Sterlite Technologies : HOLD

Looking Forward To FY12E For a Fresh Uptick

Sterlite Technologies’ (STL) PAT came well below expectations at Rs 103 mn v/s Rs 226 mn expected, primarily on account of lower EBITDA margins in both the telecom and power segments. While FY11 should have seen bottoming out of STL’s margins in both segments, FY12E brings some ray of hope. This will be driven by stabilization of telecom expansion, and comfortable order book in Power, as Power Grid’s award process has seen an uptick.  Effectively, we are maintaining our estimates for FY12E-13E and our TP of Rs 55, based on PEof 12x FY12E. Considering the recent good run-up in the stock and as we are maintainingour TP, we have a Hold rating.

Q4FY11 conference call highlights

• Revenue growth aided by Power segment: STL’s revenue rose only by 3% YoY to Rs 6.8 bn. An 8% YoY revenue de-growth in the telecom segment was offset by the 7% YoY rise in Power revenues. Going forward in FY12E, we anticipate revenues to rise by 20% YoY, driven by 30%+ YoY rise in Telecom sales. This will be on account of the company’s capex plans (witnessedsome delays in FY11E), which will be stabilized in FY12E.
• Margins bottomed out: STL’s margins have dropped ~400 bps YoY to 11.7% in FY11, with Power segment margins halving to 7.1% from 13.4% YoY. As ordering activity from Power Grid  has seen a pick-up, downward margin pressure is expected to be stemmed. Additionally, as the telecom capex stabilizes, margins on a blended basis should see an improvement for the company in FY12E.

FY12E uptick to be gradual in nature

Management has indicated that  the next 1-2 quarters will be relatively weak, and growth will be more back-ended in nature for FY12E.  We are maintaining our estimates for FY12E-13E and our TP of Rs 55, based on PE of 12x FY12E. Considering the recent good run-up in the stock,and as we are maintaining our TP, we have a Hold rating.