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Edelweiss Securities Limited
Sterlite Technologies (Sterlite) reported strong Q3FY19 numbers— revenue and EBITDA jumped 59.8% and 45.7% YoY (Street estimate 35.3% and 40.9%), respectively. Key highlights: 1) revenue growth was driven by execution of Navy order; 2) higher contribution of services business (~30%) led to 320bps QoQ dip in EBITDA margin at 22.0%; 3) management highlighted that Sterlite remained unaffected by decline in spot OF prices on account of delay in China Mobile tender as it has strong product order book; and 4) order book jumped 1.25x YoY to INR102.3bn with 50:50 split between services and products. We believe, with upcoming capacity expansions, Sterlite is well positioned to capture strong fibre demand. Sustained slowdown in China OF demand leading to supply glut is key risk to our thesis. Maintain ‘BUY’ with INR436 target price.
Strong demand boosts revenue
Sterlite clocked the highest order book ever, at INR102.31bn, a jump of 1.25x YoY,
which imparts revenue visibility for 2.0-2.5 years at the current run rate. OF and OFC
capacities are running at near 100% utilisation level, reflecting robust demand for fibre.
Installation and commissioning of the new OF capacity of 40mn fkm is on track. We
believe, faster installation of new capacity is pivotal to enable Sterlite to cater to
bourgeoning demand.
Change in business mix led to EBITDA margin slip
EBITDA margin at 22.0% missed management’s guidance of 25-26%, primarily due to
higher proportion of relatively lower margin services business (30% plus) in total
revenue. Execution of the Indian Navy project and further expansion of services
business could dent EBITDA margin in ensuing quarters.
Outlook and valuations: Sustaining momentum; maintain ‘BUY’
We believe, Sterlite is well positioned to cater to the burgeoning demand for fibre
optic cables. Management highlighted that overall demand environment remains
strong, on products as well as services front. Given China Mobile drives over 30% of the
global fiber demand, we remain watchful; but this has not impacted the overall
demand in light of aggressive push for 5G rollout. The stock is trading at 18.6x FY20E
EPS. We maintain ‘BUY/SO’ with INR436 target price (25x Q1FY21 EPS).
RESULT UPDATE
STERLITE TECHNOLOGIES Strong order book fuels revenue
COMPANYNAME
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperform
Risk Rating Relative to Sector Medium
Sector Relative to Market Equalweight
MARKET DATA (R: STTE.BO, B: SOTL IN)
CMP : INR 291
Target Price : INR 436
52-week range (INR) : 415 / 255
Share in issue (mn) : 402.4
M cap (INR bn/USD mn) : 117 / 1,646
Avg. Daily Vol.BSE/NSE(‘000) : 1,581.5
SHARE HOLDING PATTERN (%)
Current Q2FY19 Q1FY19
Promoters *
53.8 53.8 53.9
MF's, FI's & BK’s 12.1 13.0 12.1
FII's 6.2 6.6 6.5
Others 27.9 26.6 27.5
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty EW
Telecommunication Index
1 month 0.7 0.2 5.6
3 months (13.0) 4.3 9.2
12 months
(24.0) 1.1 (36.4)
Pranav Kshatriya +91 22 4040 7495
pranav.kshatriya@edelweissfin.com
Sandip Agarwal +91 22 6623 3474
sandip.agarwal@edelweissfin.com
India Equity Research| Telecom
January 24, 2019
Financials (INR mn)
Year to March Q3FY19 Q3FY18 % Chg Q2FY19 % Chg FY18 FY19E FY20E
Net revenues 13,349 8,352 59.8 10,843 23.1 32,055 45,726 61,068
EBITDA 2,939 2,017 45.7 2,733 7.5 7,494 11,146 14,719
Adjusted Profit 1,477 901 63.9 1,333 10.8 3,387 5,265 7,146
Diluted EPS (INR) 3.6 2.4 47.4 3.4 4.4 8.3 13.2 16.5
Diluted P/E (x) 35.0 23.3 18.6
EV/EBITDA (x) 16.7 12.2 9.8
Telecom
2 Edelweiss Securities Limited
Chart 1: Order book expanding rapidly
Source: Company, Edelweiss research
11 15 16 23 33 41 49 50 56
16 15 15 15
12 11
11
45 46
0.0
24.0
48.0
72.0
96.0
120.0
Q3
FY1
8
Q4
FY1
8
Q1
FY1
8
Q2
FY1
8
Q3
FY1
8
Q4
FY1
8
Q1
FY1
9
Q2
FY1
9
Q3
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9
(IN
R b
n)
Order-book
Products Services
Sterlite Technologies
3 Edelweiss Securities Limited
Financial snapshot (INR mn) Year to March Q3FY19 Q3FY18 % change Q2FY19 % change YTD19 FY19E FY20E
Net revenues 13,349 8,352 59.8 10,843 23.1 32,961 45,726 61,068 Direct costs 6,300 3,351 88.0 4,337 45.3 13,975 19,068 24,549
Gross profit 7,049 5,001 41.0 6,506 8.3 18,986 26,657 36,518
SG&A 4,110 2,984 37.7 3,774 8.9 10,865 15,511 21,799
EBITDA 2,939 2,017 45.7 2,733 7.5 8,121 11,146 14,719
Depreciation 512 448 14.4 492 4.2 1,452 2,124 2,905
EBIT 2,427 1,569 54.7 2,241 8.3 6,669 9,022 11,814
Interest 274 257 6.4 244 12.4 748 1,301 1,618
Other income 104 67 55.0 60 74.4 237 313 366
Add: Exceptional items (21) (20) NA (51) (51)
Profit before tax 2,216 1,288 72.1 1,964 12.8 6,209 7,793 10,483
Tax 760 387 96.4 652 16.6 1,960 2,580 3,336
Reported net profit 1,456 901 61.6 1,313 10.9 4,249 5,213 7,146
Exceptional items 21 - 20 2.9 51 51 -
Adjusted Profit 1,477 901 63.9 1,333 10.8 4,300 5,265 7,146
Diluted EPS (INR) 3.6 2.4 47.4 3.4 4.4 10.2 13.2 16.5
Diluted P/E (x) - - - 20.1 23.3 18.6
EV/EBITDA (x) - - - 13.9 12.2 9.8
EV/Revenues (x) - - - 2.4 3.0 2.4
Direct costs 47.2 40.1 40.0 42.4 41.7 40.2
Gross profit 52.8 59.9 60.0 57.6 58.3 59.8
SG&A 30.8 35.7 34.8 33.0 33.9 35.7
EBITDA 22.0 24.1 25.2 24.6 24.4 24.1
EBIT 18.2 18.8 20.7 20.2 19.7 19.3
Reported net profit 10.9 10.8 12.1 12.9 11.4 11.7
Tax rate 34.3 30.0 33.2 31.6 33.1 31.8
Telecom
4 Edelweiss Securities Limited
Company Description
Sterlite Technologies (Sterlite) is a global technology player engaged in designing, building
and managing telecom broadband networks. Its offerings include optical products, system
and network integration services and telecom software. Sterlite is India’s largest and only
fully integrated optical fibre cable manufacturer with OF and OFC capacity of 30mn and
15mn FKM, respectively. The company has plans to enhance production of OF to 50mn FKM
by June 2019. It has manufacturing plants in Aurangabad, Silvasa, China (through joint
venture (JV) with Tongguang) and Brazil (through JV with Conduspar). In services business,
Sterlite is developing several network projects, such as, secure network for the armed
forces, rural broadband through BharatNet, Smart Cities, and high-speed Fiber-to-the-Home
(FTTH). It also offers customisable OSS & BSS software solutions suite through Elitecore,
which it acquired in FY16. The company has TTM revenue of INR36.4bn. Investment Theme
We believe that Sterlite will be the key beneficiary of strong demand for fiber optic cables,
leveraging its capacity expansion; It’s superior cost structure due to integrated operations
will lead to high EBITDA margins improving return ratios, despite planned capex. The
company is strategically expanding its portfolio of services leveraging its knowhow of
complex network and relationships from the fiber business.
Key Risks
• China is the largest consumer of the OFC (57.5% pf global consumption) and hence and
demand fluctuation can impact the capacity utilisation
• Downturn in global economy
• Alternate connectivity technology
• Telecom capex dip
• Currency risk
5 Edelweiss Securities Limited
Sterlite Technologies
Financial Statements
Income statement (INR mn)
Year to March FY18 FY19E FY20E FY21E
Net revenue 32,055 45,726 61,068 65,951
Cost of revenues 12,954 19,068 24,549 26,512
Gross profit 19,101 26,657 36,518 39,438
Total SG&A expenses 11,608 15,511 21,799 21,764
EBITDA 7,494 11,146 14,719 17,675
Depreciation 1,822 2,124 2,905 2,486
EBIT 5,671 9,022 11,814 15,189
Add: Other income 392.7 313.19 366.41 461.65
Profit Before Tax 4,982 7,984 10,563 13,858
Less: Provision for Tax 1,332 2,580 3,336 4,259
Reported Profit 3,343 5,213 7,146 9,519
Exceptional Items 44 - - -
Adjusted Profit 3,387 5,213 7,146 9,519
Shares o /s (mn) 401 414 440 446
Adjusted Basic EPS 8.4 12.6 16.3 21.3
Diluted shares o/s (mn) 408 418 459 481
Adjusted Diluted EPS 8.3 12.5 15.6 19.8
Adjusted Cash EPS 13.0 17.7 22.9 26.9
Dividend per share (DPS) 2.1 3.1 4.1 6.4
Dividend Payout Ratio(%) 2.4 31.2 30.4 36.4
Common size metrics
Year to March FY18 FY19E FY20E FY21E
Cost of revenues 40.4 41.7 40.2 40.2
Gross margin 59.6 58.3 59.8 59.8
SG&A expenses 36.2 33.9 35.7 33.0
EBITDA margins 23.4 24.4 24.1 26.8
EBIT margins 17.7 19.7 19.3 23.0
Net Profit margins 11.5 11.8 11.8 14.6
Growth ratios (%)
Year to March FY18 FY19E FY20E FY21E
Revenues 23.6 42.6 33.6 8.0
EBITDA 44.4 48.7 32.1 20.1
PBT 91.5 60.2 32.3 31.2
Adjusted Profit 68.2 53.9 37.1 33.2
EPS 67.2 50.3 24.8 26.9
Key Assumptions
Year to March FY18 FY19E FY20E FY21E
Macro
GDP(Y-o-Y %) 6.7 7.1 7.1 7.3
Inflation (Avg) 3.6 3.7 4.0 4.5
Repo rate (exit rate) 6.0 6.3 5.8 5.8
USD/INR (Avg) 64.5 70.0 72.0 72.0
Company
Product revenues (INR mn) 26,179 32,598 44,349 45,970
Service revenues (INR mn) 5,876 13,128 16,719 19,980
Cost Assumptions (% of rev)
Direct Costs 40.4 41.7 40.2 40.2
Employee benefit exp. 10.9 11.3 10.7 10.0
Other exp 25.3 22.7 25.0 23.0
Inventory days 90 79 85 98
Receivable (days) 89 82 83 98
Payable days 82 113 92 107
Cash conversion cycle days 101 47 76 89
Avg dep rate as a % of NB 13.8 17.2 14.4 11.9
Tax rate (%) 26.7 32.3 31.6 30.7
Capex (INR mn) 4,595 8,936 5,200 1,400
6 Edelweiss Securities Limited
Telecom
Peer comparison valuation
Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E
Sterlite Technologies 1,646 23.3 18.6 10.6 8.6 37.3 38.1
Bharti Airtel 16,967 (280.3) 69.4 4.8 3.9 0.3 2.5
Bharti Infratel 6,845 19.4 16.7 6.8 6.7 13.8 15.0
Tejas Networks 236 12.4 12.9 6.6 5.5 11.7 10.2
Vodafone Idea 4,185 (2.3) (2.9) 37.6 13.6 (28.9) (17.4)
Median - 12.4 16.7 6.8 6.7 11.7 10.2
AVERAGE - (45.5) 23.0 13.3 7.7 6.8 9.7
Source: Edelweiss research
Cash flow metrics
Year to March FY18 FY19E FY20E FY21E
Operating cash flow 7,316 3,534 7,993 11,470
Financing cash flow (5,848) (9,034) (5,308) (1,519)
Investing cash flow (1,515) 4,142 (3,741) (3,448)
Net cash Flow (48) (1,358) (1,056) 6,503
Capex (4,595) (8,936) (5,200) (1,400)
Dividend paid (81) (1,626) (2,174) (3,466)
Profitability and efficiency ratios
Year to March FY18 FY19E FY20E FY21E
ROAE (%) 33.8 37.3 38.1 39.0
ROACE (%) 26.7 31.1 31.9 34.9
Inventory Days 95 79 85 98
Debtors Days 89 82 83 98
Payable Days 82 113 92 107
Cash Conversion Cycle 101 47 76 89
Current Ratio 1.7 2.1 2.1 2.4
Operating ratios
Year to March FY18 FY19E FY20E FY21E
Total Asset Turnover 1.4 1.5 1.6 1.5
Fixed Asset Turnover 2.2 2.4 2.6 2.7
Equity Turnover 2.9 3.2 3.2 2.7
Valuation parameters
Year to March FY18 FY19E FY20E FY21E
Adj. Diluted EPS (INR) 8.3 12.5 15.6 19.8
Y-o-Y growth (%) 67.2 50.3 24.8 26.9
Adjusted Cash EPS (INR) 13.0 17.7 22.9 26.9
Diluted P/E (x) 35.0 23.3 18.6 14.7
P/B (x) 10.1 7.9 6.5 5.3
EV / Sales (x) 3.9 3.0 2.4 2.2
EV / EBITDA (x) 15.3 10.6 8.6 6.9
Dividend Yield (%) 0.7 1.1 1.4 2.2
Balance sheet (INR mn)
As on 31st March FY18 FY19E FY20E FY21E
Share capital 802 828 879 892
Reserves & Surplus 10,951 14,626 19,623 25,704
Shareholders' funds 11,753 15,455 20,502 26,597
Minority Interest 820 973 1,029 1,081
Def. Tax Liability (net) 222 222 222 222
Sources of funds 24,705 35,799 41,059 49,183
Gross Block 21,128 21,979 29,104 34,304
Net Block 11,351 16,444 19,263 18,596
Capital work in progress 3,570 3,570 3,570 3,570
Intangible Assets 901 2,621 2,097 1,677
Total Fixed Assets 15,822 22,635 24,930 23,844
Non current investments 285 285 285 285
Cash and Equivalents 2,935 2,740 1,684 8,187
Sundry Debtors 8,713 11,761 16,133 19,181
Loans & Advances 350 350 350 350
Other Current Assets 5,634 5,251 6,178 7,279
Current Assets (ex cash) 18,076 22,187 29,233 34,504
Trade payable 6,562 5,264 7,170 8,394
Other Current Liab 5,851 6,784 7,903 9,243
Total Current Liab 12,412 12,048 15,073 17,637
Net Curr Assets-ex cash 5,663 10,139 14,160 16,867
Uses of funds 24,705 35,799 41,059 49,183
BVPS (INR) 28.8 37.0 44.7 55.2
Free cash flow (INR mn)
Year to March FY18 FY19E FY20E FY21E
Reported Profit 3,343 5,213 7,146 9,519
Add: Depreciation 1,822 2,124 2,905 2,486
Interest (Net of Tax) 761 881 1,107 1,242
Others 1,594 (10,030) (6,921) (4,184)
Less: Changes in WC 204 (5,346) (3,756) (2,408)
Operating cash flow 7,316 3,534 7,993 11,470
Less: Capex 4,595 8,936 5,200 1,400
Free Cash Flow 2,721 (5,402) 2,793 10,070
7 Edelweiss Securities Limited
Sterlite Technologies
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
30 Nov 2018 Amitabh Hajela Sell 18500.00
20 Aug 2018 Anand Agarwal Sell 50000.00
14 Feb 2018 Pravin Agarwal Sell 53250.00
12 Feb 2018 Pravin Agarwal Sell 150000.00
*in last one year
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Holding – Top10 Perc. Holding Perc. Holding
Twin star international 52.04 L&t mutual fund/indi 3.58
Life insurance corp 3.29 Dsp investment manag 2.13
Aditya birla sun lif 1.72 Macquarie emerging m 1.55
Reliance capital tru 1.18 Vedanta ltd 1.18
Vedanta ltd 1.18 Dimensional fund adv 1.16
*in last one year
Additional Data
Directors Data Anil Kumar Agarwal Chairman Pravin Agarwal Vice Chairman A. R. Narayanaswamy Director Arun Todarwal Director Kumud Srinivasan Director Sandip Das Director Dr. Anand Agarwal CEO Pratik Agarwal Director
Auditors – S. R. B. C. & Co. LLP
*as per last annual report
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