Tulip Telecom (Q1 FY11) – BUY (Target Rs214, Upside 17.6%)

CMP Rs182, Target Rs214, Upside 17.6%

• Q1 revenues up 18.6% yoy on the back of healthy growth in high bandwidth fiber and conventional wireless business

• EBIDTA jumps ~31%  yoy; margin improves 247bps due to higher contribution from fiber  business, bulk purchase of bandwidth on account of fiber roll out and economies of scale (translating in to lower cost/incremental subscriber added to network)
  
  
• Pre-tax profit rose 23%, impacted by higher interest cost (debt burden increased 12% yoy to Rs12.4bn) and lower other income since last year included a one-time gain of Rs145mn on FCCB buyback
  
  
• PAT growth at 8.6% yoy trailed EBIDTA performance due to a 10ppts yoy increase in effective tax rate consequent to completion of first leg of 80IA benefit post 5 years as compared to last year’s tax provision being on MAT
  
  
• Tulip has capitalized forex loss worth Rs114mn during the quarter and has deducted Rs160mn in forex gain from other income in Q1 of last year, in line with the revised AS-11 policy
  
  
• Won a contract worth Rs1.6bn to provide data connectivity in Gujarat and UP towns under the R-APDRP, a power sector reform scheme, spread over 5 years; company also awarded an order for managed services in Gujarat SWAN valued at Rs250mn for period of 3-5 years
  
  
• A 13% stake in Qualcomm’s BWA venture for Rs1.4bn would provide a foothold in the LTE-based broadband infrastructure; however, Tulip maintains fiber would be the core area of business with only 10% overlap between the two networks
  
  
• Company has expanded its intra-city fiber network to over 6,000kms covering 50 cities with a client base of 600 customers on fiber, an indication of its robust last-mile connectivity advantage; retain BUY for 9-month TP of Rs214