Event update: Sterlite Technologies (Outperformer) - Acquisition at reasonable valuation and improves access to Europe

Event

Sterlite Technologies (SOTL) acquisition of an Italian optic fiber cabling firm Metallurgica Bresciana (MB) in all cash deal of Euro 48.7 m (equity value) which will be funded through combination of Euro debt instruments and internal accruals. The acquisition is expected by end of July 2018.

About Metallurgical Bresciana (MB)

• MB is an established European Optical Fiber Cable Manufacture with manufacturing base in Italy.
• The company has posted revenues of Euro 39.5 mn, Euro 41.2 mn & Euro 48.7mn in CY15, CY16 & CY17 respectively which accounts to revenue CAGR of around 11% from CY15-CY17.
• MB debt of Euro 10mn with an EBITDA of 7.4 Euro mn, EBITDA margins of 15% and PAT margin of 9%.
• The company has total capacity of 3mn fkm cabling capacity (which can be increased to 5mkm with de-bottle necking) and is running at a utilisation rate of around ~60%. The company has ROCE of around mid ~20%.
• Europe and China contributes 85%/15% to the revenues. MB was owned by a family and was run by the professional CEO for last 20 years.

Rationale

• The acquisition will help deeper penetration in European market for SOTL and since last 2 years SOTL is focusing a lot on European geography to reduce dependence on China. IN FY17, Europe revenues accounted for 11% of the total revenue which increased to 27% in FY18.
• SOTL has no manufacturing facility in Europe and this acquisition provides deeper access to European markets.

Our View

The deal is valued at PER of 11.2x and EV/EBITDA of 8x CY17, which is reasonable considering the deal is EPS accretive (5-7% in FY19E). SOTL will use part internal accrual (20%) and remaining Euro debt to fund this acquisition. We think that the acquisition bodes well as it provides access into new customers and manufacturing capability to penetrate in European market. Maintain Outperformer.