5 March 2012

The InSites
Tulip Data City: Asia's largest data center
Maintain Neutral with revised target price of INR100

Tulip Telecom

Takeaways from site visits

Spread over 900,000sf, Tulip Data City has the capacity to host ~12,000 racks (600 racks x 20 plates) and would use peak power of ~100MW Currently, one plate is operational and the management expects four more plates to be operational in 2-3 months Tulip Data City boasts power utilization effectiveness (PUE) of 1.5x v/s the global average of ~2.2x Based on management guidance, we estimate ROIC for the data center operations to be ~21%

We recently visited Tulip Telecom's data center facility situated in Whitefield, Bangalore. The following are the key highlights of our site visit:

About Tulip Data City

Tulip Data City (TDC), Asia's largest and the world's third largest data center, is spread over 900,000sf and is located in Whitefield, Bangalore. The facility has four towers with each tower containing seven floors. Of the seven floors, five floors (also referred to as plates) constitute the data center space with the remaining two base floors housing the facilities area. In effect, these towers will station 20 plates of data center. Each plate measures 20,000-22,000sf, of which 13,000-14,000sf of the plate area is actual server area, with raised flooring. TDC has the capacity to host ~12,000 racks (600 racks x 20 plates) and would use peak power of ~100MW. Currently, one plate is operational and the management expects four more plates to be operational in 2-3 months. The facility contains a network operating center with 1,500 camera feeds and an IT management center. Currently, 40,000sf of the facility has been contracted. The first floor also contains a seating capacity of 1,500 including the TDC office space and Meet-Me rooms. The Meet-Me rooms are equipped with data connectivity from Bharti, Reliance Communications and Tulip. The state-of-the-art architecture also ensures that the data center operates at efficient levels. The Tulip Data City is likely to consume 80-100MW of power v/s 130-140MW used by similar data centers. To minimize the consumption of power, the facility is equipped with day/night security cameras, which make it possible to operate at minimal lighting conditions. Use of other energy sources like photo voltaic, heat pumps and evaporative cooling enables Tulip to reduce traditional power consumption.
Stock Info
Bloomberg TTSL IN Equity Shares (m) 145.0 52-Week Range (INR) 167/92 1,6,12 Rel. Perf. (%)-11/-37/-29 M.Cap. (INR b) 13.9 M.Cap. (USD b) 0.3 M.Cap. (USD m) 279

Tulip Telecom: Valuation summary

Year End 3/11A 3/12E 3/13E 3/14E Net Sales (INR m) 23,511 27,467 31,899 38,211 PAT (INR m) 3,064 3,172 2,681 3,198 EPS (INR) 18.9 19.5 18.5 22.1 EPS Gr. (%) 32.7 3.5 -5.3 19.3 P/E (x) 5.1 4.9 5.2 4.4 P/BV (X) 1.3 1.0 0.7 0.6 RoE (%) 28.6 23.4 15.6 15.4 RoCE (%) 14.0 11.7 9.3 9.7 EV/ Sales 1.2 1.3 1.2 1.1 EV/ EBITDA 4.2 4.7 4.5 4.0

Shobhit Khare (Shobhit.Khare@MotilalOswal.com); Tel: +91 22 3982 5428

The InSites

Power utilization effectiveness (PUE) of 1.5x: A significant value proposition

The efficiency of a data center is measured in terms of its power utilization effectiveness (PUE). The PUE is defined as the total power utilized by the data center divided by the power utilized by the computer infrastructure within the center. While the total power is inclusive of the lighting, cooling, and other equipment required for the data center, power used by the server includes servers, networking equipment and other storage systems. PUE = Total power utilized by data center / Total power utilized by computer infrastructure Tulip Data City boasts of a PUE of 1.5x v/s the global average of ~2.2x. Most in-sourced data centers operate at >3x PUE. The company believes TDC offers a significant value proposition, given the cost savings led by lower PUC.

The economics per rack: ROIC of 20%+ based on management guidance

The company expects revenue per rack of ~INR0.8m (including bundled power). TDC is likely to incur a cost of INR0.32m per rack towards power and INR0.16m per rack towards other expenses, resulting in a steady state EBITDA per rack of INR0.32m (40% EBITDA margin). The total investment outlay for data center is estimated at INR9.3b, with an upfront acquisition cost of INR2.3b, INR5b to be raised through long-term debt and mezzanine funding and the remaining through accruals. Apart from the initial outlay of INR2.3b, the company has already invested INR1.6b in the data center. Assuming 5% depreciation per year and 33% effective tax rate, we estimate ROIC for the data center operations at ~21%.
Tulip Data City: ROIC of 20%+ based on management guidance
Total no. of racks Expected revenue/rack Expenses per rack - Power - Other expenses Total Expenses per rack EBITDA per rack Upfront acquisition cost Mezzanine funding Long-term debt Internal accruals Total Capex Capex/rack EBITDA pay-back Assuming 5% depreciation per year EBIT Tax rate NOPLAT Invested Capital per rack (incl working capital) ROIC (%) INR Million 12,000 0.80 0.32 0.16 0.48 0.32 2,300 2,500 2,500 2,000 9,300 0.78 2.4 0.28 33% 0.19 0.88 21.3%

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Leverage levels remain elevated

During 9MFY12, Tulip Telecom added net debt of INR6.1b, including INR0.9b impact of adverse exchange fluctuations on forex debt. 3QFY12 was the seventh consecutive quarter of increase in net debt; reported net debt of INR21.4b does not include redemption premium of INR2.1b on FCCB due in August 2012. While the company has been considering various deleveraging options like monetization of stake in Qualcomm JV, equity raising at parent/subsidiary level, etc, timing of these events remains uncertain. The company has given a mandate to Barclays and SBI Caps for raising debt for FCCB redemption of USD140m. It is looking for minority/majority equity partners in the data center business to improve debt-equity ratio.

Cloud computing, outsourcing key drivers for data center business growth
The data center market is estimated to be USD670b by FY12. With the emergence of cloud computing, demand for data centers should increase significantly. Currently, ~80% of the 500 largest companies, including HP, IBM and NTT are Tulip's customers. The HP deal is estimated to have a revenue potential of INR5b in five years. The company has also won a cloud computing order from Reliance MediaWorks.

View and outlook

While we have been impressed by the 'state-of-the-art' facility and Tulip's timely execution, we believe ramp-up in utilization would be critical towards improvement in cash flows. We expect interest outgo to increase with an increase in debt funding. At current debt-equity levels, the balance sheet is stretched. We believe further clarity on how quickly Tulip can announce order wins and increase its utilization will be a key factor to watch out for. The stock trades at 5.2x FY13E EPS and at an EV of 4.5x FY13E EBITDA. Maintain Neutral with revised target price of INR100.

TDC: Front view

TDC: Reception entrance and water body

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TDC: Inaugurated on 6 February 2012

TDC: Lobby with view of two towers

TDC: View of the racks on raised floor

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Tulip Telecom: Financials and Valuation

Income statement
Y/E March 2011 Revenues 23,511 Change (%) 19.6 Total Expenses 16,880 EBITDA 6,631 % of Gross Sales 28.2 Change (%) 26.3 Depn. & Amortization 1,714 EBIT 4,917 Net Interest 853 Other Income 1 PBT 4,065 Tax 1,001 Rate (%) 24.6 Adjusted PAT 3,064 Change (%) 32.7 PAT after EO 3,064 2012E 27,467 16.8 19,622 7,845 28.6 18.3 2,067 5,778 1,533 -16 4,230 1,057 25.0 3,172 3.5 3,172

(INR million)
2013E 31,899 16.1 23,461 8,438 26.5 7.6 2,664 5,774 2,327 128 3,574 894 25.0 2,681 -15.5 2,681 2014E 38,211 19.8 28,061 10,150 26.6 20.3 3,209 6,941 2,857 180 4,264 1,066 25.0 3,198 19.3 3,198

Ratios
Y/E March 2011 Basic (INR) EPS 18.9 Cash EPS 29.4 Book Value 74.6 DPS 1.7 Payout %(Incl.Div.Taxes) 8.9 Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Asset Turnover (x) Leverage Ratio Debt/Equity Ratio(x) 2012E 19.5 32.2 92.5 1.7 8.6 2013E 18.5 36.9 133.0 1.9 10.1 2014E 22.1 44.2 153.2 1.9 8.5

5.1 3.3 4.2 1.2 1.3 1.7

4.9 3.0 4.7 1.3 1.0 1.7

5.2 2.6 4.5 1.2 0.7 1.9

4.4 2.2 4.0 1.1 0.6 1.9

Balance sheet
Y/E March 2011 Share Capital 290 Additional Paid up Capital831 Reserves 11,004 Net Worth 12,125 Loans 17,769 Other Liabilities 32 Capital Employed 29,926 Gross Block Less : Depreciation Net Block 23,108 4,132 18,977 2012E 290 831 13,905 15,026 25,901 32 40,958 30,808 6,199 24,610 19,785 1,159 8,523 3,504 6,599 3,437 16,348 40,958

(INR million)
2013E 325 4,743 14,214 19,282 29,094 32 48,407 36,808 8,862 27,946 24,434 1,347 10,888 5,000 7,199 3,973 20,461 48,407 2014E 325 4,743 17,141 22,209 33,453 32 55,694 42,408 12,071 30,338 30,107 1,613 13,694 7,000 7,799 4,751 25,356 55,694

28.6 14.0

23.4 11.7

15.6 9.3

15.4 9.7

98 1.07

113 0.89

125 0.82

131 0.86

1.5

1.7

1.5

1.5

Cash flow statement

Y/E March 2011 Op.Profit/(Loss) bef Tax6,631 Other Income 1 Interest Paid -853 Direct Taxes Paid -998 (Inc)/Dec in Wkg. Cap.-2,111 CF from Op.Activity 2,669 (inc)/Dec in FA+CWIP -7,394 (Pur)/Sale of Inv. -1,549 CF from Inv.Activity -8,943 Issue of Shares Inc/(Dec) in Debt Dividends Paid Other Fin. Activities CF from Fin.Activity 0 5,578 2 -272 5,307 2012E 7,845 -16 -1,533 -1,057 -4,399 840 -7,700 0 -7,700 0 8,132 2 -273 7,861 1,000 2,504 3,504

(INR million)
2013E 8,438 128 -2,327 -894 -2,616 2,728 -6,000 0 -6,000 3,946 3,193 2 -2,373 4,768 1,496 3,504 5,000 2014E 10,150 180 -2,857 -1,066 -2,895 3,512 -5,600 0 -5,600 0 4,360 2 -273 4,088 2,000 5,000 7,000

Curr. Assets 13,939 Inventories 992 Debtors 6,344 Cash & Bank Balance 2,504 Other Current Assets 4,099 Curr. Liab. & Prov. 2,990 Net Curr. Assets 10,949 Appl. of Funds 29,925 E: MOSL Estimates

Inc/(Dec) in Cash -966 Add: Opening Balance 3,470 Closing Balance 2,504 E: MOSL Estimates

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