RESULT UPDATE

STERLITE TECHNOLOGIES
Tracking strong growth momentum
India Equity Research| Telecom

COMPANYNAME
Sterlite Technologies (Sterlite) reported strong Q4FY18 numbers with EDELWEISS 4D RATINGS
19.7% YoY revenue spurt (Street estimate 22.6%) and 190bps EBITDA
Absolute Rating BUY
margin expansion to 26.0% (Street estimate 22.9%). This led to PAT Rating Relative to Sector Outperform
jumping 76.6% to INR1.2bn. Key highlights: 1) EBITDA margin surge was Risk Rating Relative to Sector Medium
led by higher contribution from product business; 2) the company is Sector Relative to Market Underweight
evaluating OFC capacity expansion as utilisation has jumped to ~90%
from 70% QoQ, while OF capacity utilisation remains ~100%; 3) order
book at highest level ever—INR52.3bn, up ~71% YoY—excluding INR35bn MARKET DATA (R: STTE.BO, B: SOTL IN)
naval order, which is in final stages of approval; and 4) on track to clock CMP : INR 342
Target Price : INR 425
USD100mn net income by FY20. We believe, Sterlite is well positioned to
52-week range (INR) : 415 / 144
capture the robust global growth in fibre consumption. Maintain ‘BUY’
Share in issue (mn) : 401.0
with TP of INR425 (28x FY20E EPS). M cap (INR bn/USD mn) : 137 / 2,015
Avg. Daily Vol.BSE/NSE(‘000) : 2,047.3
Strong product demand drives margin
Sterlite reported strong 19.7% revenue growth to INR8.47bn as OFC utilisation surged SHARE HOLDING PATTERN (%)
to ~90% from 70% QoQ. This led to 190bps spurt in margin to 26.0%. The company is Current Q3FY18 Q2FY18
seeing strong OFC demand and is evaluating options to expand its OFC capacity; Promoters * 54.0 54.1 54.2
expected to announce capacity expansion plan by Q1FY19. Robust demand is also MF's, FI's & BK’s 11.2 12.2 11.7
reflected in higher order book—up 73% YoY—largely due to 166% YoY spurt in product FII's 8.5 7.1 7.9
order book to INR4.1bn. Others 26.2 26.6 26.2
* Promoters pledged shares : NIL
(% of share in issue)
Naval order to boost services business
The company’s services order book declined 23.6% YoY as large orders continue to be PRICE PERFORMANCE (%)
lumpy and the company is not participating in low value orders. However, the order
EW
book does not include the INR35bn advance purchase order to design, build and Stock Nifty Telecommunication
manage the Indian Navy’s communications network. We expect services order book to Index
pick up with BharatNet orders getting finalised by Q1FY19 and private telecom 1 month 6.8 5.7 (1.5)
operators’ intent to connect 4G towers. 3 months (14.3) (4.5) (11.5)
12 120.2 13.6 3.3
Outlook and valuations: Firing on all cylinders; maintain ‘BUY’ months

We believe, capacity expansion will equip Sterlite to cater to the burgeoning demand
for fibre optic cables. Moreover, its superior cost structure led by integrated
operations will sustain high return ratios (32.9% RoCE in FY20E). We expect premium
valuations (22.5x FY20E EPS) to sustain on strong earnings growth (45.8% CAGR over
FY17-20E) and high return ratios. We maintain ‘BUY/SO’ with INR425 target price. Pranav Kshatriya
+91 22 4040 7495
Financials (INR mn) pranav.kshatriya@edelweissfin.com

Year to March Q4FY18 Q4FY17 % Chg Q3FY18 % Chg FY18 FY19E FY20E
Sandip Agarwal
Net revenues 8,466 7,072 19.7 8,352 1.4 32,055 45,008 55,779 +91 22 6623 3474
EBITDA 2,203 1,624 35.6 2,017 9.2 7,494 9,992 13,067 sandip.agarwal@edelweissfin.com

Adjusted Profit 1,168 637 83.5 901 29.6 3,387 4,395 6,240
Nikunj Mandowara
Diluted EPS (INR) 3.0 1.6 92.9 2.4 24.4 8.3 11.4 16.1 +91 22 4040 7431
Diluted P/E (x) 41.1 31.8 22.5 nikunj.mandowara@edelweissfin.com

EV/EBITDA (x) 19.7 15.0 11.6

April 26, 2018
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
 Telecom

Financial snapshot (INR mn)

Year to March Q4FY18 Q4FY17 % change Q3FY18 % change FY18 FY19E FY20E
Net revenues 8,466 7,072 19.7 8,352 1.4 32,055 45,008 55,779
Direct costs 3,259 2,928 11.3 3,351 (2.7) 12,954 18,228 22,311
Gross profit 5,207 4,144 25.7 5,001 4.1 19,101 26,780 33,467
SG&A 3,004 2,519 19.2 2,984 0.7 11,608 16,788 20,400
EBITDA 2,203 1,624 35.6 2,017 9.2 7,494 9,992 13,067
Depreciation 525 445 18.0 448 17.2 1,822 2,338 2,620
EBIT 1,679 1,180 42.3 1,569 7.0 5,671 7,654 10,447
Other income 172 31 457.5 67 155.1 393 270 335
Interest 253 243 4.0 257 (1.8) 1,038 1,467 1,615
Add: Exceptional items (44) (44)
Profit before tax 1,486 916 62.3 1,288 15.4 4,675 6,203 8,806
Tax 362 279 29.7 387 (6.4) 1,332 1,808 2,567
Reported net profit 1,124 637 76.6 901 24.8 3,343 4,395 6,240
Exceptional items 44 - - 44 - -
Adjusted Profit 1,168 637 83.5 901 29.6 3,387 4,395 6,240
Diluted EPS (INR) 3.0 1.6 92.9 2.4 24.4 8.3 11.4 16.1
Diluted P/E (x) - - - 41.1 31.8 22.5
EV/EBITDA (x) - - - 19.7 15.0 11.6
EV/Revenues (x) - - - 4.6 3.3 2.7
Direct costs 38.5 41.4 40.1 40.4 40.5 40.0
Gross profit 61.5 58.6 59.9 59.6 59.5 60.0
SG&A 35.5 35.6 35.7 36.2 37.3 36.6
EBITDA 26.0 23.0 24.1 23.4 22.2 23.4
EBIT 19.8 16.7 18.8 17.7 17.0 18.7
Reported net profit 13.3 9.0 10.8 10.4 9.8 11.2
Tax rate 24.4 30.5 30.0 28.5 29.1 29.1

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 Sterlite Technologies

Company Description
Sterlite Technologies (Sterlite) is a global technology player engaged in designing, building
and managing telecom broadband networks. Its offerings include optical products, system
and network integration services and telecom software. Sterlite is India’s largest and only
fully integrated optical fibre cable manufacturer with OF and OFC capacity of 30mn and
15mn FKM, respectively. The company has plans to enhance production of OF to 50mn FKM
by June 2019. It has manufacturing plants in Aurangabad, Silvasa, China (through joint
venture (JV) with Tongguang) and Brazil (through JV with Conduspar). In services business,
Sterlite is developing several network projects, such as, secure network for the armed
forces, rural broadband through BharatNet, Smart Cities, and high-speed Fiber-to-the-Home
(FTTH). It also offers customisable OSS & BSS software solutions suite through Elitecore,
which it acquired in FY16. The company has TTM revenue of INR32.1bn.

Investment Theme
We believe that Sterlite will be the key beneficiary of strong demand for fiber optic cables,
leveraging its capacity expansion; It’s superior cost structure due to integrated operations
will lead to high EBITDA margins improving return ratios, despite planned capex. The
company is strategically expanding its portfolio of services leveraging its knowhow of
complex network and relationships from the fiber business.

Key Risks
• China is the largest consumer of the OFC (57.5% of global consumption) and hence and
demand fluctuation can impact the capacity utilisation

• Downturn in global economy

• Alternate connectivity technology

• Telecom capex dip

• Currency risk

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 Telecom

Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Macro Net revenue 25,936 32,055 45,008 55,779
GDP(Y-o-Y %) 6.6 6.5 7.1 7.6 Cost of revenues 11,444 12,954 18,228 22,311
Inflation (Avg) 4.5 3.8 4.5 5.0 Gross profit 14,491 19,101 26,780 33,467
Repo rate (exit rate) 6.3 6.0 6.0 6.5 Total SG&A expenses 9,302 11,608 16,788 20,400
USD/INR (Avg) 67.1 64.5 66.0 66.0 EBITDA 5,189 7,494 9,992 13,067
Company Depreciation 1,592 1,822 2,338 2,620
Product revenues 20,116 26,179 36,043 44,894 EBIT 3,597 5,671 7,654 10,447
Employee benefit exp. 11.5 10.8 10.5 10.0 Add: Other income 234.5 392.7 270.05 334.67
Other exp 24.4 26.5 26.5 26.1 Profit Before Tax 2,602 4,982 6,456 9,166
Receivable (days) 99 86 84 88 Less: Provision for Tax 397 1,332 1,808 2,567
Payable days 131 119 96 96 Reported Profit 2,014 3,343 4,395 6,240
Exceptional Items - 44 - -
Adjusted Profit 2,014 3,387 4,395 6,240
Shares o /s (mn) 398 401 403 404
Adjusted Basic EPS 5.1 8.4 10.9 15.4
Diluted shares o/s (mn) 405 408 409 411
Adjusted Diluted EPS 5.0 8.3 10.7 15.2
Adjusted Cash EPS 9.1 13.0 16.7 21.9
Dividend per share (DPS) 1.5 2.1 2.7 3.9
Dividend Payout Ratio(%) 35.2 32.3 31.8 31.8

Common size metrics

Year to March FY17 FY18 FY19E FY20E
Cost of revenues 44.1 40.4 40.5 40.0
Gross margin 55.9 59.6 59.5 60.0
SG&A expenses 35.9 36.2 37.3 36.6
EBITDA margins 20.0 23.4 22.2 23.4
EBIT margins 13.9 17.7 17.0 18.7
Net Profit margins 8.4 11.5 10.3 11.8

Growth ratios (%)

Year to March FY17 FY18 FY19E FY20E
Revenues 14.0 23.6 40.4 23.9
EBITDA 27.6 44.4 33.3 30.8
PBT 15.7 91.5 29.6 42.0
Adjusted Profit 33.7 68.2 29.8 42.0
EPS 32.8 67.2 29.2 41.4

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 Sterlite Technologies
Balance sheet (INR mn) Cash flow metrics
As on 31st March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Share capital 797 802 805 808 Operating cash flow 4,885 4,536 5,740 7,857
Reserves & Surplus 8,004 10,341 13,414 17,776 Investing cash flow (1,869) (897) (1,231) (2,769)
Shareholders' funds 8,801 11,143 14,219 18,584 Financing cash flow (2,323) (3,878) (5,021) (5,223)
Minority Interest 452 628 805 1,057 Net cash Flow 693 (240) (511) (134)
Def. Tax Liability (net) (34) (34) (34) (34) Capex (2,151) (3,860) (5,000) (5,200)
Sources of funds 20,894 24,831 29,929 35,618 Dividend paid (709) (1,096) (1,399) (1,986)
Gross Block 18,006 21,128 24,928 29,928
Net Block 11,830 14,146 17,040 19,793 Profitability and efficiency ratios
Capital work in progress 659 659 659 659 Year to March FY17 FY18 FY19E FY20E
Intangible Assets 1,206 929 697 522 ROAE (%) 25.4 35.1 34.7 38.1
Total Fixed Assets 13,696 15,733 18,395 20,975 ROACE (%) 20.0 26.5 28.9 32.9
Non current investments 232 232 232 232 Debtors Days 99 89 83 88
Cash and Equivalents 1,724 1,408 897 763 Payable Days 131 124 95 96
Sundry Debtors 6,912 8,783 11,657 15,232 Cash Conversion Cycle 54 64 72 80
Loans & Advances 71 71 71 71 Current Ratio 1.9 2.0 2.1 2.1
Other Current Assets 3,106 3,685 4,378 5,207
Current Assets (ex cash) 13,424 16,216 20,805 26,619 Operating ratios
Trade payable 4,486 4,345 5,126 6,664 Year to March FY17 FY18 FY19E FY20E
Other Current Liab 3,695 4,413 5,274 6,306 Total Asset Turnover 1.3 1.4 1.6 1.7
Total Current Liab 8,181 8,758 10,400 12,970 Fixed Asset Turnover 1.9 2.2 2.6 2.8
Net Curr Assets-ex cash 5,243 7,458 10,405 13,649 Equity Turnover 3.0 3.0 3.4 3.2
Uses of funds 20,894 24,831 29,929 35,618
BVPS (INR) 21.7 27.3 34.7 45.2 Valuation parameters
Year to March FY17 FY18 FY19E FY20E
Free cash flow (INR mn) Adj. Diluted EPS (INR) 5.0 8.3 10.7 15.2
Year to March FY17 FY18 FY19E FY20E Y-o-Y growth (%) 32.8 67.2 29.2 41.4
Reported Profit 2,014 3,343 4,395 6,240 Adjusted Cash EPS (INR) 9.1 13.0 16.7 21.9
Add: Depreciation 1,592 1,822 2,338 2,620 Diluted P/E (x) 68.8 41.1 31.8 22.5
Interest (Net of Tax) 1,042 761 1,057 1,163 P/B (x) 15.7 12.5 9.8 7.6
Others 1,856 825 898 1,078 EV / Sales (x) 5.6 4.6 3.3 2.7
Less: Changes in WC 1,619 2,215 2,947 3,244 EV / EBITDA (x) 25.9 18.2 13.8 10.6
Operating cash flow 4,885 4,536 5,740 7,857 Dividend Yield (%) 0.4 0.6 0.8 1.1
Less: Capex 2,151 3,860 5,000 5,200
Free Cash Flow 2,734 676 740 2,657

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E
Sterlite Technologies 2,015 31.8 22.5 13.8 10.6 34.7 38.1
Bharti Airtel 25,097 81.2 40.1 5.0 4.0 3.9 6.6
Bharti Infratel 9,002 20.7 22.2 8.1 8.4 15.6 13.6
Idea Cellular 4,654 (8.2) (13.9) 9.3 7.6 (16.2) (11.2)
Tejas Networks 447 17.0 14.6 8.7 7.1 16.4 16.3
Median - 20.7 22.2 8.7 7.6 15.6 13.6
AVERAGE - 28.5 17.1 9.0 7.5 10.9 12.7
Source: Edelweiss research

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 Telecom

Additional Data
Directors Data
Anil Kumar Agarwal Chairman Pravin Agarwal Vice Chairman
A. R. Narayanaswamy Director Arun Todarwal Director
Avaantika Kakkar Director Sandip Das Director
Dr. Anand Agarwal CEO Pratik Agarwal Director

Auditors – S. R. B. C. & Co. LLP

*as per last annual report

Holding - Top10
Perc. Holding Perc. Holding
Life Insurance Corp. of India 4.38 Blackrock 3.20
L&T Mutual Fund 2.19 L&T Investment 1.81
Macquarie 1.56 Dimensional Fund 1.47
Reliance Capital 1.34 Sydinvest International 0.74
Birla Sunlife Asset Mgmt 0.56 Carnegie Fonder 0.46
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
12 Oct 2017 Serum Institute Of India Pvt Ltd Buy 4046732 263.63
12 Oct 2017 Adar Cyrus Poonawalla . Sell 4046732 263.63
21 Jul 2017 Adar Cyrus Poonawalla Buy 2057000 230.09
*in last one year

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
14 Feb 2018 Pravin Agarwal Sell 53250.00
12 Feb 2018 Pravin Agarwal Sell 150000.00
24 Jan 2018 PRATIK AGARWAL Sell 130000.00
01 Aug 2017 ANKIT AGARWAL Buy 25000.00
01 Aug 2017 Pravin Agarwal Buy 46500.00
*in last one year

6 Edelweiss Securities Limited

 RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Bharti Airtel BUY SO L Bharti Infratel HOLD SP L
Idea Cellular HOLD SP M Reliance Communication HOLD SU H
Sterlite Technologies BUY SO M Tejas Networks BUY SO M

ABSOLUTE RATING
Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

7 Edelweiss Securities Limited

 Telecom

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c2799
0f20bf0213f69235fc3f1bcd0fa1c30092792c2
Head of Research
NARAIN
0, postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e
0c89e548e5001b4f8141cf423fd58c07b02,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.04.26 18:45:02 +05'30'

Coverage group(s) of stocks by primary analyst(s): Telecom

Bharti Airtel, Bharti Infratel, Idea Cellular, Reliance Communication, Sterlite Technologies, Tejas Networks

Recent Research

Date Company Title Price (INR) Recos

25-Apr-18 Bharti Well set for long innings; 420 Buy

Airtel Result Update
24-Apr-18 Bharti Consolidation pangs; 329 Hold
Infratel Result Update
24-Jan-18 Idea Weakness persists; merger 94 Hold
Cellular advancement to drive
synergies;
Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594

One year price chart

446
450
(INR)

297 380

149 310
(INR)

- 240
Apr-14

Sep-14
Feb-14

Mar-14

Jun-14

Dec-14
Jul-14

Aug-14

Oct-14

Nov-14
May-14
Jan-14

170

100
Dec-17
Aug-17

Oct-17
Apr-17

Apr-18
Nov-17
May-17

Feb-18
Sep-17

Jan-18

Mar-18
Jun-17

Jul-17

Sterlite Technologies

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 Sterlite Technologies
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Telecom

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10 Edelweiss Securities Limited

 Sterlite Technologies

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