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Sterlite Technologies' Q3FY19 results (Outperformer) - Good execution continues; Order book traction solid

Q3FY19 result highlights

• Strong earnings momentum continues: Revenue of Rs13.5bn (IDFCe: Rs11.4bn) was up 23% qoq and +60% yoy driven by strong mix in products & services business. Revenues were 17% above our estimates due to strong growth in international market in Q3FY19. EBITDA margins decreased by 318bps QoQ to 22.0% (IDFCe: 24.3%) this was mainly due to change in product mix towards the service portfolio. Reported PAT came at Rs.1460mn (IDFCe:Rs.1364mn)  ahead than our estimates by 7%.
• Order book improves growth visibility: Q3 FY19 performance showed sustained growth, backed by a strong open order book, which stands at an all-time high of around INR 102bn bn. This includes the INR 35 bn multi-year system integration contract to design Indian Navy’s digital networks. SOTL expects majority revenue from Navy contract to be recognized in FY20 and FY21.
• Highlights from Concall: SOTL management mentioned that optical fiber pricing long term contract will be settled at $7.5 per km as compared to higher end $8.0 per km in last quarters. EBITDA margin will settle around 22%-23% due to higher product mix towards service portfolio. The cost of goods sold is higher on the services, because there is a component of high bought-out material as well  as compared to the products and manufacturing business. International business accounts to 40% of the revenues. Current Debt is around Rs.18bn and capex till Q3FY19 was Rs.7.5bn & for FY19E Rs.10bn.  China mobile postponement of the tender has created a pressure on spot prices of optical fiber but they can announce tender in this quarter.

Key positives: Strong order book

Key negatives: Margin Miss due to product mix. 

Impact on financials: FY19/FY20 EPS changed by 10% & 0.7%.

Valuations & view

SOTL reported a strong revenue performance but margin miss was below our expectations. Margin miss was mainly due to change in product mix towards the service portfolio and they management guided range of 22%-23%. SOTL strong order book gives us confidence of strong momentum going forward. Due to delay in China mobile tender announcement, we expect the pressure to remain in spot pricing of OF and expect long term contract of OF to be at $7.5 per km ($8.5 per km last year). Strong growth visibility (27%/30% EBITDA/EPS CAGR over FY18-20E) and healthy RoCE (27% in FY20E) should help SOTL sustain premium valuations .We maintain Outperformer rating with unchanged target price of Rs370 (25x FY20E EPS).