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Published on 28/10/2020 1:39:44 PM | Source: HDFC Securities Ltd

Buy Sterlite Technologies Ltd For Target Rs.161 - HDFC Securities

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Buy Sterlite Technologies Ltd  For Target Rs.161  - HDFC Securities

Our Take:

As remote working and cloud infrastructure becomes more and more relevant, the demand for an end to end network solutions providers like Sterlite Technologies Ltd. (STL) could see rise in demand as well as sales of its products in medium to long term. In order to cater to the strong demand for data and digitalization, STL has been constantly augmenting its optic fibre capacity which currently stands at ~50Mn FKM v/s 25Mn FKM in FY16 while its optic cable capacity currently stands at 18Mn FKM v/s 8Mn FKM in FY16. Along with this, STL has also multiplied its order book by 3x over last 3 years which currently stands at Rs. 10,000Cr. Going forward, the company has laid down an ambitious plan to double its revenue by FY24 along with debt reduction (Net D/E <0.5x v/s FY20-1.2x) and ROCE>20% v/s 16% as on FY20.

In the current scenario, the operating performance and cash accruals of the company will be impacted in FY21 due to COVID-19 however market leadership position and a strong order book should benefit accruals over the medium term. As a result, net debt to EBITDA should remain below 2 times, despite temporarily increasing to more than 2.1 times in FY21.

In the current scenario, the operating performance and cash accruals of the company will be impacted in FY21 due to COVID-19 however market leadership position and a strong order book should benefit accruals over the medium term. As a result, net debt to EBITDA should remain below 2 times, despite temporarily increasing to more than 2.1 times in FY21.

In the India business, government vision of every village to get optical fiber internet in the next 1,000 days should augur well for market leaders like STL.

 

Valuations and View:

STL has good track record of client acquisitions and engaging in niche and advance technologies over the past. Despite the near term revenue as well as margin pressure due to Covid-19 pandemic, STL will drive fiber investments and expand its market presence. STL has witnessed robust demand recovery as telecom companies are insulated from the virus impact and the lockdown has accelerated data consumption. Adoption of open source standard and software defined networking, diversifying out of complete dependence on Chinese vendors are some drivers of growth that will benefit the company in the medium term.

Though we remain optimistic on its revenue and profitability trajectory as well as cost rationalisation efforts going forward, we are aware of the pricing pressures. Investors could buy the stock on dips to Rs.135.5 (6.0xFY22E EV/EBITDA) and add more on dips to Rs.127 (5.7xFY22E EV/EBITDA) .We feel the Base case fair value of the stock is Rs. 145 (6.35xFY22E EV/EBITDA) and the Bull case fair value is Rs. 161 (6.9xFY22E EV/EBITDA) over the next two quarters. At the CMP of Rs 153.8 the stock trades at 6.67x FY22E EV/EBITDA.

 

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