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Tulip IT Services

Exciting track record

Tulip IT Services is into network integration and management services and Internet protocol (IP)/virtual private network(VPN) wireless connectivity. IP/VPN is a relatively new business, where the company provides inter-city and intra-city data connectivity to corporate clients. Inter-city connectivity is provided through leased lines and fibre optic cables from multiple service providers. Intra-city connectivity is provided wirelessly through owned network.

With the proceeds of the current IPO, Tulip IT Services proposes to expand its IP/VPN wireless business with a network coverage in 130 cities and to fund incremental working capital requirements.

Strengths

• Tulip IT Services’s track record is exciting, with a four-year CAGR of 69% to Rs 342.21 crore in sales in FY 2005 and an almost 100% CAGR to Rs 13.92 crore in net profit. However, the profit margin is very low due to the large hardware-trading portion.

• According to an analysis of IP VPN services by IDC, the Indian market was around Rs 230 crore in 2003 and is expected to reach Rs1100 crore by 2008. In this market, Tulip IT Services, which has created a wide area network in the country, has the first-mover advantage.

• Wireless network clients include Bank of Punjab, ABN Amro Bank, HDFC Bank, Bank of India, Indian Overseas Bank, Dupont, and Hindustan Times. The expertise in the market will attract new corporate clients.

• The in-house unit at Jammu to assemble networking equipment will provide various tax benefits including excise, sales tax and income tax exemptions

Weaknesses

• Low entry barriers for providing IP/VPN wireless services will attract more players. Also, dependency on basic service providers for inter-circle connectivity can lower bargaining power.

• Wipro Infotech, Sify, CMC, and the HCL group are the major players in network integration. They have deep pockets and expertise, and can offer stiff competition. Even Bharati Tele-Services, Reliance Infocomm and Tata Teleservices/VSNL can enter this business in a big way, with competitive advantage.

• Introduction of cost-efficient new technologies cannot be ruled out in this market. Also, changes in regulatory environment affect the sector.

Valuation

There is no listed company with a similar business model. The nearest comparable company is Ayava GlobalConnect (59% subsidiary of Avaya, US, and a major player in converged communication space) which commands a PE of 24.0 x FY05 earning of Rs 17.5. Tulip IT Services is offering shares in a price band of Rs 100- Rs 120, which gives a PE of 21.7 to 26.1 times FY05 earning of Rs 4.8 on a post issue equity of Rs 29.00 crore. Company’s track record and short-term prospects are encouraging. That’s why it is probably coming pricey. If growth continues at the same rate, investors will not repent.

PVR IPO Analysis

Pioneer in multiplexes

PVR is India's largest multiplex cinema operator by number of screens. The company established PVR Anupam, India’s first multiplex, in Delhi in 1997. It also owns, PVR Bangalore, the largest multiplex in the country.

Besides the public issue of 57 lakh shares, there is offer for sale of 20 lakh equity shares by The Western India Trustee and Executor Company (WITEC), a trust acting through its investment manager, ICICI Venture Funds Management Company. Notably, WITEC got the shares, now offered in the range of Rs 200-Rs 250, at just Rs 47.5 in March 2005.

Besides the public issue to meet the envisaged project cost, PVR also issued in September 200 lakh 5% redeemable preference shares to the promoter and WITEC at Rs 10 each.

The proceeds from the Issue will mainly be utilised to finance new cinema projects in Mumbai, Hyderabad, Delhi, Indore, Gurgaon, Lucknow, Chennai, Ludhiana, Aurangabad and Latur at an estimated cost of Rs 138 crore. PVR will also invest Rs 30 crore in the equity of CR Retail, a wholly-owned subsidiary for setting up a seven-screen multiplex at Lower Parel, Mumbai. It will also put in Rs 7 crore in the equity of PVR Pictures, another wholly-owned subsidiary distributing English and Hindi language films in India.

From 10 cinemas with 39 screens currently, PVR will have 28 cinemas with 121 screens by end of FY 2008.

Strengths

*The entertainment industry is currently on a high growth path owing to the rise in disposable income and favourable economic environment.

* As it is the largest multiplex operator in the country with property located in prime locations, PVR enjoys economy of scale in operation compared to other multiplex operators.

* The strong brand equity enables PVR to attract higher patrons with competitive ticket pricing and higher advertisement and royalty revenue compared to other competitors. It also gets the advantages of being a preferred anchor tenant in malls.

Weaknesses

*The multiplex business enjoy relatively low breakeven due to higher ticket rates and entertainment tax benefits. However, tax benefits are for a limited period and the ticket rates can be regulated by the states.

*In the short term, PVR can face pressure on profit due to the fast capacity ramp-up.

*Due to the rapid development of digital technology and the massive advancement in the broadband and networking space, the home entertainment sector may witness a fast growth in future. This can adversely affect multiplex business prospects.

*Ultimately, the film exhibition business’s fortunes depend on the success of the films they are showing. Hindi films, which dominate the business, do not have good success rates.

*PVR does not have presence in the lucrative area of Mumbai and the rest of Maharashtra. Other multiplex operators like Adlabs and Shringar Cinema have developed a good presence in these areas. So the proposed expansion here will face stiff competition from these players.

Valuation

In FY 2005, PVR reported sales of Rs 68.64 crore on a standalone basis. The reported net profit was Rs 3.65 crore. On an expanded equity of Rs 22.88 crore, FY 2005 EPS works out to Rs 1.6. Based on this, PE stand at 125 and 150 at the price band of Rs 200 and Rs 240.

In the half year ended September 2005, the company reported sales of Rs 54.32 crore and net profit of Rs 3.87 crore. However, the first half is the best for the industry and the figures cannot be annualised.

Also, there will be an annual dividend of Rs 1 crore on the preference capital, which will have to be deducted from net profit to calculate EPS.

The nearest comparable company is Shringar Cinemas, which, in spite of continued losses, is traded around Rs 80-85 (its IPO was priced at Rs 53 in April 2005). Another listed player Adlabs, which has a better business model and the backing of Anil Ambani, trades at a PE of 48. After all, multiplex is a sunrise industry and that too within the show biz. So there will be many investors – strategic as well as non-strategic -- and the demand-supply gap can continue to favour a high valuation.