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Strong demand driving growth

Sterlite Technologies (Sterlite) logged Q2FY22 results broadly met estimates with the products business, specifically Optical Interconnect, driving growth. The services segment rebounded after a blip in the previous quarter due to the second covid wave. Network creators and governments are investing heavily in digital infrastructure, and Sterlite is hoping to capitalise on it with the investments it has made.

The company is focused on three levers for growth, namely: i) growing the optical business; ii) taking the system integration business global and scaling it up in India, and iii) building a strong wireless solutions business. We broadly maintain our estimates and retain ‘BUY’ with an unchanged TP of INR386.

Strong order book drives confidence

Sterlite’s revenue grew 15.1% QoQ, in line with Street’s estimates of 15.5%. EBITDA margin declined by 30bps QoQ to 17.4%, marginally ahead of Street’s estimate of 17.2% as the proportion of services increased in the overall revenue. Order book expanded further to INR115bn, from INR112bn in the previous quarter, 76% of which is executable from FY23 and beyond. The company continues to see an increase in contribution from its targeted Telcos segment and Americas and EMEA geographies.

Macro environment favourable; transition remains key

Sterlite continues to see robust demand for its products and services as evident from its strong order book and high utilisation. The company is seeing good traction in the Optical Interconnect business, wherein attach rates have increased to 8%, from 1%, and can potentially go to 100%.

The company has completed the integration of Clearcomm and has also won two new orders in the UK. With this order book has increased 2.7% QoQ/7.5% YoY to INR115bn. The company continues to invest in R&D to drive growth in different segments and is well positioned to capitalise on the higher capex in the digital network rollout. The company recently announced that Mr. Ankit Agarwal will be the new MD. It has already hired seasoned global professionals to lead key verticals; we will keep a close watch on the transition.

Outlook and valuation: In a sweet spot; retain ‘BUY’

A strong order book imparts revenue visibility, which is likely to be the key driver of earnings growth in the next few years. The stock is trading at an attractive 14.3x FY23E EPS. Maintain ‘BUY/SO’ with an unchanged TP of INR386 (20x FY23E EPS) considering strong demand for its product, and superior execution and ratios.

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