Connectivity gains

IPO REVIEW

Given the expected demand surge in the IP/VPN segment, Tulip IT Services is priced attractively

IT infrastructure and connectivity provider Tulip IT Services' IPO is among the interesting ones to hit the markets in recent times. The company provides network integration services, rural/state wide networks and inter-city and intra-city wireless based IP/VPN (internet protocol/virtual private network) connectivity.

The issue consists of 90 lakh shares in the price band of Rs 100-Rs 120. The company has registered a 19 per cent CAGR growth over the past three years. The stock commands a valuation of 8.6x on the lower end of the price band and 10.4x on the upper end based on H1FY06 annualised earnings of Rs 11.5 on post issue dilution basis.

According to analysts, the IP/VPN services segment is set to grow manifold in the coming year. It is expected that the market size which was around Rs 230 crore in 2003, will grow to about Rs 500 crore in 2005 and Rs 1100 crore by 2008. Considering the immense growth potential in the segment, the issue is fairly priced.

Going up the value chain

Tulip is the fourth largest network integrator in the country behind Wipro, Datacraft and HCL Comnet. After starting their operations in 1992 as a reseller of software and hardware products and provider of maintenance contracts for networks, the company migrated into network integration.

Tulip designs and develops networks for their clients, provide networking equipment from other vendors, manage the integration and implementation of these projects apart from providing network management and maintenance services.

To complement the existing business as a network integrator and to pursue the potential in the VPN and broadband markets, the company recently diversified into providing IP/VPN wireless based connectivity solutions.

According to analysts, one advantage the company has over its competitors is that others provide connectivity solutions based on leased lines and VSATs, while the company provides wireless based connectivity.

Competitors like BSNL, MTNL, Reliance, Bharti, VSNL provide connectivity on leased lines (both fibre and copper) and VSAT. However, data transfer on these lines is difficult because of lack of availability of copper. Tulip overcomes this issue by use of wireless for the last mile.

The company has a country-wide presence and is able to provide a single window for countrywide support. Tulip also offers "Rural Connect" that is targeted at the state governments and agencies to provide internet connectivity in the rural areas on a revenue-sharing basis.

Tulip is a premier select partner for Cisco and currently also has over 75 certified Cisco engineers working for it. Tulip commands around 7.3 per cent of the total domestic network integration industry.

Competition on the rise

Tulip has the first mover advantage in the field of IP/VPN. The company's customer list is also quite impressive. Wireless network clients include banks like Bank of Punjab, ABN Amro Bank, HDFC Bank, Bank of India, Indian Overseas Bank apart from corporates like Dupont and Hindustan Times.

However, competition is set to rise in the IP/VPN service segment in the country. Its is quite possible that existing network integrators and telecom service might join the bandwagon, which might result in more than expected decline in tariffs in the long term, say analysts.

Impressive numbers

The company has turned in impressive performances in the past few years. It has grown at a CAGR of 19 per cent in the last three years. It recorded a 24.74 per cent rise in total income in FY05 to Rs 342.83 crore, while net profit growth was even more impressive at 110.44 per cent to Rs 13.91 crore.

The promotion of Tulip Connect, a wireless based product introduced by the company during the year has been the big driver of growth past year. For the half year ended September 30, 2005, the company has clocked a turnover of Rs 195.75 crore and a net profit of Rs 16.71 crore. Operating margins have also improved from close to five per cent in FY05 to near 11 per cent in HIFY06. 

FINANCIALS
(In Rs crore)	FY05	FY04	% Chg	H1FY06
Total income	342.83	274.84	24.74	195.75
Operating profit	16.40	8.78	86.79	21.44
OPM (%)	4.78	3.19	-	10.95
Net profit	13.91	6.61	110.44	16.71
Net margin	4.06	2.41	-	8.54

With nation-wide connectivity fast becoming imperative for banks, corporates, agents, dealers, point-of-sale terminals and ERP/CRM users, IP/VPN service segment is expected to grow rapidly. Given this background, the stock valuations are considered attractive.

The company does not have any direct competitors, as no company provides both IP/VPN connectivity and network integration. Industry peers such as Bharati Tele-Ventures, MTNL, VSNL command valuations of 46.50, 9.69x and 16.64 respectively.

Issue closes: December 15, 2005