Stock Review: Tulip Telecom

THE stock of Tulip Telecom, an enterprise data connectivity service provider, gained 2% in the last two trading sessions in a flat broader market. The momentum in Tulip's stock was on account of its acquisition of data centre assets in Bengaluru.

    Tulip Telecom offers enterprise communications connectivity, network integration, and managed services. In a move to expand its end-to-end data services offerings, Tulip has bought a data centre facility for . 230 crore. The centre would be owned and operated through the company's wholly-owned subsidiary, Tulip Data Center.

    This is the company's fifth data centre and Tulip plans to move the other four centres as well under the same subsidiary. The company expects a total investment of . 900 crore in the facility over three years. Tulip has already invested . 230 crore funded through internal accruals. The company intends to raise . 250-300 crore through an equity partner at the subsidiary level and fund the balance . 370 crore via debt raising and internal cash generation in the subsidiary.

    Tulip plans to recruit nearly 200 people for the new facility and service the balance human resources requirement through internal transfers. The centre is expected to operate at an operating margin of 50% once it starts functioning at its peak capacity. The facility is expected to start generating revenue in six to nine months with a break-even period of four years.

    The arrangement is a strategic fit making Tulip an integrated service provider in the enterprise connectivity and managed services space. The enhanced services portfolio will help the company to win a larger wallet share from its existing customer base. Moreover, the buyout, coupled with the increasing demand for data centre services, is likely to expand the company's addressable market by more than half to $3 billion in the next four years.

    At the current market price of . 168, Tulip's stock trades at 8.5 times the earnings for the trailing 12 months. Given the increasing demand for data centre facilities, the company is expected to benefit from the buyout in the coming quarters.

    The facility will start generating revenue in the next three quarters. However, it will take a while for the benefits to get reflected in the bottom line.