportunity: As per Frost & Sullivan report, the Enterprise Data Communication Services market in India is expected to grow at CAGR of 14.3% during the period 2006-13. Tulip, the market leader in (IP/VPN) connectivity, would benefit from increased adoption of multiple applications like CRM, ERP, SCM etc by small and medium enterprises who would need to network and integrate their operations across distant locations. Further MPLS based IP VPN is the fastest growing connectivity solution which offers connectivity between all offices at less expensive rates.

Tulip has 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. This has made it a partner of choice for Defence forces, State Governments and telecom service providers who want to expand their reach in rural India. Tulip having the first mover advantage with proven strengths like high uptime, short network rolls out time, bandwidth on demand and extensive network across India is set to take advantage of these opportunities.

 

E-governance to boost network integration business: With central and state governments promoting e-governance and rural broadband connectivity, more than 20 states are expected to set up state-wide area networks (SWAN). Tulip which has already bagged tenders for Haryana, West Bengal, Assam and recently Madhya Pradesh, has been front runner in this space and is set to capitalise on these emerging opportunities.

 

Concerns:

Integrated telecom service providers such as Reliance Communications, Bharti Airtel and BSNL who are already in the Data Connectivity business may offer last mile connectivity thereby impacting Tulip's profitability and market share. Also, entering into the SWAN business will lead to increase in its working capital requirements due to longer credit periods in case of government sector customers.

 

Valuations:

Tulip is the only service provider in its domain that provides customers with end-to-end connectivity services including network integration, bandwidth as well as managed services. Backed by improved product mix and huge potential in data connectivity and SWAN business, Tulip's revenues are expected to grow at CAGR of 30% over FY08A-FY10E and net profit at CAGR of 33% between FY08-10E. At CMP of Rs 709.85, it trades at P/E of 7.97x its FY09E earnings & 6.22x its FY10E earnings. Considering Tulip's diverse portfolio, technical advantages, huge customer base and strong revenue growth in domestic data services market in coming years, investors can keep medium to long term perspective on the stock.

 

 

SALES AND PROFIT PROJECTIONS
		Consolidated Annual
in Rs. Crore	Q1 FY09	FY08	FY09(E)	FY10(E)
Net sales	332.47	1218.98	1645.00	2056.00
OP	65.39	245.63	345.45	447.18
PAT	45.97	187.14	258.27	331.02
Capital	29.00	29.00	29.00	29.00
EPS (Rs.)	15.86	64.52	89.06	114.14

 

PRICE AND VALUE RATIOS
Price	709.85	Date	10/10/2008
PE	11.00	PB	4.62
Book value per share	153.49	EV	2377.57
EV/EBIDTA	8.85	Mcap	2058.57

 

SHAREHOLDING PATTERN
Share holding	Jun 2008
Promoter owned	68.96
Public owned	2.78
FIIs owned	24.1
Others owned	4.16