Initiating coverage: Sterlite Technologies (Outperformer) - Play on fiberisation with strong earnings visibility

Sterlite Technologies (SOTL), India’s largest and only integrated optical fibre cable (OFC) manufacturer controls ~41% of India’s OFC market and ~6% of the global optical fibre (OF) market. We estimate 15%+ CAGR in India’s OF market over FY18-20E, fuelled by tower fiberisation and execution of govfffmknsfpfdk ompany  reported eernment projects. Expansion in fibre capacity in FY19E (to 50m fkm from 30m fkm) backed by strong orderbook should result in continued market share gains for SOTL. Strong growth visibility (27%/32% EBITDA/EPS CAGR over FY18-20E) and healthy RoCE (27% in FY20E) should help SOTL sustain premium valuations (24x one-year forward PE). We re-initiate coverage with an Outperformer rating and target price of Rs370 (25x FY20E EPS).

Attractive addressable market: The global OF/OFC market registered 14.7%/14.6% CAGR over CY11-17 to 534m/493m fkm. We estimate healthy 15% CAGR in OF demand over CY17-CY19E, led by rising data consumption. We expect India to register 15%+ CAGR in OF/OFC demand over next 2 years on FTTH deployment and better execution of government’s broadband infrastructure projects. The OF market has seen steady realisations on good supply discipline, as the market has mere 6-7 global players.

Strong competitive positioning: SOTL controls the entire value chain of OFC production (from Silica to fibre) and enjoys strong competitive positioning. In India, the company has gained steady 41% market share, which we believe will sustain on further capacity expansion (from 30m in FY18 to 50m by June 2019) and growing demand for OF/OFC in India.

Order book provides earnings visibility: SOTL’s products business accounts for ~78% of order book at Rs40.9bn. Order book for the services business stood at Rs11.2bn, which does not include the recently bagged Rs35bn order for Indian Navy’s communications network. We estimate 27% EBITDA CAGR over FY18-FY20E.

Strong earnings and healthy returns justify premium valuations: We expect SOTL to deliver solid 32% EPS CAGR (FY18-FY20E), driven by strong growth in products and services business. SOTL’s strong growth visibility backed by a healthy order book gives us confidence on the company’s ability to sustain premium valuations (24x FY19E earnings). We initiate coverage on SOTL with an Outperformer rating and FY19E target price of Rs370, at 25x FY20E.