October 16, 2012 Tulip Telecom Ltd. Buy This Satyam On The Way Down • Get a call option on it’s assets Rohan J. Admane email@example.com Keynote Capitals Research is also available on Bloomberg KNTE <GO>, Thomson One Analytics, Reuters Knowledge, Capital IQ,Keynote Capitals Institutional Research –awarded “India’s Best IPO Analyst 2009” by MCX-Zee Business
Tulip Telecom Ltd. October 16, 2012Key Stock Data Falling share price of Tulip Telecom hides its business strengths Telecom - Sector Service and positive long term outlook CMP `37.55 52wk High/Low 160 / 34 Market Cap `Cr 544 Our Line of thought 6m Avg. daily vol 15,06,966 BSE Sensex 18,793 Current stock price performance is not relevant to Tulip’s BSE Code 532691 NSE Code TULIP strong business position and robust outlook Face Value `2 FCCB worries and pledged shares sold by lenders recently Shareholding pattern th (30 June, 2012) weighed on the stock price Public Institutio 4% ns Foreign 1% 15% Corporat However, strong asset base makes a compelling case of e 10% Promote company’s long term survival r 70% Brave investors will get outstanding returns as the companyPrice Performance % rolls over or gets acquired from the company with similar1 Month 3 Months 6 Months 1 Year -43.36 -68.00 -60.54 -74.99 business models or comes up with money in the last minute Stock Price Performance 140% Investors should buy deep value 120% 100% 80% 60% Tulip Sensex 40% 20% 0% Oct-11 Apr-12 Oct-12 Nov-11 Dec-11 Aug-12 Sep-12 Jan-12 Jun-12 Jul-12 Feb-12 Mar-12 May-12 2 Keynote Capitals Ltd.
Company Background Tulip Telecom is India’s largest MPLS VPN player and provides completeLargest MPLS VPN player,provides complete infrastructural IT solutions to mission critical industries. The company is a datainfrastructural IT solutions telecom service and IT solutions provider that offers innovative IP based infrastructural solutions. It is a front-runner in provisioning and managing multi location wide area networks for various industry verticals. Tulip Telecom has fiber optic network across all Metros and wide range of wirelessFiber optic network across presence all across India. The company has established itself as one of theall metros, data network hasthe reach of over 2000 strongest data connectivity players in the industry. It is India’s leading Enterpriselocations in India Communications Service provider. The Company’s data network has the largest reach of over 2,000 locations in India and partnerships to reach every part of the world.Designs, implements andmanages communication Tulip designs, implements and manages communication networks of largenetworks of large enterprises on long term contracts to include enterprise communicationsenterprises on long termcontracts connectivity, network integration, managed and value added services. Robust sales growth and strong operating margins 2500 30.0% 2000 25.0% 20.0% 1500 15.0% 1000 10.0% 500 5.0% 0 0.0% FY07 FY08 FY09 FY10 FY11 Sales Profit OPM High Debt to Equity is a risk 2.50 45.0% 40.0% 2.00 35.0% 30.0% High financial leverage but 1.50 stable ROE 25.0% 20.0% 1.00 15.0% 0.50 10.0% 5.0% 0.00 0.0% FY07 FY08 FY09 FY10 FY11 Debt to Equity ROE 3 Keynote Capitals Ltd.
FCCB defaults twice but strong asset base makes a compelling case However, Tulips thirst for inorganic growth created capex burden and heavy assetThe company defaulted business model, which also led to huge debt burden on the company. The companysFCCB repayment twice, in debt to equity rose from 0.5x in FY07 to 1.47x in FY11. The average cost of debt isAugust and September 2012 10.3% per annum. Tulips debt also includes FCCB payment of Rs 728 Cr. The company defaulted redemption of FCCB twice on August 27 and September 10, 2012 due to short fall of funds. According to Fitch, the company could manage arranging $72 million by way of rupee debt against $140 million redemption amount. FCCB Issue detailsTotal FCCB obligation of Rs The company had issued US$ 150 million zero coupon convertible bonds in728 cr June 2007 (“Bonds”), which were due for redemption on 26 August 2012 (“Maturity Date”). Issued Rupee value at the Rupee Current Current 3 year Particulars Issued Maturity date date time of issued value Mn 1USD maturity CAGR 26th August FCCB $150Mn 2007-08 40 6000 52 7800 7% 2012 Current outstanding positions of FCCBs The Company had bought back a portion of the Bonds during 2009; and as on 26th August 2012, the aggregate principle amount of Bonds outstanding is US$ 97 million, which represents a redemption obligation of US$ 140.1708 million (prior to withholding tax). Rupee Rupee Current Bought Issued Maturity value at Current 3 year Particulars Redemptions value maturity back date date time of 1USD CAGR Mn amount issued 26th Outstanding 2007- $52.99Mn $140Mn August 40 5600 52 7280 7% FCCBs 08 2012 Company’s performance for the year FY08 to FY11 Rs Cr Particulars FY08 FY11 3 year CAGR Revenue 1219 2351 24% EBITDA 269 663 35% PAT 187 306 18% Operating cash flow 147 350 34% Total Debt 894 1777 26% Cash position 6.38 214 223% FCCB payment rescheduled and company’s repayment strategy The company has commitments of $50million in a fresh FCCBs and funds from bank sanctions and internal accruals of $72Mn, a total of $122Mn. It plans to raise the balance $18mn in a timely manner to pay the FCCBs within the time extension sought from investors. The company asked extension of time till September 10, 2012. However, no further development was recorded by the company on the stock exchanges till date. 4 Keynote Capitals Ltd.
Statement by Tulip Management on 27th August 2012 (Defaulted payment on 26th August 2012) While the Company has partial resources towards the redemption, it is awaiting sanctionManagement is confidentthat it will arrange the and disbursements from some of the lenders to raise the balance amount, besides thenecessary amount to pay funds from the issuance of new FCCBs of approximately US$50 million. The CompanyFCCB endeavors to complete this process at the earliest and expects that the same may be completed by 10th September 2012. The Company has a firm intent to honour its obligations to the bondholders at the earliest. Statement by Tulip Management on 10th September 2012 Over last few weeks, the Company has made significant progress in its fund raising exercise through various instruments and internal accruals. The Company is making all reasonable endeavours to meet its full redemption obligation. The Company will keep stakeholders updated on further progress on this front. The Companys underlying business performance remains robust and it remains fully committed to meet its outstanding obligations in full. However, the company’s strong asset base makes a compelling case for the investors. As per FY11 annual report, the company’s asset base wasThe company has strong • Net Block – Rs 1450 crasset base • Building – Rs 106 cr • Land – Rs 2.8 cr • Equipment – Rs 1689 cr • Inventory – Rs 99 cr • Cash and Bank Balance – Rs 249 cr (Unlike Satyam Computer, it does exist ) Recently, Tulip acquired a Data Centre of around 9mn sqft in Bangalore for Rs 230 cr, this increased the total area covered by Data Centre to 10mn sqft. The company has five data centres viz., one in New Delhi, two in Mumbai and two in Bangalore. All these assets have not reflected in the company’s current market valuation of Rs 619 cr. Lenders are selling stocks is a major blow for company’s share priceLenders of pledged sharesof promoters sold almost Tulip faced severe damage in its stock price performance after few of its lenders are4.4mn shares during first consistently selling the pledged shares of promoters in the open markets. Few of theten days of October lenders such as ECL Finance and Religare Finvest sold 43.70 lakh shares during last 8 days. However, during the period the shares in the company were bought by an Escrow account from JP Morgan. Lenders / Investors Date No. of shares Share Price Transaction ECL Finance 01-Oct-12 1363794 46.34 Sell Religare Finvest 01-Oct-12 877238 44.72 Sell JPMSL A/c Copthall Mauritius Investment 01-Oct-12 809812 45.9 Buy Religare Finvest 04-Oct-12 1308732 41.23 Sell ECL Finance 08-Oct-12 821000 43.82 Sell Best case for acquisition if management doesnt able to manage fundsLucrative asset base allowsTulip to raise more funds Tulip’s ability and resources to tackle the legal cases are limited in case of default of FCCB again. The management is also unable to stop lenders from selling the pledged shares in the open market. 5 Keynote Capitals Ltd.
Case I: Asset base is so much lucrative enough that borrowing will be possible Case II: Hammering kills capitalization but assets attract buyer Building on Case II Tulip Telecom’s market capitalization is only 19% of its total asset valuation against an average of 64%. Total Assets Market Cap % of Price P/B P/S Mkt Cap ($bn) Employees ($bn) Total AssetsCisco Systems, Inc. 18.90 1.95 2.17 100.22 66,639 91.76 109%Alcatel Lucent SA 1.01 0.47 0.12 2.29 76,002 31.19 7%Juniper Networks 16.61 1.24 1.97 8.75 9,129 10.04 87%Polycom Inc 10.32 1.22 1.12 1.82 3,839 1.90 96%Tulip Telecom 41.00 0.39 0.27 0.12 5,000 0.63 19% Deals in this space Tulip Telecom building the worlds third largest data centre Tulip had acquired a data center facility in Bangaluru by purchasing 100 per cent shares of SADA IT Parks Private Ltd for Rs 230 cr in January 2011. The company chose IT major IBM and data centre consultant Schnabel to establish a data centre in Bengaluru, which the company said was to be Indias largest and the worlds third largest data centre. The data centre was spread across 9 lakh square feet. It would be built with an approximate investment of Rs 900 cr, spread over three years. The company expected data centre will have a revenue generation potential of Rs 1000 cr when it reaches its peak capacity in the next three years. Cisco Acquisitions Acquisition of vCider On October 4, 2012 Cisco acquired of vCider, headquartered in Mountain View, California. vCider has expertise in the development of virtual network overlay technology for secure data center infrastructure virtualization. vCider will be integrated into Ciscos Cloud Computing organization, reporting to Lew Tucker, chief technology officer, Cloud Computing, and will play an important role in the Cisco Open Network Environment (ONE) strategy, particularly in support of OpenStack. Acquisition of Virtuata On July 13, 2012 Cisco completed the acquisition of Virtuata. Virtuata provides innovative capabilities for securing virtual machine level information in data centers and cloud environments. 6 Keynote Capitals Ltd.
Zayo acquired AboveNet Zayo, a provider of fiber-based bandwidth services, acquired AboveNet for a whopping $2.2bn in March 2012. AboveNet, which was also in the business of providing bandwidth services, operates a fiber network of about 13,000 in mostly metropolitan areas. This business will then be combined with Zayo’s 45,000-route-mile network that covers 42 states. Both companies primarily provide service to enterprise-level customers, carriers, and governments. Equinix Sells Off 16 Data Centers to 365 Main Equinix, Inc, a provider of global data center services, announced plans to sell 16 International Business Exchange™ (IBX®) data centers located throughout the United States to an investment group consisting of 365 Main, Crosslink Capital and Housatonic Partners in a transaction valued at approximately $75 mn. After the close of the transaction, 365 Main will own and manage the 16 data centers, led by industry veterans Chris Dolan, CEO, and Jamie McGrath, COO. The transaction is expected to close in Q4 2012, subject to customary closing conditions. Conclusion Risky bet for 50-70% return with 6-9 months as stock recovers 7 Keynote Capitals Ltd.
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