Tulip Telecom - Q4FY12 Result update - Centrum

Slowdown impacts business growth

Tulip Telecom's Q4FY12 revenue was below our estimates. Revenue was up 3.7% YoY at Rs6.6bn vs our estimate of Rs7bn due to slowdown in business activity. EBITDA margin too was below our estimate at 25.6% during Q4 on lower realisation. 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. Also, we have adjusted our estimates for FY12E to factor in change in financial year to September. We believe that financing of FCCB payout due in Aug 2012 remains a concern among investors. We downgrade our rating to Hold with a revised target price of Rs78, implying EV/EBITDA of 5.1x FY13E.

- Results below expectation: Q4 result came below expectation. Tulip clocked 3.7% YoY revenue growth to Rs6.6bn as against our expectation of Rs7bn. The growth rate is one of the lowest since listing. Moreover, pricing discounts led to a decline in operating margin by 368bp YoY to 25.6%. Higher depreciation and interest expenses led to a drop in net profit by 20.1% YoY to Rs660mn during Q4.

- Return ratios slipping QoO: Return ratios slipped quarter by quarter due to continuous capex for its data center and 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 temporarily put pressure on return ratios. The company indicated that it would maintain its capex of Rs4-4.5bn for another year which is likely to up interest burden going forward and decrease return ratios. The company is entering a phase of flat/lower topline growth, decline in EBITDA margin, higher capex and threat of refinancing FCCB with debt. All of these would hurt return ratios.

Data center subsidiary in gestation period: The EBITDA loss of its subsidiary inched up to Rs30mn during Q4 as compared to Rs16mn in Q3. We may see some working capital pressure in this business given the weak macro environment. 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.

Downgrade to Hold; reduce estimates: We have reduced our revenue estimates lower to take in the impact of Q4FY12 result and factor in - 1) the slower growth rate in Tulip's business in Q4 due to weak economic environment which reduces customer spending; 2) change in financial year end to September and 3) discounts to retain existing customers which would impact revenue growth and operating margin. At the CMP, the stock trades at modest valuations of 5.2x FY13E EV/EBITDA and 16.9x FY13E earnings. We estimate 9.4% revenue growth to Rs31.7bn over FY12-14E with EBIDTA margin of 25%. We expect lower return ratios on higher capex on the data centre which will continue for next 3-4 years. We downgrade our rating to Hold on the stock and revise the target price to Rs78 to factor in earnings revision and weak environment. 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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