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Muted performance for the quarter; Witnessing softer demand in the North American market

Result Synopsis

Sterlite Technologies (SOTL) reported muted operating performance for the quarter. The sequential revenue growth & EBITDA margin was below estimates. Revenue declined by 11.5% QoQ, led by 20.9% QoQ decrease in Global networking segment; the Global Services segment grew by 8.0% QoQ as it continues to realign its Services segment with higher focus on profitability. There was sequential decrease in EBITDA margin (down 745 bps QoQ) led by higher inventory. Order book was down 6.3% YoY to Rs 98.5bn.

SOTL is expected to benefit from multi?year digital creation cycle led by 5G, FTTx and fibre demand from hyperscalars. Also, optical cable prices are broadly steady globally and provides revenue visibility. It has been gaining market share in global OFC market. However, we expect that revenue from the US market would continue to be muted over next 2-3 quarter and that would have an impact on overall revenue for FY24. We expect EBITDA margin to improve going ahead led by continued focus on cost optimization and easing off certain cost pressure related to raw material. 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 estimate revenue CAGR of 12.3% over FY23?26E with average EBITDA margin of 14.8%. We maintained our NEUTRAL rating on the stock with revised target price of Rs 144/share based on EV/EBITDA of 5.7x on FY26E. The stock trades at EV/EBITDA of 6.7x/5.5x on FY25E/FY26E.

Result Highlights

Reported revenue of Rs 13.2bn (down 11.5% QoQ, down 29.8% YoY). The Global networking segment decreased by 20.9% QoQ; Global Services segment increased by 8.0% QoQ. While, Digital and Technology segment grew by 2.6% QoQ.

EBITDA margin decreased by 745 bps QoQ to 6.8% due to decrease in overall revenue.

Order book was down 6.3% QoQ to Rs 98.5bn.

Its market share in Global ex- China OFC market YoY decreased to 9% in H1FY24 against 10% in H1FY23

Reported Loss (after MI) of Rs 570mn vs Profit of Rs 340mn in Q2FY24.

Expects revenue to decline for FY24; Significant focus on Net Debt reduction for FY24.

KEY CON-CALL HIGHLIGHTS

Under the Digital and Technology segment, focus is to reach EBITDA Breakeven.

5G in North America is expected to grow from $173 Mn to $601 Mn by the end of 2027. North America is projected to have the highest 5G penetration in 2029 at 92%.

North American Data Centre market is expected to grow to $139 Bn by 2028. North American Public Cloud Revenue is expected to grow to US$507 bn by 2028 at CAGR of 9.6%.

India Data Centre: Capex is expected to be ~Rs 45,000 crores by FY26. Tower fiberisation at ~38% vs Govt. target of 70% by FY24-25.

Reduction in EBITDA Margin was primarily on account of lower OFC Volumes.

Won orders from a Taiwanese Network & Connectivity products OEM for speciality cable.

The company has filed the Services business demerger scheme with the NCLT; awaiting first hearing date.

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