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Strong performance on benign base…

About the stock:

Sterlite Technologies (STL) is a leading telecommunication infrastructure player with offerings in optical fibre and cables, hyper-scale network design & deployment and network software.

* STL has announced a fresh capex of | 200 crore to set up 9 mn Fkm optical fibre cable plant in the US and UK. Consequently, its overall optical fibre cable capacity is expected to expand from 33 mn Fkm to 42 mn Fkm

* On the financial front, it aims to reach | 10000 crore revenue run rate by Q4FY23 along with net debt/equity < 0.5 and RoCE > 20%

Q1FY22 Results:

STL reported a mixed bag quarter.

* Revenue came in at | 1309 crore, up 49% YoY but down 11% QoQ

* EBITDA came in at | 231.9 crore, up 90.6% YoY, down ~10% QoQ with EBITDA margins at 17.7%, up 380 bps YoY and 30 bps QoQ

* PAT was at | 115.8 crore vs. | 6 crore in the base quarter, down 7% QoQ. It was also aided by net exceptional gain of | 16.2 crore

What should investors do?

* STL share price has grown by ~243% over the last five years.

* We maintain HOLD on the stock as we await improvement in leverage and sustainability of growth

Target Price and Valuation: We value STL at | 295 (| 280, earlier), at 18x FY23 P/E

Key triggers for future price performance:

* Transition into solution provider from product/services currently

* Demand offtake from expanded and overall fibre/cable pricing trajectory

* Improvement in leverage, which has gone up due to expansion and weak cash flow generation

Alternate Stock Idea:

Apart from STL, in our coverage we like Bharti Airtel.

* A play on favourable industry structure - a good enough kicker for eventual hike in tariff as well as superior digital play in medium to long term

* BUY with target price of | 690

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