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Expanding cable capacities globally…

Sterlite Technologies’ (STL) management, during its annual investors and analyst meet, announced fresh capex of | 200 crore for setting up a 9 mn Fkm optical fibre cable plant in the US and UK. STL also outlined its three growth levers as to ‘Grow optical business’, ‘Globalise system integration and scale in India’ and ‘Build strong access solution business’. On the financial front, it aims to reach | 10000 crore revenue run rate by Q4FY23 (vs. | 10000 crore revenue target in FY23 earlier) along with net debt/equity < 0.5 and RoCE > 20%. The margin guidance was also brought down a bit to 17-18% vs. 18-20%, stated earlier.

Focusing on three growth levers; TAM up 5x in last 5 years

STL reiterated that given the decade long network creation cycle driven by 5G, FTTx and rural connectivity programmes, growth momentum would be robust in the medium and long term. The management also outlined three growth levers a) Grow optical business: It plans to scale globally, enhance the portfolio through focussing on solutions, rather than selling products/services individually, b) Globalise system integration businesses and scale in India: Given its experience across network layers with telecom players, citizen network as well as defence network and with program such as Lead 360 and Netmode, it wishes to expand these offerings to global levels to build higher O&M revenues and c) Build strong access solutions business: It intends to cater to wireless solutions for 5G ecosystem through a portfolio of open networking broadband fibre and 5G wireless products such as 5G multi brand radio, WiFi6 access solution, pFTTx, etc. With these initiatives, its overall total available market (TAM) has been up more than 5x to US$ 40 billion in the last 5 years.

Expanding cable capacities in US, UK …

STL 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. STL indicated that capacity enhancements will support extensive fibre build-outs planned across the US, Europe and UK to boost rural broadband and 5G roll outs. On the financial front, it aims to reach | 10000 crore revenue run rate by Q4FY23 (vs. | 10000 crore revenue target in FY23 earlier, given Covid led delays in services portfolio) along with net debt/equity < 0.5 and RoCE > 20%. The margin guidance at 17-18% was a tad lower than 18-20%, stated earlier.

Valuation & Outlook

We maintain HOLD with a revised target price of | 280/share (earlier | 240/share). We bake in higher capex and raise our target P/E multiple to 18x vs. 15x, earlier given the definite growth plan, including capacity expansion. We would, however, await improvement in leverage, some growth traction and better capital allocation before turning constructive.

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