sterlite technologies ltd. initiating banking on technology….....

Equity | India | Telecom Services

Sterlite Technologies Ltd.

Banking on technology….. November28, 2017

BUY

Analyst

Omkar Tanksale

+91-22- 6614 2692 [email protected] Institutional Research 1

Initiating Coverage

CMP (`) Target (`)

270 346

Potential Upside Absolute Rating

28% BUY

Market Info (as on November27, 2017)

BSE Sensex 26899.6

Nifty S&P 8288.6

Stock Detail

BSE Group A

BSE Code 532374

NSE Code STRTECH

Bloomberg Code SOTL IN

Market Cap (`bn) 1078.5

Free Float (%) 45.7%

52wk Hi/Lo 307/93.5

Avg. Daily Volume (NSE) 427877

Face Value / Div. per share (`) 2.0 / 0.97

Shares Outstanding (mn) 427

Shareholding Pattern (in %)

Promoters Public

54.55 45.45

Financial Snapshot (`mn)

Y/E Mar FY16 FY17 FY18E FY19E

Net Sales 21,608 24,489 29,255 35,399

EBITDA 4,521 5,189 6,294 6,699

PAT 1,511 2,166 2,922 3,294

EPS 3.8 5.0 6.8 7.7

ROE (%) 20% 25% 28% 27%

ROCE (%) 23% 24% 29% 28%

P/E 23.6 53.3 39.2 34.8

EV/EBITDA 9.1 23.2 18.5 17.3

Share Price Performance

Rel. Perf. 1Mth 3 Mths 6Mths 1Yr

Sterlite (%) 4.3 15.4 18.7 36.7

SENSEX (%) (0.1) (4.8) (3.3) 7.7

Source: Company data, Institutional Research

Company Snapshot

Sterlite Technologies Ltd. an unique product play

Sterlite Technologies Ltd. (Sterlite) is global leader in the optical telecommunication products

and head quartered in Pune and has operation all over India and abroad. Sterlite Tech is a pure

play Telecom Products, Services & Software Company that transforms lives by delivering smarter

networks. Sharing a common lineage with Vedanta Resources Plc., Sterlite Tech is among the

global leaders in Optical Communication Products such as optical fibers, fiber optic cables and

data cables through its operations in India, China, Brazil and sales network across 5 continents.

Sterlite Tech products have enabled top telecom operators with smarter networks in more than

75 countries across the world.

Investment Rationale

The company has unique business structure that has focused portfolio

Sterlite Technologies specialize in the telecommunication sector and has focused themselves on

the three business platforms viz Product vertical, service vertical and software vertical. Sterlite

Tech products have enabled top telecom operators with smarter networks in more than 75

countries across the world. This wide reach and unique product structure gives Sterlite edge over

its peers and also helps to attain higher growth momentum. Under the Telecom Services

offerings, with expertise in designing, engineering, building & managing broadband networks,

Sterlite Tech is developing several network projects, such as secure network for the Armed Forces

under Network for Spectrum, enabling rural broadband through BharatNet, developing Smart

Cities, and establishing high-speed Fiber-to-the-Home (FTTH).

Rising global fiber demand can create better business opportunity

China is considered to be largest consumer of the optical fiber. It is having 55% of world cable

demand. Broadband China initiative leading to higher FTTH penetration to increase fiber network

deployment in China. Sterlite is taking the advantage of the rising demand in the market and

make business structure more robust. We believe that this strategy of expanding the business will

help them to grow in higher momentum.

System integration can be a great opportunity

System integration vertical is also one the major vertical the company is working on. System

integration is one of the most upcoming business opportunities in India. The new initiatives taken

by the central government like digital India can create a better business opportunity. There is

huge demand for the smart cities and have huge growth prospects for the company to grow. The

company has got the stronger order book for the vertical. In the recent quarters Sterlite received

an order for the 3 cities including Ahmadabad. The company has also selected as one of the two

global fiber cables supplier to a large Telco capturing over 65% of the market share.

Valuation

At the CMP of `270, Sterlite Technologies Ltd. is trading at 53.3 xs, and39.2x its FY17, and FY18E

EPS of `5.0 and `6.8. Compared to its peers; Sterlite is trading at a discount P/E multiple, even

though its margins are better than or comparable to peers. We initiate coverage on Sterlite with

a BUY rating and attach a multiple of 45x xs to Sterlite’s FY19E earnings (EPS) to arrive at the

target price of `346, indicating a potential upside of 28%.

75

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Sterlite BSE Sensex


Sterlite Technologies Ltd. November28, 2017

BUY

Institutional Research | Initiating Coverage 2

Index & Content

Sr. No. Topic Page No.

1 Company Background 3

3 Key Management Personnel 4

4 Investment Rationale 5

5 Revenue Growth Drivers 7

7 Key Risks 10

8 SWOT Analysis 11

9 Michael Porter’s Five Force Analysis 12

10 Valuation & Outlook 13

11 Financials 14

12 Disclaimer 15



BUY


Company Background

Sterlite Technologies is global leader in the optical telecommunication products and head

quartered in Pune and has operation all over in the India and abroad. Sterlite Tech is a pure

play Telecom Products, Services & Software Company that transforms lives by delivering smarter

networks.

Sharing a common lineage with Vedanta Resources Plc., Sterlite Tech is among the global leaders

in Optical Communication Products such as optical fibers, fiber optic cables and data cables

through its operations in India, China, Brazil and sales network across 5 continents. Sterlite Tech

products have enabled top telecom operators with smarter networks in more than 75 countries

across the world.

Under the Telecom Services offerings, with expertise in designing, engineering, building &

managing broadband networks, Sterlite Tech is developing several network projects, such as

secure network for the Armed Forces under Network for Spectrum, enabling rural broadband

through BharatNet, developing Smart Cities, and establishing high-speed Fiber-to-the-Home

(FTTH).

In 2015, Sterlite Tech broadened its offerings portfolio to include Telecom Software by acquiring

highly customizable OSS & BSS software solutions suite through Elitecore. With many industry

firsts to its credit, Sterlite Tech is home to India’s only Centre of Excellence for broadband

research, and a strong portfolio of over 100 patents.



BUY


Key Management Personnel

Sterlite has experienced management which helps company to attain desired growth over the

period of time.

Anil Agarwal, Non-Executive Chairman

Anil Agarwal founded Sterlite Group in 1976 and has been overseeing its operations since its

inception. He is the Executive Chairman of Vedanta Resources Plc and also the Chairman Emeritus

of Sesa Sterlite Limited. He has over three decades of experience in business strategy, general

management and commercial matters.

Pravin Agarwal, Vice Chairman & Whole Time Director

Pravin Agarwal is closely involved with Sterlite Group’s operations in India since inception. He has

been instrumental in the growth of Sterlite's Telecom and Power businesses. His rich experience

in general management and commercial matters spans over three decades.

Dr. Anand Agarwal, Chief Executive Officer

Dr Anand Agarwal joined Sterlite in 1995 and held key positions in manufacturing, quality

assurance and business development. He was working with Siemens prior to Sterlite. He has

completed B. Tech. in Metallurgical Engineering from IIT-Kanpur and Master’s and Ph.D. from the

Rensselaer Polytechnic Institute.

K. S. Rao, COO – Telecom Products & Solutions

K. S. Rao joined Sterlite in 1993 and has, since, held various positions in the Company's Telecom

business. His key focus areas have been engineering, manufacturing, product development,

project management and business development. K. S. Rao holds a Bachelor’s degree in

Mechanical Engineering.

Anupam Jindal, Chief Financial Officer

Anupam Jindal joined Sterlite Group in 1998 and worked with the Group's aluminium foils and

copper cables businesses before heading finance for Sterlite's mining operations in Australia. His

key work areas have been finance, treasury, accounts and MIS. Anupam is a Chartered Accountant

from the Institute of Chartered Accountants of India.

Ankit Agarwal, Director - Telecom Products

Ankit Agarwal joined Sterlite in 2007 and heads the Telecom Products division. He has an

experience of above 10 years. In addition, he is responsible for identifying and executing

strategic opportunities for Sterlite globally, including mergers and acquisitions, joint ventures

and greenfield projects. Ankit holds a Bachelor's degree from University of Southern California

and MBA from London Business School.



BUY


Investment Rationale

The company has a unique business structure that have focused portfolio

Sterlite Technologies specialize in the telecommunication sector and has focused themselves on

the three business platforms viz Product vertical, service vertical and software vertical.

Optical Communication Products such as optical fibers, fiber optic cables and data cables

through its operations in India, China, Brazil and sales network across 5 continents. Sterlite Tech

products have enabled top telecom operators with smarter networks in more than 75 countries

across the world.

Under the Telecom Services offerings, with expertise in designing, engineering, building &

managing broadband networks, Sterlite Tech is developing several network projects, such as

secure network for the Armed Forces under Network for Spectrum, enabling rural broadband

through BharatNet, developing Smart Cities, and establishing high-speed Fiber-to-the-Home

(FTTH).

In 2015, Sterlite Tech broadened its offerings portfolio to include Telecom Software by acquiring

highly customizable OSS & BSS software solutions suite through Elitecore. With many industry

firsts to its credit, Sterlite Tech is home to India’s only Centre of Excellence for broadband

research, and a strong portfolio of over 100 patents.

Product vertical includes manufacturing of optical communication products. Sterlite technology is

one the leading player in the optical fiber and optical fiber cables manufacturing. The company

has manufacturing capacity of 25 Mn km in the optical fiber space. Strong demand from china will

likely to continue in the upcoming tenure.

Focused on the connectivity opportunity


As shown in the above diagram the company has focus on 3 verticals to attain higher growth

model. The company has focus on five different business areas which can help them to grow

with higher momentum. Rising demand from the International markets can create a huge

business opportunity. Domestically also Indian telecom space, digitalization, defense and

other utilities, smart cites rural broadband will provide huge opportunity to the company. We

believe that this strategic initiative by the company can create huge potential to grow in the

upcoming tenure.



BUY


Rising global fiber demand can create better business opportunity


As shown in the above diagram the global demand for the optical fiber cable is up by 11%. We are

also expecting the global demand likely to increase in the upcoming period. China is considered

to be largest consumer of the optical fiber. It is having 55% of world cable demand. Broadband

China initiative leading to higher FTTH penetration to increase fiber network deployment in

China. Sterlite is taking the advantage of the rising demand in the market and make business

structure more robust. We believe that this strategy of expanding the business help them to grow

in higher momentum.


As we can see the demand for the system integration is rising. We can see there is huge demand

for the smart cities and have huge growth prospects for the company to grow. In the recent

quarters Sterlite received an order from 3 cities including Ahmedabad. The company has also

selected as one of the two global fiber cables supplier to a large Telco capturing over 65% of the

market share. Higher capacity utilization helps company to grow with the higher momentum. We

believe that Sterlite will realize its gains through capacity utilization.



BUY


Revenue Growth Drivers

Product Business at a glance

Sterlite technologies offer specialized telecom products in their portfolio. Sterlite is one of the

leading manufacturers of the optical fiber and optical fiber cables. Sterlite Technologies offers a

wide array of cable designs for the various needs of underground installations: from dielectric

cables, to steel tape armor, dielectric armor, ribbon tape, antirodent protection, microcables

and many other customized designs. In urban environments where space for optical fiber cable

installation is limited, their microcables have proven to be a key element to bring more density

of fiber to the homes in small conduits. The company has strong patent portfolio of 55 granted

patents across globe and break through products. Sterlite has strong global foot print in terms of

business and manufacturing capabilities.


In the upcoming period global demand for the optical fiber and optical fiber cables are likely to

remain strong which will drive the revenue growth. We believe that the company also has enough

capabilities in terms of product quality and manufacturing capacity. Domestic business demand

will likely to remain robust. Will help Sterlite to grow with higher momentum.

Raw Material Preform Optic Fiber Of Cable

• Silica & Power

• Certain natural gases

• Integrated

Core rod + cladding

• 25m fkm

Capacity• Expanding

capacity to

30m fkm

• 15m fkm

Capacity• Portfolio

Catering to

diverse end use

High end technology, fully integrated, global scale operations for

manufacturing optical fibers

Strong patent portfolio 55 granted patents across the globe and

break through products

Center of Excellence - Dedicated

to Nation

System & Network Lab

Glass and reliability Lab

Optical characteristics Lab




BUY


Network and System Integration Business at a glance

Sterlite is one of the leading service providers of the network and system integration services to

telecom service companies. The digital revolution is around the corner with Digital India, E-

governance, Smart Cities, IoT and Big Data/Analytics taking a definite shape. Sterlite is at the

forefront of this technological revolution with experience and expertise in undertaking end-to-

end creation of telecom infrastructure & applications. Sterlite helps service providers to capture

the fastest time-to-market and revenue with its deep domain expertise and the strength of

consulting services, offerings on best-in-class multi-vendor technology and software platforms to

build future-proof networks.

The company offers Telecom infra service which includes OFC infrastructure, civil infra, Data

center infra, passive infra, OFC execution etc. The company provides end to end solutions and all

the infrastructure services to its clients.


Network infrastructure services are also one of the main infrastructure services vertical where

Sterlite is operative. Sterlite has expertise in providing transport layer services, Access – Metro-E,

FTTH, Wifi, IBS, Optics and &MPLS core network , Enterprise Services, security services,

broadband infrastructure services. We believe that network integration services are one of the

key service areas in terms of revenue growth. The company has better long term perspective.

Third service offering vertical is application services. This vertical is technology specific vertical

under this vertical the company provides data centers applications, Analytics and big data

applications, content delivery networks etc. The company also offers customer centric services

like virtualization, messaging services, surveillance services etc.


Software Services will have higher growth momentum

Digital

India

Smart

Cities

Fiber Infra

Network

Access

Solution

ManageIntegratedBuildDesign

ICT Application

Active Network

Passive Network1

2

3

OpportunitiesServices

System

Integration

Network

Integration

>1,000

>10,000

>5,000

Under ExecutionBid – Participated –

Result AwaitedPipeline

>16,000SI Projects

Total



BUY


Elitecore Technologies, founded in 1999, is a part of Sterlite Technologies Limited. It is a global

IT product company providing BSS alongside packet core with flexibility of modular and pre-

integrated offerings. Adhering to TM Forum and 3GPP standard, Elitecore telecom offerings are

compatible to large vendor ecosystem addressing to operator’s requirement of faster time-to-

market and better TCO. As experienced IP solutions player, Elitecore products are highly

responsive to next-generation services, fulfilling operator monetization needs across the access

networks. Elitecore has over 150+ network deployments for 52 service providers with presence

across 40+ countries. Diagram company website.

Elitecore serves as a very good entry in the OSS/ BSS space and the wider telecom software

space. The Company will help transform Sterlite from a capital-intensive driven growth to

knowledge and services driven growth. Elitecore helps to build capabilities in the services and

solutions space, thus creating a new facet within the telecoms value chain. Together, Sterlite

and Elitecore will be able to offer complete suite of products and solutions for telecom service

providers and become a partner of choice, be it fibre & cable portfolio, network creation and

software solutions.


Way to Play

Lay

er

Pre

sen

ce

Own product business Partnering for solutions Integration

Network& Control

OSS &Middle-

ware

BSS &Business

Appz

System Integrators (SIs)

Telecom Equipment Manufacturers (TEMs)

1

2

3

4

Middleware (MW)

Pure play BSS/OSSplayers Typically build on their

strong integration skills

Specialized

BSS/OSS players

Leverage their network and

control core capabilities to

offer solutions with own

and partner products

Selectively partner for

solutions and don't offer

integration services

Landscape in Telecom OSS/BSS SpaceSterlite Tech addressable :

CurrentGlobal OSS-BSS Market

$8.2 Bn

FY15(Current Market)

$12.3 Bn

FY’18(New Geo’s)



BUY


Key Risks

Investment Risk :

Slowdown in the telecom infra spending may affect the business on the higher nod.

Change in the economic climate / legislation against Indian offshore development in the

countries where the company provides its services.

The company has business to business structure this will lead to limited client supply

which contributes significant part of the top line. Loss of one client may impact

significant part of the top line.

The company needs to have higher capital expenditure to attain higher growth which

may impact ROE and ROCE negatively.

New technology may affect the FOC business substantially. This can also be a biggest

threat to its business.



BUY


SWOT Analysis

Sterlite

Technologies

Ltd

Strengths

• Strong domain focus

• Very well Diversification of

business.

• Strong management and

Technology backup

Opportunities

• Further penetration in

telecom industry

• Mining the existing and new

clients

Weaknesses

• High client concentration

• Single domain dependence

Threats

• Slowdown in telecom

infrastructure spending

• Loss of top client




BUY


Michael Porter’s Five Force Analysis

Inter-firm Rivalry–High

Lower Entry barriers in

the industry have led to

high concentration in

the industry.

Threat of new entrants –

Increasing

• Growing demand for FOC

consumption due to higher

penetration may attract other

players. .

Bargaining Power of

Suppliers – High

• Less competition in FOC puts

lesser pressure on suplier.

Bargaining Power of Buyers –

Increasing

• More no of supplier may put

pricing pressure and bargaining

power of buyers may increasing.

Threat from Substitutes -

Increasing

• New technologies wireless

communications may put pressure

on the business




BUY


Valuation & Outlook

At the CMP of `270, Sterlite Technologies Ltd. is trading at 53.3 xs, and39.2x its FY17, and FY18E

EPS of `5.0 and `6.8. Compared to its peers; Sterlite is trading at a discount P/E multiple, even

though its margins are better than or comparable to peers. We initiate coverage on Sterlite with

a BUY rating and attach a multiple of 45x xs to Sterlite’s FY19E earnings (EPS) to arrive at the

target price of `346, indicating a potential upside of 28%.

1 year forward P/E Chart

Source: Capitaline, Institutional Research

1 year forward P/ BV Chart

Source: Capitaline, Institutional Research

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BUY


Income Statement

Y/E Mar (`mn) FY15 FY16 FY17 FY18E FY19E

Net revenues 30,971 21,608 24,489 29,255 35,399

Operating Expenses 26,364 17,087 19,299 22,962 28,700


EBITDA Margin (%) 15% 21% 21% 22% 19%

Depreciation 1,850 1,309 1,592 1,522 1,550

Other Income 513 128 116 175 200

Interest (Net) 3,269 1,133 1,110 1,200 1,200

Exceptional Items - - - - -

PBT 1 2,208 2,602 3,747 4,149

PBT Margin (%) 0% 10% 11% 13% 12%

Tax 37 637 397 749 830

Adjusted PAT (36) 1,571 2,205 2,998 3,319

Extraordinary Items - - - - -

Reported PAT (26) 1,511 2,166 2,922 3,294

Balance Sheet


Equity capital 788 790 797 797 797

Reserves & Surplus 10,081 6,756 8,004 9,461 11,401

Net worth 10,869 7,546 8,801 10,258 12,198

Total debt 44,359 4,686 4,271 4,250 4,175

Deferred Tax Liability 474 491 397 500 450

Short term borowings 6,219 3,573 5,910 4,250 5,210

Trade payables 8,997 3,701 4,486 6,011 6,120

Short term provision 6,878 4,616 3,440 4,750 4,750

Total Current Liabilities 22,576 12,578 14,091 15,661 16,205

Total Liabilities & Equity 83,922 26,962 29,507 32,519 35,578

Tangible assets 40,390 9,924 11,921 13,113 14,687

Intangible assets 162 1,538 1,036 1,191 1,334

Capital WIP 21,926 1,740 659 725 798

Intangible assets WIP 1 - 171 188 150

Total Non-Current Assets 62,478 13,201 13,786 15,217 16,968

long term loans and advances

1,335 737 71 1,000 1,000

Debtors 8,344 6,982 6,867 6,412 6,500

Cash & bank 3,759 808 1,374 4,150 5,575

Loans & advances 2,405 1,091 - 1,500 1,000

Other Current Assets 386 1,354 2,802 1,620 1,500

Total Assets 83,922 26,404 29,507 32,519 35,578

Key Ratio


Per Share Ratios

Fully diluted E P S

(0.1)

3.8

5.0

6.8

7.7

Book Value

29

19

21

24

29

Dividend per share

236

395

588

818

922

Valuation Ratio

P/E -

23.6

53.3

39.2

34.8

P/BV

1.9

4.7

13.1

11.2

9.4

EV/EBITDA

13.7

9.1

23.2

18.5

17.3

EV/Sales

2.0

1.9

4.9

4.0

3.3

Growth Ratios

Sales Growth 21% -30% 13% 19% 21%

EBITDA Growth 67% -2% 15% 21% 6%

Net Profit Growth - - 43% 35% 13%

EPS Growth - - 33% 37% 0%

Common size Ratios

EBITDA Margin 15% 21% 21% 22% 19%

EBIT margin 11% 15% 15% 17% 15%

PAT margin 0% 7% 9% 10% 9%

Operating Expenses 85% 79% 79% 78% 81%

Return ratios

RoNW 0% 20% 25% 28% 27%

RoCE 5% 23% 24% 29% 28%

Turnover ratios (days)

Debtors ( Days) 98 118 102 80 67

Creditors ( Days) 106 63 67 75 63

Solvency Ratios

Total Debt/Equity

5.6

1.9

1.8

1.6

1.6

Interest coverage

1

3

3

4

4


Cash Flow


PBT 1 2,208 2,602 3,747 4,149 Add: Depreciation 1,850 1,309 1,592 1,522 1,550

Other Adjustments

4,847

2,664

3,379

4,394

4,824 Chg in working capital (702) (2,266) (2,671) (2,836) (2,716) Taxes paid (220) (540) (397) (749) (830)

CF from operations 3,927 2,066 312 808 1,278 Change in fixed assets (11,592) (2,226) (415) (1,413) (1,789) Purchase of investment 0 (16) (300) (450) (450) Proceeds from investment sale 80 6 25 25 25

Other Adjustments

1,810

556

700

750

750 CF from Investing acti.

(11,718)

(2,189)

(440)

(1,713)

(2,089)

Chg in debt

22,206

2,072

(415)

(21)

(75) Dividend & dividend tax

(117)

(234)

(709)

(982)

(1,107)

Interest paid

(5,746)

(1,301)

(1,110)

(1,200)

(1,200)

Other Adjustments

0

(31)

(95)

(120)

(120) CF from financing acti.

8,500

(818)

892

3,682

2,235

Chg in cash

709

(941)

764

2,776

1,424

Opening cash

842

1,551

610

1,374

4,150

Closing cash

3,759

808

1,374

4,150

5,575

Du-Pont Analysis (%) FY14 FY15 FY16 FY17E FY18E PAT/ PBT -2400 68 83 78 79 PBT/ PBIT 0 66 70 76 78 PBIT / Sales 11 15 15 17 15 Sales / Assets 50 150 159 174 183 Assets/ Equity 564 191 175 164 159 ROE 0 20 25 28 27



BUY


NOTES

Recommendation Rationale

Recommendation Expected Absolute Return (%) over 12 months

BUY >15%

ACCUMULATE <10% and >15%

NEUTRAL <-10% and <10%

REDUCE >-10% and <-20%

SELL >-10

Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month

horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch

between upside/downside for stock and our recommendation. Name Designation Email Contact

Omkar Tanksale Sr. Analyst - Fundamental Research [email protected] 91 (22) 6614 2692

I, Mr. Omkar Tanksale(Research Analyst of GEPL), having Education Qualification MBA Finance, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I, also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Disclosure :-

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