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Sterlite Technologies Ltd
Overweight; STTE.BO, SOTL IN
Business set to recover following dismal 3Q, revise TP to Rs76
• Revising Earnings and Price Target on the back of disappointing
3Q: We cut our FY11E-FY13E EPS by 33%-50% incorporating dismal
3Q results (70% below our estimates) and potentially weak 4Q. We are
factoring in a recovery in FY12E, but below the management guidance
range of Rs4B-Rs5B EBITDA for FY12E. We accordingly reduce our
Sep-11 PT to Rs76, based on 12x Sep-12E P/E.
• Growth set to recover: After a significant slowdown in revenues and
profits in 3QFY11, business momentum is set to recover in FY12E.
SOTL stock is down 35% YTD 2011 and is now trading at 8.9xFY12E
P/E. We believe that 3QFY11 marked a bottom for revenues and
margins and we expect the stock price to recover, as business picks up.
• Power cable business to pick up on PGCIL orders: Power cable
business slowed down on account of delays in orders from PGCIL –
management expects large chunk of PGCIL orders to be placed in
4QFY11E – ordering for 180,000MT of conductors is expected in 4Q,
almost 75% of the total annual target for FY11. SOTL has L1 position
for over Rs6B of such orders, which are expected to be released in 4Q
• Increased focus on high-speed broadband to drive growth for optic
fibers: US, Australia, UK, Brazil and Malaysia have recently announced
national broadband policies for increased penetration of high-speed
broadband. SOTL, with its strong international presence is well placed to
benefit. Management expects to sell 12MM KMs of optical fiber and
5MM KMs of optical fiber cables in FY12E, up 40% YoY.
• New wins in UMTP, a long term value creation opportunity: SOTL
now has a portfolio of three UMTPs projects with a total value of about
Rs40B to be operated on Build, Own, Operate, Maintain basis. These
projects are likely to scale up over next 3-5 years and could provide
value unlocking opportunities. We have not factored any potential upside
from these projects in our estimates.
Growth set to recover following poor 3Q
3Q results significantly below estimates
SOTL reported poor Q3 earnings with revenues down 33% YoY and EBITDA
margins down 460 bps YoY. Net profits declined 77% yoy, 70% below our
estimates. Management attributed the decline in revenues and margins to the
combination of following factors.
• Delays in ordering for power conductors by PGCIL on account of revision in
bidding norms
• Low margin orders executed by the power conductor business to make up for
loss in revenues due to delays in PGCIL orders
• Flat volumes for optical fiber business, aggravated by decline in price by around
US$1/KM.
• Access business segment performance was poor with almost no new orders
executed vs. Rs3B in revenues and Rs300MM in EBITDA in Q3FY10.
Recovery ahead – what is changing?
Although we expect some of the challenges of 3Q to continue into Q4 as well, we
believe that 3Q marks a bottom for earnings and we expect trends to improve going
forward. Recovery is likely to be driven by the following factors:
• Turnaround in power conductor volumes: PGCIL is expected to execute around
84% of its XIth plan targets. PGCIL has indicated around 240,000 MT of
conductor orders in FY11, of which, around 180,000 of orders are expected to be
released in Q4FY11-Q1FY12. SOTL has L1 positions of about Rs6B from these
orders.
• Improvement in volumes for optical fiber and optical fiber cables: Over last few
months, Governments of US, Australia, UK, Brazil and Malaysia have
announced national broadband policies to offer high-speed broadband in their
economies. Based on recent order visibility SOTL Management expects to sell
12MM KMs of optical fiber and 5MM KMs of optical fiber cables in FY12E.
• We believe that the recovery in sales will also drive margin improvement
through operating leverage gains. EBITDA margins in 3QFY11 have declined to
7.4%, from normalized levels of 14%-15%, mainly on account of adverse
leverage on decline in sales and also on account of an inferior product mix.
Going forward, we expect EBITDA margins to pick up and normalize in FY12E.
Earnings recovery to drive stock performance
SOTL is currently trading at 9x FY12E P/E, at a discount of 20% to its global peer
group and at a discount of 25% to its historic LT trading average of 12x P/E. We
expect the stock performance to revive as business growth momentum improves over
the next few quarters. We forecast EPS CAGR of 36% over FY11E-FY13E.
Revising estimates and cutting PT to factor in lower 3Q
We revise our estimates to account for slowdown in FY11E, delay in PGCIL orders
to FY12E and rising cost pressures on margins. Accordingly, we cut our FY11E EPS
by 51%, FY12E EPS by 34% and FY13E EPS by 33%.Our FY11E and FY12E
estimates are below the revised guidance issued by the management, cushioning any
further potential negative surprises. Management has guided at volumes of at-least
160,000 MT of aluminum conductors and sales of 12MM KMs of optical fiber and
5MM KMs of optical fiber cables in FY12E. Management has also guided at a sales
of 400,000 data cable boxes in FY12E. Accordingly, management has guided at
FY11E EBITDA of Rs3B and FY12E EBITDA of Rs4-Rs5B. Our FY11E and
FY12E EBITDA estimates are below management guidance.
Based on our earnings revision, we cut our price target to Rs76 (From Rs120 earlier).
The reduction in our price target is a reflection of a cut in out earnings estimates as
well as a downward revision in our target P/E multiple. Our new price target of Rs76
is based on 12x Sep-11 P/E (14x Mar12E P/E earlier), in line with global peer group
average. While SOTL has a strong positioning in India, with strong opportunities in
power conductor driven by rising infrastructure investments, as well as increasing
demand for high-speed broadband capacities driving demand for optic fiber and fiber
cables – we have cut out target multiple of 14x to 12x, arguing that recent
disappointments in earnings are likely to depress the earnings multiple
UMTP – New wins provide long term growth opportunity
SOTL indicated that it’s first Ultra Mega Power Transmission Project (UMTP) is on
track and should be commissioned in Mar-13, as per schedule. SOTL has achieved
financial closure of Rs7B debt syndication for this project.
Over last 6 months, SOTL has been awarded another 2 UMTP projects. These
include 1) establishment of two 765 kV Double Circuit transmission lines in the
states of Chattisgarh and MP, 2) establishment of 765 KV Single Circuit Lines;
Vadodara-Dhule-Aurangabad and Indore-Bhopal-Jabalpur. These projects have been
awarded to SOTL on Build, Own, Operate and Maintain (BOOM) basis.
SOTL now has a portfolio of three projects with a total value of about Rs40B. These
transmission systems would evacuate and transmit power through a network of about
2200 km of transmission lines and 2 substations; in the states of Maharashtra,
Gujarat, Madhya Pradesh, Chattisgarh, West Bengal, Bihar and Assam. We believe
SOTL is well positioned to garner a rising market share of these projects and could
contribute significantly to its revenues over the next 3-5 years. We have not factored
in these projects into our estimates and if executed successfully, we believe these
projects could enhance value for SOTL over the next few years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Technologies Ltd
Overweight; STTE.BO, SOTL IN
Business set to recover following dismal 3Q, revise TP to Rs76
• Revising Earnings and Price Target on the back of disappointing
3Q: We cut our FY11E-FY13E EPS by 33%-50% incorporating dismal
3Q results (70% below our estimates) and potentially weak 4Q. We are
factoring in a recovery in FY12E, but below the management guidance
range of Rs4B-Rs5B EBITDA for FY12E. We accordingly reduce our
Sep-11 PT to Rs76, based on 12x Sep-12E P/E.
• Growth set to recover: After a significant slowdown in revenues and
profits in 3QFY11, business momentum is set to recover in FY12E.
SOTL stock is down 35% YTD 2011 and is now trading at 8.9xFY12E
P/E. We believe that 3QFY11 marked a bottom for revenues and
margins and we expect the stock price to recover, as business picks up.
• Power cable business to pick up on PGCIL orders: Power cable
business slowed down on account of delays in orders from PGCIL –
management expects large chunk of PGCIL orders to be placed in
4QFY11E – ordering for 180,000MT of conductors is expected in 4Q,
almost 75% of the total annual target for FY11. SOTL has L1 position
for over Rs6B of such orders, which are expected to be released in 4Q
• Increased focus on high-speed broadband to drive growth for optic
fibers: US, Australia, UK, Brazil and Malaysia have recently announced
national broadband policies for increased penetration of high-speed
broadband. SOTL, with its strong international presence is well placed to
benefit. Management expects to sell 12MM KMs of optical fiber and
5MM KMs of optical fiber cables in FY12E, up 40% YoY.
• New wins in UMTP, a long term value creation opportunity: SOTL
now has a portfolio of three UMTPs projects with a total value of about
Rs40B to be operated on Build, Own, Operate, Maintain basis. These
projects are likely to scale up over next 3-5 years and could provide
value unlocking opportunities. We have not factored any potential upside
from these projects in our estimates.
Growth set to recover following poor 3Q
3Q results significantly below estimates
SOTL reported poor Q3 earnings with revenues down 33% YoY and EBITDA
margins down 460 bps YoY. Net profits declined 77% yoy, 70% below our
estimates. Management attributed the decline in revenues and margins to the
combination of following factors.
• Delays in ordering for power conductors by PGCIL on account of revision in
bidding norms
• Low margin orders executed by the power conductor business to make up for
loss in revenues due to delays in PGCIL orders
• Flat volumes for optical fiber business, aggravated by decline in price by around
US$1/KM.
• Access business segment performance was poor with almost no new orders
executed vs. Rs3B in revenues and Rs300MM in EBITDA in Q3FY10.
Recovery ahead – what is changing?
Although we expect some of the challenges of 3Q to continue into Q4 as well, we
believe that 3Q marks a bottom for earnings and we expect trends to improve going
forward. Recovery is likely to be driven by the following factors:
• Turnaround in power conductor volumes: PGCIL is expected to execute around
84% of its XIth plan targets. PGCIL has indicated around 240,000 MT of
conductor orders in FY11, of which, around 180,000 of orders are expected to be
released in Q4FY11-Q1FY12. SOTL has L1 positions of about Rs6B from these
orders.
• Improvement in volumes for optical fiber and optical fiber cables: Over last few
months, Governments of US, Australia, UK, Brazil and Malaysia have
announced national broadband policies to offer high-speed broadband in their
economies. Based on recent order visibility SOTL Management expects to sell
12MM KMs of optical fiber and 5MM KMs of optical fiber cables in FY12E.
• We believe that the recovery in sales will also drive margin improvement
through operating leverage gains. EBITDA margins in 3QFY11 have declined to
7.4%, from normalized levels of 14%-15%, mainly on account of adverse
leverage on decline in sales and also on account of an inferior product mix.
Going forward, we expect EBITDA margins to pick up and normalize in FY12E.
Earnings recovery to drive stock performance
SOTL is currently trading at 9x FY12E P/E, at a discount of 20% to its global peer
group and at a discount of 25% to its historic LT trading average of 12x P/E. We
expect the stock performance to revive as business growth momentum improves over
the next few quarters. We forecast EPS CAGR of 36% over FY11E-FY13E.
Revising estimates and cutting PT to factor in lower 3Q
We revise our estimates to account for slowdown in FY11E, delay in PGCIL orders
to FY12E and rising cost pressures on margins. Accordingly, we cut our FY11E EPS
by 51%, FY12E EPS by 34% and FY13E EPS by 33%.Our FY11E and FY12E
estimates are below the revised guidance issued by the management, cushioning any
further potential negative surprises. Management has guided at volumes of at-least
160,000 MT of aluminum conductors and sales of 12MM KMs of optical fiber and
5MM KMs of optical fiber cables in FY12E. Management has also guided at a sales
of 400,000 data cable boxes in FY12E. Accordingly, management has guided at
FY11E EBITDA of Rs3B and FY12E EBITDA of Rs4-Rs5B. Our FY11E and
FY12E EBITDA estimates are below management guidance.
Based on our earnings revision, we cut our price target to Rs76 (From Rs120 earlier).
The reduction in our price target is a reflection of a cut in out earnings estimates as
well as a downward revision in our target P/E multiple. Our new price target of Rs76
is based on 12x Sep-11 P/E (14x Mar12E P/E earlier), in line with global peer group
average. While SOTL has a strong positioning in India, with strong opportunities in
power conductor driven by rising infrastructure investments, as well as increasing
demand for high-speed broadband capacities driving demand for optic fiber and fiber
cables – we have cut out target multiple of 14x to 12x, arguing that recent
disappointments in earnings are likely to depress the earnings multiple
UMTP – New wins provide long term growth opportunity
SOTL indicated that it’s first Ultra Mega Power Transmission Project (UMTP) is on
track and should be commissioned in Mar-13, as per schedule. SOTL has achieved
financial closure of Rs7B debt syndication for this project.
Over last 6 months, SOTL has been awarded another 2 UMTP projects. These
include 1) establishment of two 765 kV Double Circuit transmission lines in the
states of Chattisgarh and MP, 2) establishment of 765 KV Single Circuit Lines;
Vadodara-Dhule-Aurangabad and Indore-Bhopal-Jabalpur. These projects have been
awarded to SOTL on Build, Own, Operate and Maintain (BOOM) basis.
SOTL now has a portfolio of three projects with a total value of about Rs40B. These
transmission systems would evacuate and transmit power through a network of about
2200 km of transmission lines and 2 substations; in the states of Maharashtra,
Gujarat, Madhya Pradesh, Chattisgarh, West Bengal, Bihar and Assam. We believe
SOTL is well positioned to garner a rising market share of these projects and could
contribute significantly to its revenues over the next 3-5 years. We have not factored
in these projects into our estimates and if executed successfully, we believe these
projects could enhance value for SOTL over the next few years.
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