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Wednesday, August 20, 2008

Tulip Telecom - looks attractive stock investment

Tulip Telecom continues to look attractive at current valuations, given its future growth prospects.

It has shown sustainable operational growth, along with a healthy rise in its client list. Tulip is keen to improve its presence in highmargin businesses, going ahead.

BUSINESS:
Tulip provides solutions for corporate data connectivity and network integration. While the former accounts for over two-thirds of its revenue, the latter contributes the remaining. Under network integration, it designs and implements data networks, as well as supplies and integrates active and passive network components. Its data connectivity segment provides last mile connectivity using advanced technologies such as multi protocol label switching (MPLS) and virtual private network (VPN). Sify, Reliance Communications, Bharti Airtel and VSNL are the other players in this segment. Tulip leads the pack with 28% market share in the segment.
Tulip provides solutions for the government and corporate sector and has a strong client base across both segments. It had over 900 clients at the end of the June’08 quarter. The company has added two more services in its deliverables, including managed services and value-added services (VAS). The former includes services like data centre and remote infrastructure management (RIM). VAS includes bundled data, voice and video solutions in the space of education and tele-medicine.

Tulip has also undertaken capital expenditure to strengthen its presence in the VPN space. It is laying a fibre optic network to provide high-bandwidth last mile connectivity to its enterprise customers in 10 major cities. The project cost is estimated at Rs 50-60 crore.

FINANCIALS:
Tulip’s revenue and net profit recorded a five-year CAGR of 43% and 139%, respectively, till FY08. The company has seen phenomenal growth in the past three years.
Between FY06 and FY08, its revenue has more than doubled, while PAT has grown four times. Along with overall growth, its profitability has also improved significantly. During the
June ’08 quarter, Tulip’s revenue grew by 56% to Rs 334.6 crore. Operating profit rose by a similar percentage to Rs 67.3 crore, while net profit increased by Rs 46 crore.

VALUATIONS:
The company had raised around Rs 600 crore through foreign currency convertible bonds (FCCB) last year. This is expected to dilute equity in future; hence, and such an impact needs to be taken into account while taking an investment decision.

We expect to see moderation in the company’s growth momentum due to the base effect. Thus, growth in sales is expected to be 40% and 30% in FY09 and FY10, respectively. Though net margin was under pressure in the June ’08 quarter, the company is likely to maintain its margin at over 14% for the said period, given its foray into high-margin services.
This translates into diluted earnings per share (EPS) of Rs 71 and Rs 92 for FY09 and FY10, respectively. At the current price of over Rs 950, Tulip’s stock is trading at estimated P/Es of 14 for FY09 and 10 for FY10. We retain our ‘buy’ call on the stock with an investment horizon of two years.
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