Buy Sterlite Tech; target of Rs 70: KRChoksey

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Buy Sterlite Tech; target of Rs 70: KRChoksey

KRChoksey is bullish on Sterlite Technologies and has recommended buy rating on the stock with a target of Rs 70 in its August 10, 2011 research report.

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KRChoksey is bullish on Sterlite Technologies and has recommended buy rating on the stock with a target of Rs 70 in its August 10, 2011 research report.

" Sterlite Technologies , net revenues grew by 11% YoY to Rs 547 crore against our expectation of Rs 516 crore, led by power segment (16% growth YoY). Exports grew by ~42% YoY to Rs 153 crore, of which Europe and America together contributed ~43% vs 37% share in Q1FY11. Execution of lower margin orders in power segment led EBITDA margins (excluding other income) to further shrink by 166bps sequentially and 1136bps YoY to 5.5%. Net profit declined by ~91% YoY and almost halved on QoQ basis to Rs 5.2 crore against our expectation of Rs 6.9 crore. Order book grew by 9% sequentially to Rs 2,400 crore against Rs 2,200 crore in FY11, a positive surprise in the absence of any PGCIL order for conductors being released during the quarter and led by good inflows in telecom segment. Exports contribute ~25% of total backlog vs 16% in FY11"

"Realisations in the conductors segment during Q1FY12 declined by ~3% YoY and ~11% QoQ to ~Rs 127,000/ton. Conductor volume grew by ~19% YoY to 31,000 MT while revenues grew by 16% YoY during Q1FY12. Higher material cost and execution of lower margins orders, however led EBITDA margins to shrink to ~Rs 2,600/ton vs ~Rs 4,000 during Q4FY11 and ~Rs 17,000 in Q1FY11. PGCIL contributed around 25-26% of conductor revenue. STL is currently operating at almost full utilization level. Telecom segment (including optical fiber, optical fiber cable, data cable and IMS business) remained muted during the quarter. Net revenues grew by just ~0.6% on YoY basis, though declined by ~9% sequentially to Rs 153 crore. EBITDA margins improved by 273 bps sequentially against a decline of 542 bps on YoY basis, suggesting gradual improvement in optical fiber market in terms of realization. STL booked revenue of Rs 22 crore in its IMS business vs Rs 26 crore in Q1FY11 and zero in Q4FY11. Order book in telecom stood at Rs 600 crore (0.9x on FY11 telecom revenue), providing revenue visibility for almost a year."

"Management has indicated net working capital of ~Rs 750 crore deployed at the end of Q1FY12 vs ~Rs 790 crore at the end of Q4FY11. Due to higher cost of incremental debt (11% vs 9.5-10% on an average), interest expense went up by 207% YoY and 20% QoQ. The impact is mitigated to some extent by interest income (~Rs 7 crore) booked on maturity of Religare Fixed Maturity plan of Rs 100 crore during the quarter. Management has maintained its EBITDA guidance of Rs 400 crore for FY12. However we believe that slowdown in domestic power sector coupled with slow recovery in US with European crisis still looming high, we could see some delay on the order inflows front both from PGCIL and international markets. Consequently we are revising our FY12E and FY13E estimates factoring in some delay in order inflows and high raw material prices not cooling off as we had expected."

"We expect margins to improve going forward as a large chunk of low margin orders in power segment have been executed by Q1FY12 in our view. Telecom segment has also shown some improvement in terms of demand and realisations. STL is currently trading at very attractive valuations with PER of 10.5x on FY12E EPS of Rs 5 and 8x on FY13E EPS of Rs 6. We continue to prefer STL in the cables and conductors segment on the back of strong expected performance, market leadership position and diversified business model. We maintain our BUY recommendation on the stock with the TP of Rs 70, rolling our valuation base over to FY13E EPS," says KRChoksey research report.

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