10 February 2012
3QFY12 Results Update | Sector: Telecom
Tulip Telecom
BSE SENSEX
S&P CNX
17,831
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,412
TTSL IN
145.0
181/100
-10/-27/-28
16.7
0.3
CMP: INR115
TP: INR120
Neutral
3QFY12 results below estimates:
Tulip Telecom (TTSL) posted a PAT of INR773m for 3QFY12, down 5% YoY and
11% QoQ. Revenue and EBITDA declined 2% QoQ v/s our expectation of 4% growth. EBITDA margin improved
50bp YoY but remained flat QoQ at 29%.
Macro headwinds impacting enterprise spends, data center booking:
The management now expects FY12
revenue growth to be 14-16% (v/s 20% earlier), implying flattish QoQ growth in 4QFY12. While TTSL has been
able to hold EBITDA margin at ~29%, slowdown in revenue growth can impact margins negatively. The data
center business (capital employed: INR3.5b) has not yet begun contributing revenue. While the visible funnel
for data center space has increased to 225,000sf, we note a reduction in target booking to 15-20% by the end
of FY12 v/s the last quarter guidance of 25%.
Leverage levels remain elevated:
During 9MFY12, TTSL added net debt of INR6.1b, including INR0.9b impact
of adverse exchange fluctuations on forex debt. This was the seventh consecutive quarter of increase in net
debt; reported net debt of INR21.4b does not include redemption premium of INR2.1b on FCCB due in August
2012. While the company has been considering various deleveraging options like monetization of stake in
Qualcomm JV, equity raising at parent/subsidiary level, etc, timing of these events remains uncertain.
Downgrade to Neutral:
3QFY12 earnings were 20% lower than we had estimated and leverage concerns
remain unaddressed. We cut our FY12/13/14 EBITDA estimates by 5/10/12% and EPS estimates by 12/18/23%.
We downgrade our stock recommendation to
Neutral,
with a revised target price of INR120. The stock trades
at 6.2x FY13E EPS and at an EV of 4.9x FY13E EBITDA. While valuations are supportive, re-rating would be
contingent on key concerns getting addressed. We would await more clarity on re-financing of upcoming
FCCB redemption, stake sale in Qualcomm BWA venture and revenue ramp-up of data center before taking a
constructive view on the stock.
Shobhit Khare
(Shobhit.Khare@MotilalOswal.com); Tel: +91 22 3982 5428

Tulip Telecom
3QFY12 results below estimates
Tulip's 3QFY12 PAT declined 5.5% YoY and 11.3% QoQ to INR773m (est of INR961m).
Revenue increased 14% YoY but declined 2.3% QoQ to INR6.9b (est of INR7.3b)
EBITDA grew 16% YoY but declined 2% QoQ to INR2b (6% below est).
EBITDA margin was up 50bp YoY but remained flat QoQ at 29% (20bps above est).
Capex incurred in 9MFY12 is INR4.04b on standalone basis and an additional
INR1.37b for the Tulip data center business
Effective tax rate was 26.3% during 3QFY12.
Forex loss during the quarter was INR0.89b (v/s INR0.44b in 2QFY12)
During 3QFY12 the data centre subsidiary reported EBITDA loss of INR16m taking
the total EBITDA loss to INR46m in 9MFY12.
3QFY12 Concall highlights
Change in working capital for 9MFY12 has been ~INR3.5b.
During the quarter, Tulip won an order for 200 racks from NTT Japan for which
billing is expected to commence by March 2012.
The company has raised mezzanine debt of INR2.5b. The cost of the mezzanine
debt is higher than the average cost of debt for Tulip.
In 9MFY12, gross block has increased INR6.3b.
Capex guidance of INR4b for core business (excluding data center).
Net debt has increased for seven consecutive quarters
Source: Company/MOSL
Tulip: Quarterly EBITDA and margin
RM cost declined on QoQ basis (% of revenue)
Source: Company/MOSL
10 February 2012
2

Tulip Telecom
Macro headwinds impacting enterprise spends, data center booking;
leverage levels remain elevated
Over past one year net debt has increased from INR12.4b to INR21.4b. 3QFY12 was
the seventh consecutive quarter of QoQ increase in debt for Tulip.
The reported net debt of INR21.4b does not include redemption premium of
INR2.1b on FCCB due in August 2012.
While the company has been considering various de-leveraging options like
monetization of stake in Qualcomm JV, equity raising at parent/subsidiary level
etc, timing of these events remains uncertain.
Revenue outlook for Tulip has weakened due to the economic slowdown.
Management now expects FY12 revenue growth to be 14-16% (vs 20% earlier),
implying flattish QoQ growth in 4QFY12.
Data center business (capital employed of INR3.5b) has not yet started contributing
revenue for the company.
While visible funnel for data center space has increased to 225,000 sq ft, we note
reduction in target booking to 15-20% by end FY12 v/s last quarter guidance of
25%.
Downgrade to Neutral with TP of INR120
We downgrade Tulip from Buy to
Neutral
with a revised TP of INR120.
We cut FY12/13/14 EBITDA by 5/10/12% and EPS by 12/18/23%.
We would await more clarity on re-financing of upcoming FCCB redemption, stake
sale in Qualcomm BWA venture and revenue ramp-up of data center before taking
a constructive view on the stock.
At CMP of INR115, the stock trades at FY13 P/E of 6.2x and EV/EBITDA of 4.9x.
We expect 14% EBITDA CAGR over FY12-14E
FY12E EBITDA margin expected to reach ~29% (%)
Source: Company/MOSL
10 February 2012
3

Tulip Telecom
Data center operations ramp up
FCF continues to be negative
Leverage remains high
Net working capital continues to inch up (INR b)
We model decline in capex going forward
Source: Company/MOSL
10 February 2012
4

Tulip Telecom
Tulip Telecom: Summary of estimate change
FY12E
Revenue (INR b)
FY13E
FY14E
Old
New/Actual
Change (%)
EBITDA (INR b)
Old
New/Actual
Change (%)
Net Profit (INR b)
Old
New/Actual
Change (%)
Diluted EPS (INR)
Old
New/Actual
Change (%)
Depreciation (INR b)
Old
New/Actual
Change (%)
Net Finance Cost (INR b)
Old
New/Actual
Change (%)
EBITDA Margin (%)
Old
New/Actual
Change (bp)
Tax Rate (%)
Old
New/Actual
Change (bp)
28.8
27.5
-4.5
8.2
7.8
-4.7
3.6
3.2
-12.0
22.2
19.5
-12.0
2.1
2.1
-1.7
1.4
1.5
8.0
28.6
28.6
-7
25.0
25.0
0
34.9
31.9
-8.6
9.4
8.4
-9.9
3.7
2.7
-26.7
22.5
18.5
-17.8
2.8
2.7
-3.8
1.8
2.3
26.1
26.8
26.5
-37
25.0
25.0
0
42.0
38.2
-9.0
11.5
10.1
-11.8
4.6
3.2
-31.2
28.6
22.1
-22.9
3.4
3.2
-4.7
2.1
2.9
34.7
27.4
26.6
-84
25.0
25.0
0
Source: Company/MOSL
Tulip Telecom: EV/EBITDA band
Tulip Telecom: P/E band
Source: Company/MOSL
10 February 2012
5

Tulip Telecom
Tulip Telecom: an investment profile
Company description
Tulip is a leading player in the Indian enterprise data
segment focused on providing connectivity to
corporates, SMEs and government verticals. Tulip has an
outstanding track record, having scaled up to a dominant
~31% market share in the largest and fastest growing
VPN segment within five years. Tulip has network
presence in ~2,000 cities and a client base of ~2,400.
Visibility on monetization of stake in Qualcomm JV
and equity raising at parent/subsidiary level
remains low.
Potential technology disruption.
Recent developments
Tulip's Bangalore Data center has been
commissioned. Orders amounting to a total value
of INR6b for 5 years for 30,000sq ft have been
booked.
Tulip has won an order for INR0.5b from Sahara Para
banking for connecting 3,000 locations across India.
Tulip has won a government project worth INR0.5b
from Rajasthan State Crime and Criminal Tracking
Network and Systems.
Key investment argument
Tulip's owned and leased 'last mile' fiber network
spans over 18,000 Kms; Fiber rollout allows tapping
high bandwidth connects thereby capturing higher
share of clients' requirement, increasing the
addressable market by 5-6x and de-risking from
competition; Fiber constitutes ~83% of the new order
inputs in data connectivity business.
Increased traction from fiber rollout and increased
revenue contribution from data center should
support 18/14% CAGR in revenue/EBITDA during FY12-
14E.
The government vertical, which contributes <5% of
revenue, is likely to be an additional growth driver.
Valuation and view
We downgrade Tulip from Buy to
Neutral
with a
revised TP of INR120.
We cut FY12/13/14 EBITDA by 5/10/12% and EPS by
12/18/23%.
We would await more clarity on re-financing of
upcoming FCCB redemption, stake sale in
Qualcomm BWA venture and revenue ramp-up of
data center before taking a constructive view on
the stock.
At CMP of INR115, the stock trades at FY13 P/E of
6.2x and EV/EBITDA of 4.9x.
Key investment risks
High leverage levels with net debt/annualized
EBITDA of 2.7x in 3QFY12.
Net debt levels at INR21.4b (excluding redemption
premium of INR2.1b on FCCB due in August 2012).
Comparative valuations
P/E (x)
EV/EBITDA (x)
EV/Sales (x)
P/BV (x)
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
Tulip
5.9
6.2
5.0
4.9
1.4
1.3
1.2
0.9
Bharti
28.8
17.3
8.4
6.7
2.8
2.3
2.5
2.2
Idea
41.5
19.0
8.5
6.3
2.2
1.8
2.4
2.1
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
19.5
18.5
Consensus
Forecast
22.4
26.6
Variation
(%)
-12.8
-30.4
FY12
FY13
Target price and recommendation
Current
Price (INR)
115
Target
Price (INR)
120
Upside
(%)
4.3
Reco.
Neutral
Stock performance (1 year)
Tuli p Tel ecom
200
Sens ex - Rebas ed
Shareholding pattern (%)
Dec-11
Promoter
Domestic Inst
Foreign
Others
10 February 2012
69.9
1.6
18.7
9.8
Sep-11
69.9
1.7
18.8
9.6
Dec-10
69.0
1.9
19.6
9.6
170
140
110
80
Feb-11
Ma y-11
Aug-11
Nov-11
Feb-12
6

Tulip Telecom
Financials and Valuation
10 February 2012
7

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