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Short-term hurdles, Cut rating to HOLD |
HOLD
CMP: Rs 92 Target Price: Rs 100
n Q2FY11 profit of Rs576mn, below our estimate of Rs651mn due to lower conductor volume growth
n Delay in power conductor order in-flows and stabilization of expanded fiber capacity to hit growth.
n Cut EPS estimates by 21% /17% to Rs6.3 /8.3 for FY11E & FY12E respectively mainly due to cut in volume estimates
n Cut Rating to HOLD from BUY earlier with revised target price of Rs100 (from Rs131 earlier)
Q2FY11 results miss estimates - PAT grew 5% yoy and EBIDTA 2% yoy
Q2FY11 PAT grew by 5.3% yoy of Rs576mn, below our estimate of Rs651mn. Revenue
grew just 9.4% yoy to Rs5.1bn (v/s our estimate of Rs5.9bn) entirely led by growth in
telecom revenues. Conductor revenues remained flat on 4% volume decline due to
delay in order inflows from PGCIL. EBIDTA grew by 1.9% due to fall in conversion
margins. Conductors segment EBIDTA fell 13% yoy while teleocm EBIDTA margins
remained stable sequentially. Higher interest expense on sharp rise in debt to Rs7.9bn
(from Rs5.5bn in 1QFY11) resulted in just 2% PBT growth. PAT growth of 5.3% to
Rs576mn was below our estimate of Rs651mn despite lower tax provision of 19% v/s
estimated tax rate of 22.5% for FY11E.
Fiber capacity stabilization and conductor order delays to affect volume
growth
Sterlite has completed the power conductor capacity expansion from 115,000 to
160,000 MT and fiber cables capacity from 2mn fkms to 6mn fkms, however the fiber
capacity of 12mn is delayed due to plant stabilization issues. Although the conductor
capacity has come on stream, the delay in order inflows from the largest client PGCIL,
has been affecting volume growth. Hence we have cut the conductor’s volume estimate
by 20% /11% and fiber volume estimate by 16.7% / 12.5% for FY11E/12E respectively.
EPS estimates cut by 20.7% /17% to Rs6.3 /8.3 for FY11E /12E
Considering the delay in order inflows from PGCIL (the largest customer), lower fiber
volume due to plant stabilization and lower fiber realization, we have cut our revenue
and EBIDTA estimate by 15.9% / 11.5% and 18.4% / 14.8% for FY11E/12E
respectively. We have cut our EPS (fully diluted) estimate by 20.7% /17.1% resulting in
EPS of Rs6.3 /8.3 for FY11E / FY12E. Our revised estimates imply PAT and EPS
CAGR of 15.3% and 9.8% over FY10-12E respectively.
Cut rating to HOLD (from BUY) with target price Rs100 (earlier Rs131)
Considering the below estimated results and short-term challenges, we downgrade our
rating to HOLD (from BUY) with revised price target of Rs100 (earlier Rs131).
While short-term challenges remain in the form of (1) order delays in conductor’s
business (2) plant stabilization & realization drop in optic fiber business, we recommend
that fall in the stock price should be used as an opportunity to buy with long term view
due to strong underlying growth opportunity, multifold capacity benefit which is yet to
accrue and management’s vision of attaining global leadership position.
Q2FY11 results miss estimates - PAT grew 5% yoy and EBIDTA 2% yoy
Q2FY11 PAT grew by 5.3% yoy of Rs576mn, below our estimate of Rs651mn. Revenue
grew just 9.4% yoy to Rs5.1bn (v/s our estimate of Rs5.9bn) entirely led by growth in
telecom revenues. Conductor revenues remained flat on 4% volume decline due to
delay in order inflows from PGCIL. EBIDTA grew by 1.9% due to fall in conversion
margins. Conductors segment EBIDTA fell 13% yoy while teleocm EBIDTA margins
remained stable sequentially. Higher interest expense on sharp rise in debt to Rs7.9bn
(from Rs5.5bn in 1QFY11) resulted in just 2% PBT growth. PAT growth of 5.3% to
Rs576mn was below our estimate of Rs651mn despite lower tax provision of 19% v/s
estimated tax rate of 22.5% for FY11E.
Fiber capacity stabilization and conductor order delays to affect volume
growth
Sterlite has completed the power conductor capacity expansion from 115,000 to
160,000 MT and fiber cables capacity from 2mn fkms to 6mn fkms, however the fiber
capacity of 12mn is delayed due to plant stabilization issues. Although the conductor
capacity has come on stream, the delay in order inflows from the largest client PGCIL,
has been affecting volume growth. Hence we have cut the conductor’s volume estimate
by 20% /11% and fiber volume estimate by 16.7% / 12.5% for FY11E/12E respectively.
EPS estimates cut by 20.7% /17% to Rs6.3 /8.3 for FY11E /12E
Considering the delay in order inflows from PGCIL (the largest customer), lower fiber
volume due to plant stabilization and lower fiber realization, we have cut our revenue
and EBIDTA estimate by 15.9% / 11.5% and 18.4% / 14.8% for FY11E/12E
respectively. We have cut our EPS (fully diluted) estimate by 20.7% /17.1% resulting in
EPS of Rs6.3 /8.3 for FY11E / FY12E. Our revised estimates imply PAT and EPS
CAGR of 15.3% and 9.8% over FY10-12E respectively.
Cut rating to HOLD (from BUY) with target price Rs100 (earlier Rs131)
Considering the below estimated results and short-term challenges, we downgrade our
rating to HOLD (from BUY) with revised price target of Rs100 (earlier Rs131).
While short-term challenges remain in the form of (1) order delays in conductor’s
business (2) plant stabilization & realization drop in optic fiber business, we recommend
that fall in the stock price should be used as an opportunity to buy with long term view
due to strong underlying growth opportunity, multifold capacity benefit which is yet to
accrue and management’s vision of attaining global leadership position.
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