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Sterlite Technologies Ltd>
  • CMP : 142.8 Chg : 4.63 (3.35%)
  • Target : 220.0 (25.71%)
  • Target Period : 12-18 Month

28 Jan 2023

Recovery on track!

About The Stock

Sterlite Technologies (STL) is a leading telecommunication infrastructure player with offerings in in optical fibre (OF) and optical fibre cables (OFC), hyper-scale network design, and deployment and network software.


Recovery continued with product segment driving profitability

  • Revenues came in at ₹ 1882 crore, up 11.8%% QoQ, 38.8% YoY driven by product segment. The product segment grew 77% YoY, 13% QoQ to ₹ 1486 crore while services declined 22.4% YoY, 7.5% QoQ to ₹ 382 crore
  • Reported EBITDA was at ₹ 243 crore, vs. loss in base quarter and up ~5.2% QoQ, with EBITDA margins at 12.9%, largely driven by revenues mix as product segment has superior margins. Product had a margin of 20.3% vs. ~20% in Q2
  • PAT was at ₹ 50 crore, up 14% QoQ and vs. loss in the base quarter
What should Investors do?

STL’s share price has grown ~19% over last five years.

  • STL is uniquely positioned to benefit from 5G/ FTTH deployment cycle both domestically and globally. We believe that with focus on ramping down/exiting loss making segment and improving services segment profitability, STL will likely see a healthy earnings momentum ahead. Thus, we maintain BUY rating
Target Price and Valuation

We value STL at ₹ 220, at 15x FY25 P/E.

Key Triggers for future price performance
  • Demand offtake from expanded and overall fibre/cable pricing trajectory
  • Improvement in leverage, which has gone up due to expansion and stretched working capital in services business
  • Improving optical interconnect attach rate to aid margins
New Stock Ideas

Apart from STL, in our coverage we like Bharti Airtel.

  • A play on favourable industry structure and superior digital play
  • BUY with a target price of ₹ 920

Key Financial Summary

(Year-end March) FY20 FY21 FY22 5 yr CAGR (FY17-22) FY23E FY24E FY25E 3 yr CAGR (FY22-25E)
Net Sales (| crore) 5,154.4 4,825.2 5,754.3 17.3 7,009.9 8,195.8 8,985.4 16.0
EBITDA (| crore) 1,069.3 810.7 534.8 0.6 911.4 1,270.7 1,437.7 39.0
Net Profit (| crore) 433.9 275.5 62.0 -21.0 160.1 479.9 587.2 111.6
EPS (|) 10.8 6.9 1.6 - 4.0 12.1 14.8 -
P/E (x) 16.2 25.2 112.4 - 43.5 14.5 11.9 -
Price / Book (x) 3.7 3.5 3.6 - 3.3 2.9 2.4 -
EV/EBITDA (x) 8.4 11.6 18.2 - 11.1 8.0 6.7 -
RoE (%) 25.0 14.0 2.0 - 10.2 19.7 20.5 -
RoCE (%) 20.9 12.9 5.7 - 11.6 16.6 18.9 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key performance highlight and outlook

Product segment to drive revenues growth…

STL’s market share (ex-China) grew to ~12% in 9MFY23 vs. ~11% in H1F23, led by increase in OFC market share in Americas. The company operates optical product segment, which has a healthy 20%+ margin while newly focussed interconnect products margins are at ~30%. The company has also maintained that, going ahead, growth should be driven by growing OFC volumes (increasing market share, increasing optical interconnect attach rate and developing new products) and consolidating the services business (by focusing on profitable growth and reducing working capital). We highlight that this is a good move and as services business had stretched working capital cycle. We bake in revenue CAGR of ~16% in FY22-25E driven by continued robust capacity utilisation in the product segment as well as stable services business. We build in margins to recovery to 16% in FY25 with improving interconnect attach rate from 10% currently to 40% in medium term (interconnect product as a percentage of cable revenues), improved margins in services (led by project mix) and reduced losses led by exit from wireless software business.

Strong order book; margins to improve in services ahead…

The order book was at ~| 12054 crore (vs. | 11697 crore in Q2), of which O&M portion was 23%. Order book mix: Telcos at 64%, citizen networks/government at 17%, and Enterprises at 19%. The key order wins in Q3 were a) multi-million-dollar, multi-year contract with a leading North American broadband connectivity player for optical fibre cable, b) multi-million-dollar, multi-year contract with a European telco for optical fibre cable, c) multi-million-dollar orders for optical interconnect from European Telco, d) pan India fibre rollout in multiple states for leading Indian telcos. The company is targeting selective order intake in India in the India private segment. As a result, India private revenue split has gone up from 31% to 42% in 9MFY23 compared to FY22. It indicated that telcos are expected to deploy ~200,000 cable km across National long-distance network, Access network and FTTH roll out in next 18-24 months for 5G, which is an opportunity for the company in the medium term. Its medium-term target is to reach services margins of ~10% vs. 1% currently as it expects to be profitable in the UK with execution ramp up by H1FY24 along with completion of legacy projects.

Ramp down of non-core/loss making segment on track…

The company has ramped down the wireless and telecom software business with no additional investments in capital and manpower from Q4FY23. The company expects PBT to improve, going forward. It is building new business in digital & technology solutions, which currently in the capability building phase.

Other highlights

  • The company expects capex of | 500 crore for FY23 and | 350 crore for FY24 (largely for interconnect and optical business)
  • Net debt was at ~| 3400 crore vs. | 3239 crore in Q2. It expects to release working capital with completion in certain projects. Going ahead, the company expects services working capital to come down to 180 days from 270 days currently. It is targeting to close FY23 at net debt of | 3200 crore. Medium term net debt to EBITDA target is 2-2.5x
  • The company has decided to | 500 crore as right issue, likely to improve capital structure. The issue is likely to be completed in H1FY24
  • Global OFC demand is expected to grow at 7.6% CAGR over CY22-25 from 534 mn fkm to 624 mn fkm while North America and India are expected to grow at 12-13% CAGR during the same period

STL is uniquely positioned to benefit from 5G/FTTH deployment cycle both domestically and globally. We believe that with focus on ramping down/exiting loss making segment and improving services segment profitability, STL will likely see healthy earnings momentum ahead. Thus, we maintain BUY and assign a target price of | 220, valuing the company at 15x FY25E P/E.



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