Buy Tulip Telecom; target of Rs 213: IIFL

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Buy Tulip Telecom; target of Rs 213: IIFL

IIFL is bullish on Tulip Telecom and has recommended buy rating on the stock with a target of Rs 213 in its June 15, 2011 research report.

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RELATED NEWS Buy Action Construction; target of Rs 80: Motilal Oswal Buy Shriram Transport; target of Rs 756: Hedge Equities Buy Sandesh; target of Rs 316: Firstcall Research ALSO READ See previous views by IIFL See what other Experts & Brokerages are saying about Tulip Telecom See messages about Tulip Telecom Tulip Telecom BSE | NSE 29/05/12 Are Mutual Funds betting on Tulip Telecom?

IIFL is bullish on Tulip Telecom and has recommended buy rating on the stock with a target of Rs 213 in its June 15, 2011 research report.

"Tulip Telecom, overall ~Rs 9.3bn (~40% of Tulip Mcap) would be spent on the 0.9mn sq ft data centre in Bangalore over 3 years including Rs2.3bn upfront investment made by Tulip in previous fiscal. We peg the DCF-based equity value of Bangalore DC at ~US$200mn, which is in line with the value derived from the reported up to 30% dilution of DC subsidiary. Bangalore DC would report losses of just under US$10mn in FY12, its first year of operation but turn cash break-even in FY13 at 35% utilization. We refrain from adding the Bangalore DC value to our TP given the back-ended nature of revenues/profit. With a strong standing in data centre segment, Tulip would benefit from the estimated 12.5% cagr for third party data centres. Core MPLS VPN growth momentum should continue its robust showing."

"We have modeled the Bangalore DC on DCF basis since in a steady state the business would have annuity-like characteristics with predictable cash flows. Using explicit forecasts for 10 years, assuming 2.5% terminal growth and 11.4% WACC, we estimate the equity value at ~US$200mn. This is largely in line with the implied valuation based on what Tulip has reportedly set out to garner from a 30% equity dilution at the DC subsidiary. However, given the back-ended nature of revenue/PAT (slated to turn FCF +ve in FY15) we refrain from including this value in our TP."

"Third party data centre segment is poised to grow at ~13% cagr over FY10-14. We expect Tulip to benefit from the increased adoption rate of 3rd party DC to 23% from 18% in 2009. On core business, we continue to remain bullish on Tulip as the preferred play on the fast growing MPLS VPN segment within the enterprise data connectivity ecosystem. Stock trades at an attractive 5.5x FY13 PER, which is at the lower end of its historic 1-yr fwd range. We marginally tweak FY12 EPS estimates but reiterate BUY with a 9-mth target price of Rs 213," says IIFL research report.

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