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Tulip IT Services is a Delhi based company involved in IT infrastructure & connectivity. The company is strong in network integration & now with its foray in IP/VPN, its going to be stronger

href="https://www.valueresearchonline.com/stocks/snapshot.asp?code=16470" class="gen">Tulip IT Services is a New Delhi based company with presence in over 1,000 cities of India. Tulip is an IT infrastructure and connectivity provider. Some of the company's many services encompass network integration services, rural/state wide networks and intra-city and inter-city IP/VPN (internet protocol/virtual private network) connectivity. Tulip is a market leader in IP/VPN connectivity and is the fourth largest player in the network integration space.

Tulip started operations in 1992 as a re-seller of software and hardware products. Tulip ventured into IP/VPN connectivity in 2004, after having established itself as a network integrator.

Growing Opportunity
IP/VPN is fast gaining acceptance amongst corporate entities for data connectivity, with it being cost effective and easy to rollout. The IP/VPN market has witnessed a resounding 31 per cent growth in the last three years. The size of this market is estimated to be Rs 1,200 crore by 2009 due to the increase in demand for applications such as ERP (enterprise resource planning), CRM (customer relationship management) and CBS (core banking solution). These services are used by banks, financial institutions, C&F agents, vendors, retailers and IT and ITES companies. With banks in India planning to connect more than 75,000 branches to a centralised CBS to enable real time gross settlement, demand for data connectivity will auger well for Tulip. And Tulip, with its first mover advantage, is well positioned to capture this opportunity with its ability to rapidly roll out network over difficult terrains.

E-governance to Help
The central and state governments in India are promoting e-governance and rural connectivity and around Rs 3,334 crore have been allotted for this initiative. More than 20 states are expected to set up state-wide area networks. The average size of each project is estimated to be Rs 100 crore and Tulip has already bagged tenders for Haryana, West Bengal and Assam.

Tulip IT Services currently has two main areas of business: network integration and management services, and IP/VPN wireless connectivity. In the network integration business, the company designs and develops network solutions. The company has also started providing remote management services through its network operation centres. However, this space is highly fragmented and very competitive. It is a trading business and margins are low.

To complement this, Tulip ventured into the high-margin business of IP/VPN. Tulip provides IP/VPN wireless connectivity services under the brand name of Tulip Connect. The main purpose of VPN is to provide virtual capabilities similar to private leased lines at much lower costs by using shared public infrastructure. The company provides inter-city and intra-city data connectivity specifically to corporate clients based on a hybrid strategy. Inter-city connectivity is provided through leased lines and fibre optic cables from MSPs (multiple service providers) like BSNL, Bharti, Reliance, VSNL, GAIL, Railtel, and Power Grid. Intra-city connectivity is provided wirelessly through its own network.

Going Forward
In order to become an end-to-end solution provider, Tulip has launched its managed services portfolio, including data centre services and video services for enterprises. The company plans to lease out space in its data centres to small and medium enterprises. It plans to invest Rs 80 crore and would set up data centres in Mumbai, Chennai, Bangalore and Hyderabad. The one is Delhi is already operational. The internet data centre market in India is expected to grow to around $200 million by 2009. Tulip also plans to lay around 500 km of optical fibre within major cities like Delhi, Mumbai, Chennai, Bangalore, Hyderabad and Kolkata. The company recently received its ILD license, which will help it address the needs of customers for international voice, video and data connectivity.

Risks
The entry of integrated telecom players such as Bharti, Reliance and BSNL into the IP/VPN space could increase competition for Tulip and thereby affect margins and profitability. Adaptation of 3G and WiMax will provide low-cost wireless broadband connectivity over long distances.

Financials
Tulip has traditionally been in the business of network integration and related services. This is a highly competitive segment where margins are low and not much growth is expected. In FY-06, the company made a conscious decision to foray into the IP/VPN market and it has now become the leader in this segment. This change is expected to alter the revenue mix from 16 per cent in FY-06 to 49 per cent in FY-09-E in favour of the IP/VPN segment. Revenues from the network integration segment can be expected to grow at 18 per cent CAGR to Rs 703.1 crore in FY-09 from Rs 426.68 crore in FY-06. Revenues from the IP/VPN segment should witness a 100 per cent CAGR to Rs 655.12 crore from Rs 81.49 crore over the same period. With the shift in business mix towards the high-margin IP/VPN business, Tulip can expect the EBITDA margins to increase from 13.07 per cent in FY-06 to 21.56 per cent in FY-09.

The growth in operating margins will be led by the revenue shift towards IP/VPN business. Tulip enjoys tax benefits under Sec 80IB for telecom service providers. It will pay nil income tax for first five years followed by exemption of 30 per cent for next five years.