STERLITE TECHNOLOGIES Muted quarter (Sept) :: Edelweiss

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􀂄 Subdued growth in revenues and earnings
Sterlite Technologies (SOTL) reported lacklustre Q2FY11 results, in line with our
estimate. Revenues grew 9.4% Y-o-Y, to INR 5.1 bn, primarily driven by 31.2% Yo-
Y growth in the telecom segment to INR 1.8 bn. Growth in power was, however,
flat at 0.3% Y-o-Y, to INR 3.3 bn. On the volume front, power conductors de-grew
marginally by 3.4% Y-o-Y to 28,000 MT, whereas optical fibre grew 4.8% to 2.2 mn
fkms; optic fibre cables though grew strong to 0.9 mn fkms, up 50% Y-o-Y. Slower
execution in the conductor segment is owing to lack of new orders from Power Grid
Corporation (PGCIL). Marginal decline in demand from China has hampered volume
growth in optical fibre to some extent.
􀂄 Margin constrained owing to higher raw material & staff costs
EBITDA growth was flat at 1.9% Y-o-Y, to INR 906 mn, as the company reported
129bps decline in EBITDA margin. The decline in EBITDA margin is owing to
increase in raw material cost (up 98bps, to 62.3% of sales) besides higher
employee costs (up 108bps to 4.1% of sales), which we believe, is due to expanded
capacities. Both power and telecom recorded decline of 198bps and 226bps Y-o-Y in
EBITDA margins, to 12.8% and 28.8%, respectively. Lower tax rate, along with
increased other income, helped SOTL raise PAT at 5.3% Y-o-Y, to INR 576 mn.
􀂄 Improved order book position
SOTL’s order backlog grew 27.5% Y-o-Y, to INR 22.0 bn (0.9x FY10 revenues),
with INR 16 bn (increase of 33% Y-o-Y) backlog in power conductors and the
balance INR 6 bn (increase of 14% Y-o-Y) in telecom. With the bulk tendering of
PGCIL expected in H2FY11 and increased spending from SEBs & private players,
SOTL’s order book position is expected to improve in the ensuing quarters. On the
telecom business, increased bandwidth requirement and favourable regulatory
changes in several countries is expected to help telecom order flows.
􀂄 Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on the company on the back strong demand drivers in both
Power and Telecom segment, with PGCIL’s order for conductors expected to flow
from H2FY11 and higher fibre demand (driven by mobile users and increase
demand for bandwidth in India and other geographies) respectively. The stock is
trading at 13.3x FY11E and 10.3x FY12E earnings. We maintain our ‘BUY’
recommendation on the stock.