Fibre focus to help Tulip Telecom bloom

Tulip Telecom Ltd, enterprise data connectivity (EDC) services provider with a strong pan-India presence and last-mile wireless connectivity, is well-poised to benefit from its recent investments into fibre network and its focus on changing the business mix.
Business

Tulip Telecom is a data telecom service and IT solutions provider offering internet protocol-based infrastructural solutions in India and abroad. Tulip provides end-to-end solutions that include network integration (NI), corporate data connectivity, infrastructure management services and IT consulting services to enterprises.

It is the fifth-largest EDC player in India with a market share of 11.3% (FY10); the widest reach with a presence in over 2,000 cities; and a strong base of over 1,600 customers across sectors.
Tulip’s business can be classified into two main segments — network integration (NI) and EDC services.

NI services: Tulip is the fifth-largest player in the NI space, where it offers integrated solutions for design, upgrade and expansion of business networks. The company also helps its clients in identifying and providing network equipments, and in post-implementation network management and maintenance services. 

EDC services: The company offers internet protocol/ virtual private network (IP/VPN) based wireless connectivity services to corporate clients. It is the largest player in the fast-growing multi-protocol label switching (MPLS) VPN segment with a market share of around 30%. This high-margin (30-40% operating margins) segment contributes almost 88% to its consolidated revenues currently.

Investment rationale
Tulip has a first-mover advantage as it deployed a countrywide network using wireless on the last mile thereby reaching out to Tier 2/3 cities and rural areas. This has made it a partner of choice for corporates, telecom service providers, defence forces and state governments which want to stay connected with rural India. The company also scores over its competitors due to proven strengths like high uptime, short network rollout time and bandwidth on demand due to its sourcing fibre bandwidth from multiple vendors.

The EDC market is expected to grow at a CAGR of over 22% till FY2014, driven by steady economic growth, geographical expansion by corporates and government investments in e-governance and infrastructure. The demand for MPLS VPN networks, which contributes 43% to the total EDC market, is expected to grow at over 34% till then due to its cost advantage, increased reliability and network security features. This provides huge opportunity for Tulip, which is the leader in this segment.
The company is looking to shift its focus further from the low-margin NI business to the high-margin EDC segment as it aims to bring down share of NI to 10% by FY13.

The company has invested heavily in fibre rollout as last mile connectivity in over 300 cities in order to cater high bandwidth requirements at major business districts and also to cater to other related services like IPLC, DLC and high speed internet.
Concerns

Any economic slowdown leading to reduction in corporate spending on IT and telecom networks or reduction in prices by its competitors may impact the company’s revenues and profit margins. Also, it faces risk from entry of new BWA spectrum winners into last mile enterprise connectivity, though it may take time for these players to set up infrastructure and win customers.
Valuations

Given the five-times increase in addressable market post the fibre last mile connectivity and its increasing market share in high-margin managed services, the company’s revenues are expected to grow at a CAGR of 20% and net profits at a CAGR of 18% over FY10-FY12E.

At the current market price of `162.60 per share, the stock trades at 8.38 times its expected FY11E earnings and 6.94 times its expected FY12 earnings per share.

Considering Tulip’s diverse portfolio, strong and niche customer base, high return ratios and scalable business model, one can consider investing in the stock from a medium-to-long term perspective.

Disclaimer: The writer does not hold any share in the company