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Spread Too Thin
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Bedi has emerged as India's largest MPLS VPN (multiprotocol label switching, virtual private network) player (think of him as the person who provides your company's video conferencing facilities) in a short span of time, ahead of telecom giants such as Bharti Airtel, Idea, Vodafone, Reliance Communications, Tata Communications and BSNL. Tulip has a 30 per cent market share — equivalent to the next three competitors combined — in the Rs 3,500 crore MPLS VPN market. And now, from being an enterprise connectivity solutions provider, Tulip Telecom is planning to move up the value chain and be an end-to-end solutions provider with network integration, infrastructure management services and consulting.
In the first decade of its existence, Tulip was just a value-added re-seller of IT hardware, software, networking gear and wireless products. An opportunity to provide connectivity in the Malappuram district in Kerala, as a part of a government project in 2003, triggered its first wave of growth. Providing conventional work-line connectivity in Malappuram was too expensive. Also, the region's hilly terrain made the task hugely challenging. But Tulip's risk paid off. Next, it decided to concentrate on data connectivity even as large telecom players such as Bharti Airtel, Vodafone, Idea, Reliance Communications, Tata Teleservices and the erstwhile monopoly service provider BSNL focused mainly on the voice segment due to the boom in the sector.
When Bedi's Tulip Telecom arrived on the scene, it had three things going for it. First, private telecom players were focussed on the voice market, allowing Tulip to focus on the data sector. Second, unlike BSNL where last mile connectivity was through copper which limited data connectivity speeds and the radius within which the service could be provided, Tulip's wireless connectivity meant a tower could provide service to a 100 km radius with significantly high speeds (64-128Kbps on wireless). Third, while the large telcos spent huge amounts of money laying inter-city fibre, Tulip focused on intra-city services, thus capturing the critical last mile customer relationship. "While others focused on retail customers, we focused on companies, where each relationship is of significantly higher value than retail,"
But things are changing now, and Bedi has a tough challenge on his hands. With voice tariffs having hit rock bottom, the big telecos are now focused on earning more from data — a fact that Bedi acknowledges. Also, they have already laid the inter-city fibre networks and most of them have some intra-city network too. So how will Tulip compete against the big boys? "I am in 300 cities. It is 35 for the nearest competitor. By the time they catch up with me, with my own data centres, I will be too far ahead. For them enterprise data is less than two per cent of their revenues while this is my core business. Therefore, the level of expertise and understanding we bring in is very high. Enterprises don't change vendors easily," reasons Bedi.
In a few years, Tulip expects that 70 per cent of its telecom revenue will come from fibre. Since data centres will eventually be its core business, Bedi is investing in them. The Bangalore centre is Tulip's fifth and was built at a cost of Rs 900 crore. The data centres provide the company enormous flexibility to scale up or down depending on customer requirements using cloud technology. Tulip offers private clouds (hosting business), co-location through hybrid cloud and public cloud. It has already signed up HP, NTT and IBM as customers for its Bangalore centre. Currently, data connectivity services make up 64 per cent of Tulip's revenues.
Tulip is now aspiring to provide bandwidth, managed services, server hosting and security services along with the data centre. "We will compete with and co-opt large technology companies on a case-to-case basis. Scale is critical in this business. Our early start gives us an advantage. We will provide infrastructure and platform as a service, so that our customers can scale up or down based on their requirements," says Bedi. "Managed data centre revenues will eventually be 60 per cent of our income."
The Road Ahead
Tulip plans to be a one-stop shop for all data needs. For instance, if there is a large bank with hundreds of branches across the country — all these branches are networked with a core banking solution — typically, when the connectivity goes down, the network operations centre is informed which in turn hauls up the bandwidth provider. "For a typical data connectivity provider his responsibility ends with providing input to the customer's router. But the network link might have malfunctioned due to any number of reasons such as hardware failure, lack of proper system integration or some other reason. Increasingly, customers are looking to work with a single vendor for their telecom, managed services and data centre requirements. This is the space we now want to operate in," says Bedi.
Deepinder Bedi, executive director of Tulip Telecom and H. S. Bedi's son, who is in charge of marketing Tulip as a one-stop shop offering the entire portfolio of solutions, admits that the competitive landscape in the managed services market is different from enterprise connectivity solutions market. "Here we are competing with the likes of Wipro, TCS, IBM, HP and HCL. But the advantage we have is that a telecom player can sell managed services but a managed services company cannot sell bandwidth as it is not easy to get into that space."
|Deepinder Bedi Executive Director, Tulip Telecom|
"We are competing with the likes of Wipro, TCS, IBM, HP and HCL"
(BW Pic By Jagadeesh N.V.)
However, not everyone agrees. A senior executive of a leading system integrator (SI) says that existing skill sets or customer relationships of managed services players are not easy to replicate. "Most of the large SI players can provide the entire gamut of servers, storage, software and can always lease bandwidth. While Tulip is correct in saying that customers are looking to work with fewer vendors and want ‘one throat to choke' they will not find it easy to crack this market."
Where's The Money, Honey?
Tulip Telecom over the last five years has grown at a CAGR (compound annual growth rate) of 22 per cent and has nearly tripled its revenues during this period. However, all this growth has come at a huge cost. Today the gross debt of the company is almost equal to its annual revenue. This has the market worried. Emkay Global Financial Services in a report released in May, pointed out that tepid revenue and margin growth, along with a highly leveraged balance sheet was a big concern. "Management's guidance for slower growth led by tough economic conditions and continuous debt increase due to higher funding required by data centres becomes worrisome," reads the report.
Financial services firm Citi, in its report on Tulip, released in May, expressed similar concerns. "Th business will continue to guzzle cash ahead, given its mid-way through investment cycle. Slowing economy has a cascading impact on the business with slower order wins, pricing pressures and delayed payments from customers." With debt at Rs 2,330 crore as of third quarter of FY12 and an average borrowing cost of close to 13 per cent, the company needs to pare down this quickly to continue its exemplary growth story.
Tulip, says senior Bedi, is acutely aware of the challenges. He recently exited the joint venture (JV) with Qualcomm for broadband wireless access in which he had invested Rs 140 crore and had a 13 per cent stake. Bharti Airtel had picked up a 49 per cent stake in the JV for $165 million. Bedi says he will use the funds generated from the stake sale for paying off part of Tulip's debt and towards business expansion. Further reduction in debt could be considered by selling stake in one of Tulip Telecom's subsidiary companies. This could be done at the data centre level. "If NTT of Japan can pick up a 74 per cent stake in Netmagic (another Indian data centre provider) for Rs 600-700 crore, IDC in a recent report says we can be valued at 5-6x of our data centre revenues, which I expect to be Rs 1,000 crore in three years. So I could unlock value at the Bangalore data centre which is a separate subsidiary," says Bedi.
Between him and his family owning 70 per cent of the company's equity, would this also mean a dilution of their holding? Bedi is quick to assert that he is not in a hurry to do this. "Early on I realised the value of not diluting quickly. When the PE players could not recognise my value, investors sitting in Gujarat and elsewhere did. Since we went public in January 2006, I have been clear that I will look at further dilution only when the value is right." He adds, "Our aim is to grow into India's largest data company."
(This story was published in Businessworld Issue Dated 02-07-2012)