Sterlite Technologies: A compounding machine

Jitendra Kumar Gupta Moneycontrol Research

The global upturn in the optical fibre business has led to huge demand, enabling companies such as Sterlite Technologies to grow faster. Market dynamics are shifting from pure telecom to a more diversified market like data networks needed by enterprises, cloud computing, government, smart cities, defence and content players, particularly in light of the rollout of 5G for intense applications.

The company expects its user industry to undertake a capex of about $300 billion over the next few years. With an 8-10 percent global market share, it is eying a $30 billion opportunity for itself. Even if a fraction of this gets materialised, it is still huge. If the company is able to manage growth with prudent capital allocation and balance sheet management, there should be nothing to look back.

Thanks to the huge capex lined up by the user industry, Sterlite Technologies has been able to grow its order book faster than its sales. As against an order book of close to 1.2 times FY17 and 1.6 times FY18 sales, the company is currently sitting to an order book of close 2.6 times, or Rs 9,455 crore, providing strong revenue visibility for the next two-and-a-half years.

Numbers speak volumes This has already started to reflect in growth. During Q2 FY19, the company delivered 39 percent revenue growth at Rs 1,084 crore, led by robust execution and demand. Due to high demand, it is currently working at very high capacity utilisation across segments, thus generating higher operating margins.

Its optical fibre cable business is operating around 90 percent capacity utilisation. During the quarter gone by, the company saw its operating margin improve 335 basis points (100 bps = 1 percentage point) to 25 percent. Besides, contribution of value-added product business is increasing and has helped in higher realisations, leading to better margins. Overall, this led to a strong 56 percent year-on-year jump in earnings before interest, tax, depreciation and amortisation (EBITDA) to Rs 279 crore and net profit increasing 84 percent to Rs 131 crore.

On a growth trajectory Earnings growth is expected to remain strong over the next two years, backed by a robust order book, capacity expansion and contribution from value-added products. Integration of its recent acquisition in Europe and capacity enhancements should help in growing overall earnings in coming years.