Sterlite Technologies, which deals in fibre optic cables, has several tailwinds going for it: government initiatives such as Digital India and Smart Cities, expectation of exponential data growth and 5G deployment the world over.
It boasts of an all-time high order book, which also ensures strong revenue visibility and has a strategic plan in place to achieve $100 million net income by FY20.
The companys stock has gained 1,370 per cent over the past five years, to trade at Rs 351.10 on April 30, 2018 from Rs 24 on May 2, 2013.
Analysts project Sterlite to ride strong global demand for optical fibre cable, as the telecom players build on their 4G networks.
Brokerage ICICIdirect.com believes other growth catalysts such as 5G, internet of things (IoT) and domestic government-led initiatives such as Digital India, Bharat Net (Phase II) should ensure strong growth visibility in the medium to long term.
The company estimates fibre demand for 5G at 2.5-5 times compared with that for 4G from CY20 onwards. It augurs well for an integrated player like Sterlite. The company also hopes to benefit from demand-supply mismatch, which will remain elevated in CY18.
ICICIdirect.com said, “The demand funnel for Sterlite, both on product (global 4G network expansion and 5G foray) and services, looks strong. Optical fibre capacity expansion announcement would bring in additional revenue opportunity worth Rs 1,000 crore at full capacity (from FY20 onwards), which would, in turn, be margin accretive.”
Exports accounted for 54 per cent of revenue in FY18 against 37 per cent in FY17. Revenue contribution of European and Chinese markets stood at 27 per cent and 13 per cent in FY18 compared with 11 per cent and 19 per cent, respectively, a year ago.
The company kicked off FY19 with an all-time high order book of Rs 5,223 crore, up 73 per cent year-on-year. Sterlite posted a record quarterly profit of Rs 112 crore for March quarter of FY18 over Rs 64 crore in the year-ago quarter.
It has received Rs 3,500 crore advanced purchase orders (not yet included in order book) to design, build and manage Indian Navys communication network.
Technology-led innovations are core to the companys business. Its patent count has been growing, and reached 189 as of FY18, which give it a strategic competitive advantage for market access and higher realisation from new products, which account for 14 per cent of its revenues.
The companys return on equity (RoE) has increased to 28 per cent in FY18 from 23 per cent and 20 per cent in FY17 and FY16, respectively. The debt-to-equity ratio has improved to 0.7 times last financial year from 1 time and 1.3 times in FY17 and FY16, respectively. Return on capital employed (RoCE) grew significantly to 30 per cent in FY18 from 21 per cent and 20 per cent in FY17 and FY16, respectively.
Rating agency CRISIL recently upgraded its rating on Sterlites long-term bank facilities to 'CRISIL AA/Stable' from 'CRISIL AA-/Positive', and reaffirmed its 'CRISIL A1+' rating on the companys commercial paper programme, reaffirming its strong financial clout.
Emkay Global Financial Services says the company has lined up Rs 1,060 crore capital expenditure for next two years. This capex will be funded through a mix of internal cash flows and new debt.
The brokerage expects net debt to sustain at 0.8 times by FY20. “We have factored in the increased working capital requirement owing to rising revenue from the systems integration business,” the brokerage said. Emkay has a buy rating on the stock with a 12-month target price of Rs 500.
Axis Capital is bullish on Sterlite with a target price of Rs 383. Edelweiss Securities is also positive on it with a target price of Rs 425. “Sterlite is well positioned to capture the robust global growth in fibre consumption,” Edelweiss said in a report.
“Going ahead, opportunities from network for spectrum (NFS) Bharat Net (phase II) (expected to witness bidding in traction in FY19) and Smart Cities are likely to drive revenue visibility in the services and solutions businesses. We maintain a buy recommendation on the stock with a target price of Rs 440,” brokerage ICICIdirect said in a report.
The company dominates Indias optic fibre market with a 40 per cent share and has a 6 per cent share of the global market. Postponement in government expenditure for the Bharat Net project and the “broadband for all” initiative, any downturn in the global economy, alternate connectivity technology and a dip in telecom capex are some of the key risks for the stock.
Forex sensitivity to earnings owing to increasing dependence on exports is yet another key risk for the company.