Sterlite Technologies:Slowdown in order inflows:: Daiwa

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Sterlite Technologies (SOTL IN) Rating:2
Slowdown in order inflows could dampen earnings growth for FY11



What has changed?
 While Sterlite Technologies’s (SOTL) 2Q FY11 results were broadly in line with
our forecasts, there was disappointment from management’s hint of a possible
downward revision to its FY11 guidance due to a slowdown in order inflows.
Impact
 2Q FY11 results were broadly in line with our forecasts. SOTL recorded a
net profit of Rs576m, a rise of 4% QoQ, driven by a 4% QoQ increase in
revenue. Strong revenue growth for the high-margin telecom segment helped
the EBITDA margin expand by 90 basis points QoQ.
 Slowdown in power segment’s order inflows. Order inflows for the power
segment have slowed for the past two quarters, as SOTL’s largest client, Power
Grid (Not rated), is following a two-stage bid evaluation process now, thereby
delaying contract awards. The slowdown in order inflows contributed to muted
revenue growth sequentially for the power segment, which contributes 60% of
SOTL’s revenue on average.
 We have revised down our FY11 EPS forecast by 15%. We have revised
down our forecasts for the power segment to factor in reduced power-conductor
sales (by 20% for FY11). We have revised down our revenue forecasts by 15%
for each of FY11 and FY12 and our EPS forecasts by 15% for FY11 and 11%
for FY12.
Valuation
 We have lowered our DCF-based six-month target price to Rs107 from Rs124,
to reflect the downward revisions to our earnings forecasts.
Catalysts and action
 We expect order inflows to return to a normal level in one-to-two quarters, as
we expect Power Grid expedite the tendering process to meet its five-year capex
plan (which ends in FY12). We maintain our 2 (Outperform) rating on SOTL,
as we believe demand for its products, power conductors and optical fibre
should remain strong both in India and its main export markets.