TEXT-Fitch revises Tulip Telecom's outlook to negative

March 29 - Fitch Ratings has revised India-based Tulip Telecom Limited's (Tulip) Outlook to Negative from Stable while affirming its National Long-Term rating at 'Fitch A+(ind). The agency has also downgraded Tulip's INR600m commercial paper (CP) programme to 'Fitch A1(ind)' from 'Fitch A1+(ind)'. A full rating breakdown is provided below.

The Outlook revision and CP rating downgrade reflect delays in both equity infusion into Tulip's data centre subsidiary and sale of its 13% stake in Qualcomm JV, as well as refinancing risks related to redemption of USD97m foreign currency convertible bonds (FCCBs), due in August 2012. As a result, Fitch expects Tulip's financial leverage (adjusted net debt/ EBITDAR) to remain high in FY12 (financial year ending March) and FY13. The company is setting up a data centre in Bengaluru with a total capex of over INR9bn, and has raised INR2.5bn mezzanine debt in place of the proposed equity infusion.

The ratings reflect Tulip's extensive network coverage within India. Its 9,000km fibre network covers over 300 cities, and its wireless network provides last mile connectivity in over 2,000 locations. The ratings also reflect Tulip's leadership position in multi-protocol label switching virtual private network segment. Fitch expects the upcoming data centre facility to drive revenue and profit growth in the medium term.

The ratings are, however, constrained by the expected increase in competition in the corporate data connectivity (CDC) industry from existing telecom operators and roll-out of broadband wireless access (BWA) services. Fitch notes that telecom operators facing a maturing voice market would most likely start focusing on the broadband market, including CDC. Tulip also faces regulatory challenges in the form of a possibility of imposition of license fees on its unlicensed 3.3Ghz spectrum and revenue sharing of its internet service provider business. Fitch expects an increase in working capital requirements to result in cash outflow of over INR3bn in FY12.

Tulip's net financial leverage increased to 2.3x in FY11 from 1.7x in FY10, due to high capex and acquisitions of INR8.9bn, including the acquisition of the data centre facility in Bengaluru and a 13% stake in Qualcomm's Indian JV and fibre roll-outs.

Negative rating guidelines include increased competition in Tulip's core business leading to a reduction in its profitability, higher-than-expected capex and/or delays in Qualcomm JV stake sale resulting in net financial leverage exceeding 2.5x on a sustained basis, and delays in raising debt/equity for FCCB redemption. The Outlook will be revised back to Stable on the Qualcomm JV stake sale and successful redemption of FCCBs, resulting in net financial leverage of below 2.5x in FY13 and beyond.

Established in 1992, Tulip is an end-to-end data connectivity services provider. Its business segments - data connectivity solutions, managed services and network integration - provide data services, IT infrastructure and network solutions to enterprise clients and government. Qualcomm JV has licenses to provide BWA services in four telecom circles. In FY11, Tulip generated revenue of INR23.5bn (FY10: INR19.7bn) and earned a net profit of INR3.1bn (margin: 13.0%), compared with INR2.3bn in FY10 (margin: 11.7%). In 9MFY12, revenue was INR20.4bn, with a net profit of INR2.4bn. Revenue growth in Q3FY12 was 13.9%, compared with 22.2% in H1FY12.

Tulip's ratings:

- National Long-Term rating: affirmed at 'Fitch A+(ind) and Outlook revised to Negative

- INR1.25bn non-convertible debentures: affirmed at 'Fitch A+(ind)'

- INR600m CP/ Short-Term debt programme (within fund-based working capital limits): downgraded to 'Fitch A1(ind)' from 'Fitch A1+(ind)'