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1. October 22, 2010
Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs
STERLITE TECHNOLOGIES LTD BUY
Strong Buy
Sterlite Technologies Ltd is an Aurangabad based manufacturing company that Buy
Hold
provides transmission solutions to the Power and Telecom Sector. Globally, it is the Reduce
largest player in the Power Conductor Market and the 5th largest in the Optic Fiber cables Sell
Strong Buy – Expected Returns > 20% p.a.
& the market leader in both segments in India. Buy – Expected Returns from 10 to 20% p.a.
Hold – Expected Returns from 0 % to 10% p.a.
• Global bandwidth usage now doubles in about 16 months, compared to 24 months Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk
Sell – Returns < 0 %
previously. In FY2011, an estimated USD 2bn will be spent in India on 3G
Infrastructure. Both will increase demand for Optic Fiber cables.
• For many years, there was under- investment in Transmission equipment is many
developing countries & technology has also aged. There is a thrust on newer
technology to reduce losses & overheads. With focus on building green power STOCK DATA
BSE / NSE Code 532374 / STRTECH
plants far from cities, there will be increasing need for Transmission equipment.
Bloomberg Code SOTL IN EQUITY
• The planned outlay for conductors is Rs. 31,500 crores or 4% of Total Power outlay No. of Shares (Mn) 356
Sensex / Nifty 19,872 / 5,982
in the 11th Five year plan. For the 12th Five year plan, the outlay is Rs. 49,000 crores. PRICE DATA
CMP Rs (20th Oct '10) 98.1
This represents a huge opportunity for the company to capture.
Beta 1.03
• Sterlite is the first private company entering the Power transmission segment which Market Cap (Rs mn) 34,943
52 Week High-low 124/51
will provide visibility of revenues, strong margins & an opportunity to lease Optic- Average Daily Volume 118,834
Fiber cables which can be used by telecom companies & ISPs. STOCK RETURN (%)
30D 3M 6M 1Y
Based on a consolidated FY12 P/E multiple of 13, the fair value for the Sterlite Tech 0% -14% 11% 53%
Sensex -1% 11% 15% 15%
company works out to Rs. 119. Nifty -1% 12% 16% 17%
SHARE HOLDING PATTERN (%)
Financial Snapshot Promoter 50.2
Projections (Rs Mn) FY08A FY09A FY10A FY11E FY12E Institution 18.8
Non Institution 31.0
Revenue 16,839 22,892 24,316 27,319 30,925
Total 100.0
Y-o-Y Growth % 193.0% 35.9% 6.2% 12.3% 13.2% 1 Year Price Performance (Rel. to Sensex)
EBIDTA 2,177 2,429 4,037 4,634 5,170 100
Y-o-Y Growth % 168.1% 11.6% 66.2% 14.8% 11.6%
80
PAT After MI 1,007 904 2,458 2,903 3,259
Y-o-Y Growth % 209.8% -10.1% 171.8% 18.1% 12.3% 60
EPS Rs 3.1 5.6 6.9 8.2 9.2 40
BVPS Rs 33.2 38.6 25.7 32.4 41.0
20
EBIDTA % 12.9% 10.6% 16.6% 17.0% 16.7%
NPM % 6.0% 4.0% 10.1% 10.6% 10.5% 0
ROE % 46.6% 14.6% 26.8% 25.1% 22.4% -20
PER x 12.0 10.7
P/B Ratio 3.0 2.4 -40
Sensex Sterlite Technologies
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2. October 22, 2010
BUSINESS PROFILE
Sterlite Technologies is promoted by Mr. Anil Agarwal of the Vedanta group. It was formed in 2000 by demerging the
Telecom Segment of Sterlite Industries (SIL). It later acquired the Power Transmission business from Sterlite Industries in
Sterlite has 8
2006 and since then has focused on providing solutions to these two segments. manufacturing plants
in India.
In the Power segment, the company manufactures Power conductors, which help in transmitting electricity charges from
one point to the other. In the Telecom segment, the company manufactures Optical Fiber (OF), Fiber Optic & Copper Cables;
all used by Telecom or Internet Service providers. The company has 8 manufacturing plants in India and has sales offices in
over 50 countries including China, Russia, UK and South Africa.
In the optical fiber segment, the company is increasing its capacity from 12 million kms to 20 million kms; making it the 3rd
largest player in the OF segment globally. In the power conductors segment, the company has a capacity of 160,000 Metric
Tonnes and will expand it to 200,000 MT by end of FY2011.
At the end of Q1FY11, the company had an order book of Rs. 26 bn. Of this, Rs. 8 bn of orders are from the telecom segment Current expansion will
and Rs. 18 bn from the Conductors segment. Rs. 14 bn of the power order is from Power Grid Corporation, while exports make the company the
largest conductor
constitute Rs. 5.5 bn to the order book. manufacturer & 3rd
The company entered the power transmission sector as the 1st private player & connects Assam, WB & Bihar on a Build-Own- largest Optic Fiber
manufacturer globally.
Operate & Maintain basis. The company might want to enter the Production Segment to further integrate backwards.
18
Revenue Breakup ( in Rs. Billions) 16 Order Book on Q1FY11
16
14
14
12
12
In Rs. Billions
10
10
8 8
14.73 15.25
6 6
9
4 8.16 4
2 2
0 0
Telecom Power
Power Telecom
2009 2010 Domestic International
Strong position & scale provide high industry barriers; but commodity prices are concerning
Sterlite Technology has a high degree of operating leverage. While there is no entry barrier in the manufacturing in either
Sterlite has a high
sector it operates in, the long gestation period to recover the investments make it difficult to enter the segment. The operating leverage,
company also is backward integrated in both the sectors & with increasing size of operations it will consolidate its hold. increasing barriers to
competition.
The main concern to the company is increasing Capex required on the new Transmission project in East India, which can
reduce balance sheet health in the near term. Another major concern is prices of metals. Any spike in Aluminum, Copper &
Steel which formed 73% of Raw Material Costs and can affect earnings.
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3. October 22, 2010
BUSINESS PERFORMANCE
Revenue Diversification, Profitability growth to improve ahead…
The government plans to give BSNL a Rs. 180 bn tender for WiMax & PowerGrid plans to invest Rs. 640 bn to build Pricing pressures are
high capacity transmission highways. The company which has a large chunk of Government orders is also seeing not anticipated by the
company.
improvement in orders from the private sector, in both the segments. The company has said that pricing pressure
will not be seen in either segments and cost escalation clauses will keep costs in check.
For Q1FY11, sales increased by 13% to Rs. 4.92 bn, compared to the same Quarter last year. For the same period,
EBITDA grew by 10% to Rs. 0.88bn & Net profit grew to Rs. 0.56bn, up by 22%.
Revenue, Operating & PAT Margin Quarterly Performance
35,000 16% 10000 25%
14% 9000
30,000
8000 20%
12%
Revenues (Rs mn)
25,000 7000
Margins(%)
10% 6000 15%
20,000 5000
8%
15,000 4000 10%
6% 3000
10,000 4% 2000 5%
5,000 1000
2%
0 0%
- 0%
FY08 FY09 FY10 FY11E FY12E
Revenue (Rs Mn) EBIDTA Margin PAT Margin Net Revenue (Rs mn) EBITDA Margins
Peer Group Comparison
Revenue EBIDTA PAT P/E P/B CMP FV
Companies ROE (%)
(Rs. mn) Margin (%) Margin (%) (x) (x) (Rs.) (Rs.)
Sterlite Technologies 24,316 17% 10% 27% 14.2 3.8 98 2
Vindhya Telelinks 2,455 15% 11% 10% 16.9 1.6 369 10
Paramount Telecom. 7,529 6% -1% - - 0.4 8 2
*FY10 consolidated figures
Peer Comparison
Sterlite Technologies has no competitors with similar size & scale. Its closest competitor is Paramount Telecom,
Sterlite Technologies
which turned in a loss last year. Vindhya Telelinks is currently trading at a higher P/E & has comparable margins, but has a better ROE &
going ahead, Sterlite will see improvement in margins due to efficiency from its expansion & the transmission EBITDA than its peers.
project in East India which can give EBITDA margins of 85-90%
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4. October 22, 2010
VALUATION
We estimate Sterlite Technologies’ revenues to grow at a CAGR of 12.8% over FY2010-12 to Rs 30.9bn by
Based on a consolidated
FY2012. We further estimate that PAT would grow at a CAGR of 15.1 % over FY2010-12 to Rs 3.26 bn in FY12 P/E multiple of 13, the
FY2012 from Rs 2.45bn in FY2010. fair value for the company
works out to Rs 119.
Based on a consolidated FY12 P/E multiple of 13, the fair value for the company works out
to Rs. 119
We recommend a ‘BUY’ rating on the stock.
Financial Analysis and Projections
Particulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E
Net Revenue 16,839 22,892 24,316 27,319 30,925
Other Income 110 88 230 232 234
Total Income 16,949 22,980 24,546 27,551 31,160
Operating Expenditure 14,772 20,551 20,509 22,917 25,989
Depreciation 372 425 483 531 610
EBIT 1,805 2,004 3,554 4,103 4,560
EBIT Margin (%) 10.7% 8.8% 14.6% 15.0% 14.7%
Interest 501 905 381 381 381
Profit Before Tax 1,303 1,099 3,173 3,722 4,179
Less: Tax 297 193 714 819 919
Profit After Tax 1,006 906 2,459 2,903 3,259
Minority Interest 0 2 1 0 0
PAT After MI 1,007 904 2,458 2,903 3,259
PAT Margin (%) 6.0% 4.0% 10.1% 10.6% 10.5%
ROE (%) 46.6% 14.6% 26.8% 25.1% 22.4%
EPS (Rs) 3.1 5.6 6.9 8.2 9.2
BVPS (Rs) 33.2 38.6 25.7 32.4 41.0
Valuation Ratios (x) FY11E FY12E
P/E 12.0 10.7
P/B 3.0 2.4
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5. October 22, 2010
Board of Directors
Director Name Current Position Description
Dr. Anand Agarwal serves as Chief Executive Officer, Whole-time Director of Sterlite Technologies Limited. He joined
Sterlite in 1995 and has held various positions, including manufacturing, quality assurance and business development.
CEO, Whole Time
Anand Agarwal Prior to joining Sterlite, he worked with Siemens. He completed his B. Tech. in metallurgical engineering from IIT Kanpur
Director
and was awarded Masters and PhD from the Rensselaer Polytechnic Institute, USA.
Mr. Anil K. Agarwal serves as Non-Executive Chairman of the Board of Sterlite Technologies Limited. He founded the
Sterlite Group in 1976 and has been overseeing its operations since its inception. He is the Executive Chairman of Vedanta
Non-Executive Resources Plc. He is also Chairman of Sterlite Industries (India) Limited, Bharat Aluminium Company Limited (BALCO) and
Anil Agarwal
Chairman Sterlite Energy Limited. Anil Agarwal is the Director at Vedanta Aluminium Limited. He has over three decades of
experience in business strategy, general management and commercial matters.
Mr. Pravin Agarwal serves as Whole-time Director of Sterlite Technologies Limited. He has been closely involved with the
Sterlite Group’s operations in India since its inception and has been instrumental in growing the telecom and power
Pravin Agarwal Whole Time Director
businesses. His experience in general management and commercial matters spans about three decades.
Mr. Arun Todarwal serves as Non-Executive Independent Director of Sterlite Technologies Limited. He is partner of
Non-Executive Todarwal & Todarwal, a Mumbai-based firm of chartered accountants, holds a bachelors degree in commerce and is a
Arun Todarwal Independent member of the Institute of Chartered Accountants of India. He has experience spanning over two decades in finance and
Director audit.
Mr. Haigreve Khaitan serves as Non-Executive Independent Director of Sterlite Technologies Limited. He is partner of
Non-Executive Khaitan & Co. a Mumbai-based firm of lawyers, holds a bachelors degree in legislative laws. He has varied experience
Haigreve Khaitan Independent spanning a decade in commercial and corporate laws, tax laws, mergers and acquisitions, restructuring, foreign
Director collaboration, licensing, etc.
Shri. A. R. Narayanaswamy serves as Non-Executive Independent Director of Sterlite Technologies Limited. He is an Audit
Non-Executive
Practitioner and runs a management consultancy catering to the pharmaceutical, chemical, engineering and hospitality
A.R. Narayanswamy Independent
sectors. He is a Chartered Accountant by profession and his experience spans over three decades.
Director
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