Tulip Telecom - Q3FY12 Result update - Centrum

Slowdown impacts business growth

Tulip Telecom's Q3FY12 revenue was below our estimates. Revenue was up 13.9% YoY at Rs6.8bn vs our estimate of Rs7.4bn due to slowdown in business activity. However, EBITDA margin was in line with our estimate at 29% during Q3. We revise our revenue assumption downward to factor in the uncertain economic environment in the country which has decelerated the growth momentum of the company. However, visibility in data centre is improving and the company has orders worth Rs6bn for 5 years which bodes well considering that it is a business in the investment phase. We believe that negatives in terms of FCCB payout due in Aug 2012 is factored in the current valuation. We re-iterate Buy rating with a revised target price of Rs205, implying EV/EBITDA of 6.1x and 5.5x FY12E and FY13E respectively.

- Results below expectation: Q3 result came below expectation. Tulip clocked 13.9% YoY revenue growth to Rs6.8bn as against our expectation of Rs7.4bn. However, the business mix in favour of fibre based services helped the company maintain operating margin at 29% (in line with our estimates). Higher interest expenses and tax rate led to a decline in net profit by 5.3% YoY to Rs773mn during Q3.

- Return ratios slipping q-o-q: While the EBITDA margin remains intact, return ratios slipped quarter by quarter due to continuous capex for its data center as well as the existing fibre based segment. Also, working capital pressure has increased with the company beginning to implement R-APDRP projects. We believe that lower asset utilization would temporary put pressure on return ratios. The reduction in capex from FY13, lower interest rate and monetization of investment in Qualcomm/stake sale in subsidiary would reduce interest burden going forward and improve return ratios.

- Traction seen in data center subsidiary: Tulip booked orders worth Rs6bn for 5 years for 30,000 sq ft. Also, the estimated loss in subsidiary reduced to US$3bn from earlier estimation of US$10mn for FY12. While the stake sale is still away, the company has achieved financial closure for its funding requirement of Rs5bn over a 3-year period. It has already got visibility of ~40% of usable capacity.

- Re-iterate Buy; despite reduction in estimates: We have reduced our revenue estimates lower to take in the impact of Q3FY12 result and factor in - 1) the slower growth rate in Tulip's business in Q3 due to weak economic environment which reduces customer spending; 2) a shift in losses to FY13 for data center business as the full year impact would be visible and higher interest cost for FY13E. At the CMP, the stock trades at modest valuations of 4.4x FY12E EV/EBITDA and 5.2x FY12E earnings. We estimate 16% revenue growth to Rs37bn over FY12-14E with EBIDTA margin of 29% despite the data centre's business losses. We expect lower return ratios on higher capex on data centre which would continue for next 3-4 years. We re-iterate Buy rating on the stock and revise target price to Rs205 to factor in earnings revision. Key triggers for the stock would be: (1) monetization of investment in Qualcomm business; (2) stake sale in data center subsidiary; and (3) higher-than-expected growth in business.

Source : Equity Bulls

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