Stock Review: Tulip Telecom

 

The stock of Tulip Telecom, an enterprise data connectivity service provider, has outperformed the broader market over the past three months. The stock has gained 10% against a 2% drop in the BSE Sensex. Higher realisation on the fibre network and improved contribution from the managed services business is expected to offer further impetus to the stock in the coming quarters.

Tulip Telecom offers services in the enterprise communications connectivity, network integration and managed services space. With end-to-end data connectivity solution spread across 300 cities, the company intends to build an extensive last-mile integrated fibre network in the country.

The company has witnessed a decent topline growth over the past few quarters. During the March 2011 quarter, the topline grew 6% to nearly . 640 crore sequentially, driven mainly by the enterprise data services segment.
The growing demand from the fibre segment is expected to be the key growth driver. More than 80% of the new orders received during the quarter in the data-connectivity space were in the fibre segment – up 10 percentage points from the previous quarter.

The operating profit margin has been hovering in the range of 27-29% over the past four quarters. However, the company's bottomline growth continues to remain slow. This can be attributed to high interest payment and tax outgo on account of the newly-acquired data centre in Bengaluru for a total investment of . 900 crore spread across three years.

The facility is expected to become operational by August 2011. Tulip expects to clock . 1,000 crore in annual revenues after three years once the data centre becomes fully operational.

Tulip expects to clock a 20% yearon-year revenue growth and a 50 basis-point improvement in its operating margin for FY12. Also, government orders in the power segment and network bandwidth service area are expected to drive the growth.

However, huge debt on the books remains a concern. An anticipated stake sale in the data centre and divestment of its 13% stake in Qualcomm remain a key trigger for the stock. At Monday's close of . 158, the stock trades at 7.4 times its earnings for the trailing 12 months.