Published on 21/01/2021 10:08:09 AM | Source: Yes Securities Ltd

Sell Sterlite Technologies Ltd For Target Rs.128 - Yes Securities

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Conference call takeaways

* During the quarter, the company saw sharp pick up in capacity utilization across fibre and product segment while service business execution improved sequentially. It expects this growth momentum to continue in Q4. The company continues to focus on the wireless segment and Open Radio Access Network (O‐RAN) going forward.    The Optical Fibre cable industry grew by 5% yoy while the company outpaced it. It is expanding Optic Cables capacity to 33 Mn. Fkm by June (18 Mn. Fkm currently). The demand for Optical Fibre in India is likely to remain strong in 2021 with increasing demand from Bharatnet and FTTH deployment. The demand for FTTH slowed down in Europe due to the second COVID‐19 wave.   

* India remained the key region for the company with ~56% revenue share in 9M FY21 followed by Europe (33% of revenue). Telco remained the largest revenue contributor with 64% in 9M FY21 followed by Citizen Networks (22%) and Enterprises (11%). The share of exports which stands at ~37%, is expected to move to 50% in the coming few years. The share of revenues from Products stood at ~50% with balance revenues coming from the Services segment.

* The margin for the quarter stood at 17.5% and the company expects the Operating margins to be at 18‐20% levels going forward. The improvement in margins would be driven by increase in scale of operations. The mix of services and products is likely to be almost equal in near to medium term.

* Depreciation during the quarter declined yoy as it excluded certain amortization costs of Goodwill related the past acquisitions. The Q3 FY21 depreciation would be the normal run rate going forward.

* The company’s Orderbook remained flattish qoq at Rs.107.4 bn. Customer Segment wise order book: Enterprise: 17.5%; Telcos: 47.8%; citizen network: 34.3% and cloud: 0.4%  

* Key orders won during Q3 FY21 include 1) A 5 year, multi‐million dollar contract for supply, warranty & maintenance of 5G RAN systems 2) Opticonn solution for a leading telecom player in Europe 3) IBR cable for a leading hyperscale company.

* Based on the current order pipeline and contractual deliveries, the Company expects ~Rs.15 bn of revenues during Q4 FY21.  

* The company completed the acquisition of Optotec. The consolidation will start from 1st week of Q4 FY21 or from 19th Jan‐21 (completion date of acquisition). This acquisition will be EPS accretive from the first year itself. This deal will provide a wide range of products to the clients.     

* Other Details: (1) Loss of revenue due to pandemic in Europe stands at Rs.300‐ 350 mn which may continue even during Q4. (2) New board members will get added taking the tally to 8 (3) The incremental cash generated will be used for retiring the debt (4) New products like Garuda, 5G Multi‐Band Radio and Wi‐Fi6 Access Solution will get rollout in FY22. (5) The company has stated with T‐Fibre (A & B) project and has completed 87%  of the Indian Navy project – Project Varun. Mahanet (A) project completion stood at 92%.


Our view

While topline performance has been decent, the margins have deteriorated on yoy basis. This is primarily due to higher share of low margin Services segment. We have increased our topline estimates for FY21 to incorporate the strong performance and improved outlook. We however do not expect significant improvement in margins from current levels based on the current product mix. STL has decent presence in Europe and extended lockdown in that region there could impact revenues. We roll forward our estimates to FY23 and maintain our negative view on the stock for revised target price of Rs.128. Retain SELL.


Sterlite Technologies (STL) Q3 FY21 – Result Summary

* Sterlite technologies delivered revenues of Rs13.1 bn (+9% yoy) during Q3 FY21. It was higher than our estimates of Rs.12.2 bn topline.

* Operating Margins during Q3 FY21 came in at 17.5% (‐257 bps yoy) vs our estimates of 17%.

* Lower depreciation and interest costs saw STL reported PAT of Rs.870 mn during Q3 FY21.

* The Order book at end of quarter stood almost flat at Rs. 107 bn.


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