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STERLITE TECHNOLOGIES
Disappointing results
Results nosedive on all fronts
Sterlite Technologies (SOTL) reported disappointing Q3FY11 results, below our and
consensus estimates. Revenues degrew 33.2% Y-o-Y, to INR 5.8 bn, primarily led
by sharp fall in telecom revenues, which were down 64.9% (to INR 1.6 bn) and flat
revenue growth in the power segment. The telecom segment was down on the back
of: (a) high base effect of Q3FY10; (b) lower sales to China; (c) no sale from access
business and (d) optical fibre price drop. Power segment revenues were hampered
due to: (a) lower conductor volume; and (b) lack of order flows from Power Grid
Corporation (PGCIL).
EBITDA de-grew 58.7% Y-o-Y, to INR 431 mn, on the back of weak operating
performance. EBITDA margin fell sharply by 460bps Y-o-Y, to 7.4%, on the back of
increased other expenses (up 346bps Y-o-Y to 16.6% of sales) and staff costs (up
194bps Y-o-Y to 3.7% of sales). PAT fell 76.8% Y-o-Y, to 171 mn.
Order book position deteriorates
SOTL’s order backlog degrew 21% Y-o-Y, to INR 17.0 bn (0.7x FY10 revenues),
with INR 14.0 bn (decrease of 13% Y-o-Y) backlog in power conductors and the
balance INR 3.0 bn (decrease of 45% Y-o-Y) in telecom. Order inflows during the
quarter were down 43% to INR 7.4 bn (excluding the L1 position of INR 6.6 bn
from the opening order book); else, inflows would be down 94% Y-o-Y.
Cut earnings for FY11E and FY12E by 36% and 33%, respectively
Based on poor performance during the quarter and cautious commentary by the
management, together with grim outlook for businesses in terms of order flows,
we cut our volume estimate in both power and telecom. This lowers our revenue
estimates by 11% and 18% for FY11E and FY12E, respectively. We cut the PAT
estimate by 36% and 33% for FY11E and FY12E, respectively, on the back of
margin pressure in both businesses and interest pressure, going forward.
Outlook and valuations: Challenging; downgrade to ‘HOLD’
We are disappointed with Q3FY11 results and remain concerned with the macro
environment, where dependence of PGCIL is high for SOTL. The short to medium
term environment remains challenging for the company and we do not see any
key positive trigger in the near term. On the revised EPS of INR 4.5 (from INR 7.0
earlier) and INR 5.9 (from INR 8.9 earlier), the stock is trading at 12.3x FY11E
and 9.3x FY12E earnings. We downgrade our recommendation on the stock to
‘HOLD’ from ‘BUY’.
Volume and realisation during Q3FY11
On the volume front, power conductors grew marginally by 3.0% Y-o-Y, to 34,000 MT,
whereas optical fibre grew 9.5% to 2.3 mn fkms; optic fibre cables, however, grew strong
to 1.1 mn fkms, up 57.1% Y-o-Y. Realisation fell 1.5%/10.9%/10.0% Y-o-Y for power
conductors/optical fibre/optic fibre cables, respectively.
Bags second BOOM projects
The company secured its second BOOM project this week, the first 765kv transmission line
for system strengthening the western and northern regions. The company would operate
and maintain the transmission system for 35 years. The project cost is estimated to be INR
13 bn and is likely to complete by FY14, with revenue beginning in FY15. Having bagged
this project, the company’s total portfolio for development of transmission system from the
two projects stands at 1,100 kms.
Segmental performance
The company reported flat growth of 0.7% in the power segment, to INR 4.2 bn, whereas
it recorded de-growth of 64.9% in its telecom segment to INR 1.6 bn, Y-o-Y. For 9mFY11,
power grew 4.6% Y-o-Y, to INR 10.9 bn, while telecom de-grew 32.6%, to INR 4.9 bn,
during the same period. The company reported fall in EBIT margin in both the segments.
The power segment margin dipped sharply by 1034bps to 2.0%, while the telecom margin
during the same period increased by 618bps to 17.9%
Company Description
SOTL, incorporated in 2000 (Sterlite Optical Technologies), was formed post the
demerger of telecom business of Sterlite Industries. Spearheaded by Dr. Anil Agarwal,
SOTL provides transmission solutions for telecom and power industries. With footprint in
70 countries, the company is India’s only fully integrated optical fiber producer and
amongst the Top 5 producers of power conductors globally.
Its business activity comprises:
• Manufacture and supply of optical fibers, fiber optic cables, copper telecom cables,
structured data cables, ADSL2+ modems.
• Manufacture and supply of power transmission conductors, aluminum & alloy rods.
• Telecom integration projects & managed services.
Investment Theme
SOTL is likely to grow significantly over the next few years (led by strong demand
drivers and capacity expansion) as its core business operations are poised to enjoy best
of both worlds - strong demand for optical fiber with expanding wireless subscriber base
& increasing internet usage and large spending on power T&D. SOTL’s core earnings are
likely to post a 38% CAGR over FY09-12E (on revenue-mix shift, economies of scale and
lower financing cost) with return ratios in excess of 20% and INR 8.5 bn CFO (over
FY10-12E). We believe SOTL has an advantage over its global and local peers because of
its lowest cost structure (integrated manufacturing facilities), competitive technology and
continued thrust on technology up-gradation, which enable it to earn better EBITDA
margins relative to peers. Integrated manufacturing operations, in our view, are likely to
be the biggest strength that SOTL can leverage over the medium term.
Key Risks
Currency fluctuations risk: SOTL’s earnings in FY09 were severely impacted by
adverse foreign currency movements on its foreign denominated debt. Given that ~30%
of its revenues come from exports and one-third of its current debt is foreign
denominated, the company’s operations are exposed to international currency
movements.
Technology up-gradation: Optical fiber, at least, currently is the most efficient way of
transferring high bandwidth data. Any technological innovation that could lead to more
efficient and better quality transfer of data will severely impact SOTL’s business
operations.
Commodity risk: Being largely a processor/convertor on power conductor business
where ~80% costs are related to commodity, SOTL’s power business is exposed to
adverse commodity price fluctuations.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
STERLITE TECHNOLOGIES
Disappointing results
Results nosedive on all fronts
Sterlite Technologies (SOTL) reported disappointing Q3FY11 results, below our and
consensus estimates. Revenues degrew 33.2% Y-o-Y, to INR 5.8 bn, primarily led
by sharp fall in telecom revenues, which were down 64.9% (to INR 1.6 bn) and flat
revenue growth in the power segment. The telecom segment was down on the back
of: (a) high base effect of Q3FY10; (b) lower sales to China; (c) no sale from access
business and (d) optical fibre price drop. Power segment revenues were hampered
due to: (a) lower conductor volume; and (b) lack of order flows from Power Grid
Corporation (PGCIL).
EBITDA de-grew 58.7% Y-o-Y, to INR 431 mn, on the back of weak operating
performance. EBITDA margin fell sharply by 460bps Y-o-Y, to 7.4%, on the back of
increased other expenses (up 346bps Y-o-Y to 16.6% of sales) and staff costs (up
194bps Y-o-Y to 3.7% of sales). PAT fell 76.8% Y-o-Y, to 171 mn.
Order book position deteriorates
SOTL’s order backlog degrew 21% Y-o-Y, to INR 17.0 bn (0.7x FY10 revenues),
with INR 14.0 bn (decrease of 13% Y-o-Y) backlog in power conductors and the
balance INR 3.0 bn (decrease of 45% Y-o-Y) in telecom. Order inflows during the
quarter were down 43% to INR 7.4 bn (excluding the L1 position of INR 6.6 bn
from the opening order book); else, inflows would be down 94% Y-o-Y.
Cut earnings for FY11E and FY12E by 36% and 33%, respectively
Based on poor performance during the quarter and cautious commentary by the
management, together with grim outlook for businesses in terms of order flows,
we cut our volume estimate in both power and telecom. This lowers our revenue
estimates by 11% and 18% for FY11E and FY12E, respectively. We cut the PAT
estimate by 36% and 33% for FY11E and FY12E, respectively, on the back of
margin pressure in both businesses and interest pressure, going forward.
Outlook and valuations: Challenging; downgrade to ‘HOLD’
We are disappointed with Q3FY11 results and remain concerned with the macro
environment, where dependence of PGCIL is high for SOTL. The short to medium
term environment remains challenging for the company and we do not see any
key positive trigger in the near term. On the revised EPS of INR 4.5 (from INR 7.0
earlier) and INR 5.9 (from INR 8.9 earlier), the stock is trading at 12.3x FY11E
and 9.3x FY12E earnings. We downgrade our recommendation on the stock to
‘HOLD’ from ‘BUY’.
Volume and realisation during Q3FY11
On the volume front, power conductors grew marginally by 3.0% Y-o-Y, to 34,000 MT,
whereas optical fibre grew 9.5% to 2.3 mn fkms; optic fibre cables, however, grew strong
to 1.1 mn fkms, up 57.1% Y-o-Y. Realisation fell 1.5%/10.9%/10.0% Y-o-Y for power
conductors/optical fibre/optic fibre cables, respectively.
Bags second BOOM projects
The company secured its second BOOM project this week, the first 765kv transmission line
for system strengthening the western and northern regions. The company would operate
and maintain the transmission system for 35 years. The project cost is estimated to be INR
13 bn and is likely to complete by FY14, with revenue beginning in FY15. Having bagged
this project, the company’s total portfolio for development of transmission system from the
two projects stands at 1,100 kms.
Segmental performance
The company reported flat growth of 0.7% in the power segment, to INR 4.2 bn, whereas
it recorded de-growth of 64.9% in its telecom segment to INR 1.6 bn, Y-o-Y. For 9mFY11,
power grew 4.6% Y-o-Y, to INR 10.9 bn, while telecom de-grew 32.6%, to INR 4.9 bn,
during the same period. The company reported fall in EBIT margin in both the segments.
The power segment margin dipped sharply by 1034bps to 2.0%, while the telecom margin
during the same period increased by 618bps to 17.9%
Company Description
SOTL, incorporated in 2000 (Sterlite Optical Technologies), was formed post the
demerger of telecom business of Sterlite Industries. Spearheaded by Dr. Anil Agarwal,
SOTL provides transmission solutions for telecom and power industries. With footprint in
70 countries, the company is India’s only fully integrated optical fiber producer and
amongst the Top 5 producers of power conductors globally.
Its business activity comprises:
• Manufacture and supply of optical fibers, fiber optic cables, copper telecom cables,
structured data cables, ADSL2+ modems.
• Manufacture and supply of power transmission conductors, aluminum & alloy rods.
• Telecom integration projects & managed services.
Investment Theme
SOTL is likely to grow significantly over the next few years (led by strong demand
drivers and capacity expansion) as its core business operations are poised to enjoy best
of both worlds - strong demand for optical fiber with expanding wireless subscriber base
& increasing internet usage and large spending on power T&D. SOTL’s core earnings are
likely to post a 38% CAGR over FY09-12E (on revenue-mix shift, economies of scale and
lower financing cost) with return ratios in excess of 20% and INR 8.5 bn CFO (over
FY10-12E). We believe SOTL has an advantage over its global and local peers because of
its lowest cost structure (integrated manufacturing facilities), competitive technology and
continued thrust on technology up-gradation, which enable it to earn better EBITDA
margins relative to peers. Integrated manufacturing operations, in our view, are likely to
be the biggest strength that SOTL can leverage over the medium term.
Key Risks
Currency fluctuations risk: SOTL’s earnings in FY09 were severely impacted by
adverse foreign currency movements on its foreign denominated debt. Given that ~30%
of its revenues come from exports and one-third of its current debt is foreign
denominated, the company’s operations are exposed to international currency
movements.
Technology up-gradation: Optical fiber, at least, currently is the most efficient way of
transferring high bandwidth data. Any technological innovation that could lead to more
efficient and better quality transfer of data will severely impact SOTL’s business
operations.
Commodity risk: Being largely a processor/convertor on power conductor business
where ~80% costs are related to commodity, SOTL’s power business is exposed to
adverse commodity price fluctuations.
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