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Revenue growth comes back; Traction key ahead!

Sterlite Tech’s (STL) performance in Q3FY21 was a mixed bag as topline beat (with growth returning after 4 quarters of decline) was offset by lower than expected margins. Revenues came in at | 1314 crore, up 9.3% YoY. Product and services were in the ratio of 55:45. EBITDA came in at | 230 crore, down 4.7% YoY, owing to revenue mix. Reported EBITDA margins came in at 17.5%, down 257 bps YoY. PAT came in line at | 86.6, up 64.6% YoY, as Q3FY20 had one-off tax settlement. On adjusted basis, PAT was down 4% YoY.

Management expect growth momentum to continue

STL has indicated that capacity utilisations are at all-time high and execution on the ground for services also continues to improve on Q-o-Q basis. It has guided for continued growth in Q4FY21 on QoQ basis. It has indicated that Optical fiber demand has revived by investments in digital infrastructure. Globally, OFC Industry volumes in H22020 have grown by 5% YoY and STL volumes have grown faster than the industry high. STL perceives that unprecedented decade of digital network creation. Factors such as adoption of open source standard and software defined networking, are some of the drivers of growth for the company ahead, in the medium term. We bake in revenues CAGR of ~14.5% over FY20-23E. After a decline of 5% YoY in FY21 revenues, we expect FY22 revenues to witness a spurt (up ~33% YoY) driven by improved capacity utilisation as well as continued traction in solutions based business, with FY23 revenues growth at ~19%YoY. We build in margins of 19% for FY22E and FY23E, based on management guidance of margin band of 18-20%.

Order book visibility remain robust…

The order book was at | 10737 crore (vs. | 10705 crore in Q2), of which O&M portion was 25%. STL expects outstanding order execution worth | 1501 crore in Q4FY21, | 5470 crore in FY22 and remaining in FY23 and thereafter. The Open Participation Funnel has grown by ~15% QoQ to | 13800 crore. The order inflows traction has been encouraging with key order wins in Q3 such as a) five year, multi-million-dollar contract for supply, warranty & maintenance of 5G RAN systems platform, b) Opticonn solution for a leading telecom player in Europe and c) IBR cable (6912 fibers) for a leading hyperscale company

Valuation & Outlook

The recovery in revenue growth is a key positive, however, we note that the fibre pricing weakness persists. We upgrade to HOLD (vs. REDUCE earlier), valuing it at revised target price of | 200/share, largely on the back of reversal of revenue decline cycle. We would, however, await improvement in leverage (net debt was at | 2158 crore as on Q2FY21) backed by cash flows generation and pricing improvement before turning constructive.

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