Fitch Ratings has downgraded India-based Tulip Telecom?s national long-term rating from Fitch A-(ind) to Fitch BB+(ind). It has also downgraded Tulip Telecom?s Rs 1.25 billion non-convertible debentures from Fitch A-(ind) to national long-term Fitch BB+(ind). All the ratings are on Rating Watch Negative.
The downgrade by Fitch Ratings reflects Tulip Telecom?s inability to tie up adequate funds for redeeming its $97 million outstanding foreign currency convertible bonds (FCCBs), which are due on August 26, 2012 at a premium of 44.506 per cent. The total outflow for FCCB redemption will be $ 145 million. The company has so far arranged $72 million through rupee debt and internal accruals, and has received firm commitments of $50 million towards the subscription of a fresh FCCB issue. The fresh FCCB issue would be conditional upon the company depositing the balance amount through a bank debt into an escrow account initiated specifically for redeeming the existing FCCBs.
Tulip Telecom needs to immediately make arrangements for the remaining amount. Fitch Ratings will resolve the negative rating once Tulip Telecom ties up sufficient funding for redeeming FCCBs in a timely manner and makes available the details of the funding arrangement and its impact on the credit profile of the company.
Other issues highlighted by the rating agency include the significant increase in Tulip Telecom?s financial leverage (adjusted net debt/earnings before interest, tax, depreciation, amortization, and restructuring or rent cost, subdued revenue growth and an expected increase in competition in the corporate data connectivity (CDC) industry.
The financial leverage for the company increased from 2.3x in the financial year 2011 to 3.6x at the end of March 2012. This was a result of a higher-than-expected increase in gross debt to from Rs 17.8 billion in 2011 to Rs 27.5 billion in 2012 due to large capex and investments and higher working capital requirements. The revenue growth in the fourth quarter and the fifth quarter at 3.7 per cent and 9.6 per cent, respectively for the financial year 2012 was subdued as compared to the revenue growth of 19.3 per cent between the first and the third quarter of the financial year 2012. The EBITDA margin registered by the company stood at 25.6 per cent and 26.8 per cent, respectively for the fourth quarter and the fifth quarter of 2012 as compared to 28.7 per cent during the first and the third quarter of the financial year 2012. Fitch Ratings states that the company has changed its financial year ending to September, effective from 2012. Therefore, the financial year 2012 will comprise 18 months ending September 2012. The rating agency estimates that the revenue growth for the company is likely to remain subdued over the short-to-medium-term in view of the weak economic environment and high competitive pressures.
Fitch Ratings expects Tulip Telecom to face competition from existing telecom operators and the roll-out of broadband wireless access services. Telecom operators facing a maturing voice market would most likely start focusing on the broadband market, including CDC. The rating agency states that Tulip Telecom may face regulatory challenges in the form of a possibility of imposition of license fees on its unlicensed 3.3 GHz spectrum and revenue sharing of its internet service provider business. The company may also need to raise more debt to fund its capex plans.
The ratings, however, continue to draw support from Tulip Telecom?s extensive network coverage within India. The company?s 9,000 km fibre network covers over 300 cities, and its wireless network provides last-mile connectivity in over 2,000 locations. The Fitch ratings also reflect Tulip Telecom?s leadership position in the multi-protocol label switching virtual private network segment. The rating agency expects the company?s upcoming data centre facility to drive its revenue and profit growth in the medium-term.
Tulip Telecom established in 1992 is an end-to-end data connectivity services provider. It has interests in various business segments like data connectivity solutions, managed services and network integration – providing data services, information technology infrastructure and network solutions to enterprise clients and government entities. Fitch Rating reports that for a period of 12 months ending on March 2012, Tulip Telecom reported revenue of Rs 27.1 billion as compared to revenue of Rs 23.5 billion for the financial year 2011. However for both the financial years 2012 and 2011, the company earned a net profit of Rs 3.1 billion each.
