PRIVATE CLIENT GROUP
Sterlite Technologies (STRTECH IN) 14 November 2018 INDIA | MIDCAP| VISIT NOTE Not Rated We recently visited Sterlite Technologies Limited’s plant, below are our key takeaways: COMPANY DATA Sterlite Technologies (STL) is one of the leading global players providing data network solutions viz optical fiber O/S SHARES (MN) : 402.2 MARKET CAP (RS BN) : 146.1 (OF), OF cables, software solutions and system integration services. STL is a fully integrated manufacturer of MARKET CAP (USD MN) : 2021.2 52 ‐ WK HI/LO (RS) : 415.0/253.3 optical fiber cables and is among a handful of players that can undertake the entire process of manufacturing TRADING VOL. 3M (000) : 75809.5 from silicon to pre‐form to fiber to cables. In addition to its product setup STL has forward integrated into PAR VALUE (RS) : 2.0 providing services to its customers like system integration and software which allow it to provide comprehensive SHARE HOLDING PATTERN, % and integrated offerings to customers sharply differentiating it and thereby positioning it to capture greater PROMOTERS : 53.86 FII / FPI : 6.81 share of wallet from sharply increasing global demand for creation of next generation data networks. FI / MF : 12.69 PUBLIC & OTHERS : 26.64 STL has optical fiber manufacturing facilities located in India & China (JV), optic fiber cabling facilities in India, China (JV), Italy and Brazil (JV) and has a sales network across 5 continents globally. In 2015, with the acquisition PRICE Vs. SENSEX of EliteCore Technologies, STL added Telecom Software to its service offerings. With a strong presence internationally STL generates nearly 54% of revenues from international markets with 8 of the top 10 global telecom players its customers. STL shares a common lineage with Vedanta Resources PLC enabling strong management bandwidth and strategic support. Recently STL has also acquired Mettallurgica Bresciana SpA to extend its presence in the European market and enhance its portfolio of high value data cables. Majority of the revenues of STL are generated from the products business, nearly 76.5% of revenues are generated from the optical fiber and optical fiber cables business, while 21.3% of the revenues are derived from the services business (including software and system integration businesses) which are under 3 years old and yet Source: Phillip Capital India Research in startup mode. Customers of STL typically include the following – Global Service Providers, Global Internet
Companies, Defence Services, and Citizen Networks. While in the services business the company caters to only Samarth Sanghavi (+ 9122 6655 1412) to domestic opportunities and its order books include wins from the Indian Navy, Smart Cities and is undertaking [email protected] BharatNet projects as well. Increasing internet and mobile data consumption in India has been aiding the growth of fiber and cable companies. India is a 460 million internet user market, second only to China, and this is expected to increase to
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635.8 million users by FY 2021 while global users are expected to grow to 8.3 billion by 2023. Global optical fiber consumption over the past 12 years has grown at 17% CAGR and now stands at 493 mn fiber kilometers. New technologies like 5G, increasing data consumption and FTTH as well as evolving design and standards for data networks are driving exponential demand for optic fiber are supportive of this increase in demand for OF cables. STL is trading at CMP of INR 363.0 based on the price on 6th November, 2018 at a PE of 43.5x based on its FY 18 earnings of INR 8.34 and at a PE of 31.8x based on its TTM earnings of INR 11.4.
Industry Overview Optical fibers are a way to transmit data from one point to another at extremely fast speeds. Optical fibers can be considered as pipes that carry light, the light has the ability to transfer data from one point to another and fiber cables serve as a medium to reach the designated point. Optical fibers are manufactured from silica which is found in mines globally. This silica is then converted to glass pre‐form and that is then converted to cables. Globally, there a wide range of companies which are involved in the manufacture of Optical Fiber Cables (OFC), however, the manufacture of cables is the last step of value addition. The process of preparing the pre‐form and consequently the optical fiber is the stage at which there are few players. STL is among the few players which has its presence in this segment which lends it a considerable advantage to domestic peers. Some of the leading manufacturers of optical fiber are:
• CommScope Inc
• Corning Inc
• Fujikara Ltd
• OFS Fitel, LLC
• Prysmian SpA
• Sterlite Technologies Ltd
• Nexans
• Sumitomo Electric Owing to the large supply of silica globally, the prices of fiber and cables have also remained stable over the years. However, the technology of converting the silica to fiber is not present with all players and that has resulted in the market being dominated by few players. With the pace of digital adoption scaling new heights globally – data demand has not only been increasing with increasing data consumption from individuals but also from corporations and governments. This is being assisted by the need to digitize records, individual data and targeted delivery of benefits. Financial Page | 2 | PHILLIPCAPITAL INDIA RESEARCH PRIVATE CLIENT GROUP STERLITE TECHNOLOGIES LIMITED INITIATING COVERAGE REPORT inclusion and digital inclusion are the buzzwords today which are driving government policies and all these contribute to the demand for fiber cables which are the backbone needed for a digitally connected society. Data consumption has now become an essential need and is expected to witness exponential per capita consumption growth in times to come. This demand has also prompted a capex cycle across manufacturers of optic fiber cable manufacturers globally. Below are a few points as per a CISCO report “The Zettabyte Era” (full report can be found here https://www.cisco.com/c/en/us/solutions/collateral/service‐ provider/visual‐networking‐index‐vni/vni‐hyperconnectivity‐wp.html):
• Annual global IP traffic will reach 3.3 ZB per year by 2021: or 278 exabytes (EB) per month. In 2016, the annual run rate for global IP traffic was 1.2 ZB per year, or 96 EB per month
Source: CISCO, VNI Global IP Traffic Forecast, 2016‐21, Phillip Capital (India) Research • Global IP traffic will increase nearly threefold over the next 5 years: Overall, IP traffic will grow at a Compound Annual Growth Rate (CAGR) of 24 percent from 2016 to 2021. Monthly IP traffic will reach 35 GB per capita by 2021, up from 13 GB per capita in 2016
• Broadband speeds will nearly double by 2021. By 2021, global fixed broadband speeds will reach 53 Mbps, up from 27.5 Mbps in 2016.
• Traffic from wireless and mobile devices will account for more than 63 percent of total IP traffic by 2021: By 2021, wired devices will account for 37 percent of IP traffic, and Wi‐Fi and mobile devices will account for 63 percent of IP traffic. In 2016, wired devices accounted for the majority of IP traffic, at 51 percent.
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Source: CISCO, VNI Global IP Traffic Forecast, 2016‐21, Phillip Capital (India) Research • Traffic from wireless and mobile devices will account for more than 63 percent of total IP traffic by 2021: By 2021, wired devices will account for 37 percent of IP traffic, and Wi‐Fi and mobile devices will account for 63 percent of IP traffic. In 2016, wired devices accounted for the majority of IP traffic, at 51 percent.
Source: CISCO, VNI Global IP Traffic Forecast, 2016‐21, Phillip Capital (India) Research
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• Capex of customers driving demand for STL’s products: STL has been witnessing increasing demand for its products with increasing capex from its customers like digital and network firms. Additionally considering the capex undertaken by telecom companies and infra build companies (like National Broadband and Defence Network) is expected to increase the demand for optic fibers manifold.
Source: Company, Phillip Capital (India) Research
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India’s current fiberization stands at 25% in comparison to developed countries which stands at 70‐80%. With increasing fiberization and government thrust on increasing connectivity. We believe that this is expected to aid the business of Sterlite Technologies and aid as a strond demand factor. While the demand for fiber cables has increased in the domestic market, the global demand for fiber cables has also increased exponentially over the last 12 years. In CY 2005 the demand for cables stood at 75 million fiber kilometers it has grown to 493 million fiber kilometers in 2017.
Source: CRU Data, Company, Phillip Capital (India) Reserach
With increased technology advancement like FTTH and 5G roll out, fiberization levels will have to increase significantly in order to cater to the demand. This trend has been similar globally that has resulted in fiber cable demand increasing exponentially. While India’s demand for OFC has been miniscule in comparison to the overall cable demand, new advancements like IoT, virtual reality, video streaming, cloud‐based businesses will all require fiber cables which is expected to increase the demand for fiber cables manifold. The table below depicts how modern technologies are driving demand:
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Soruce: GSMA, Company, Phillip Capital (India) Research
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Increasing Capacity Utilization: STL has manufacturing capacities in India, China, Brazil and Italy now. Cumulatively the capacities of optical fiber in India & China (JV) stand at 30 mnfkm (million fiber kilometers) and that of optical fiber cables in India, China (JV), Italy and Brazil (JV) stands at 18 mnfkm (with 3 mn recently added with the acquisition of Metallurgica Bresciana). The company plans to add further capacity of 20 mnfkm of Capacity to cater to the high demand, half of which is expected to come stream by December 2018 and the other half will be operational by June 2019.
With this expansion the optical fiber capacity will expand from the current 30 mnfkm to 50 mnfkm placing Sterlite Tech among the Top 4 players globally in terms of capacity. The Company has also announced enhancing its cabling capacity by 15 mnfkm from present global capacity of 18 mnfkm to increase to 33 mnfkm by June 2020. Separately, the company is also pursuing debottlenecking projects at the European plant of its recently acquisition Metallurgica Bresciana – this should increase the capacity from 3mnfkm to 5 mnfkm which will take the total capacity to 35 mnfkm.
Source: Company, Phillip Capital (India) Research
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Services Business: In comparison to most international players, STL is the only player in this space which has forward integrated into providing services to its clients. This segment is a possible game changer for the company which gives it the ability to differentiate its offerings to customers by offering comprehensive solutions from a single vendor. With several government initiatives like BharatNet and Smart Cities which provides a massive opportunity for telco service providers. Currently the company is developing and providing services for 3 Smart Cities like Gandhinagar, Jaipur and Kakinada. Recently the company has also won an order of INR 3,500 crores to design, build and manage the Indian Navy’s communication networks for 9 years.
Backward Integration: STL is among few global players with the ability to be able to manufacture OFC from silica. Only less than 10 players globally have this technology and capability. This enables the company to be able to derive higher margins as compared to only cable manufacturers thereby capturing value from all parts of the chain. This backward integration also elevates the company’s competitive position as it is perceived as a reliable supplier by global customers given the assured supply of fiber under varied market condition thereby enhancing its winnability for large, multi‐year supply contracts. Further, control over large parts of the value chain allows it to drive R&D interventions across the spectrum enabling it to also produce wide variety of IP based products which can be used for specific applications. Some of the different products are ‐ bend insensitive single mode fiber, aerial cable, micro cable, ribbon cable and FTTX cable in OFC space. A visual representation for the same is provided below:
Source: Company, Phillip Capital (India) Research
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Healthy Order Book Leading to Revenue Visibility: FY 18 order book for STL has increased to INR 5,223 crores and at TTM it stands at INR 6,034 crores. Currently revenues of the company stand at INR 3,337 crores, this gives the company a revenue visibility of nearly 2 times its current revenues. The growing order book indicates strong business traction. Of the current order book of INR 6,034 crores, INR 4939 crores is from the products business while the balance is from the services business. With the current Navy order received by the company, services business is likely to see growth going ahead in the future.
Source: Company, Phillip Capital (India) Research
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Diversified Geographical Presence: With manufacturing facilities present in India, China, Brazil and Italy STL has got a global presence across the world. STL’s products are supplied to over 100 countries it is working with 8 of the top 10 global telco companies across the world. International revenues for the organization have improved from 24% in FY16 to 54% in FY18 signifying higher traction from the international market. Most of the international revenues have grown from the European markets whose share has increased from 11% in FY17 to 27% in FY18 while India continues to dominate with 46% of the total revenues.
2000 Export Revenues Global Revenue Mix 1800 55% of total revenues 1600 1400 13% 1200 1000 37% of total revenues India 1735 13% 46% 800 Europe 600 24% of total revenues 957 400 China 537 200 27% RoW 0 FY16 FY17 FY18 Exports (INR Cr)
STL has a competitive edge due to its R&D capabilities: STL has a strong R&D team through its Centre of Excellence (CoE) in Aurangabad. With its high‐end research, STL has been able to build a strong portfolio of 189 global patents and is currently developing products for advanced technologies such as 5G.products like cables with fiber count as high as 5,000, bend insensitive fiber and more. The CoE is differentiated by deep knowhow of interdisciplinary technologies such as glass science, wave optics and application engineering, while the CSN is working on networking technologies such as Software Defined Networks (SDN), wireless connectivity, and Internet of Things (IoT), among many other applications. The CoE gives STL a strong positioning in providing its customers with latest technology products and quicker adaptation to newer technologies like 5G and FTTH among others.
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Page | 12 | PHILLIPCAPITAL INDIA RESEARCH PRIVATE CLIENT GROUP STERLITE TECHNOLOGIES LIMITED INITIATING COVERAGE REPORT Quarterly Update (Q2 FY2019): • STL numbers in Q2 FY19 have been promising overall with net profit increasing by 90% YoY and 7% QoQ while revenues increased 39% YoY and a 24% growth QoQ. • Company secured an order worth INR 35 bn from Indian Navy. Majority of these revenues are expected to be recognized by FY20 and FY21. • Order book position at an all time high of INR 9455 crore as on October 24, 2018. This gives the company strong visibility for over the next two years with the book to bill ratio increasing to 2.6x once again at an all time high. Additionally the new capex which the company has undertaken will be on stream in phases by January 2019 and then June 2019 which bodes well for the company.
• EBITDA margins for the company have increased by 335 bps to 25.2% ‐ due to higher utilization levels resulting in higher operating leverage and with higher value added products • Management estimates sustainable EBITDA margins will be around 22‐24% • 3mnfkm of Metallurgica Bresciana will be increased to 5mnfkm in the next 3 months and 10mnfkm additional capacity will be added in India by January 2019. • Debt levels have increased from INR 884 crore (Net debt) to INR 1703 crore (Net debt) on account of the capex and the acquisition undertaken by the company. Page | 13 | PHILLIPCAPITAL INDIA RESEARCH PRIVATE CLIENT GROUP STERLITE TECHNOLOGIES LIMITED INITIATING COVERAGE REPORT
Quarterly Performance Particulars Sep‐18 Jun‐18 Sep‐17 Particulars Sep‐18 Jun‐18 Sep‐17 Gross Sales 10843.40 8768.90 7792.60 SOURCES OF FUNDS Less: Excise Duty 0.00 0.00 0.00 Share Capital 804.5 802.0 800.6 Net Sales 10843.40 8768.90 7792.60 QoQ growth % 24% 4% 5% Reserves & Surplus 12202.2 10951.2 8968.6 YoY growth % 39% 18% 42% Shareholder's Funds 13006.7 11753.2 9769.2
(Increase) / Decrease In Stocks ‐83.50 588.00 627.90 Minority Interest 976.4 819.5 616.5 Purchase of Finished Goods 33.40 54.60 23.80 Cost of Services & Raw Materials 4387.10 2696.10 2480.80 Long Term Borrowing 13341.0 6305.4 4401.1 % of sales 40% 31% 32% Other Long Term Liabilities 2413.0 726.8 1642.9 Operating & Manufacturing Expenses 2430.20 2055.90 2053.80 % of sales 22% 23% 26% Long Term Provisions 21.9 251.2 206.3 Employee Cost 1343.30 925.40 903.60 % of sales 12% 11% 12% Total Liabilities 29759.0 19856.1 16636.0 Total Expenditure 8110.50 6320.00 6089.90 APPLICATION OF FUNDS PBIDT (Excl OI) 2732.90 2448.90 1702.70 Net block 13601.3 11512.7 12104.6 EBITDA % 25% 28% 22% Good Will 1841.9 739.3 887.1 Capital Work in Progress 8270.1 3570.2 751.1 Other Income 59.80 72.50 85.90 Depreciation 491.60 447.90 436.70 Investments 420.7 284.8 202.0 Long Term Loans & Advances 412.4 350.1 256.4 EBIT 2301.10 2073.50 1351.90 Other Non Current Assets 1455.6 1057.4 830.8 Interest 243.70 230.50 242.90 Current Investments 1170.0 1550.0 580.0 Inventories 4897.3 3378.5 2690.3 PBT 2057.40 1843.00 1109.00 Sundry Debtors 11697.0 8712.8 8413.6 Tax 651.70 548.40 327.40 Cash and Bank 1445.2 1384.8 2876.0 Tax % 32% 30% 30% Other Current Assets 4917.1 4576.8 3397.7 Profit After Tax 1405.70 1294.60 781.60 Discontinued Operation (Net of tax ) ‐20.40 ‐9.80 0.00 Total Current Assets 24126.6 19602.9 17957.6
Net Profit (after Extrodinary Items) 1385.30 1284.80 781.60 Less : Current Liabilities and Provisions PAT % 13% 15% 10% Short Term Borrowings 5917.4 4627.4 6549.9 Minority Interest ‐72.60 ‐77.70 ‐67.10 Trade Payables 8234.7 6561.8 4756.9 Shares of Associates 0.00 0.00 ‐2.20 Other Current Liabilities 6033.3 5570.0 4985.6 Consolidated Net Profit 1312.70 1207.10 712.30 Provisions 109.3 280.7 233.8 Other Comprehensive Incomes (Net of tax ) ‐232.90 209.20 9.50 Total Current Liabilities 20294.7 17039.9 16526.2 Minority Interest Comprehensive Income ‐18.90 5.00 ‐25.00 Net Current Assets 3831.9 2563.0 1431.4 Total Comprehensive Income 1060.90 1421.30 696.80 Deferred Tax Assets / Liabilities ‐74.9 ‐221.6 172.6 Equity Capital 804.50 803.00 800.60 Deferred Tax Assets 0.0 0.0 172.6 Face Value (In Rs) 2.00 2.00 2.00 Deferred Tax Liability 74.9 221.6 0.0 Basic EPS before Extraordinary Items 3.30 3.00 1.80 Total Assets 29759.0 19855.9 16636.0 Page | 14 | PHILLIPCAPITAL INDIA RESEARCH PRIVATE CLIENT GROUP STERLITE TECHNOLOGIES LIMITED INITIATING COVERAGE REPORT
Income Statement Y/E March, INR Millions FY16 FY17 FY18 Cash Flow Net Sales 21439.9 24488.5 31788.1 Y/E March, INR Millions FY16 FY17 FY18 Growth % ‐31% 14% 30% PBT 2249.8 2573.7 4972.8 Adjustments 2551.4 2647.4 3246.3 Total Expenses 17373.1 19641.5 24683.1 Change in WC ‐2167.1 427.1 203.8 Raw Material Costs 9725.9 11057.9 12510.7 Cash Flow from Operating Activities 2146.7 4885.0 7316.1 Employee Costs 2051.0 2985.5 3487.9 Other Manufacturing Costs 5596.2 5598.1 8684.5 Capital Expenditure ‐2308.9 ‐2144.6 ‐4577.0 EBITDA 4066.8 4847.0 7105.0 Change in Investments 651.6 ‐305.8 ‐1386.2 Growth % ‐10% 38% 66% Others 96.8 120.9 96.6 EBITDA Margin % 19% 20% 22% Cash Flow from Investing Activities ‐1555.0 ‐2322.8 ‐5848.4 Depreciation 1260.0 1250.2 1477.4 EBIT 2806.8 3596.8 5627.6 Dividend (Incl. Tax) ‐282.3 ‐709.1 ‐380.8 Interest 1192.4 1229.3 1038.3 Change in Equity 2.2 6.2 14.7 Other Income 635.4 234.5 392.7 Change in Debt 834.0 37.9 ‐184.0 PBT 2249.8 2602.0 4982.0 Others ‐1363.1 ‐1203.9 ‐965.1 Less: Taxation 651.9 396.6 1331.5 Cash Flow from Financing Activities ‐809.2 ‐1868.9 ‐1515.2 Effective Tax Rate (%) 29% 15% 27% Net Change in Cash ‐217.5 693.3 ‐47.5 Recurring PAT 1597.9 2205.4 3650.5 Growth % 4563% 38% 66% PAT Margin % 7% 9% 11% Valuation Ratios Minority Interest & Share of Associate ‐60.8 ‐191.6 ‐307.2 FY16 FY17 FY18 Reported PAT 1537.1 2013.8 3343.3 EPS 3.9 5.1 8.3 Wtd. Avg. of Shares (Mns) Book Value 18.6 21.6 28.8 DPS 1.0 1.3 2.0 Balance Sheet Growth Ratios Y/E March, INR Millions FY16 FY17 FY18 Net Sales % ‐30.8 14.2 29.8 Equity Capital 790.4 796.6 802.0 EBITDA % 4563.4 38 66 Share Warrants 190.5 197.4 212.4 PAT % Reserves 6565.5 7806.7 10738.8 Return Ratios Net Worth 7546.4 8800.7 11753.2 ROA % 2.9 8.0 11.0 Minority Interest + Others 312.1 452.0 819.5 ROE % 17.6 27.6 36.2 Total Borrowings 4678.4 4270.7 6305.4 RoCE % 8.0 20.1 27.8 Current Liabilities 12028.3 14091.1 17039.7 Turnover Ratios Non Current Liabilities 1579.4 1460.9 1199.6 Asset Turnover (x) 0.4 0.9 1.0 Total Liabilities 26144.6 29075.4 37117.4 Receivable Days 123.8 98.2 88.4 Inventory Days 49.8 37.9 38.2 Net Block 11369.6 13036.7 12252.0 Payable Days 139.9 82.7 92.2 CWIP 1723.2 659.1 3570.2 Liquidity Ratios Investments 164.3 581.7 1834.8 Current Ratio (x) 1.0 1.0 1.1 Others 530.6 420.1 1448.4 Interest Cover (x) 2.9 3.1 5.8 Current Assets Total Debt / Equity (x) 1.5 1.3 1.0 Inventories 2053.1 3334.9 3378.5 Valuation Ratios Debtors 7084.0 6866.9 8671.9 PER (x) 23.3 24.9 37.5 Cash 777.2 1374.1 1384.8 Price / Book (x) 4.9 5.8 10.8 Other Current Assets 2442.6 2801.9 4576.8 Total Assets 26144.6 29075.4 37117.4 EV / Sales (x) 2.1 2.4 4.3 EV / EBITDA (x) 9.8 11.7 18.1 Page | 15 | PHILLIPCAPITAL INDIA RESEARCH PRIVATE CLIENT GROUP STERLITE TECHNOLOGIES LIMITED INITIATING COVERAGE REPORT
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Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. 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