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Mixed operating performance in the quarter

Our view and valuation

Overall, mixed performance for the quarter. While, revenue for the quarter was below estimates, EBITDA margin was inline with expectation. SOTL is expected to benefit from multi?year digital creation cycle led by 5G, FTTx and fibre demand from hyperscalars.  Also, optical fibre cable prices are on the rise globally and should benefit Sterlite Technologies. It has been gaining market share in global OFC market. The rise in revenue mix from international clients is in right direction. Besides optical fiber business, the focus on system integration business and wireless solutions would help to drive revenue growth going ahead. We expect EBITDA margin to improve going ahead led by easing off certain cost pressure related to raw material and logistics. It has been able to pass some increase in cost to customers.    The moderation in capex intensity will help to keep debt under control.  

We maintain BUY rating on the stock with revised target price of Rs 203 per share at 7.5x EV/EBITDA on FY24E. We have cut down our target EV/EBITDA multiple from 8.5x to 7.5x to account higher cost of capital(WACC) in this environment of high macroeconomic uncertainty. Trades at EV/EBITDA of 5.5x on FY24E

Result Highlights

* Reported revenue of Rs 15.75bn( down 0.4% QoQ, up 20.3% YoY). The optical business comprising 72% of revenue grew 6% QoQ, whereas, the Services segment comprising 27% of revenue declined by 16% QoQ, as SOTL has become more conscious of selecting right projects at right margin in India Services segment

* EBITDA margin grew 150 bps QoQ to 7.2%, as cost pressure from high logistics and raw material  cost have started easing off.

* Reported net loss of Rs 200mn vs net loss of Rs 224mn in Q4FY22

* The capacity utilization for optical fiber cable was 88% in the quarter. The interconnect attach rate stands at 11% ( compared to 3% in FY21)and the target is to take it to 100%.

* R&D expenditure was Rs 530mn in Q1FY23 , mainly directed towards Open RAN products.

* Reported orderbook of Rs 112bn vs 116bn as of Q4FY22 ( the dip in order book was due to focus on winning right orders in India Services segment) 

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