Tulip Telecom

Investors with a two-year horizon can buy the shares of Tulip Telecom, a data connectivity provider in the domestic market, considering its strong business prospects and attractive valuations. At Rs 430, the share trades at a modest valuation of seven times its likely 2008-09 earnings. Tulip has maintained healthy growth rates in its business over the last three years, including in the first half of the current year. Its revenues and profits have grown by 52.2 per cent and 37.1 per cent respectively. Strong technical advantages in its operations and continuing engagements with high-value clients with big technology spends give Tulip an edge in the domestic market.

Tulip offers wireless last-mile connectivity for its Virtual Private Network 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. The Internet Protocol 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 Frost & Sullivan. Tulip is estimated to have a market share of 37.8 per cent in this segment. Further, the domestic enterprise data market is put at Rs 13,393 crore by 2013.

Tulip has over 900 clients across 1,300 cities in India across BFSI, retail, government and telecom segments, and is well-placed to make further inroads into this market. Data-intensive industries such as banks, large corporates and government are also likely to ramp up their investments in branch connectivity, spelling a further opportunity for Tulip. Considering that data connectivity means offering higher bandwidth, the company has also started building its own fibre network. This process is nearing completion in key business districts of top metros across the country. This will enable the company to offer a blend of fibre-based and wireless data connectivity, a larger addressable market.

The company is trying to bring down the low-margin network integration business to 20 per cent from over 40 per cent currently, by taking such deals only as a part of a complete managed services deal. This may help improve the margins for the company. Tulip has been able to secure a host of e-governance deals to enable offering government-to-citizen services, and range between Rs 50 crore and Rs 95 crore. This also allows Tulip to cross-sell its VPN services. Competition from Bharti Airtel, Reliance and Sify in the VPN market and players such as CMC and HCL Infosystems in hardware-intensive deals create pricing pressure for the company.