IDFC Securities - Sterlite Technologies (STLTECH) Sterlite Technologies Q1FY19 results (Outperformer) - In line quarter; Strong growth in order book

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IDFC Securities

Sterlite Technologies' Q1FY19 results (Outperformer) - In line quarter; Strong growth in order book

Q1FY19 result highlights

In line operating performance: Revenue of Rs8.7bn (IDFCe: Rs9.09bn) was up 3.6% qoq and +17.8% yoy driven by strong volumes in product business. Revenues were 3.6% below our estimates due to negative surprise in software business in Q1FY19. EBITDA margins improved by 190bp qoq to 27.9% (IDFCe: 24.9%) driven by strong growth in products business. Reported EBITDA and net profit of Rs2.44bn and Rs1,238m were 8.3% & 13.0% respectively ahead than our estimates.
Order book improves growth visibility: Order book was up 92% yoy to Rs60.3bn in Q1FY19 (Q4FY18: Rs.40.9bn) led by strong growth of 20.6% QoQ, 200% YoY in product business. Higher product business mix (82% of book) improves growth visibility and will help them to maintain higher EBITDA margins. Services & Software order book would continue to be lumpy with final awards awaited. Management expects strong growth in 2HFY19 with the help of execution of Navy contract.
Recent acquisition bodes well with the strategy: 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. This quarter domestic business showed a positive surprise on account of strong demand from private telecom companies. Management expects a strong growth from exports business in coming years.

Key positives: Strong order book

Key negatives: Decline in exports & services revenue

Impact on financials: FY19 EPS upgraded by 4.2% and FY20E EPS remains unchanged.

Valuations & view

SOTL reported in line operating performance with continued traction in product business order book. Management commentary remained optimistic with increasing demand for fiber across domestic and international markets. Management expects 2HFY19 to be strong as compared to 1HFY19 on account of strong growth from exports business & services business. Strong growth visibility (27%/33% EBITDA/EPS CAGR over FY18-20E) and healthy RoCE (27% in FY20E) should help SOTL sustain premium valuations (24x one-year forward PE). We maintain Outperformer rating and target price of Rs370 (25x FY20E EPS).

20/07/2018 6 EN

Underlying

Sterlite Technologies

Sterlite Technologies Limited. Sterlite Technologies Ltd is a global technology company. The Company is engaged in designing, building and managing smarter digital networks. Its digital networks focused business products, services and software includes optical communication products, network and system integration services and operations support systems (OSS)/business support system (BSS) software solutions. It operates in six continents and more than 100 countries. The Company operates through manufacturing facilities in India, China and Brazil. Its portfolio consists of approximately 155 patents. The Company's projects include intrusion-proof smarter data network for the Armed Forces, rural broadband for BharatNet, Smart Cities' development, and establishing high-speed Fibre-to-the-Home (FTTH) networks.

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INE089C01029 National Stock Exchange of India India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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