Emkay: Sterlite Technologies Worst is behind, Upgrade to BUY

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Sterlite Technologies

Worst is behind, Upgrade to BUY

BUY

CMP: Rs 55                                        Target Price: Rs 68

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n     Q3FY11 profit of Rs171mn, significantly below our est. of Rs606mn, dragged by lower EBITDA margin in Power biz

n     Execution of low margin orders in absence of orders from PGCIL, led to sharp fall in power margins to 2.9% v/s average of 12-13%

n     Cut EPS estimate    s by 31% /18% to Rs4.4 /6.8 for FY11E & FY12E respectively mainly due to cut in profitability in power and realization in fiber

n     Stock price correction factors disappointments- Upgrade rating to BUY from HOLD earlier with revised target price of Rs68 (from Rs100 earlier)

Profits reflects the worst– PAT -77% yoy and EBIDTA -59% yoy

STL reported disappointing set of numbers for Q3FY11 on EBITDA and PAT front.

Revenue was in line with our estimates at Rs5791mn declining 33% yoy, affected by

65% decline in telecom revenues due to higher NI revenues in base quarter and drop in

fiber realization. Cons. EBITDA declined 78% yoy, led by execution of low margin

orders in the power segment. EBITDA margin at 7.4% was down 460bps yoy. EBITDA

margin from the power segment for Q3FY11 stood at 2.9% v/s 12-13% average in the

preceding quarters. Lower EBITDA coupled with higher interest cost resulted in 80%

decline in PBT. PAT at Rs171mn was below our estimate of Rs606mn, down 77% yoy.

Conductor profitability – the key disappointment

Led by execution of low margin orders in the power conductor segment, the company

reported only ~Rs3500 EBITDA/ton v/s ~Rs >15,000 EBITDA/ton in the previous few

quarters. Management has lowered the EBITDA/ton guidance for FY11E to Rs9500 v/s

earlier guidance of Rs12000-13,000.

EBITDA guidance revised downwards

Management in the earnings call has revised the EBIDTA guidance for FY11E to Rs3bn

v/s earlier guidance of Rs 5bn (given at the start of FY11), due to lack of activity from

PGCIL and dismal optic fiber realizations. Further, it has guided for Rs4-5bn EBITDA for

FY12E, expecting strong volume growth on revival in ordering activity from PGCIL.

Upgrade to BUY with revised target price of Rs68 (from Rs100 earlier)

Considering the delay in order inflows from PGCIL (the largest customer), drop in fiber

realizations, and lower volumes, we have cut our revenue and EBIDTA estimate by

10.0% / 24.6% and 9.4% / 14.9% for FY11E/12E, respectively. We have cut our EPS

(fully diluted) estimate by 30.6% /18.1% resulting in EPS of Rs4.4 /6.8 for FY11E /

FY12E respectively.

While short-term challenges remain in the form of (1) order delays in conductor’s

business (2) realization drop in optic fiber business, we believe that the same is

reflected in the Q3FY11 financial performance. Considering the worst performance

behind us and the sharp fall in stock price, we upgrade rating on the stock from HOLD

to BUY with target price Rs68 (earlier Rs100).