Sterlite Technologies' Q2FY19 results (Outperformer) - Good execution continues; Order book traction solid

Q2FY19 result highlights

• Strong operating performance: Revenue of Rs10.8bn (IDFCe: Rs10.0bn) was up 24% qoq and +39.1% yoy driven by strong mix in products & services business. Revenues were 8% above our estimates due to strong growth in international market in Q2FY19. EBITDA margins improved by 335bp yoy to 25.2% (IDFCe: 24.9%) driven by strong operating performance. Reported EBITDA and net profit of Rs2.7bn and Rs1,354m were 11% & 1% respectively ahead than our estimates.
• Order book improves growth visibility: Q2 FY19 performance showed sustained growth, backed by a strong open order book, which stands at an all-time high of around INR 94 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.
• Strong expansion in fibre & cable capacity: SOTL has been organically & inorganically strengthening its core optical products capability. SOTL will do optical fibre capacity expansion to 50m km by Jun-19 (30m km now) & cable capacity expansion to 33 mn km. The main demand drivers are data growth, 5G roll out and expansion of JIO in India followed by other telecos. SOTL will spend Rs3.2bn in the next two years. This is over and above the ongoing capex of Rs12bn for optic fiber expansion. New capex will be funded from internal cash flows and debt.

Key positives: Strong order book

Key negatives: Management commentary on China demand

Impact on financials: FY19/FY20 unchanged EPS

Valuations & view

SOTL reported strong operating performance with continued traction in product business and order book. Management commentary remained optimistic with increasing demand for fiber. 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 with unchanged target price of Rs370 (25x FY20E EPS).