Results in-line, Retain BUY

June 1, 2010

BUY
Price Rs 941 Sensex Target Price Rs 1,240 16,945

Tulip Telecom reported Q4FY10 results in line with estimates. Net sales increased by 14.9% YoY to Rs 5.3bn (v/s estimate of Rs5.5bn). EBIDTA increased by 56% YoY to Rs 1.55bn (v/s estimate of Rs1.6bn). Higher contribution from data connectivity business along with economies led to 768 bps YoY improvement in EBIDTA margin to 29.1%. APAT increased by 73.4% YoY to Rs 795 mn (v/s estimate of Rs826mn). While the revision in depreciation policy to adjust the useful life of fiber assets reduced the depreciation for the quarter, the tax rate of 37% to factor the higher tax impact for full year (towards completion of first 5 years of 80 I (A)) benefit impacted the profits. During the quarter, Tulip transferred its SWAN projects with aggregate investment of Rs 2.3bn into an SPV at book value and has received Rs1.4bn as upfront cash consideration, while the balance would be received on receipt of payments by the SPV. Post transfer of SWAN projects, Tulip owns 10% stake in the SPV, and the risk of cost over-run gets transferred to the SPV. We believe that this move of hiving off the non-accretive SWAN projects is largely neutral for the company as it reduces Tulips ownership from 100% to 10% but also transfers risk of payment default, cost over-run, project delays, etc. to the SPV. Post the in-line Q4FY10 results, we retain our revenue and EBIDTA estimates but revise our depreciation and tax assumptions to factor change in depreciation policy and higher tax provision of 24% resulting in increased EPS of ~5% each for FY11E and FY12E. Our revised EPS estimates of Rs110.0 and Rs133.8 implies attractive valuations 8.6x and 7x for FY11E and FY12E respectively. We maintain BUY rating on the stock with DCF based target price of Rs 1,240.

Price Performance
(%)

1M 12 16

3M 1 (3)

6M 12M 1 1 38 19

Absolute Rel. to Sensex

Source: Bloomberg

Stock Details
Sector Reuters Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)

Telecommunications TULP.BO TTSL@IN 290 10 29 1,250/660 27/582 77209 1.5

Fiber growth traction strong

Tulips strong operating growth traction is mainly led by strong growth in data connectivity business. Within data connectivity business, Tulip continues to make strong in-roads with 600 of its 1600 clients already beginning to use its services on fiber. With over 20% of contribution currently coming from fiber, Tulip is targeting its fiber based network services to contribute ~70% of its revenue in next 2 years.

Debt reduced on transfer of SWAN projects to SPV Shareholding Pattern (%)

M10
Promoters FII/NRI Institutions Private Corp Public
Source: Capitaline

D09 69.0 24.8 1.6 1.6 3.0

S09 69.0 23.0 2.0 2.3 3.8

69.0 24.8 1.6 1.6 3.0

Tulip has transferred its SWAN projects at book value of Rs2.3bn to an SPV in which it holds 10% stake, in return for upfront cash consideration of Rs1.4bn and balance (difference between book value and cash received) to be received on receipt by SPV. With the receipt of Rs1.4bn cash, its net debt reduced to Rs8.4bn in Mar-10 v/s Rs11.0bn in Dec-09.

Capex guidance of Rs 4.5-5bn for FY11E

Tulip has incurred capex of Rs4.5bn in FY10, mainly towards setting up intra-city fiber network. Tulip has extended its fiber based data connectivity services to 46 cities and plans to further expand the same. Tulip management has guided for capex of Rs4.5-5bn for FY11E with 85-90% of capex to be incurred in fiber infrastructure. Our estimates suggest that despite such large capex, Tulip would turn FCF+ve by end FY11E.

YE-Mar Sumit Modi sumit.modi@emkayglobal.com +91 22 6612 288 Abhishek Gaoshinde abhishek.gaoshinde@emkayglobal.com 91 22 6612 278 FY2009 FY2010 FY2011E FY2012E

Net Sales 16,144 19,664 24,376 28,450

EBITDA (Rs Mn) 3,367 5,255 6,799 8,136

EBIDTA (%) 20.9 26.7 27.9 28.6

PAT (Rs Mn) 2,505 2,755 3,621 4,406

EPS (Rs) 86.4 95.0 110.0 133.8

EV/ EBITDA (x) 10.4 6.8 5.2 4.0

RoCE (%) 18.8 19.9 23.1 24.4

P/E (x) 10.9 9.9 8.6 7.0

Emkay Global Financial Services Ltd

Result Update

Tulip Telecom Ltd

Tulip Telecom Ltd Change in depreciation policy results in EPS increase

Result Update

Tulip has revised its depreciation policy from an aggressive 10-11% straight line method to ~9.3% due to lower depreciation on fiber assets which have longer useful life. Tulip has also adjusted for lower depreciation on fiber assets for FY10 in Q4FY10 that has resulted in lower depreciation of Rs155mn v/s ~Rs409mn in Q3FY10. Hence we have realigned our estimates for change in the policy resulting in deprecation expense lowering by 17.8% to Rs 1.6 bn and 17.5% to Rs 1.9bn for FY11E and FY12E respectively.

Increased EPS estimates by ~5% each for FY11E and FY12E

Post Q4FY10, while keeping our revenue & EBIDTA estimates intact, we have lowered depreciation rates and increased tax rate from 22% to 24% due to (lapse of 5year of 80I (a) benefit). This has resulted in 5.2% and 4.8% increase in our estimated EPS for FY11E and FY12E to Rs110.0 and Rs133.8 respectively.
FY10A Old Revenues EBIDTA EBIDTA % PAT EPS ( Rs) 19,664 5,255 26.7 2,755 95.0 24,376 6,799 27.9 3,444 105 FY11E New 24,376 6,799 27.9 3,621 110.0 % chg 0.0% 0.0% 0 5.1% 5.2% Old 28,450 8,136 28.6 4,203 127.7 FY12E New 28,450 8,136 28.6 4,406 133.8 % chg 0.0% 0.0% 0 4.8% 4.8%

Valuations attractive Retain BUY with target Rs1240.

Although we have increased our EPS estimates by ~5% each for FY11E and FY12E, our DCF based target price on the stock remains unchanged at Rs1246. At CMP of Rs941, the stock trades at 8.6x and 7x our estimates EPS of Rs110 and Rs113.8 for FY11E and FY12E respectively. Retain BUY rating with DCF based target price of Rs1246 (unchanged). We highlight that we have factored the full conversion of FCCBs in FY11E resulting in equity dilution of 13.5%.

Emkay Research

1 June 2010

Tulip Telecom Ltd

Key Financials
4Q09 Net sales Raw mat exp Employee exp Other exp Operating exp EBIDTA Depreciation EBIT Interest PBT (Core) Other income PBT Tax PAT APAT EPS AEPS 4,616 3,298 199 129 3,626 990 136 854 143 711 579 1,290 232 1,057 459 36.5 15.8 1Q10 4,429 3,037 185 121 3,343 1,086 353 734 158 575 271 847 96 751 622 25.9 21.5 2Q10 4,910 3,309 208 122 3,639 1,271 436 836 187 648 37 685 164 521 577 18.0 19.9 3Q10 5,009 3,307 202 147 3,656 1,353 409 944 187 757 104 860 172 688 688 23.7 23.7 4Q10 5,303 3,301 221 236 3,758 1,545 155 1,390 185 1,205 57 1,262 467 795 795 27.4 27.4 YoY % chg 14.9 0.1 11.0 82.7 3.7 56.0 13.8 62.7 28.8 69.6 (90.2) (2.2) 100.8 (24.8) 73.4 (24.8) 73.4 95.0 86.4 FY10 19664 12953 825 632 14409 5255 1353 3902 716 3186 468 3654 899 2755 FY09 16144 11559 712 505 12777 3367 414 2953 462 2491 344 2835 330 2505

Result Update

YoY % chg 22% 12% 16% 25% 13% 56% 226% 32% 55% 28% 36% 29% 173% 10%

10%

% of sales Raw mat exp Employee exp Other exp EBIDTA EBIT PAT ETR 71.4 4.3 2.8 21.5 18.5 22.9 18.0 68.6 4.2 2.7 24.5 16.6 16.9 11.3 67.4 4.2 2.5 25.9 17.0 10.6 24.0 66.0 4.0 2.9 27.0 18.8 13.7 20.0 62.2 4.2 4.5 29.1 26.2 15.0 37.0

YoY bps chg (919) (14) 165 768 771 (791) 1,897 65.9 4.2 3.2 26.7 19.8 14.0 24.6 71.6 4.4 3.1 20.9 18.3 15.5 11.6

YoY bps chg 573 22 (8) (587) (155) 151 (1,298)

Emkay Research

1 June 2010

Tulip Telecom Ltd Key Financials

Profit & Loss FY09 Net Sales Growth (%) Raw materials % to sales Personnel cost % to sales Admin exp % to sales Sales & distribution exp % to sales EBITDA % of Sales Depreciation EBIT % of Sales Interest charges Other Income PBT Taxes PAT Growth (%) ETR 16,144 32.4 11,559 71.6 712 4.4 464 2.9 42 0.5 3,367 20.9 414 2,953 18.3 462 344 2,835 330 2,505 33.8 11.6 FY10 19,664 21.8 12,953 65.9 825 4.2 632 3.2 0 0.5 5,255 26.7 1,353 3,902 19.8 716 468 3,654 899 2,755 10.0 24.6 FY11E 24,376 24.0 15,324 62.9 1,005 4.1 1,004 4.1 244 1.0 6,799 27.9 1,622 5,177 21.2 615 205 4,767 1,146 3,621 31.5 24.0 FY12E 28,450 16.7 17,683 62.2 1,145 4.0 1,173 4.1 313 1.1 8,136 28.6 1,924 6,212 21.8 602 188 5,798 1,392 4,406 21.7 24.0 Gross Block Less Depreciation Net Fixed Assets CWIP Inventory Debtors Cash and Bank Loans & Advances Total Curr. Assets Total Cur Liab & Prov Net Current Assets Misc expenses Total Assets 9,437 1,062 8,375 3,772 916 3,242 3,470 1,093 8,722 2,821 5,901 4 18053 15,440 2,415 13,025 950 1,077 3,232 3,447 808 8,565 1,347 7,218 4 21198 Equity Capital Reserves & surplus Networth Total Debt Def tax liability Capital Employed Balance sheet FY09 290 6,529 6,819 11,225 9 18,053 FY10 290 9,013 9,303 11,887 9 21,198

Result Update

FY11E 329 16,749 17,079 6,585 9 23,673

FY12E 329 20,847 21,177 6,085 9 27,271

19,440 4,037 15,403 1,450 1,336 4,007 2,273 534 8,150 1,336 6,814 4 23673

21,940 5,961 15,979 1,450 1,559 4,677 4,536 624 11,395 1,559 9,837 4 27271

Cash Flow Statement FY09 PBT Depreciation Tax Change in WC Others CFO (Inc)/Dec in fixed assets Others CFI Inc/(Dec) in Equity Net Borrowings Dividend paid others CFF Inc/(Dec) in cash Cash beginning Cash ending 2,286 (136) (3,812) (1,661) (2,468) 5,938 3470 662 (271) (716) (325) (23) 3,470 3447 2,835 414 (1) (165) (78) 3,005 (7,365) 3,553 (3,812) (3,181) (4,500) 4,463 (5,302) (308) (615) (1,762) (1,174) 3,447 2273 (500) (308) (602) (1,410) 2,263 2,273 4536 (2,500) FY10 3,654 1,353 (899) (1,340) 716 3,483 (3,181) FY11E 4,767 1,622 (1,146) (770) 615 5,088 (4,500) FY12E 5,798 1,924 (1,392) (759) 602 6,173 (2,500)

Ratios FY09 EBIT % NPM % ROCE % ROE % ROIC % EPS Cash EPS Book Value Debtors days Creditors days Working capital TO % Total Debt: Equity Fixed Asset TO PE (x) Cash PE (x) P/BV (x) EV/Sales (x) EV/EBITDA Dividend yield % 18.3 15.5 18.8 44.4 26.8 86.4 100.5 235.1 73 64 36.6 1.6 2.3 10.9 9.4 4.0 2.2 10.4 0.43 FY10 19.8 14.0 19.9 34.2 24.1 95.0 141.6 320.8 60 25 36.7 1.3 1.6 9.9 6.6 2.9 1.8 6.8 0.85 FY11E 21.2 14.9 23.1 27.5 26.4 110.0 159.2 518.7 60 20 28.0 0.4 1.4 8.6 5.9 1.8 1.4 5.2 0.85 FY12E 21.8 15.5 24.4 23.0 28.2 133.8 192.3 643.2 60 20 34.6 0.3 1.4 7.0 4.9 1.5 1.1 4.0 0.85

Emkay Research

1 June 2010

Tulip Telecom Ltd

Result Update

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Emkay Research

1 June 2010