Tulip IT Services

Investments with a one-two year horizon can be considered in the shares of Tulip IT Services (Tulip IT).

At Rs 957, the share trades at 18 times its current earnings and 14 times its estimated FY-09 earnings. Though Tulip IT has strictly no comparable peers, it faces competition in some of its segments of operation from hardware and system integration players. With expanding margins and a healthy revenue mix, the company appears well-poised to tap potential opportunities.

The company broadly operates in two business segments — network integration and corporate network and data services. The latter includes the fast growing IP VPN (internet protocol virtual private network) service that connects branches of companies, banks and many other data transfer-intensive organisations. This service has enabled Tulip IT to count several blue-chip companies in its client base. Strong technical advantages in its segment of operations, continuing engagements with high-value clientele with big technology spends and bright prospects for new business segments give Tulip IT an edge in the domestic market.
Business Advantages

Wireless last mile connectivity: Tulip IT offers wireless last-mile connectivity for its VPN services. ‘Last mile’ here refers to the connectivity between the company’s point of presence in any city to the client’s premises in that city.

This removes the dependence on wired leased lines that is usually resorted to by players such as Sify. It also enables quicker implementation and deployment of VPN services and becomes especially important in difficult terrains or where last-mile leased line is not available or the incumbent inordinately delays allocation. Most other players in VPN services depend on leased lines for last-mile connectivity.

MPLS based backbone: The company has built a multi-protocol label switching (MPLS) technology based backbone network. This technology is regarded as being easily scalable in architecture and superior to traditional ATM or Frame Relay-based technologies. This MPLS VPN of Tulip IT is offered in around 1,000 cities across the country giving it strong edge over competitors. The company offers inter-city connectivity through optic-fibre network, leased from players such as Gailtel, Railtel and Power Grid Corporation, among others.

Vendor Neutral: In the network integration segment where the company offers implementation and system integration services related to IT and telecom infrastructure, Tulip IT works with multiple vendors with no special preferences. This enables it to retain flexibility to customise services to the specific requirements and preferences of clients.
Business Drivers

IP VPN service well-poised: The IP VPN market is estimated to be Rs 3,343 crore in size by 2013, growing from the current Rs 1,200 crore levels , according to a report from Frost & Sullivan. Tulip IT is estimated to have a market share of 28 per cent in this segment.

Tulip IT has managed to win a large client base in this segment. These include banks such as Punjab National Bank and some PSU banks, ADAG group companies, Bajaj Allianz, France Telecom and Idea Cellular among others. Most of these companies are data intensive and would require secure VPNs to communicate between branches.

The company is especially targeting PSU banks. This becomes important with many PSU banks adopting core banking facilities across the country. Such services will also cater to the CRM and ERP requirements of companies. Tulip IT with its presence and execution capabilities appears well-placed to cater to these opportunities. This creates a sustainable revenue stream for the company. The IP VPN business has been growing rapidly for the company and now contributes over 50 per cent of the revenues. It is also a higher margin service.

Government SWAN deals and budget cues: The company has been able to secure a host of government deals in IT infrastructure and implementation. These include state wide area network (SWAN) deals of the governments of Haryana, Assam and West Bengal. These are e-governance deals to enable offering of government-to-citizen services, each of which is worth over Rs 50 crore. With both the Union and Railway Budgets setting higher outlays towards IT, order flows from this segment may increase for Tulip IT. Defence, another sector with increased allocation, also offers opportunities for Tulip IT to cross-sell its IP VPN capabilities.

Data centres business: Tulip IT also hosts and fully manages data centres on behalf of companies. This is an emerging area as it allows companies to outsource critical IT infrastructure. Tulip IT offers this service in the form of co-location with the client as well as on a fully managed service basis.

This becomes important for small and medium enterprises adopting IT for the first time and wanting to minimise cost. This opens up a wide potential client base for the company. Significantly, many of the domestic IT services companies also view the SME segment as offering a lot of promise.
Risks

Fully integrated telecom players such as Bharti Airtel or Reliance Communications increasing their presence in the enterprise VPN space and possibly trying to offer wireless last mile connectivity may pose competition to Tulip IT. A ramp up in government deals may lead to a smaller deal size as well as lower margins; apart from extending the receivables cycle. In hardware-intensive deals, the company faces competition from players such as CMC, HCL Infosystems, Wipro Infotech and Datacraft.

Via BL