Tulip Telecom Ltd

Investments with a one-two year horizon can be considered in the stock of Tulip Telecom, a strong player in the domestic data connectivity and network integration space.

At Rs 855, the share trades at 11 times its likely 2008-09 earnings. Though Tulip has strictly no comparable peers, it faces competition in some of its segments of operation from hardware and system integration players. With margins expanding, owing to a healthy revenue mix, the company appears well-poised to tap potential opportunities. Tulip’s revenues over the past three years have grown at a compounded annual rate of 53.5 per cent to Rs 1,239.4 crore while net profits have grown at 137.9 per cent to Rs 187.2 crore.

The company broadly has two sets of operations — 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 enables secure transmission of data, voice and video for companies, enabling Tulip to add several blue-chip companies across several industries to 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 an edge in the domestic market.

Key Business Advantages

Wireless last mile connectivity: Tulip 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 other players such as Sify. It also enables quicker implementation and deployment of VPN services.

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. The MPLS VPN of Tulip is offered in around 1,200 cities across the country giving it an edge over competitors.
Business Drivers

Changing revenue-mix: Tulip has managed to win a large client base in the IP VPN segment, including PSU banks such as Punjab National Bank, 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’s present focus on PSU banks assumes significance at a time when a number of PSU banks are adopting core banking facilities across the country. Such services will also cater to the CRM and ERP requirements of companies.

Tulip 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, which has been growing rapidly, accounts for well over 50 per cent of the revenues. It is also a higher margin service compared to network integration, which explains the company’s expanding overall margins over the past few years.

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 by Frost & Sullivan. Tulip is estimated to have a market share of 28 per cent in this segment. Further, the domestic enterprise data market is estimated to be Rs 13,393 crore by 2013. Tulip, with its strong existing client relationships, appears well-placed to gain from the opportunity.

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 and, more recently, Madhya Pradesh. These are e-governance deals to enable offering of government-to-citizen services, and range between Rs 50 and Rs 95 crore. With both the Union and Railway Budgets setting higher outlays towards IT, order flows from this segment may increase for Tulip. Defence, another sector with increased allocation, also offers opportunities for Tulip to cross-sell its IP VPN capabilities.

Data centres and remote infrastructure management: Tulip 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 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.

Though this is a nascent area for Tulip, this model has the potential to create a sustainable revenue stream for the company over a longer period.

The company has also started WiMAX deployments recently and would look to leverage on its backbone network and wireless last mile network. With bidding for spectrum and Wimax services set to take off soon, this is another area that holds potential for Tulip.
Risks

Attempts by fully integrated telecom players such as Bharti Airtel or Reliance Communications to increase their presence in the enterprise VPN space and to possibly offer wireless last mile connectivity may pose competition to Tulip. In hardware-intensive deals, the company faces competition from players such as CMC, HCL Infosystems and Wipro Infotech, creating pricing pressures on deals.