result update sterlite technologies companyname … tech... · cost assumptions (% of rev) direct...

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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

[email protected]

Sandip Agarwal +91 22 6623 3474

[email protected]

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

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120.0

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FY1

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Order-book

Products Services

Sterlite Technologies


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


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



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


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 (%)


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


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


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


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


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


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


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)


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



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

result update sterlite technologies companyname … tech... · cost assumptions (% of rev) direct...

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