CRISIL lowers Sterlite Technologies` fair value to Rs 37

Sterlite Technologies Ltd’s (Sterlite Tech’s) Q1FY13 revenues were higher while PAT was slightly below CRISIL Research’s expectations. Higher-than-expected sale of fibre cables (better realisation though it is a low-margin product) resulted in higher revenues but lower margins. Revenues grew 58% y-o-y and 7% q-o-q to Rs 8,661 mn, primarily driven by high sales volume of all the products. EBITDA margin expanded by 252 bps y-o-y to 8% as the company, like in Q4FY12, reported improved profitability in both its segments. However, contrary to our expectations, profitability hardly increased sequentially. Adjusted PAT grew 250% y-o-y (11% q-o-q) to Rs 183 mn following revenue growth and improvement in profitability. We maintain our fundamental grade of 3/5.

Telecom segment: capacity expansion and favourable product mix; good prospects
The telecom segment’s revenue grew at a healthy 80% y-o-y (6% q-o-q) to Rs 2,763 mn, primarily due to: a) increase in optical fibre volumes in line with increase in capacity and b) higher sale of fibre cable. The company sold 3.4 mn fibre-km (21% higher y-o-y) of optical fibre, out of which 44% (historically 30%) has been used internally to manufacture fibre cables. Due to the change in the product mix, the segment’s EBITDA margin remained at a low 17% compared to 23% in Q1FY12. We have revised our estimates to factor in the change in product mix.

Conductor business: low profitability; increasing competition
The conductor segment’s revenue grew by 44% y-o-y (6% q-o-q) to Rs 5,695 mn on account of higher sales volume and higher realisations. The company utilised its capacity more optimally to execute the healthy order book; capacity utilisation was 91% in Q1FY13 as compared to 78% in Q1FY12 and 88% in Q4FY12. Increasing execution of high-margin orders from PGCIL in Q1FY13 pushed realisations up and improved profitability. EBITDA per tonne increased to Rs 7,420 from Rs 2,665 in Q1FY12. However, it declined 16% q-o-q from Rs 8,844 (adjusted for bad debt write-off of Rs 50 mn) in Q4FY12. We believe competition has increased in the industry, which is affecting Sterlite Tech’s profitability. We are positive on the demand outlook for conductors. The company has a healthy order book (Rs 21 bn - 62% from PGCIL) and has bagged its first order in the US during the quarter. It has also received an order for 2,200 km OPGW (optical fibre composite overhead ground wire) cables from Africa. We have reduced our profit estimate after factoring in an increase in competition but we do expect profitability to improve, albeit lower than previously estimated, with the increasing execution of high-margin orders.

Fair value estimate lowered to Rs 37; CMP has upside
We have used the sum-of-the-parts method to value Sterlite Tech. We have lowered the fair value to Rs 37 in line with the downward revision in our estimates. Based on the current market price of Rs 33, the valuation grade is 4/5.

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