>STERLITE TECHNOLOGIES (EDELWEISS)

■ Revenue up 35% to INR 8.7 bn; mix tilting towards telecom
Sterlite Technologies’ (SOTL) Q3FY10 revenue recorded a robust growth of 35.1% Y-o-Y to INR 8.7 bn primarily driven by a strong execution in its telecom business,which grew 108.6% Y-o-Y to INR 4.5 bn. The power transmission business, however, posted a marginal dip of 1.9% to INR 4.2 bn. The telecom segment’s contribution to the overall revenue improved to 51.7% against 33.5% in Q3FY09. On the volume front, SOTL recorded a 68% Y-o-Y growth in optical fibres volume to 2.1 mn km, while that for power conductors increased 6.5% Y-o-Y to 33,000 MT.

Strong telecom execution drives PAT

■ Strong execution boosts performance
During the quarter, reduced raw material (down 219bps to 73% of sales) and employee (down 22bps to 1.8% of sales) costs were negated to an extent by an increase in other expenses (up 138bps to 13.2% of sales), limiting improvement of EBITDA margin by 104bps to 12%. The EBITDA margin improvement led to a robust 47.8% EBITDA growth Y-o-Y to INR 1,044 mn. Further, halving of the interest cost (down 53.2% Y-o-Y) and significant improvement in other income helped post a strong PAT. Adjusted PAT recorded a strong growth of 78.6% Y-o-Y to INR 636 mn (after adjusting for profit on sale of asset worth INR 101.1 mn). Hence, we revise our EPS estimates upwards for FY10E and FY11E by 2.2% and 14.3% respectively on the back of higher than expected margins.

■ Strong visibility; order book up 52% Y-o-Y; expansion on schedule
SOTL’s order backlog recorded a strong growth of 52% Y-o-Y to INR 21.5 bn (0.8x FY10E revenues) with INR 16 bn (increase of 33% Y-o-Y) backlog in power conductors and the balance INR 5.5 bn (increase of 156% Y-o-Y) in the telecom business. Management has indicated that expansion projects for both optic fibres (6 mn km to 12 mn km) and power conductors (115,000 MT to 160,000 MT) are on schedule and likely to be completed by Q4FY10 with volume impact visible from Q1FY11.

■ Outlook and valuations: Positive; maintain ‘BUY’
Demand for power conductors continues to remain strong on the back of significant spending expected in power T&D in the country. Fibre optic demand is driven by growing number of mobile subscribers, 3G auction, and increase in the number of broadband users. With gradual shift in the business towards high margin telecom business together with strong outlook in the power T&D space we remain positive on the SOTL. The stock is currently trading at P/E of 12.3x and 10.5x FY11E and FY12E, respectively. We maintain our ‘BUY’ recommendation on the stock.

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