Tuesday, April 27, 2010

>STERLITE TECHNOLOGIES: Strong telecom margin drives PAT (EDELWEISS)

■ Revenue up 15% to INR 6.6 bn
Sterlite Technologies’ (SOTL) Q4FY10 revenues recorded growth of 14.7% Y-o-Y, to INR 6.6 bn, primarily driven by 19.9% Y-o-Y growth in the power transmission business to INR 4.8 bn. The telecom business, however, recorded a mere 2.9% Y-o- Y growth to INR 1.8 bn due to lower execution during the quarter. Telecom’s contribution to the overall revenue fell to 27.5% during the quarter against 30.6% in Q4FY09. On the volume front, SOTL recorded 38.4% Y-o-Y growth in optical fibres volume to 2.2 mn km, while that for power conductors increased 11.5% Y-o- Y to 36,794 MT.

Telecom margin zooms to 31%
During the quarter, reduced raw material (down 598bps to 64.1% of sales) and employee (down 15bps to 2.2% of sales) costs were negated to some extent by increase in other expenses (up 277bps to 17.1% of sales). This led to 336bps improvement in EBITDA margin to 16.6%. This, in turn, led to a robust 43.8% EBITDA growth Y-o-Y to INR 1,101 mn. Further, reduced interest cost (down 31.7% Y-o-Y) and significant improvement in other income helped post strong PAT growth of 57.4% Y-o-Y, to INR 722 mn, during the quarter. In view of improved business outlook and guidance by management, we revise our EPS estimates upwards for FY11E and FY12E by 4.4% and 9.7%, respectively.

Strong visibility; order book up 75% Y-o-Y; expansion on schedule
SOTL’s order backlog recorded a strong growth of 75.2% Y-o-Y, to INR 24.0 bn (0.8x FY11E revenues), with INR 18 bn (increase of 58% Y-o-Y) backlog in power conductors and the balance INR 6 bn (increase of 161% Y-o-Y) in the telecom business. Management has indicated that expansion projects for both optic fibres (expansion to 20 mn km) and power conductors (expansion to 200,000 MT) are on schedule and likely to be completed by end FY12 and FY11, respectively.

Outlook and valuations: Positive; maintain ‘BUY’
We are positive on SOTL, given that both businesses (power and telecom) have favourable demand drivers with significant spending expected in power T&D in India and fibre demand (driven by growing number of mobile subscribers, 3G auction along with pick up in the global fibre market). At our target price of INR 103, the implied target P/E for FY11E and FY12E is 14.5x and 11.8x, respectively. We maintain our ‘BUY’ recommendation on the stock.

To read the full report: STERLITE TECHNOLOGIES