Motilal Oswal neutral on Tulip Telecom

Motilal Oswal has maintained neutral rating on Tulip Telecom with revised target price of Rs 100 in its March 5, 2012 research report.

About Tulip Data City: Tulip Data City (TDC), Asia's largest and the world's third largest data center, is spread over 900,000sf and is located in Whitefield, Bangalore. The facility has four towers with each tower containing seven floors. Of the seven floors, five floors (also referred to as plates) constitute the data center space with the remaining two base floors housing the facilities area. In effect, these towers will station 20 plates of data center. Each plate measures 20,000-22,000sf, of which 13,000-14,000sf of the plate area is actual server area, with raised flooring. TDC has the capacity to host ~12,000 racks (600 racks x 20 plates) and would use peak power of ~100MW. Currently, one plate is operational and the management expects four more plates to be operational in 2-3 months.

The facility contains a network operating center with 1,500 camera feeds and an IT management center. Currently, 40,000sf of the facility has been contracted. The first floor also contains a seating capacity of 1,500 including the TDC office space and Meet-Me rooms. The Meet-Me rooms are equipped with data connectivity from Bharti, Reliance Communications and Tulip. The state-of-the-art architecture also ensures that the data center operates at efficient levels. The Tulip Data City is likely to consume 80-100MW of power v/s 130-140MW used by similar data centers. To minimize the consumption of power, the facility is equipped with day/night security cameras, which make it possible to operate at minimal lighting conditions. Use of other energy sources like photo voltaic, heat pumps and evaporative cooling enables Tulip to reduce traditional power consumption.

Leverage levels remain elevated: During 9MFY12, Tulip Telecom added net debt of INR6.1b, including INR0.9b impact of adverse exchange fluctuations on forex debt. 3QFY12 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. The company has given a mandate to Barclays and SBI Caps for raising debt for FCCB redemption of USD140m. It is looking for minority/majority equity partners in the data center business to improve debt-equity ratio.

Cloud computing, outsourcing key drivers for data center business growth: The data center market is estimated to be USD670b by FY12. With the emergence of cloud computing, demand for data centers should increase significantly. Currently, ~80% of the 500 largest companies, including HP, IBM and NTT are Tulip's customers. The HP deal is estimated to have a revenue potential of INR5b in five years. The company has also won a cloud computing order from Reliance MediaWorks.

View and outlook: While we have been impressed by the 'state-of-the-art' facility and Tulip's timely execution, we believe ramp-up in utilization would be critical towards improvement in cash flows. We expect interest outgo to increase with an increase in debt funding. At current debt-equity levels, the balance sheet is stretched. We believe further clarity on how quickly Tulip can announce order wins and increase its utilization will be a key factor to watch out for. The stock trades at 5.2x FY13E EPS and at an EV of 4.5x FY13E EBITDA. Maintain Neutral with revised target price of INR100.

Non-Institutions holding more than 90% in Indian cos

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