Sterlite Technologies Ltd.

Transcription

1 Nov-16 Dec-16 Jan-17 Jan-17 Feb-17 Mar-17 Mar-17 Apr-17 May-17 May-17 Jun-17 Jul-17 Jul-17 Aug-17 Aug-17 Sep-17 Oct-17 Oct-17 Nov-17 Initiating Coverage Equity India Telecom Services Sterlite Technologies Ltd. Banking on technology.. November28, 2017 BUY CMP (`) Target (`) Potential Upside Absolute Rating 28% BUY Market Info (as on November27, 2017) BSE Sensex Nifty S&P Stock Detail BSE Group A BSE Code NSE Code STRTECH Bloomberg Code SOTL IN Market Cap (`bn) Free Float (%) 45.7% 52wk Hi/Lo 307/93.5 Avg. Daily Volume (NSE) Face Value / Div. per share (`) 2.0 / 0.97 Shares Outstanding (mn) 427 Shareholding Pattern (in %) Promoters Public Financial Snapshot (`mn) Y/E Mar FY16 FY17 FY18E FY19E Net Sales 21,608 24,489 29,255 35,399 EBITDA 4,521 5,189 6,294 6,699 PAT 1,511 2,166 2,922 3,294 EPS ROE (%) 20% 25% 28% 27% ROCE (%) 23% 24% 29% 28% P/E EV/EBITDA Share Price Performance Company Snapshot Sterlite Technologies Ltd. an unique product play Sterlite Technologies Ltd. (Sterlite) is global leader in the optical telecommunication products and head quartered in Pune and has operation all over India and abroad. Sterlite Tech is a pure play Telecom Products, Services & Software Company that transforms lives by delivering smarter networks. Sharing a common lineage with Vedanta Resources Plc., Sterlite Tech is among the global leaders in Optical Communication Products such as optical fibers, fiber optic cables and data cables through its operations in India, China, Brazil and sales network across 5 continents. Sterlite Tech products have enabled top telecom operators with smarter networks in more than 75 countries across the world. Investment Rationale The company has unique business structure that has focused portfolio Sterlite Technologies specialize in the telecommunication sector and has focused themselves on the three business platforms viz Product vertical, service vertical and software vertical. Sterlite Tech products have enabled top telecom operators with smarter networks in more than 75 countries across the world. This wide reach and unique product structure gives Sterlite edge over its peers and also helps to attain higher growth momentum. Under the Telecom Services offerings, with expertise in designing, engineering, building & managing broadband networks, Sterlite Tech is developing several network projects, such as secure network for the Armed Forces under Network for Spectrum, enabling rural broadband through BharatNet, developing Smart Cities, and establishing high-speed Fiber-to-the-Home (FTTH). Rising global fiber demand can create better business opportunity China is considered to be largest consumer of the optical fiber. It is having 55% of world cable demand. Broadband China initiative leading to higher FTTH penetration to increase fiber network deployment in China. Sterlite is taking the advantage of the rising demand in the market and make business structure more robust. We believe that this strategy of expanding the business will help them to grow in higher momentum. System integration can be a great opportunity System integration vertical is also one the major vertical the company is working on. System integration is one of the most upcoming business opportunities in India. The new initiatives taken by the central government like digital India can create a better business opportunity. There is huge demand for the smart cities and have huge growth prospects for the company to grow. The company has got the stronger order book for the vertical. In the recent quarters Sterlite received an order for the 3 cities including Ahmadabad. The company has also selected as one of the two global fiber cables supplier to a large Telco capturing over 65% of the market share. Sterlite BSE Sensex Valuation Rel. Perf. 1Mth 3 Mths 6Mths 1Yr Sterlite (%) SENSEX (%) (0.1) (4.8) (3.3) 7.7 At the CMP of `270, Sterlite Technologies Ltd. is trading at 53.3 xs, and39.2x its FY17, and FY18E EPS of `5.0 and `6.8. Compared to its peers; Sterlite is trading at a discount P/E multiple, even though its margins are better than or comparable to peers. We initiate coverage on Sterlite with a BUY rating and attach a multiple of 45x xs to Sterlite s FY19E earnings (EPS) to arrive at the target price of `346, indicating a potential upside of 28%. Analyst Omkar Tanksale omkar@geplcapital.com Institutional Research 1

2 Index & Content Sr. No. Topic Page No. 1 Company Background 3 3 Key Management Personnel 4 4 Investment Rationale 5 5 Revenue Growth Drivers 7 7 Key Risks 10 8 SWOT Analysis 11 9 Michael Porter s Five Force Analysis Valuation & Outlook Financials Disclaimer 15 Institutional Research Initiating Coverage 2

3 Company Background Sterlite Technologies is global leader in the optical telecommunication products and head quartered in Pune and has operation all over in the India and abroad. Sterlite Tech is a pure play Telecom Products, Services & Software Company that transforms lives by delivering smarter networks. Sharing a common lineage with Vedanta Resources Plc., Sterlite Tech is among the global leaders in Optical Communication Products such as optical fibers, fiber optic cables and data cables through its operations in India, China, Brazil and sales network across 5 continents. Sterlite Tech products have enabled top telecom operators with smarter networks in more than 75 countries across the world. Under the Telecom Services offerings, with expertise in designing, engineering, building & managing broadband networks, Sterlite Tech is developing several network projects, such as secure network for the Armed Forces under Network for Spectrum, enabling rural broadband through BharatNet, developing Smart Cities, and establishing high-speed Fiber-to-the-Home (FTTH). In 2015, Sterlite Tech broadened its offerings portfolio to include Telecom Software by acquiring highly customizable OSS & BSS software solutions suite through Elitecore. With many industry firsts to its credit, Sterlite Tech is home to India s only Centre of Excellence for broadband research, and a strong portfolio of over 100 patents. Institutional Research Initiating Coverage 3

4 Key Management Personnel Sterlite has experienced management which helps company to attain desired growth over the period of time. Anil Agarwal, Non-Executive Chairman Anil Agarwal founded Sterlite Group in 1976 and has been overseeing its operations since its inception. He is the Executive Chairman of Vedanta Resources Plc and also the Chairman Emeritus of Sesa Sterlite Limited. He has over three decades of experience in business strategy, general management and commercial matters. Pravin Agarwal, Vice Chairman & Whole Time Director Pravin Agarwal is closely involved with Sterlite Group s operations in India since inception. He has been instrumental in the growth of Sterlite's Telecom and Power businesses. His rich experience in general management and commercial matters spans over three decades. Dr. Anand Agarwal, Chief Executive Officer Dr Anand Agarwal joined Sterlite in 1995 and held key positions in manufacturing, quality assurance and business development. He was working with Siemens prior to Sterlite. He has completed B. Tech. in Metallurgical Engineering from IIT-Kanpur and Master s and Ph.D. from the Rensselaer Polytechnic Institute. K. S. Rao, COO Telecom Products & Solutions K. S. Rao joined Sterlite in 1993 and has, since, held various positions in the Company's Telecom business. His key focus areas have been engineering, manufacturing, product development, project management and business development. K. S. Rao holds a Bachelor s degree in Mechanical Engineering. Anupam Jindal, Chief Financial Officer Anupam Jindal joined Sterlite Group in 1998 and worked with the Group's aluminium foils and copper cables businesses before heading finance for Sterlite's mining operations in Australia. His key work areas have been finance, treasury, accounts and MIS. Anupam is a Chartered Accountant from the Institute of Chartered Accountants of India. Ankit Agarwal, Director - Telecom Products Ankit Agarwal joined Sterlite in 2007 and heads the Telecom Products division. He has an experience of above 10 years. In addition, he is responsible for identifying and executing strategic opportunities for Sterlite globally, including mergers and acquisitions, joint ventures and greenfield projects. Ankit holds a Bachelor's degree from University of Southern California and MBA from London Business School. Institutional Research Initiating Coverage 4

5 Investment Rationale The company has a unique business structure that have focused portfolio Sterlite Technologies specialize in the telecommunication sector and has focused themselves on the three business platforms viz Product vertical, service vertical and software vertical. Optical Communication Products such as optical fibers, fiber optic cables and data cables through its operations in India, China, Brazil and sales network across 5 continents. Sterlite Tech products have enabled top telecom operators with smarter networks in more than 75 countries across the world. Under the Telecom Services offerings, with expertise in designing, engineering, building & managing broadband networks, Sterlite Tech is developing several network projects, such as secure network for the Armed Forces under Network for Spectrum, enabling rural broadband through BharatNet, developing Smart Cities, and establishing high-speed Fiber-to-the-Home (FTTH). In 2015, Sterlite Tech broadened its offerings portfolio to include Telecom Software by acquiring highly customizable OSS & BSS software solutions suite through Elitecore. With many industry firsts to its credit, Sterlite Tech is home to India s only Centre of Excellence for broadband research, and a strong portfolio of over 100 patents. Product vertical includes manufacturing of optical communication products. Sterlite technology is one the leading player in the optical fiber and optical fiber cables manufacturing. The company has manufacturing capacity of 25 Mn km in the optical fiber space. Strong demand from china will likely to continue in the upcoming tenure. Focused on the connectivity opportunity As shown in the above diagram the company has focus on 3 verticals to attain higher growth model. The company has focus on five different business areas which can help them to grow with higher momentum. Rising demand from the International markets can create a huge business opportunity. Domestically also Indian telecom space, digitalization, defense and other utilities, smart cites rural broadband will provide huge opportunity to the company. We believe that this strategic initiative by the company can create huge potential to grow in the upcoming tenure. Institutional Research Initiating Coverage 5

6 Rising global fiber demand can create better business opportunity As shown in the above diagram the global demand for the optical fiber cable is up by 11%. We are also expecting the global demand likely to increase in the upcoming period. China is considered to be largest consumer of the optical fiber. It is having 55% of world cable demand. Broadband China initiative leading to higher FTTH penetration to increase fiber network deployment in China. Sterlite is taking the advantage of the rising demand in the market and make business structure more robust. We believe that this strategy of expanding the business help them to grow in higher momentum. As we can see the demand for the system integration is rising. We can see there is huge demand for the smart cities and have huge growth prospects for the company to grow. In the recent quarters Sterlite received an order from 3 cities including Ahmedabad. The company has also selected as one of the two global fiber cables supplier to a large Telco capturing over 65% of the market share. Higher capacity utilization helps company to grow with the higher momentum. We believe that Sterlite will realize its gains through capacity utilization. Institutional Research Initiating Coverage 6

7 Revenue Growth Drivers Product Business at a glance Sterlite technologies offer specialized telecom products in their portfolio. Sterlite is one of the leading manufacturers of the optical fiber and optical fiber cables. Sterlite Technologies offers a wide array of cable designs for the various needs of underground installations: from dielectric cables, to steel tape armor, dielectric armor, ribbon tape, antirodent protection, microcables and many other customized designs. In urban environments where space for optical fiber cable installation is limited, their microcables have proven to be a key element to bring more density of fiber to the homes in small conduits. The company has strong patent portfolio of 55 granted patents across globe and break through products. Sterlite has strong global foot print in terms of business and manufacturing capabilities. Center of Excellence - Dedicated to Nation Raw Material Preform Optic Fiber Of Cable Silica & Power Certain natural gases Integrated Core rod + cladding 25m fkm Capacity Expanding capacity to 30m fkm 15m fkm Capacity Portfolio Catering to diverse end use High end technology, fully integrated, global scale operations for manufacturing optical fibers System & Network Lab Glass and reliability Lab Strong patent portfolio 55 granted patents across the globe and break through products Optical characteristics Lab In the upcoming period global demand for the optical fiber and optical fiber cables are likely to remain strong which will drive the revenue growth. We believe that the company also has enough capabilities in terms of product quality and manufacturing capacity. Domestic business demand will likely to remain robust. Will help Sterlite to grow with higher momentum. Institutional Research Initiating Coverage 7

8 Network and System Integration Business at a glance Sterlite is one of the leading service providers of the network and system integration services to telecom service companies. The digital revolution is around the corner with Digital India, E- governance, Smart Cities, IoT and Big Data/Analytics taking a definite shape. Sterlite is at the forefront of this technological revolution with experience and expertise in undertaking end-toend creation of telecom infrastructure & applications. Sterlite helps service providers to capture the fastest time-to-market and revenue with its deep domain expertise and the strength of consulting services, offerings on best-in-class multi-vendor technology and software platforms to build future-proof networks. The company offers Telecom infra service which includes OFC infrastructure, civil infra, Data center infra, passive infra, OFC execution etc. The company provides end to end solutions and all the infrastructure services to its clients. Services Design Build Integrated Manage Opportunities Digital India 3 ICT Application Smart Cities System Integration 2 Active Network Fiber Infra Network Access Solution Network Integration 1 Passive Network Network infrastructure services are also one of the main infrastructure services vertical where Sterlite is operative. Sterlite has expertise in providing transport layer services, Access Metro-E, FTTH, Wifi, IBS, Optics and &MPLS core network, Enterprise Services, security services, broadband infrastructure services. We believe that network integration services are one of the key service areas in terms of revenue growth. The company has better long term perspective. Third service offering vertical is application services. This vertical is technology specific vertical under this vertical the company provides data centers applications, Analytics and big data applications, content delivery networks etc. The company also offers customer centric services like virtualization, messaging services, surveillance services etc. >5,000 >10,000 SI Projects >16,000 >1,000 Under Execution Bid Participated Result Awaited Pipeline Software Services will have higher growth momentum Total Institutional Research Initiating Coverage 8

9 Layer Presence Equity India Telecom Services Elitecore Technologies, founded in 1999, is a part of Sterlite Technologies Limited. It is a global IT product company providing BSS alongside packet core with flexibility of modular and preintegrated offerings. Adhering to TM Forum and 3GPP standard, Elitecore telecom offerings are compatible to large vendor ecosystem addressing to operator s requirement of faster time-tomarket and better TCO. As experienced IP solutions player, Elitecore products are highly responsive to next-generation services, fulfilling operator monetization needs across the access networks. Elitecore has over 150+ network deployments for 52 service providers with presence across 40+ countries. Diagram company website. Elitecore serves as a very good entry in the OSS/ BSS space and the wider telecom software space. The Company will help transform Sterlite from a capital-intensive driven growth to knowledge and services driven growth. Elitecore helps to build capabilities in the services and solutions space, thus creating a new facet within the telecoms value chain. Together, Sterlite and Elitecore will be able to offer complete suite of products and solutions for telecom service providers and become a partner of choice, be it fibre & cable portfolio, network creation and software solutions. Sterlite Tech addressable : CurrentGlobal OSS-BSS Market $12.3 Bn BSS & Business Appz 1 Pure play BSS/OSS players Landscape in Telecom OSS/BSS Space Specialized BSS/OSS players System Integrators (SIs) Typically build on their strong integration skills 3 $8.2 Bn OSS & Middleware 2 Middleware (MW) Selectively partnerfor solutions and don't offer integration services FY15 (Current Market) FY 18 (New Geo s) Network & Control Leverage their network and control core capabilities to offer solutions with own and partnerproducts 4 Telecom Equipment Manufacturers (TEMs) Own product business Partnering for solutions Integration Way to Play Institutional Research Initiating Coverage 9

10 Key Risks Investment Risk : Slowdown in the telecom infra spending may affect the business on the higher nod. Change in the economic climate / legislation against Indian offshore development in the countries where the company provides its services. The company has business to business structure this will lead to limited client supply which contributes significant part of the top line. Loss of one client may impact significant part of the top line. The company needs to have higher capital expenditure to attain higher growth which may impact ROE and ROCE negatively. New technology may affect the FOC business substantially. This can also be a biggest threat to its business. Institutional Research Initiating Coverage 10

11 SWOT Analysis Strengths Strong domain focus Very well Diversification of business. Strong management and Technology backup Opportunities Further penetration in telecom industry Mining the existing and new clients Sterlite Technologies Ltd Weaknesses High client concentration Single domain dependence Threats Slowdown in telecom infrastructure spending Loss of top client Institutional Research Initiating Coverage 11

12 Michael Porter s Five Force Analysis Threat of new entrants Increasing Growing demand for FOC consumption due to higher penetration may attract other players.. Bargaining Power of Suppliers High Less competition in FOC puts lesser pressure on suplier. Inter-firm Rivalry High Lower Entry barriers in the industry have led to high concentration in the industry. Bargaining Power of Buyers Increasing More no of supplier may put pricing pressure and bargaining power of buyers may increasing. Threat from Substitutes - Increasing New technologies wireless communications may put pressure on the business Institutional Research Initiating Coverage 12

13 Apr-07 Nov-07 Jun-08 Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov-14 Jun-15 Jan-16 Aug-16 Mar-17 Oct-17 May-18 Dec-18 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 Equity India Telecom Services Valuation & Outlook At the CMP of `270, Sterlite Technologies Ltd. is trading at 53.3 xs, and39.2x its FY17, and FY18E EPS of `5.0 and `6.8. Compared to its peers; Sterlite is trading at a discount P/E multiple, even though its margins are better than or comparable to peers. We initiate coverage on Sterlite with a BUY rating and attach a multiple of 45x xs to Sterlite s FY19E earnings (EPS) to arrive at the target price of `346, indicating a potential upside of 28%. 1 year forward P/E Chart Close -Unit Curr 10.0 X 15.0 X 20.0 X 25.0 X 30.0 X Source: Capitaline, Institutional Research 1 year forward P/ BV Chart Close -Unit Curr 4.0 X 5.0 X 6.0 X 7.0 X 8.0 X Source: Capitaline, Institutional Research Institutional Research Initiating Coverage 13

14 Income Statement Y/E Mar (`mn) FY15 FY16 FY17 FY18E FY19E Net revenues 30,971 21,608 24,489 29,255 35,399 Operating Expenses 26,364 17,087 19,299 22,962 28,700 Y/E Mar (`mn) FY15 FY16 FY17 FY18E FY19E EBITDA Margin (%) 15% 21% 21% 22% 19% Depreciation 1,850 1,309 1,592 1,522 1,550 Other Income Interest (Net) 3,269 1,133 1,110 1,200 1,200 Exceptional Items PBT 1 2,208 2,602 3,747 4,149 PBT Margin (%) 0% 10% 11% 13% 12% Tax Adjusted PAT (36) 1,571 2,205 2,998 3,319 Extraordinary Items Reported PAT (26) 1,511 2,166 2,922 3,294 Balance Sheet Y/E Mar (`mn) FY15 FY16 FY17 FY18E FY19E Equity capital Reserves & Surplus 10,081 6,756 8,004 9,461 11,401 Net worth 10,869 7,546 8,801 10,258 12,198 Total debt 44,359 4,686 4,271 4,250 4,175 Deferred Tax Liability Short term borowings 6,219 3,573 5,910 4,250 5,210 Trade payables 8,997 3,701 4,486 6,011 6,120 Short term provision 6,878 4,616 3,440 4,750 4,750 Total Current Liabilities 22,576 12,578 14,091 15,661 16,205 Total Liabilities & Equity 83,922 26,962 29,507 32,519 35,578 Tangible assets 40,390 9,924 11,921 13,113 14,687 Intangible assets 162 1,538 1,036 1,191 1,334 Capital WIP 21,926 1, Intangible assets WIP Total Non-Current Assets 62,478 13,201 13,786 15,217 16,968 long term loans and 1, ,000 1,000 advances Debtors 8,344 6,982 6,867 6,412 6,500 Cash & bank 3, ,374 4,150 5,575 Loans & advances 2,405 1,091-1,500 1,000 Other Current Assets 386 1,354 2,802 1,620 1,500 Total Assets 83,922 26,404 29,507 32,519 35,578 Key Ratio Y/E Mar (`mn) FY14 FY15 FY16 FY17E FY18E Per Share Ratios Fully diluted E P S (0.1) Book Value Dividend per share Valuation Ratio P/E P/BV EV/EBITDA EV/Sales Growth Ratios Sales Growth 21% -30% 13% 19% 21% EBITDA Growth 67% -2% 15% 21% 6% Net Profit Growth % 35% 13% EPS Growth % 37% 0% Common size Ratios EBITDA Margin 15% 21% 21% 22% 19% EBIT margin 11% 15% 15% 17% 15% PAT margin 0% 7% 9% 10% 9% Operating Expenses 85% 79% 79% 78% 81% Return ratios RoNW 0% 20% 25% 28% 27% RoCE 5% 23% 24% 29% 28% Turnover ratios (days) Debtors ( Days) Creditors ( Days) Solvency Ratios Total Debt/Equity Interest coverage Cash Flow Y/E Mar (`mn) FY14 FY15 FY16 FY17E FY18E PBT 1 2,208 2,602 3,747 4,149 Add: Depreciation 1,850 1,309 1,592 1,522 1,550 Other Adjustments 4,847 2,664 3,379 4,394 4,824 Chg in working capital (702) (2,266) (2,671) (2,836) (2,716) Taxes paid (220) (540) (397) (749) (830) CF from operations 3,927 2, ,278 Change in fixed assets (11,592) (2,226) (415) (1,413) (1,789) Purchase of investment 0 (16) (300) (450) (450) Proceeds from investment sale Other Adjustments 1, CF from Investing acti. (11,718) (2,189) (440) (1,713) (2,089) Chg in debt 22,206 2,072 (415) (21) (75) Dividend & dividend tax (117) (234) (709) (982) (1,107) Interest paid (5,746) (1,301) (1,110) (1,200) (1,200) Other Adjustments 0 (31) (95) (120) (120) CF from financing acti. 8,500 (818) 892 3,682 2,235 Chg in cash 709 (941) 764 2,776 1,424 Opening cash 842 1, ,374 4,150 Closing cash 3, ,374 4,150 5,575 Du-Pont Analysis (%) FY14 FY15 FY16 FY17E FY18E PAT/ PBT PBT/ PBIT PBIT / Sales Sales / Assets Assets/ Equity ROE Institutional Research Initiating Coverage 14

15 NOTES Recommendation Rationale Recommendation Expected Absolute Return (%) over 12 months BUY >15% ACCUMULATE <10% and >15% NEUTRAL <-10% and <10% REDUCE >-10% and <-20% SELL >-10 Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for stock and our recommendation. Name Designation Contact Omkar Tanksale Sr. Analyst - Fundamental Research omkar@geplcapital.com 91 (22) I, Mr. Omkar Tanksale(Research Analyst of GEPL), having Education Qualification MBA Finance, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. 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Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. GEPL Capital Private Limited is a SEBI registered Research Analyst entity bearing SEBI Reg. No. INH under SEBI (Research Analysts) Regulations, Reg./Corp. Office : D-21 Dhanraj Mahal, CSM Marg, Colaba, Mumbai Contact No SEBI Reg.No. NSE/NSE F&O/CD - INB , INF & INE BSE/BSE F&O- INF , For more information visit us at : : For research related queries at research@geplcapital.com Institutional Research Initiating Coverage 15