InitiatingCoverageSterliteTechnologiesLtd.

Recommendation

BUY

CMP(02/09/2011)

Rs.39

TargetPrice

Rs.53

BigisgettingBigger!

Sector

Power&Telecom

StockDetails

Sterlite Technologies Ltd (STL) is Indias only fully integrated optical fiber
manufacturer and the fifthlargest globally. The company is also the third
largestglobalmanufacturerofpowerconductorsandisaleaderinthelocal
marketwith25%marketshare.

InvestmentRationale

BSECode

532374

NSECode

STRTECH

MassiveCapacityExpansionleaderinitsbusinesses

The company has embarked on a capacity expansion for its power

conductors
and optical fiber business units. In the power conductor
SOTLIN
segment,ithasincreasedcapacityfrom75000MtpainFY07to160000Mtpa
1542 inFY10andisfurtherexpandingto200000MtpabyFY12.Thiswouldmake
45.27 STLtheworldslargestintegratedmanufacturerofpowerconductors.Inthe
10436 optical fiber segment, the company is increasing its capacity to 20 mn kms
fromitscurrent12mnkms.ThiswouldmakeSTLamongthelargestglobal
243394
manufacturersofopticalfibersbyFY12.Theimpactoftheseexpansionswill
2 beseeninFY13.
25%

BloombergCode
MarketCap(Rs.Crs)
FreeFloat(%)
52wkHI/Lo(Rs)
Avg.volume(Monthly)
FaceValue(Rs)
Dividend(FY11)
Shareso/s(Crs)
RelativePerformance

1Mth

3Mth

SterliteTech

21.6%

27.4%

Sensex

8.3%

8.5%

39.29 IndependentPowerTransmissionProjectslongtermbenefits
STLhasventuredintobiddingforindependentpowertransmissionprojects
1Yr
and has won a BOOM project of East North Interconnection mega
59.7% transmission whereby it will get fixed revenues every year. This would
7.5%
provideadditionalrevenuestreamafter35years.Thisprojecthasachieved
financial closure and is on schedule. The company has 2 other BOOM
projectsunderthisportfolioforwhichitistargetingthefinancialclosurein
FY12.

HugeGlobalOpticFiberDemandwellsettobenefit

ShareholdingPattern30/06/2011
PromotersHolding

In2010,theglobaldemandforopticalfibercablereached182mnfiberkm
and this is expected to cross 200 mn fiberkm in 2011 on the back of
developedcountryseffortstobuildFTTxnetworks.Chinesedemandsawa
flat growth in the previous year. This year, however, all the 3 telecom
operatorsinChinatogetherhavecomeupwithinvestmentplansofUS$50
billion for building 3G mobile network and construction of FTTx networks.
SterlitehasformedaJVwithaChinesefirmwith75%ownershipandisina
verygoodpositiontocapturethisdemand.

54.7% Valuation&Recommendation
13.8% STL is a leader in the areas of its operations and the end user industries
PowerandTelecomareseeingrobustgrowth.
6.1%

25.4% Weexpectrevenuestogrowby22%toRs.2762crandPATtomoveupby
14%toRs.160crinFY12E.AtCMP,thestockistradingat9.6xofFY12EEPS
of Rs.4.08. We assign a multiple of 13x to its FY12E EPS to arrive at price
targetofRs.53andassignaBUYrecommendationonthestock.

Institutional(Incl.FII)
CorporateBodies
Public&others
SunilJain,VPEquityResearch(02239268196)
sunil.jain@nirmalbang.com
AmishPansuria,ResearchAnalyst(02239268174)
amish.pansuria@nirmalbang.com

Year

NetSales

Growth%

EBITDA

Margin%

AdjPAT Margin%

EPS

PE

P/Bv

FY10A

2431

6.2

381

15.7

246

10.1

7.3

5.3

1.4

FY11A

2262

7.0

265

11.7

FY12E

2762

22.1

322

11.7

140

6.2

3.9

10.0

1.5

160

5.8

4.1

9.6

1.2

InitiatingCoverageSterliteTechnologiesLtd.

COMPANYPROFILE

Sterlite Technologies (STL) is a leading global provider of transmission solutions for the
power and telecom industries. It is among the Top 3 global manufacturers of power
conductors and among the Top 5 global manufacturers of optical fibers and cables. It is
Indiasonlyfullyintegratedopticalfibermanufacturer.Thecompanyisaleaderinthelocal
marketwith25%marketshare.Itsbusinesscanbeclassifiedintotwomajorsegments
power transmission which contributed 71% to net revenues and telecom products and
solutionssegment,whichcontributedtherestinFY11.

Thecompanymanufacturesandsuppliesopticalfibers,fiberopticcables,coppertelecom
cables, structured data cables and ADSL2+ modems. It also deals in power transmission
conductors and aluminum and alloy rods. It offers telecom integration and managed
services.

Thecompanyhasaglobalpresencewithclientsinover55countriesinAsiaPacific,Africa,
EuropeandNorthAmerica.Almost28%ofitssalescomefromInternationalbusiness.

To strengthen its presence in China, STL recently formed a JV with a Chinese company,
JiangsuTongguangCommunicationCoLtd;STLholdsa75percentstakeintheJV.ThisJVis
setting up a manufacturing facility for 4 mn km of cables in China, and is expected to
becomeoperationalbySeptember2012.

InitiatingCoverageSterliteTechnologiesLtd.

INDUSTRY

Power
Investment in the power T&D sector DomesticMarket
in 12th fiveyear plan is estimated at The Government of India has an ambitious mission of POWER FOR ALL BY 2012. Power
Rs 240,000 cr providing an requirement will double by 2020 to 400,000 MW. To cater to this growing energy
opportunity of Rs. 552 cr in the requirement, investments in new generation facilities are inevitable. The investments in
conductorsegment
generation have to be supported with equal if not more investments to build a robust

transmissionanddistribution(T&D)network.

Afteradecadeofunderinvestmentinthetransmissionanddistributionspace,the11thand

12thPlansaremoreprogressiveforthissegment.Thisisevidentfromthefactthattheshare

ofexpenditureonT&Dinthe11thPlanand12thPlansis51%and56.4%,respectively,as

compared to the 44.2% share in the 10th Plan. Transmission capex in the 11th plan has

increasedtoRs.140,000crfromRs.98,300crinthe10thplan.Thebulkoftheinvestments

in the transmission segment are being done by PGCIL (40%) and SEBs, while the private

sector constitutes only a small proportion. Based on preliminary estimates, transmission

spendingisexpectedtoincreasetoRs.240,000cr(upby71%)inthe12thplan.

Inthe12thPlanPGCILplanstospendRs.120,000crfor:

Enhancingthecapacityoftheinterregionaltransmissiongridfrom37,000MVAto

75,000MVA.

BuildingaHighCapacityTransmissionCorridor(HCTC)forRs.49,630cr(60%ofthis

willbespentontransmissionlines)

StateElectricityBoards(SEBs)havealsostartedinvestinginsettingupaswellasupgrading

their T&D infrastructure. As per the preliminary estimates of the 12th Plan, SEBs are

expectedtospendRs.100,000crontheirT&Dinfrastructure.

GlobalPowertransmissionMarket

ThereisrenewedmomentuminT&Dinfrastructurebuildupinsomeofthedevelopedparts

of the world. The usual life of a transmission line is around 3035 years. Many of these

developed nations are now nearing the end of T&D infrastructure and many state and

nationaltransmissionutilitiesinthesecountriesarenowplanninginvestmentstoupgrade

or set up new grids. The renewable energy installations are also demanding new T&D

infrastructuretoevacuatepowerfromthenewgeneratingstations.

USA: The American Reinvestment and Recovery Act of 2009 is facilitating a US$ 11 billion

investmentintheT&Dgrid.

Russia:MinistryofEnergyhasestimatedaninvestmentofUS$385billionforitspowergrids

overthenext10years.

China:US$28billioninvestmentinitspowergridby2015.

Mexico:US$10billioninvestmentintheT&Dsectorby2018.

MiddleEast&Africa:AccordingtoIEA~US$77bnofinvestmentswouldberequiredinthe

T&DsectorofMiddleEastoveraperiodof20082015.Similarly,investmentsworth~US$63

bnareexpectedtobeinvestedinbuildinguptheT&DinfrastructureinAfrica,overthesame

period.

Global electricity sector investment is anticipated to reach US$ 10 Trillion by 2030. More

thanUS$5trillionwillbeusedtoinvestintransmissionanddistributionnetworks.

InitiatingCoverageSterliteTechnologiesLtd.

STL is Indias largest and fifth largest

globally in optical fiber production
and is in a good position to capture
theglobaldemandforfiberoptic.

Telecom

DomesticMarket
Indiaisthesecondlargesttelecommarketwith585mnwirelesssubscribers.However,the
penetrationlevelsarestillabout50%oftheenormouspotentialavailable.Governmentof
Indiahasintensifieditseffortstorolloutbroadbandand3Gservicesinthesemiurbanand
rural areas. We believe that the India market with the highest number of wireless
subscribersisalsoataninflectionpointofgrowthandshouldwitnessgoodgrowthinfiber
deploymentsinthenext23yearsasthebandwidthdemandincreasesridingonthedata
ridden3Gtechnology.
Demandwillbefuelledbythe3Grolloutthatisunderwayinthecountry.Theotherarea
wherethedemandwillcomefromisthegovernment.Therearethreemajorprojects:fiber
tothevillageproject,whichisbeingdrivenbytheMinistryofIT,thenthereisthespectrum
releaseofdefensesectorandthereisanationalknowledgenetwork.

GlobalMarket
AsperCRUestimates,globaldemandforopticalfiberisexpectedtocross200millionkms
in2011.Andthedemandinthefirsthalfoftheyearwasalreadycloseto100millionkms,
representsagrowthofabout5%over2010.
ThedemandforfiberopticcableinotheradvancedeconomieslikeUSA,Japan,Germany,
andNetherlandsisalsorisingduetotheireffortstobuildFibertotheNodeandFiberto
theHome(FTTH)networks.

Source:Company&NBResearch

Chinesedemandwhichconstitutesalmost40%oftheworlddemandforopticalfibersawa
flat growth in the previous year. These fears have been dispelled with all three telecom
operators in China coming out with investment plans of about US$ 50 billion for those
servicingthe3Gmobilenetworkupgrades.

SterlitebeingqualifiedandcertifiedbyallthreemajorChineseoperatorsforfibersupplies,
whichisaverypositivedevelopmentandwiththerecentjointventureinChina,which
shouldstartoperatinginFY13,willbeinmuchstrongerpositiontocapturethedemandin
thecomingyears.

InitiatingCoverageSterliteTechnologiesLtd.

STL would become worlds largest

integrated manufacturer of power
conductors.

Returns from the Independent Power

Transmission Project would start
cominginfromFY14onwards.

INVESTMENTRATIONALE

CapacityExpansionwouldmakeSTLaleader
Inthepowerconductorsegment,STLisincreasingcapacityfrom160000MTto200000MT.
ThiswouldmakeSTLtheworldslargestintegratedmanufacturerofpowerconductors.In
the optical fiber segment, the company is increasing its capacity to 20 mn km. The
company is on track to complete all plant & machine installations by the end of FY12
towardsits20mnkmcapacity.STLwouldbepositionedamongsttheTop3manufacturers
globally. This increase in capacities would bring benefits of economies of scale and add
cushion towards the margin pressure prevailing in the industry. The full impact of this
capacityexpansionwillbevisibleonlyinFY13.

PowerConductors(MT)OpticalFiber(MnKms)

Source:Company&NBResearch

IndependentPowerTransmissionProjectslongtermbenefits
Sterlite has ventured into bidding for independent power transmission projects, which includes
evacuation of power from the generation stations, strengthening of the grid and transmission of
powerfrompoolingstationstotheothergridstationsandloadcenters. Inthisspace, STLhaswona
Build,Own,OperateandManage(BOOM)projectofUltraMegaPowertransmissionprojectoftwo
400kVdoublecircuitlinesof~430KminIndia.Thetransmissionlineswouldbecommissionedwithin
3yearsandthecompanywouldmaintainthemforaminimumtimeframeof22years.Thiswould
provideadditionalrevenuestreamafter35years.Thefinancialclosureofthisprojectisdone.
Thesecondandthirdprojectoftransmissionschemeinvolvesestablishmentof765KVSingleCircuit
Lines; VadodaraDhuleAurangabad and IndoreBhopalJabalpur. The project involves a total line
length of about 1,000 km and the set up of two 1500 MVA substations at Dhule and Bhopal. The
projectwouldbecommissionedwithin36monthsandtheCompanywouldoperateandmaintainthe
transmission system for a minimum tenure of 35 years thereafter. The financial closure for these
projectsisexpectedinFY12.

HugeGlobalOpticFiberDemandwellsettobenefit
China has been the main driver in the market globally at more than 40% of all world
demand.ItwasexpectedthatthedemandforfiberopticcablewillslowdowninChinaat
theendof2010,butlatestdatashowsthatdemandhascontinuedtoremainrobust.The
demandinChinawaspropelledbynetworkoperatorseffortstoimproveconnectivityand
to cater to demand arisingfrom 3G/4Gusage. Thedemand for fiber optic cable in other
advancedeconomieslikeUSA,Japan,Germany,andNetherlandsisalsorisingduetotheir
efforts to build Fiber totheNode and FibertotheHome (FTTH) networks. This
combination will drive demand globally for fiber optic cable in 2011 to 200 mn km. The
growthinthemarketin2012willcomefromWesternEuropeandNorthAmerica.Strong
demand globally, is breaking away from the business cycle in the USA and Western
EuropesincedemandisnowbeingdrivenbyFTTH/FTTC.Thereisalsoadditionaldemand

InitiatingCoverageSterliteTechnologiesLtd.

in emerging markets, and new optical fiber lines are being planned in Russia, Brazil,
BangladeshandUzbekistan.

OrderBookExpansiongivesrevenuevisibility
ThestrongorderbookofRs.2400cr(1.06xitsFY11revenues)attheendofQ1FY12gives
goodrevenuevisibilityforthecomingyear.TheorderbackloginpowersegmentisRs.1800
crandthebalanceisfromthetelecomsegment.

Orderbookexpanded9%sequentiallyinQ1FY12.PGCILisexpectedtoreleaseordersof
275000MTofconductors(against225000MTinthecorrespondingpreviousyear),bulkof
whichwouldcomeintheH2FY12.STLwithitsleadershippositioninthepowerconductors
marketinIndiastandstobenefitfromthis.

RevenuesandMarginstoimprove
Order flows for power conductors which are released by PGCIL were muted in
9MFY11, which lead to degrowth in revenues by 7% in FY11. Margins were
affected due to execution of low margin orders which were accepted during
recessionperiod.EBITDAforthePowerConductorsbusinessfellfromanaverage
ofRs.1000012000/MTtobelowRs.4000/MTinQ1FY12.

PGCIL released major orders in Q4FY11 which would be executable over a 1218
monthtimeperiod.STLbaggedordersworthRs.1150crduringQ4FY11(~Rs.800
crworthordersfromPGCIL). Executionoftheseorderswillhelp improvementin
marginsgoingforwardandthefullimpactofmarginexpansionwouldbeseenin
theQ3&Q4FY12results.EBIDTAMarginsareexpectedtobe~11.712%inFY12E.
Weexpecttherevenuesofthecompanytoimproveby22%toRs2762crinFY12E.

InitiatingCoverageSterliteTechnologiesLtd.

Source:Company&NBResearch

Risks
o

HighDependenceofPGCILContracts
PGCIL contributed almost 30% of STLs FY11 revenues. This high reliance on PGCIL is
riskyforthecompany.

ExecutionofBOOMproject
ROEcouldbeaffectedifthereisanyoverrunincapexandincreaseddebtcosts.

CompetitionintheConductorBusiness
DomesticConductormarketisfloodedwithnewentrants.Thiscouldresultinfurther
pressureonmarginsforthecompany.

InitiatingCoverageSterliteTechnologiesLtd.

We assign a Target PE of 13x to the

stock

Valuation&Recommendation
STL is a leader in the areas of its operations and the end user industries Power and
Telecom are seeing robust growth. This demand is expected to remain positive in the
comingyears.Concernslikemarginpressurewouldbetackledbythecompanybyreducing
themanufacturingexpenseswiththeeconomiesofscaleitenjoys.

Weexpecttherevenuestogrowby22%toRs.2762crandPATtomoveupby14%toRs.160
cr.AtCMP,thestockistradingat9.6xofFY12EEPSofRs.4.08.Weassigna13xtothestock
andarriveatpricetargetofRs.53andassignaBUYrecommendationonthestock.

ForwardPEBand

InitiatingCoverageSterliteTechnologiesLtd.
Q1FY12ResultUpdate

STL reported disappointing results during the quarter wherein revenues grew by
11%YoYtoRs.547cr.Thiswasonthebackof16%YoYgrowthintheconductors
segmentatRs.394cr.TelecomrevenuesremainedflatatRs.153cr.

EBIDTA margins dropped significantly to 5.5% due to execution of low margin

projectsintheconductorsegment.MarginsintheConductorsegmentweremere
0.9%whilethatintelecomsegmentwere17%.

PAT was lower by 49% YoY at Rs.5.23 cr. This was mainly due to lower revenues
andhigherinterestcosts.

Order book stands at Rs.2400 cr which was a rise of 9% sequentially. PGCIL has
announcedtoreleaseordersof275000MTintheH2FY12against225000MTinthe
previousyear.

Financials

Q1FY12

Q1FY11

YoY%

Q4FY11

QoQ%

RevenuesNet

547.3

491.8

11%

682.2

20%

EBITDA

30.2

83.0

64%

49.0

38%

EBIDTAMargin

5.5%

16.9%

7.2%

Interest

21.9

7.1

207%

18.2

20%

EBDT

8.3

75.9

89%

30.8

73%

Depreciation

14.6

13.1

12%

15.8

7%

OtherIncome

13.8

5.5

152%

0.1

19614%

PBT

7.5

68.3

89%

15.1

50%

Tax

2.3

12.7

82%

4.8

52%

PAT

5.2

55.6

91%

10.3

49%

EPS

0.13

1.42

91%

0.3

49%

Source:Company

InitiatingCoverageSterliteTechnologiesLtd.
Financials
Profitability (Rs. In Cr)
Y/EMarch
RevenuesNet
%change
EBITDA
%changeinEBIDTA
Interest
EBDT
Depreciation
OtherIncome
Extraordinary(ForexGain/Loss)
PBT
Tax
PAT
Adj.PAT
Shareso/s(No.inCr.)
AdjDilutedEPS
CashEPS
DPS(%)
Quarterly(Rs.InCr)
Revenue
EBITDA
Interest
EBDT
Dep
OtherInc.
Extraordinary
PBT
Tax
PAT
EPS(Rs.)
OperationalRatio
EBITDAmargin(%)
AdjPATmargin(%)
AdjEPSGrowth(%)
PriceEarnings(x)
BookValue(Rs.)
ROE(%)
ROCE(%)
DebtEquityRatio
Price/BookValue(x)
EV/Sales
EV/EBIDTA

Source:Company,NBResearch

FY09A

2289.2
35.8%
234.2
17.4%
53.2
180.9
42.5
3.7
34.8
107.3
19.3
88.0
116.8
32.4
3.6
4.0
25%
Sep.10
509.44
90.56
9.22
81.34
13.34
3.27
0.00
71.27
13.72
57.55
1.62
FY09A
10.2%
5.1%
23.3%
10.9
19.0
20.1%
13.3%
0.8
2.1
0.8
7.6

FY10A FY11A FY12E

2431.6
2262.6
2762.3

7.0% 22.1%
6.2%
265.6 322.4
381.0
62.7% 30.3% 21.4%
38.1
47.4
58.2
342.8
218.2 264.1
48.3
56.0
63.9
22.9
16.0
15.0
0.0
0.0
0.0
317.5
178.2 215.3
71.4
37.7
54.9
246.1
140.5
160.4
246.1
140.5 160.4
33.5
39.3
39.3

7.3
3.9
4.1

8.8
5.0
5.7

25%
25%
25%

Dec10 Mar11 Jun11

579.11 682.23 547.33

48.98 30.19
43.08
12.85
18.22
21.85

30.23
30.76
8.34

15.75
14.63
13.84
0.07
13.80
7.16
0.00
0.00
0.00
15.08
7.51
23.55
4.88
2.28
6.88

16.67
10.20
5.23
0.47 0.26
0.13
FY10A FY11A FY12E
15.7% 11.7% 11.7%
10.1% 6.2%
5.8%
110.6% 42.9% 14.1%
5.3
10.0
9.6
27.2
26.3
31.9
32.0%
14.4% 14.0%

28.4%
14.8% 15.2%

0.4
0.6
0.4

1.4
1.5
1.2

0.7
1.0
0.8

4.4
8.1
6.5

FinancialHealth(Rs.InCr)
Y/EMarch
ShareCapital
Warrant/ESOP
Reserves&Surplus
Misc.Exp(notw/o)
NetWorth
TotalLoans
DeferredTaxLiabilities
TotalLiabilities

NetFixedAssets

Investments

CurrentAssets
Currentliability&Provision
WorkingCapital
TotalAssets
CashFlow(Rs.InCr)
Operating
OperatingIncome
ChangeinWC
OtherAdjustment
CFfromOperation
Investment
Capex
OtherInvestment
TotalInvestment
Financing
DividendPaid
ShareCapital
Premium/Reserve
Borrowing
OtherIncome
Other
Interest
TaxPaid
TotalFinancing
NetChg.inCash
Cashatbeginning
Cashatend

FY09E

FY10A

32.3
5.26
583.4
0.0
620.9
496.6
56.0
1173.5

656.7

92.0

925.3
500.5
424.8
1173.5
FY09E

234.2
238.7
3.4
469.5

132.5
86.0
218.5

71.1
31.02
813.9
0.0
916.0
358.2
60.2
1334.4

106.1

108.8

1166.3
621.4
544.8
1334.4
FY10A

1479.3
736.9
742.4
1878.5
FY12E

265.6
280.7
5.3
9.7

64.0
14.1
78.1

322.4
14.1
0.0
308.3

244.9
2.7
247.6

20.8
6.6
63.3
138.4
22.9
0.0
38.1
67.2
171.8
131.8
77.9
209.7

133.8

1538.3
792.4
745.9
1721.7
FY11A

381.0
11.8
11.0
381.7

1002.3

78.6
6.05
1174.5
0.0
1259.1
544.8
74.6
1878.5

866.9

FY12E

71.3
30.10
934.5
0.0
1035.9
619.8
66.0
1721.7

683.4

9.4
0.0
0.7
166.6
3.7
34.8
53.2
2.6
262.2
11.2
89.1
77.9

FY11A

199.2
25.0
224.2

23.0
0.2
2.2
261.6
16.0
0.0
47.4
31.8
177.7
79.6
209.7
130.1

22.6
7.3
78.2
75.0
15.0
0.0
58.2
46.3
101.6
17.6
130.1
112.5

InitiatingCoverageSterliteTechnologiesLtd.
Note

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