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Published on 20/07/2018 3:16:10 PM | Source: Emkay Global Financial Services Ltd

Buy Sterlite Technologies Ltd For Target Rs.500.00 - Emkay

Solid again

Record profits continue

*  Reiterate BUY with 59% upside to our TP of Rs500. Catalysts from strong earnings momentum and order wins in system integration (SI) business.

*  1Q net profit of Rs1.2bn (+100% YoY, +12% QoQ) was 6% above estimate. The company benefited from operating leverage in optic fiber and cable plants which are running near full capacity utilization.

*  We forecast 40% EPS CAGR in FY18-20E backed by: 1) contribution from recently acquired European cabling company, 2) optic fiber capacity expansion to 50m KM by Jun19 from current 30m KM, 3) improvement in optic fiber cable capacity utilization and, 4) execution of system integration orderbook.

*  The stock has corrected 25% in recent Midcap sell-off. The current PER of 19.5x FY20E is unjustified given 33% ROE and 40% EPS CAGR in next 2 years.

A unique data play

SOTL is a unique data play as 100% of its profits come from data related products/ services. Demand for SOTL's products remains strong as evident form rising order book. A proliferation of 4G and the launch of 5G services should underpin optical-fibre growth for at least the next 5-7 years. This should continue to benefit SOTL, in our view.

Strong set of numbers across the board

SOTL delivered a strong set of 1Q results in many aspects, with most operating metrics well above consensus and our expectations. 1Q net profit surged 100% YoY/12% QoQ to Rs1.2bn. This was driven by revenue growth of 22% YoY and EBITDA margin expansion of 600bp YoY. Interest cost declined by 19% YoY.

Expect 40% EPS CAGR during FY18-20E

Our FY20E earnings of Rs6.5bn is 8% below management guidance. We would revisit our forecasts closer to the commencement of new optic fiber plant. The full impact of new capex on earnings will be visible from FY21 onwards. We are upbeat on SI business too, which has orderbook of Rs10bn and pending order of Rs35bn from Indian Navy.

Growth justifies premium

SOTL’s current PER of 19.5x FY20E is not expensive given the anticipated 40% EPS CAGR, and 36% ROE by FY20E. Also, the growth visibility provides justification to our target PER multiple of 31x.

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