Tulip is the top-ranked player in the IP VPN market in India, with 28% marketshare in FY2007, as per Frost & Sullivan.
In FY2008 also, Tulip recorded a strong 108.4% y-o-y growth in this business. Going forward, IP VPN is expected to be the fastest-growing enterprise telecom segment in India and is estimated to touch Rs3,343 crore by CY2013/FY2014, implying a CAGR of 16.8% over CY2006-13/FY2007-14 (Rs1,127 crore).
With businesses using more efficient, secure and cost-effective technologies like IP VPN and given Tulip’s vast network coverage, it seems set to benefit significantly from the growth of the Indian economy going forward.
Tulip’s network extends across 1,300 cities in India with over 3,400 points of presence (POPs), also covering the interior-most regions of the country.
This has led to the strong performance of its IP VPN Business and the key differentiator enabling this has been its last mile connectivity on wireless.
In fact, competitors like Bharti actually lease Tulip’s last mile infrastructure for their own requirements.
Tulip Telecom is investing Rs100 crore in FY2009 to roll out its own Metro Ethernet fibre network in the key central business districts (CBDs) in India.
This will enable it to offer seamless end-to-end connectivity to major corporate clients based in commercial clusters, whose bandwidth requirements are typically high, ranging from 2 Mbps to 155 Mbps.
These initiatives will increase the addressable market size over six-fold to over Rs6,600 crore (Rs1,000 crore currently), as Tulip will be able to address the last mile on fibre as well apart from wireless currently.
Overall, we expect Tulip to record a 32.4% and 25.3% CAGR in topline and bottomline, respectively FY2008-10E. We expect a 60bp margin expansion expected over the period.
At Rs400, the stock is trading at a P/E of 4.7x FY2010E EPS and an EV/EBITDA of 4.3x FY2010E EBITDA. We believe these valuations are fairly attractive, given the bright future prospects of the company.
We Initiate Coverage on the stock with a BUY recommendation and 12-month target price of Rs602, implying a target P/E of 7x FY2010E EPS.