Fitch Ratings has downgraded India-based Tulip Telecom Limited's (Tulip) National Long-Term rating to 'Fitch BB+(ind)' from 'Fitch A-(ind)'. Fitch has also downgraded Tulip's INR1.25bn non-convertible debentures to National Long-Term 'Fitch BB+(ind)' from 'Fitch A-(ind)'. All the ratings are on Rating Watch Negative (RWN).

The downgrade reflects Tulip's inability to tie up adequate funds for redeeming its USD97m outstanding foreign currency convertible bonds (FCCBs), due on 26 August 2012 at a premium of 44.506%. Total outflow for FCCB redemption will be USD145m. The company has so far arranged INR4bn (USD72m) through rupee debt and internal accruals, and has received firm commitments of USD50m towards the subscription of a fresh FCCB issuance. 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.

The company needs to immediately make arrangements for the remaining amount. Fitch will resolve the RWN once Tulip ties up sufficient funding for redeeming FCCBs in a timely manner and details of the funding arrangement and its impact on the credit profile of the company are available.

Other ratings concerns include the significant increase in Tulip's financial leverage (adjusted net debt/EBITDAR), subdued revenue growth and an expected increase in competition in the corporate data connectivity (CDC) industry.

Financial leverage in the 12 months ended March 2012 increased to 3.6x from 2.3x in FY11 because of a higher-than-expected increase in gross debt to INR27.5bn from INR17.8bn due to large capex and investments and higher working capital requirements. Revenue growth in Q4FY12 and Q5FY12 was subdued at 3.7% and 9.6%, respectively, compared with the 19.3% growth during Q1FY12-Q3FY12, while EBITDA margin were 25.6% and 26.8%, respectively, compared with 28.7% during the same period. The company has changed its financial year ending to September, effective from 2012. Therefore, FY12 will mean 18 months ended September 2012. Revenue growth is likely to remain subdued over the short- to medium-term in view of the weak economic environment and high competitive pressures.

Fitch expects Tulip 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. 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. The company may also need to raise more debt to fund its capex plans.

The ratings, however, continue to draw support from 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 the multi-protocol label switching virtual private network segment. Fitch expects the company's upcoming data centre facility to drive its revenue and profit growth in the medium-term.

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 entities. In the 12 months ended March 2012, Tulip generated revenue of INR27.1bn (FY11: INR23.5bn) and earned a net profit of INR3.1bn (margin: 11.4%), same as the FY11 profit of INR3.1bn (margin: 13.0%).