Tulip Telecom Ltd, an enterprise communications service provider, reported subdued sequential growth for the quarter ended December. Revenue grew by 3% sequentially and operating profit rose by 5%. This was somewhat on expected lines, since the September quarter represented a relatively high base, with revenue growth of 11.4% and operating profit growth of more than 15% compared with the June quarter. On a year-on-year (y-o-y) basis, growth in revenue was healthy at around 20% both in the December quarter and in the first nine months of the current fiscal.
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The company offers nearly off-the-shelf wireless enterprise connectivity with its products, and in locations that are not well-serviced by competitors. This has helped it maintain decent growth rates, as well as operate at decent margins. The operating margin expanded by 150 basis points (bps) last quarter on a y-o-y basis, after having expanded by 200 bps in the September quarter. Y-o-y growth in operating profit, therefore, has been around 28% in each of the last three quarters.
Yet, while earnings are growing at a healthy pace, rising debt levels are a concern. According to a report by Anand Rathi Financial Services Ltd, “The capex(capital expenditure) in the first nine months of the current financial year was broadly equal to cash profits. However, during the same period, net debt increased by Rs240 crore (excluding a Rs140 crore investment in Qualcomm’s Indian broadband wireless access subsidiary). This suggests an increase in Tulip’s working capital.
What’s more, in January, the firm made a further investment of Rs230 crore in acquiring a 100% stake in a data centre firm in Bangalore. The firm plans to invest an additional Rs670 crore in the data centre operations, though it’s aiming to raise funds at the subsidiary level. While Tulip’s net debt levels and its debt-equity ratio would not rise substantially, its leverage is nevertheless inching up. As Anand Rathi’s analysts put it, “While we do not see financial leverage as an issue, huge capex (outlay is approximately 75% of our current capex forecasts for the next three years) would delay free-cash flows and depress valuations in case of execution slippages (for example, delays in utilization ramp-up).”
The company’s valuations look reasonable at less than nine times estimated earnings for the current fiscal, but the above mentioned risks may keep a check on its shares.
Graphics by Ahmed Raza Khan/Mint
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