Hold Tulip Telecom; target of Rs 111: Emkay

“Tulip Telecom, currently 1lac sq feet is almost ready and 20,000 sq feet is already occupied by on of its customers. Remaining 3lac sq feet to get functional in next 18-24 months. Order book for data centre stands at Rs6.0bn for 30,000 sq feet and it is expected to rent additional 55,000sq feet by end of current fiscal. Management maintains its guidance to achieve revenue of Rs10bn over next 5 years. It has also indicated 40% peak EBITDA margins are easily achievable once the full capacity gets operational. It has done financial closure of Rs5.0bn for TDC (Tulip Data City) and remaining capex in third year would be done through internal accruals. Management had earlier indicated to raise ~3.0bn via stake sale in DC to the extent of 25% but looking at current ramp-up in the facility and order book, it has indicated to raise Rs3.0bn but for the lesser stake.”

“Indian DC market is pegged at $671mn with growth rate of 36.5%. Total data centre space available in India is 1.5mn sq feet while demand is significantly high at 3.4-4mn sq feet. Recent deal in the third party Data Centre of Netmagic with NTT encourages more deals in future, given the huge growth potential in the segment. As per IDC (International Data Corporation), NTT bought 74% stake for an estimated amount of $128mn valuing the company at $173mn. Netmagic has 70,000 sq feet space with 1000 customers. Management also indicated that DoT’s demand pertaining to revenue share would not impact divestment in Qualcomm.”

“During Q3FY12 company had reported lower than expected revenue growth and management indicated slower revenue growth was due tough economic conditions and guided for revenue growth of ~15% yoy for FY13E. However, in the long run, increase in addressable market led by fibre network roll out which would support strong revenue growth of 16.9% CAGR over FY11-13E. 83% of new orders are coming on fibre for data connectivity business.”

“At the current juncture, weak revenue growth, high leverage, increasing working capital requirement and delays in the stake sale in data centre and Qualcomm are key negatives for the company. Further, interest expense for the company is expected to increase significantly over the next two years led by re-financing of FCCB debt and draw down of debt for Data Centre (taken through Mezzanine facility). Nevertheless, revenue accretion from the data centre, stake sale in data centre and revival in macro economic scenario would be positive for tulip. Further, divestment of Qualcomm stake would have positive sentiment on company but it would not materially reduce debt. Debt would increase by Rs4.5bn in FY13E, led by FCCB redemption and ongoing capex for Data Centre which would lead to higher interest outgo. We cut EPS est. by 18.8% for FY13E. We have included the redemption premium of ~Rs2.1bn in the debt which has led to high interest cost going forward. At CMP of Rs99, stock trades at valuations of 4.9x P/E and 3.8x EV/EBIDTA for FY13E.”

“We maintain our HOLD rating on the stock with revised target price of Rs111 (earlier Rs124),” says Emkay Global Financial Services research report.

FIIs holding more than 30% in Indian cos

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