Result Update

October 22, 2010

Rating matrix
Rating : Strong Buy Sterlite Technologies (STEOPT)
Target : Rs 113
Target Period : 12-15 months Rs 86
Potential Upside : 31%

WHAT’S CHANGED…
Trailing 4 quarters growth (Rs Crore)
Q3FY10 Q4FY10 Q1FY11 Q2FY11 PRICE TARGET ................................................................................ From Rs 125 Rs 113
Net Sales 867 662 492 509 EPS (FY11E) ..................................................................................... From Rs 8.8 Rs 7.7
EBITDA 104 110 83 91 EPS (FY12E) .................................................................................... From Rs 10.4 Rs 9.4
PAT 74 72 56 58 RATING ......................................................................................................... Unchanged

Valuation summary Growth delayed long term growth intact…

Year to March 31 FY09 FY10 FY11E FY12E Sterlite Technologies (STL) reported a disappointing set of results in
NP (Rs crore) 91 246 286 350 Q2FY11. The company reported revenues of Rs 509 crore in Q2FY11 (I-
Adj. NP(Rs crore) 91 246 286 350 direct estimates: Rs 623 crore), implying a growth of 9.4% YoY and
EPS (Rs) 2.7 6.9 7.7 9.4 3.6% QoQ. EBITDA margins contracted 129bps to 17.8% due to lower
Growth (%) -12.2 152.3 11.4 21.4 fiber prices globally and stabilisation of the newly commissioned fiber
P/E (x) 31.3 12.4 11.2 9.2 capacity. Consequently, PAT grew at a moderate 5.3% YoY to Rs 57.5
Price / Book (x) 4.5 3.3 2.5 2.0
crore.
ROCE (%) 16.5 27.8 24.5 23.0 ƒ Weak power segment performance
RoNA (%) 8.4 20.0 16.1 16.5
The subdued topline performance was primarily by flat revenues of the
RoE (%) 15.3 32.0 26.1 24.1
key Power Transmission business (65% of sales). The segment’s
Stock data revenues grew at a mere 0.3% YoY and degrew 2.7% QoQ to Rs 330
Market Capitalisation Rs 3053 crore crore due to slowdown of ordering from key customer PGCIL (delays in
Debt (Q2FY11) Rs 792 crore project awarded from change in bidding to two-stage process). On the
Cash (Q2FY11) Rs 256 crore other hand, Telecom Products & Solutions revenues growth was higher at
31% YoY to Rs 179 crore (but still constrained due to delays in
EV (Q2FY11) Rs 3589 crore
stabilization of new capacity).
52 week H/L Rs 124/51
ƒ H2FY11E also likely to be challenging
Equity capital Rs 71 crore
Face value Rs 2 As a result of the weak Q2FY11 results, the management has announced
DII Holding (%) 14.0
that its FY11E sales guidance (+25% earlier) will be lowered.
Nevertheless, the management expects growth momentum to pick-up in
FII Holding (%) 5.6
FY12E with the stabilisation of the recently commissioned capacity and
increased power sector ordering. However, we expect fiber optic pricing
Price movement to continue to remain under pressure due to sluggishness of Chinese
demand (40% of global demand in FY10).
160 7,500
6,000
Outlook & Valuation
120
Negative surprise for the quarter came in form of downward revision of
(In d ex)

4,500
(R s)

80
3,000 revenue and profitability guidance for FY11E. This is mainly on account
40 1,500 of delay in ordering from Power Grid Corporation and
stabilisation issues on the new expanded optic fiber capacity. The
0 0
A ug-09 Dec-09 A pr-10 A ug-10
downward revision though not quantified was the key dampener for the
stock correcting by ~14%in past two trading sessions. The
STL Nifty (RHS)
management expects to come out with the revised guidelines in next 30
days time.
Analyst’s name
Chirag J. Shah
In the meantime, we would advise caution in the counter in the short to
shah.chirag@icicisecurities.com medium term (3-6 months) as the negative sentiments would be a key
overhang on the stock. Though there might be some volatility in the
Sanjay Manyal short term but that will not dampen the growth prospects for the
Sanjay.manyal@icicisecurities.com company.

ICICIdirect.com | Equity Research

Sterlite Technologies (STEOPT)

However on longer term view we believe the growth prospect has

spilled over to FY12E and longer term potential remains intact. We have
revised our estimates for FY11E and FY12E respectively and value the
company at 12x FY12E earnings. Our target price stands at Rs 114 (From
Rs 125 earlier as the guidance has been pruned down)

Exhibit 1: Key Financials

Rs crore Q2FY11 Q2FY10 Q1FY11 YoY Gr(%) QoQ Gr(%)
Total Revenues 509 466 492 9.4 3.6
EBITDA 91 89 83 1.9 9.1
EBITDA Margin(%) 17.8 19.1 16.9 - -
Reported Net Profit 58 55 56 5.3 3.5
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 Sterlite Technologies (STEOPT)

Exhibit 2: Trend of order book

Order book of STL stood at Rs 2,200 crore in Q2FY11. Of
3,000 2,600
the total order book, Power Transmission business order
2,400
book was at Rs 1,600 crore. PGCIL continues to remain 2,150 2,200
2,250
the largest customer with a 33% share of total order
1,600 1,725

(R s cro re)
book. 1,415
1,320 1,370
1,500

750

Q 2F Y 09

Q 3F Y 09

Q 4F Y 09

Q 1F Y 10

Q 2F Y 10

Q 3F Y 10

Q 4F Y 10

Q 1F Y 11

Q 2F Y 11
Source: Company, ICICIdirect.com Research

Exhibit 3: Trend of revenues

Revenues grew at a moderate rate of 9.4% YoY and 3.6%
1,000 867
QoQ to Rs 509 crore in Q2FY11. International revenues
accounted for 29% of the total revenues in H1FY10.
750 666 642 662
578
(R s cro re)

492 509
436 466
500

250

0
Q 2F Y 09

Q 3F Y 09

Q 4F Y 09

Q 1F Y 10

Q 2F Y 10

Q 3F Y 10

Q 4F Y 10

Q 1F Y 11

Q 2F Y 11
Source: Company, ICICIdirect.com Research

Exhibit 4: Trend of segment-wise sales

Flat sales growth of the key Power Transmission business 600

448 480
(~65% of total sales) was primarily responsible for the 427 401 419
moderate topline growth in Q2FY11 450 388
329 340 330
278 296
(R s)

300 215
177 182 179
140 136 152
150

0
Q 2F Y 09

Q 3F Y 09

Q 4F Y 09

Q 1F Y 10

Q 2F Y 10

Q 3F Y 10

Q 4F Y 10

Q 1F Y 11

Q 2F Y 11

Pow er Telecom

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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Sterlite Technologies (STEOPT)

Exhibit 5: Trend of EBITDA margins

EBITDA margins have declined 130bps YoY in Q2FY11 due 35.0

to issues associated with stabilization of new capacity and 30.0
pricing pressures in the fiber optics market 25.0
20.0

(% )
15.0
10.0
5.0
0.0

Q 2F Y 09

Q 3F Y 09

Q 4F Y 09

Q 1F Y 10

Q 2F Y 10

Q 3F Y 10

Q 4F Y 10

Q 1F Y 11

Q 2F Y 11
Pow er Telecom O v erall

Source: Company, ICICIdirect.com Research

Estimates changes
We have reduced our FY11E and FY12E sales volume assumptions for
both the Power Transmission and Telecom Products & Solution
businesses. The power conductor sales volumes have been lowered by in
FY11E-12E due to the delays in project awarded by PGCIL from change in
bidding to two-stage process. In the Telecom Products & Solution
business, we have lowered sales volume of optical fibers and fiber optic
cables marginally due to our concerns on the stabilization of new
capacity.

Consequently, we have reduced our FY11E-12E revenue estimates by

10.6% and 8.5%, respectively, and our FY11E-12E PAT estimates by 8.2%
and 4.9%, respectively (Note : our earlier estimates were lower than
consensus estimates).

Exhibit 6: Changes in earning estimates

FY11E FY12E
(Rs crore) New Old % change New Old % change
Sales 2,602 2912 10.6 3,174 3469 8.5
EBITDA 433 462 6.4 513 543 5.5
PAT 286 312 8.2 350 368 4.9
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 Sterlite Technologies (STEOPT)

ICICIdirect.com coverage universe (Capital Goods)

Thermax NP (Rs Cr) EPS (Rs) PE (x) P/BV (x) RoCE (%) RoE(%)
Idirect Code THERMA CMP 790 FY10 141 11.9 66.6 9.0 34.2 14.1
Target 825 FY11E 363 34.0 23.2 7.4 43.3 31.2
Mcap (Rs Cr) 7901 Upside (%) 4.4 FY12E 518 43.5 18.2 5.7 45.3 35.3
BGR Energy NP (Rs Cr) EPS (Rs) PE (x) P/ABV (x) RoCE (%) RoE(%)
Idirect Code BGRENE CMP 770 FY10 201.0 27.9 27.6 7.9 23.0 31.8
Target 827 FY11E 304.8 42.3 18.2 5.9 25.2 36.9
Mcap (Rs Cr) 5544 Upside (%) 7.4 FY12E 372.0 51.7 14.9 4.4 23.6 33.8
Hindustan Dorr Oliver NP (Rs Cr) EPS (Rs) PE (x) P/BV (x) RoCE (%) RoE(%)
Idirect Code HINDOR CMP 135 FY10 56 7.7 17.5 4.3 34.2 27.9
Target 164 FY11E 74 10.3 13.1 3.3 30.5 29.0
Mcap (Rs Cr) 972 Upside (%) 21.5 FY12E 98 13.6 9.9 2.5 32.0 29.6
Sterlite Technologies NP (Rs Cr) EPS (Rs) PE (x) P/BV (x) RoCE (%) RoE(%)
Idirect Code STEOPT CMP 86 FY10 246 6.9 12.4 3.3 27.8 32.0
Target 113 FY11E 286 7.7 11.2 2.5 24.5 26.1
Mcap (Rs Cr) 3053 Upside (%) 31.4 FY12E 350 9.4 9.2 2.0 23.0 24.1
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 Sterlite Technologies (STEOPT)

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is 2 years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;

Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
7th Floor , Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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