Sterlite Technologies Ltd

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About the Company

STL, Sterlite Technologies Limited (Formerly Sterlite Tech) is a digital technology multinational company having offices in India, China, the US, SEA, Europe, and MEA. It has more than 270 patents and serving customers in over 150 countries, including Fortune 100. The company is specialized in optical fiber and cables, hyper-scale network design, and deployment and network software and offers bespoke integrated solutions for global data networks of CSPs, Telcos, and OTTs. STL has also partnered with global telecom companies, cloud companies, citizen networks, and large enterprises to design, build, and manage such a cloud-native software-defined network. It has a strong global presence with next-gen optical preform, fiber, and cable manufacturing facilities in India, Italy, China and Brazil, and two software-development centers.

Q4FY22 Updates

Financial Results & Highlights

Detailed Results:

1. The quarter saw revenue growth of 8% YoY in consolidated terms .
2. Standalone revenues remained flat % YoY.
3. The open order book is at Rs 11639 Cr currently.
4. The completion of various data network projects for the company are as follows: 

1. T-Fibre: 50%
2. Modern Optical fibre rollout for large Indian telco (phase 1): 88%
3. Fibre to the home rollout in the U.K.: 3% (for the first project)
4. Data center connectivity projects: 58 completed
5. Network modernization (PGCIL): 47%

1. The order book spread across customer segments is as follows: 
   1. Telcos: 62%
   2. Enterprises: 15%
   3. Citizen Networks: 22%
   4. Cloud Players: 1%
2. The client base revenue break up for FY22: 
   1. Telcos:                    76%
   2. Citizen networks: 7%
   3. Enterprises:           14%
   4. Cloud:                       3%

Investor Conference Call Highlights: 

1. Huge investments by network creators including Govt. in creating digital infrastructure are being done according to the management.
2. Technological shift to 5G is happening rapidly with 4.4 billion 5G subscribers expected by 2027.
3. OFC demand is expected to increase to 648 million by 2026.
4. The management states that the company captured a 6% market share in America in a very less time.
5. The company’s market share in Europe increased from 16% to 25% YoY.
6. The company increased its optical interconnect attach rate from 3% in FY21 to 11% in FY22.
7. The management is guiding for revenue growth of 23-25% in FY23 along with EBIDTA margins of its optical biz being 20-22% & 10-12% respectively & the net debt to remain flattish.
8. The company has sought principal approval for the demerger of its entities in case it wants to raise cash & ensure that the consolidated debt level doesn’t increase.
9. The company is expecting to do Capex of Rs.500 Cr in FY23 out of which Rs.400 Cr will be for new projects.
10. The company is focusing on incurring regular capex because of which it doesn’t expect debt levels to come down substantially.
11. The decrease in margins by 500 Bps was contributed by increased investments (100Bps) & increased costs of raw materials & freight (200 Bps each).
12. The management states that normalized margins are likely to come from H2 FY23.
13. The management expects an increase in margins by 700-900 Bps to 20-22% in the coming period due to higher pricing, higher attach rate & softening of costs.
14. The company is planning a capex of Rs.300 Cr in the US & UK which will help in increasing its cable capacity by 8-9 Kms.
15. The company’s inventory levels increased in Q4 due to higher dispatches to the US & UK where transit time is between 45-90 days.

Analyst’s View:

The company had a poor quarter in terms of profitability due to higher costs of freight & raw materials along with increased investments. The company is aiming to have sustained growth momentum due to the deal wins and the recent qualification as a PLI scheme-approved company. Its global recognition as an Open RAN vendor should also help it bag 5G orders in the future. It remains to be seen how fast the move towards 5G will take place in the company’s principal geographies and whether the company will be able to maintain its planned trajectory to take advantage of this 5G movement along with the company’s ability to scale up its European business which is currently not profitable. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q3FY22 Updates

Financial Results & Highlights

Detailed Results:

1. The quarter saw a revenue growth of 3.6% YoY in consolidated terms.
2. Standalone revenues grew by 10% YoY.
3. The company saw loss after tax of Rs 140 Cr in consolidated terms in Q3.
4. The open order book is at Rs 11700 Cr currently.
5. The share of North America in STL revenue has risen to 13% in Q3. It also secured orders of Rs 300 Cr from the region in Q3.
6. The completion of various data network projects for the company are as follows:
   1. Mahanet: completed
   2. T-Fibre: 44%
   3. Modern Optical fibre rollout for large Indian telco (phase 1): 83%
   4. Fibre to the home rollout in U.K.: 2% (for the first project)
   5. Data center connectivity projects: 49 completed, 13 ongoing
7. The client base revenue breakup in 9M is as follows:
   1. Telcos: 74%
   2. Enterprises: 7%
   3. Citizen Networks: 16%
   4. Cloud Players: 3%
8. The order book spread across customer segments is as follows:
   1. Telcos: 62%
   2. Citizen networks: 22%
   3. Enterprises: 15%
   4. Cloud: 1%
9. The company won multiyear orders worth about Rs.700 Cr for proprietary Opticonn offering.
10. The company has reported negative EBIDTA due to onetime provisions.

Investor Conference Call Highlights: 

1. Huge investments by network creators including Govt. in creating digital infrastructure are being done according to the management.
2. The technological shift to 5G is happening rapidly with 2.6 billion 5G subscribers are expected by 2026.
3. The wireless shift towards RAN technology will lead to a sustained digital infrastructure creation cycle of 7-10 yrs.
4. OFC demand is expected to increase from 500 to 634 million by 2026.
5. Europe and North America, which are key markets for the company are likely to grow at around 5% to 6.8%.

6. The management believes an increase in profitability of the Indian telcos has led to a CapEx divide i.e Telcos are expected to deploy approximately 200,000 cable km in FY ’23 to strengthen the fiber backbone to enable the 5G and strengthen 4G and FTTX.
7. The company secured orders close to Rs.300 Cr in the optical networking business.
8. The fiber cable capacity in South Carolina will be operational by Q2 of FY23 which will help the company to get access to Tier-1 telecom operators & grow its presence in the North American region.
9. The company has completed the business integration with Clearcomm & now has more than 150 employees and more than 20-plus partners on board.
10. The management is confident about increasing the U.K. contribution to 25% of its global business services.
11. Geographical revenue distribution mix is increasing towards EMEA & America.
12. The company’s financial objectives are to achieve a run rate of Rs.100 billion per annum by quarter 4 of next fiscal, Net debt-to-equity ratio < 0.5, and a ROCE >20%.
13. The total bottom-line impact of the one-off provisions is slightly north of Rs. 200 Cr.
14. The margins on the product side were like the previous quarter with slight variations on account of higher freight costs.
15. The margins on the service side were soft due to the low margins contract pursued by the company, however, they are expected to improve after the next few quarters due to improved margins from Europe which are currently in negative territory due to the small scale of operations.
16. Margins (ex-provision) have fallen by 6-7% QoQ due to investments not panning out as planned, higher remunerations to employees & low margin product revenue mix.
17. Depreciation for the current quarter was abnormally high due to the backlog of the last 12 months on the acquired assets.
18. On the Rs.10,000 Cr of revenue guidance, management sees 35-40% coming from service, 5% from wireless, and the rest 55-60% from the product side.
19. The management expects the fiber prices to firm up & not increase by the large extent that was witnessed In the previous quarters.
20. The company’s volumes for the fiber business are at a capacity utilization of about 75% to 80%. And on the cable side, it is close to 8 million.
21. The management states that one can assume book-to-bill revenue to be 20-25% every quarter.

Analyst’s View:

The company had a poor quarter in terms of profitability due to one-time provisions. The revenue growth was low at only 3.6% as well. But the bright spots are that the company is sourcing new deals and expanding steadily in the USA and UK markets. The company is aiming to have sustained growth momentum due to the deal wins and the recent qualification as a PLI scheme-approved company. Its global recognition as an Open RAN vendor should also help it bag 5G orders in the future. It remains to be seen how fast the move towards 5G will take place in the company’s principal geographies and whether the company will be able to maintain its planned trajectory to take advantage of this 5G movement along with the company’s ability to scale up its European business which is currently not profitable. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q2FY22 Updates

Financial Results & Highlights

*Contains exceptional item for gain of Rs 52.75 Cr

**Contains exceptional item for gain of Rs 16.23 Cr

Detailed Results:

1. The quarter saw a revenue growth of 29% YoY in consolidated terms while PAT increased by 77% YoY.
2. Standalone revenues grew by 40% YoY whereas PAT grew by 86% YoY.
3. The order book for the remaining 6 months of FY22 is Rs. 2700 cr. and beyond that, it is Rs. 8800 cr. The open order book is at Rs 11500 Cr currently.
4. The company’s net debt stood at Rs. 2815 cr.
5. The completion of various data network projects for the company are as follows:
   1. Project Varun: 99%
   2. Mahanet: 99%
   3. T-Fibre: 34%
6. Modern Optical fibre rollout for large Indian telco: 62%
7. Fibre to the home rollout in U.K.: 2% (for the first project)
8. Data center connectivity projects: 21 ongoing
9. R&D spending is now at 3.2% of revenues in H1.
10. The client base revenue breakup in H1 is as follows:
    1. Telcos: 74%
    2. Enterprises: 8%
    3. Citizen Networks: 15%
    4. Cloud Players: 3%
11. The order book spread across customer segments is as follows:
    1. Telcos:                    59%
    2. Citizen networks: 24%
    3. Enterprises:           16%
    4. Cloud:                       1%
12. The company plans to reach Rs 10000 Cr annualised revenue rate by Q4.
13. STL plans to move towards net debt to equity of 0.5 times.
14. Amalgamation of Clearcomm with STL completed.

Investor Conference Call Highlights:

1. Huge investments by network creators including Govt. in creating digital infrastructure are being done according to the management.
2. Technological shift to 5G is happening rapidly with 2 billion 5G connections are expected by 2023.
3. The wireless shift towards RAN technology will lead to a sustained digital infrastructure creation cycle of 7-10 yrs.
4. Investments in fibers for optical fiber network creation are expected to increase by 20% in a couple of years.
5. The management senses signs of potential capex to be incurred by telecom providers like Airtel, JIO, and VI.
6. Ankit Agarwal will replace Mr. Anand Agarwal as the Managing Director of STL as a part of the succession planning exercise.
7. The company is seeing good growth in its optical fibers venture viz Opticonn solution.
8. The company’s market share in the European market has increased from 3% to 26% in the past 5 years.
9. The Company has increased its attach rate to 8% after the acquisition of Optotec business & is striving to reach an industry-standard 100% attach rate in the coming years.
10. The company’s system integration business where it serves the Indian army & navy has grown by 6 times in the last 5 years.
11. The company is working with JIO & Airtel for tower fiberisation and Fibre to the home.
12. In the wireless segment, the company has 11 early-stage engagements and 14 participation stage engagements.
13. Praveen Cherian has joined the company as the CEO of the System Integration business
14. Due to sustained R&D investments, the company’s patent count has increased to 636 by Q2 of FY 22.
15. The pricing of China’s 140 km mobile tender is being seen as a major positive industry development by the management.
16. The company is looking to leverage its relationships and unique combined solution offering of cable & interconnect (which will lead to cost savings for customers) to grow its optical interconnect business.
17. Receivables look on a higher side due to some movement from unbilled other assets to debtors leading to higher debtors. However as per the management, net working capital has improved.
18. The management expects the company to grow at a faster rate as compared to the market. Thus it is planning to expand its capacity from 33 million to 42 million fiber kilometres.
19. The company is fully backward integrated on the fiber side at 50 million fiber kilometres.
20. The company is spending Rs. 500 cr out of which Rs 300 cr is already done. Will be done in the second half. Further, the company will do a sustainable capex of Rs. 200-250 cr in the following year.
21. The company has a fiber capacity of 50 million and the current capacity utilization level stood at 70% whereas it has a cable capacity of 33 million and a capacity utilization rate of 85%.
22. The revenue breakup for Q2 was 2/3 from products and 1/3 from services.
23. The management is seeing additions in capacity by its competitors in China, Europe & North America however they are in line with demand growth being observed in the industry.
24. The company’s subsidiary STL Networks has been approved as a PLI – approved manufacturer in the networks and communications space.
25. The management expects to benefit from the Government’s outlay of Rs. 20,000 cr for citizen network (Bharatnet) projects.
26. The company has secured an opportunity of GBP 42 million which is expected to be completed in the next 1.5 years.
27. The company has 11 engagements going on currently in USA.
28. The management foresees system integration business to derive 2/3 of revenue from India and the rest from other countries.
29. The contribution of the optical fiber business is expected to be 55% of total revenues, while that of system integration & access solutions is expected to be 40% & 5% respectively by Q4 according to the management.
30. The management states that there aren’t any M&A opportunities going for STL currently, but the company is on the lookout for them.
31. The management states that one can assume book-to-bill revenue to be 20-25% every quarter.

Analyst’s View:

The company has had a great quarter with major deal wins and good operational performance. Sterlite has managed to grow its global OFC market share to 6.5%. The company has seen a good Q2 with the order book rising to Rs 11500 Cr. It has managed to bag key deals in Europe. The company is aiming to have sustained growth momentum due to the deal wins and the recent qualification as a PLI scheme-approved company. Its global recognition as an Open RAN vendor should also help it bag 5G orders in the future. It remains to be seen how fast the move towards 5G will take place in the company’s principal geographies and whether the company will be able to maintain its planned trajectory to take advantage of this 5G movement. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q1FY22 Updates

Financial Results & Highlights

*Contains exceptional item for gain of Rs 52.75 Cr

**Contains exceptional item for gain of Rs 16.23 Cr

Detailed Results:

1. The quarter saw revenue growth of 48.5% YoY in consolidated terms. This growth was so high due to the loss of operations in Q1 last year which made for a small base.
2. Consolidated net profit rose to Rs 107 Cr for the quarter.
3. The current order book stands at Rs 11200 Cr.
4. Exports accounted for 58% of revenues in Q1.
5. The client base revenue breakup in Q1 is as follows:
   1. Telcos: 72%
   2. Enterprises: 8%
   3. Citizen Networks: 18%
   4. Cloud Players: 2%
6. The completion of various data network projects for the company are as follows:
   1. Network Modernisation for Indian Navy (VARUN): 95%
   2. MAHANET: 92%
   3. T-Fibre for Telangana: 27%
   4. Modern Optical fibre rollout for large Indian telco: 48%
   5. Data Centre projects in EMEA: 13 ongoing
   6. UK Gigabit Network FTTH started
7. Sterlite now has a global OFC market share of 6.5%.
8. The order book spread across customer segments is as follows:
   1. Telcos:                    56%
   2. Citizen networks: 29%
   3. Enterprises:           15%
   4. Cloud:                       1%
9. The order book spread is expected is Rs 4200 Cr in 9MFY22 and Rs 7000 Cr for beyond FY22.
10. EBITDA margin was at 18% for Q1.
11. Key deal wins in Q1 were:
    1. Multi-million-dollar deal with a large European telco for the Opticonn solution
    2. Incremental order for Lead360 from a large Indian Telco
    3. Strategic Partnership with a leading Telecom solution provider in UK to connect homes to broadband by deploying FTTx Mantra
12. STL acquired Clearcomm, a UK-based Network Integration Company. Clearcomm has seen annual sales of close to GBP 20 million in the last 3 years and has grown 25% in the same period. The company has been bought at an enterprise valuation of GBP15.5 million.

Investor Conference Call Highlights:

1. There are more than 170 5G commercial networks running across the globe now. 5G subscriber base is expected to reach 2 billion by 2023 and 4.5 billion by 2025-26.
2. Fiber connections are becoming more mainstream with demand for homes in the EU to double in the next 5 years to reach 208 million users.
3. The company’s entry into the UK market is expected to provide good benefits from the recently announced Project Gigabit which involves a GBP5 billion investment to connect rural areas with broadband in the UK.
4. The company successfully completed proof of concept for the programmable fiber-to-the-x software solution with Chunghwa Telecom.
5. The PoC showed how STL’s fully virtualized optical line terminal software stack enables Chunghwa to upgrade its gigabit passive optical network to a 10-gigabit symmetric PON network. This technology is being deployed for enterprises in Taiwan and will be deployed for homes soon.
6. STL has entered into a strategic collaboration with Facebook Connectivity to co-develop general-purpose radio under the Evenstar program. The Evenstar program is a collaborative effort by Facebook as well as global partners to accelerate the adoption of Open RAN technology.
7. The company was recognized by Gartner as a key 5G RAN vendor.
8. The current order funnel is more than 60% towards STL’s key accounts.
9. The company is targeting to reach Rs 10000 Cr annual revenue by the end of FY23.
10. It also expected net debt to equity to come to 0.5 in the same time period.
11. Capacity utilization was at 70-75% in Q1.
12. The management assures that there aren’t any IP issues with STL and the lawsuit by Prysmian is just a competitive tactic.
13. The current net debt is at Rs 2600 Cr for STL.
14. The orders from the Bharat Broadband initiative should come in H2 and the bulk of revenues should flow in FY23 according to the management.
15. The management is looking to maintain the current growth rate of 25% per year for the new acquisition of Clearcomm and will maintain margins at the current level of 13-15% for the next 5-6 years.
16. The margins were higher in Q1 due to lower contributions from services. A major part of the orders received in Q1 was from the Opticonn business and from European Telcos.
17. The company announced a new capex of Rs 200 Cr to set up new optical cable facilities in the UK & the USA. These new facilities should add 9 million km to the current expanded capacity of 33 million km.
18. The company saw a cash inflow of Rs 67 Cr from the sale of land.
19. The company is focussing on increasing the order book steadily at the pace of 5-6% each quarter.
20. The company will be participating in the Bharat Net PPP as a system integrator and as a cable provider. It has already applied for the radio hardware segment under the PLI scheme.
21. The company doesn’t have any worry from Huawei & ZTE as it is not competing with these companies directly.

Analyst’s View:

The company has had a good quarter and it has seen many major deal wins. Sterlite has managed to grow its global OFC market share to 6.5%. The company has seen a good Q1 with the order book rising to Rs 11200 Cr. It has managed to bag key deals in Europe. The recent acquisition of Clearcomm should also help STL consolidate its market reach in the UK. The newly announced capex for setting cable facilities in the UK and USA highlights the confidence of the company in terms of future demand from these geographies. Its global recognition as an Open RAN vendor should also help it bag 5G orders in the future. It remains to be seen how fast the move towards 5G will take place in the company’s principal geographies and whether the company will be able to maintain its planned trajectory to take advantage of this 5G movement. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q4FY21 Updates

Financial Results & Highlights

*Contains exceptional item of loss of Rs 50.71 Cr.

Detailed Results

1. The quarter saw revenue growth of 27% YoY in consolidated terms. 
2. Consolidated net profit rose by 55% YoY for the quarter. 
3. The current order book stands at Rs 10754 Cr.  
4. Exports accounted for 44% of revenues in FY21. 
5. The client base revenue breakup in FY21 is as follows:  
   1. Telcos: 65% 
   2. Enterprises: 11% 
   3. Citizen Networks: 22% 
   4. Cloud Players: 2% 
6. The completion of various data network projects for the company are as follows:  
   1. Network Modernisation for Indian Navy (VARUN): 92% 
   2. MAHANET: 98% (A) 61% (B) 
   3. T-Fibre for Telangana: 26% (A) 18% (B) 
   4. Modern Optical fibre rollout for large Indian telco: 41% 
7. Sterlite is on target to increase OFC capacity to 33 mn km by June ‘21. 
8. Sterlite now has a global OFC market share of 5.1%. It has seen OFC volume growth of >35% YoY in FY21 despite flat industry growth. 
9. The order book spread across customer segments is as follows:  
   1. Telcos:                    54% 
   2. Citizen networks: 29% 
   3. Enterprises:           16% 
   4. Cloud:                       0.3% 
10. The order book spread is expected is Rs 5470 Cr in FY22 and Rs 5284 Cr for beyond FY22. 
11. EBITDA margins were at 19% in Q4 and 18% for FY21. 
12. Key deal wins in Q4 were: 
13. A three-year strategic collaboration with Openreach to provide millions of kms of optical fibre cable to help connect UK with a full-fibre network. 
14. ~$100Mn deals in the MEA region – for building future-ready digital networks. 
15. Partnership with Airtel to build optical network across 10 circles. 
16. STL also grew it patent portfolio by 191 filings in FY21 bringing the total till date to 569, including its first 5G patent. 
17. The company announced a final dividend of Rs 2 per share. 

Investor Conference Call Highlights

1. Over 163 commercial deployments of 5G occurred globally in FY21.  
2. OFC demand in India has grown 19% driven by FTTH rollouts and Bharatnet.  
3. The addressable market for STL has risen to $40 billion with $18-20 billion in optical connectivity products, $15 billion in Virtualised access & Network software, and $7 billion in system integration services.  
4. R&D spending was at 3.1% of revenues in FY21.  
5. The management has identified 3 main drivers for growth for STL. They are:  
   1. Growing OFC and Optical interconnect business   
   2. Going global on system integrations and scaling it up in India  
   3. Scale up the virtualized access solutions based on VRAN and ORAN  
6. The debt is expected to peak in FY22 and then start to go down.  
7. Net debt as of 31st March 2021 is at Rs 2410 Cr vs Rs 1970 Cr last year.  
8. The product to services mix is around 45-55 with many deliveries containing both sides.  
9. The management has admitted that given the low prices that the industry has seen in the past few years, it is logical to see price strengthening going forward. But the impact is small for STL since most of the company’s deals are long-term contracts.  
10. The management states that for 5G networks, all different elements like wired connections, wireless and data centers, and servers are all being converged together for the network formation. There are indeed many competitors in the ORAN space including Altistar and others.  
11. The industry shift to ORAN is providing more opportunities than what all players can take according to the management.  
12. The capex in FY22 should be similar to FY21 to the tune of Rs 400-450 Cr. Capex will come down after FY23. This will also coincide with the start of the drop in the debt-to-equity ratio.  
13. The maintenance capex is around 60-65 Cr only and the rest will be towards growth.  
14. The breakup of the funnel is around 40% while India is around 60%.  
15. The Openreach deal is a product deal only.  
16. The EBITDA margin should remain stable around 17-18% while R&D spend is expected to rise going forward.   
17. The delivery time for STL in USA and EU has expanded to 6 months and 4 months respectively.  
18. 5G in India should start from the 2nd half of CY 2022 according to the management.  
19. The management has stated that it will try to keep days of working capital to 75-100 days going forward.  
20. The management has stated that the capex planned to date should be sufficient for the company’s growth for the next 2-3 years. 

Analyst’s View

The company has had a good quarter and it has seen many major deal wins. Sterlite has managed to grow its OFC volumes around 35% YoY despite flat industry growth. The company has seen a good FY21 with around 191 patents filed in the year, including the company’s first 5G patent. There is a massive opportunity in the cards for the company from the widespread industry shift towards ORAN networks and the rising investments in the network connections space around the world and in India. It remains to be seen how the 2nd wave of COVID-19 unravels for Sterlite and how fast will the move towards 5G take place in the company’s principal geographies. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q3FY21 Updates

Financial Results & Highlights

Detailed Results

1. The quarter saw revenue growth of 9% YoY in consolidated terms.
2. Consolidated net profit rose by 64% YoY for the quarter mainly due to a lower base last year due to exceptional loss.
3. The current order book stands at Rs 10707 Cr. Volumes of optical fibre and cables sold were at an all-time high in Q3.
4. Exports accounted for 44% of revenues in 9MFY21.
5. The company expects continued growth in Q3 & Q4 according to Vision 2023.
6. The client base revenue breakup in 9M is as follows:
   1. Telcos: 64%
   2. Enterprises: 11%
   3. Citizen Networks: 22%
   4. Cloud Players: 3%
7. The completion of various data network projects for the company are as follows:
   1. Network Modernisation for Indian Navy: 87%
   2. MAHANET: 92% (A) 34% (B)
   3. T-Fibre for Telangana: 18% (A) 13% (B)
   4. FTTH rollout for a large Indian Telco: 2%
   5. Modern Optical fibre rollout for large Indian telco: 21%
8. The order book spread across customer segments is as follows:
   1. Telcos:                    47.8%
   2. Citizen networks: 34.3%
   3. Enterprises:           17.5%
   4. Cloud:                       0.4%
9. The order book spread is expected is Rs 1501 Cr in the rest of FY21, Rs 5470 Cr in FY22 and Rs 3766 Cr for beyond FY22.
10. EBITDA margins were at 18%.

Investor Conference Call Highlights

1. Demand for fibre is expected to be at almost 255 million in H2FY21.
2. The global micro data center market is expected to grow 5 fold by 2025.
3. The company has launched STL LEAD 360 which has a lot of technology interfaces using robotics, using drone survey, using VR-based digital training as well as very strong cloud-based planning and integrated remote field management to ensure both a very fast as well as long-lasting network rollout.
4. STL has also launched its range of wireless solutions in Q3. The first among these is Garuda, which is a smart 5G indoor small cell.
5. STL has also launched a high-capacity outdoor Wi-Fi access point for high-density deployments.
6. The commercial rollout of these newly launched products should start from H2FY22 onwards.
7. STL has completed the acquisition of Optotec in Q3. The addressable market for STL post-acquisition is $8-10 billion.
8. STL is also bringing back the expansion of optical fiber cable capacity which is expected to be expanded from 18 million km to 33 million km by June 2021.
9. STL has bagged a 5-year multimillion-dollar deal for 5G RAN systems and a significant order of an Opticonn Solution for a leading telecom player in Europe.
10. Despite rising demand for OFC, pricing has remained stable and has not risen much in Q3.
11. The management maintains margin guidance of 18-20%.
12. There was a drop in depreciation in Q3 as the goodwill from the Elitecore acquisition was fully amortized in Q2.
13. The management admits that to reach revenues of Rs 10,000 Cr STL needs to have an order book of Rs 16,000-18,000 Cr.
14. Currently, the company will be looking to use the cash generated from operations to retire debt and thus will not be looking for acquisitions for some time.
15. Wireless is not expected to be higher than 4-5% of revenues for STL according to management.
16. The company is yet to decide whether it will utilize the PLI benefit or not on making wireless devices. This is because it is focused on product design and capability at the moment.
17. STL is looking to offer end to end solutions by combining CODU software from ASOCS with Open RAN hardware.
18. The earliest this can be implemented is expected to be FY23.
19. EU accounts for 26-27% of revenues currently.
20. The management expects overseas growth to faster for STL as compared to India.
21. Given the ratio of products to services remains at current levels of 50:50, the management expects margin expansion to come from value-added product sales.
22. The company has 21 key accounts which generate 82% of sales. The company is focused on creating a larger addressable market of their wallets and deeper penetration of their wallets for these accounts.

Analyst’s View

Sterlite has had a good quarter and it has witnessed the highest ever cable sales volumes. However, high-profit growth YoY in this quarter is mainly due to the lower profit base last year. In Q3FY20, they had a high exceptional loss of 50 Cr. That is not there this quarter, hence, profit optically looks higher. They are seeing a good recovery in the product business with utilization levels at an all-time high. The company is seeing a good deal-wins abroad mainly in its products in Q3 and is also expecting to see sales for virtualized access products start from next year onwards. There is a massive opportunity in the cards for the company from the development of the 5G ecosystem announced by Reliance Jio based on Open RAN technology which is also supported by Airtel, both of which have announced that they will connect more than 100 million homes in next 5 years. It remains to be seen how the post-COVID-19 unravels and how fast will the move towards 5G take place in the company’s principal geographies. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q2FY21 Updates

Financial Results & Highlights

Detailed Results

1. The quarter saw a revenue decline of 14.6% YoY in consolidated terms.
2. Consolidated net profit declined by 64% YoY for the quarter.
3. The current order book stands at Rs 10705 Cr. Manufacturing operations have exceeded pre-covid levels.
4. Exports accounted for 47% of revenues in Q2FY21.
5. The company expects continued growth in Q3 & Q4 according to Vision 2023.
6. The client base revenue breakup in H1 is as follows:
   1. Telcos: 66%
   2. Enterprises: 11%
   3. Citizen Networks: 20%
   4. Cloud Players: 3%
7. The completion of various data network projects for the company are as follows:
   1. Network Modernisation for Indian Navy: 83%
   2. MAHANET: 88% (A) 1% (B)
   3. T-Fibre for Telangana: 14% (A) 8% (B)
   4. FTTH rollout for a large Indian Telco: 2%
   5. Modern Optical fibre rollout for large Indian telco: 5%
8. The order book spread across customer segments is as follows:
   1. Telcos:                    43.9%
   2. Citizen networks: 36.9%
   3. Enterprises:           18.8%
   4. Cloud:                       0.4%
9. The company has completed the open market buyback program of Rs 100 Cr.

Investor Conference Call Highlights

1. The company has made good additions to its advisory board and management teams both in India and abroad which it expects to help deliver Vision 2023 and provide impetus to its global growth approach.
2. Around Rs. 2500 Cr of the order book is expected to be executed in H2FY21 and the rest will be done in FY22 and beyond.
3. The company has won a large order for Opticonn solution from a leading telecom player in Europe.
4. It has also won a fiber rollout order for 10 circles for Airtel. It has also won a large digital transformation mandate from a leading telecom operator in Africa.
5. Lastly, the company has won some Wi-Fi-6 hardware and service management platforms from a disruptive Japanese digital network creator.
6. STL’s capacity utilizations have exceeded the pre-COVID levels and the company expects to see further improvements in Q3 & Q4.
7. Overall debt has increased slightly to Rs 2158 Cr.
8. The management agrees that Bharatnet is indeed created to be shared by all telcos and that network creation in the same geographies is done more for capacity reasons rather than ownership reasons. This is true everywhere in the world.
9. O&M part accounts for around 30% of the total project Capex and is executed over 7-10 years.
10. The fiber rollout order for Airtel is for Rs 700 Cr and the Mahanet order is of Rs 2000 Cr all-inclusive. The Telangana order is of Rs 1700-1800 Cr.
11. Most of the global orders won by the company (other than the Africa order) are for data centres from the acquisition done last year.
12. Fiber capacity utilization is at 60% of 50 million capacity while cable utilization is at 90%+ of 18 million capacity. Margin wise, the management expects product margins to inch towards 20%+ as utilization rises.
13. Revenue mix was at around 60-40 with the majority skewed towards the product side.
14. The company is expected to reduce its dependence on fiber prices as it is looking to make more sales on cables going forward which have almost 3 times realization as compared to bare fiber.
15. The main driver for the virtualized access products business is the propagation of 5G, Wi-Fi-6, and cloud computing ecosystem. The company expects real products to start shipping from Q2FY22 onwards. The company will be essentially looking at getting off-the-shelf hardware, embedding it with software, and staying away from manufacturing as much as possible.
16. The management expects pricing to be stable as demand in non-China territories firms up going forward.
17. The company is still on track for its pending capex of Rs 550 Cr which is expected to do by 9MFY22 at the latest.
18. The management expects the move towards Open RAN to gain momentum over the next 3-5 years with the announcement of Jio and Airtel to move towards it and Qualcomm to make chips for Open RAN.
19. The increase in cable capacity from the present 18 million to 30 million is expected to take place in modular phases over the next 7-odd months. The newly added capacity of 12 million can provide additional revenue of $150-160 million at full capacity (considering the realization of $15-16 for cable).
20. The capex mentioned above of Rs 550 Cr is for both the fiber and cable expansion. Total capacity after the expansion is expected to be at 50 million of fiber and 30 million cables which the management feel is enough to fulfill the company’s goal of reaching yearly revenues of Rs 10,000 Cr.

Analyst’s View

Sterlite Technologies saw a big revenue and profit decline in the current quarter. The company has had a down quarter as the business recovers from COVID-19. They are seeing a good recovery in the product business with utilization levels rising above pre-covid levels. The company is seeing a decent deal wins abroad mainly on the data center business and is also expecting to see sales for virtualized access products start from next year onwards. There is a massive opportunity in the cards for the company from the development of the 5G ecosystem announced by Reliance Jio based on Open RAN technology which is also supported by Airtel. It remains to be seen how the uncertainty around COVID-19 unravels and how fast will move towards 5G take place in the company’s principal geographies. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q1FY21 Updates

Financial Results & Highlights

Detailed Results

1. 1. The quarter saw a severe revenue decline of 38% YoY in consolidated terms.
   2. Consolidated net profit declined by 98% YoY for the quarter.
   3. The current order book stands at Rs 10312 Cr. The proportion of new product to revenue stood at 20%.
   4. Exports accounted for 51% of revenues in Q1FY21.
   5. Plant production is back to pre-COVID levels all across the world.
   6. The company has announced Vision 2023 wherein the next 3 years it plans to:
      1. double the revenue to Rs. 10,000 crore
      2. reduce the net debt to equity by half to 0.5
      3. deliver a Return on Capital Employed (RoCE) above 20%
   7. The client base breakup is as follows:
      1. Telcos: 62%
      2. Enterprises: 15%
      3. Citizen Networks: 19%
      4. Cloud Players: 4%
   8. The completion of various data network projects for the company are as follows:
      1. Network Modernisation for Indian Navy: 81%
      2. MAHANET: 82%
      3. T-Fibre for Telangana: 5%
      4. FTTH rollout for a large Indian Telco: 2%
   9. The company expects fiber demand to rise form 2021 onwards and 5G deployment cycle to last around 8-10 years.
   10. The order book spread across customer segments is as follows:
       1. Telcos:                    38%
       2. Citizen networks: 41%
       3. Enterprises:           20%
       4. Cloud:                       1%
   11. The company is looking to complete the open market buyback program by Q2.

Investor Conference Call Highlights

1. There is a high degree of urgency to build new networks as 2020 has triggered a race for creating these digital infrastructure investments.
2. These digital networks that are getting created need to reach everyone at scale and quality. In terms of scale, these networks need to have many more digital lanes to handle 4 to 5x Internet traffic.
3. These new networks will be built at the edge with a large capacity closer to the consumer. These networks are going to be a combination of both seamless wired as well as a wireless combination.
4. These new-generation digital networks require an integrator, requires a network and a system integrator, who possesses the capability to integrate all these new technologies, which Sterlite is capable of today.
5. The company is focusing on increasing the overall opportunity funnel and win ratio in the top 20 key accounts across the globe.
6. Overall global demand for Optical fiber is expected to grow 6% in H2.
7. Amongst notable order wins that in Q1, Sterlite won a multiyear contract for the Opticonn Solution from a leading Middle East telecom player. It also got additional orders for fiber rollout towards strengthening the MahaNet projects. The company is continuing to get orders for FTTx MANTRA for a large Southeast Asian telco.
8. The order book spread for the rest of FY21 is around Rs 3200 Cr. This is the minimum number the company is expecting to deliver this year. The company doesn’t expect any delays on these orders and on the other hand sees urgency from customers for expedited deliveries of their orders.
9. Overall demand is increasing despite good supply from China because many players looking to reduce dependence on Chinese products. Also, the demand shift is happening towards value-added products and end-to-end solutions.
10. The management has stated that despite the slowdown in the industry, the decline in Sterlite has not been as severe as the rest of the industry as the company started end-to-end solutions where fiber forms a very small part of the overall value bucket.
11. The management has clarified that there is no tie-up between Sterlite, Reliance and Tech Mahindra for the development of the 5G ecosystem based on Open RAN technology. It is just that Tech Mahindra specializes in the software portion of Open RAN technology while Sterlite specializes in both hardware and software for this technology.
12. The company is not worried about any dumping of Chinese products as preferential market access opportunity for Indian companies restricts Chinese companies from competing at the same level as players like Sterlite.
13. The management has stated that the main reason for the decline in business in Q1 was the loss of operations of about 1 month in services and 2 months in manufacturing for the company across all locations. Demand remains intact and thus the company should see sales recover in H2.
14. The company is still reviewing whether it wants to get into the BSNL 4G tender and in what capacity.
15. According to capacity expansion, the company is aiming for a 10% market share globally.
16. The company is not making any geographically based strategies and is instead focussed on servicing its 20 biggest customers regardless of location.
17. The management expects margins to remain in the range of 18-20% going forward. The margins in Q1 were impacted severely due to loss of revenues which resulted in the margin falling to 15%.
18. The FTTH rollout for the Indian Telco which is at 2% currently has a size of Rs 1000 Cr and the majority of it is expected to be completed in FY21.
19. Capacity utilization for fiber was at 48% of the expanded capacity and for cable, it was at 70% in Q1.
20. The management expects R&D expenses to remain at 2% of revenues at more than Rs 100 Cr each year.
21. For R&D investments, the company is not looking for an IRR immediately. It is instead looking at ROI 2-3 years down the line. In the case of inorganic investments, the company has a strict requirement of IRR at >20% to maintain ROCE at >20%.
22. The management has also stated that it has interacted with CXOs of more global telcos and cloud companies than it has done in the last 5 years.
23. The company is currently looking at a Total Addressable Market of $30 billion which expects to grow to $75 billion by 2023.

Analyst’s View

Sterlite Technologies saw a big revenue and profit decline in the current quarter. The company has had a dismal quarter mainly due to loss of operations in both services and product businesses during the lockdown period. The management expects the recovery to be steady in H2. The way forward for the communications industry seems to have been pushed towards data much faster due to COVID-19. As remote working and cloud infrastructure becomes more and more relevant, the demand for an end to end network solutions providers like Sterlite is also expected to rise. The company is making good investments and partnerships in the industry to enhance its capabilities and take advantage of the upcoming demand wave for stronger networks and more and more data centers. There is a massive opportunity in the cards for the company from the development of the 5G ecosystem announced by Reliance based on Open RAN technology where Sterlite is one of the frontrunners in India. It remains to be seen how the uncertainty around COVID-19 unravels and how fast will the company be able to adapt and take advantage of the post COVID world. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q4FY20 Updates

Financial Results & Highlights

* Contains Exceptional Item of an additional provision for Rs 50.71 Cr.

Detailed Results

1. 1. The quarter saw a severe revenue decline of 35% YoY in consolidated terms but FY20 revenues were flat at 1.26% YoY.
   2. Consolidated net profit declined 53% YoY and 26% YoY for the quarter and FY20 periods respectively.
   3. The current order book stands at Rs 10037 Cr. The proportion of new product to revenue stood at 20%.
   4. Within FY20, the company
      1. Acquired IDS Group which is a data center design and deployment specialist
      2. Invested in ASOCS which is a pioneer in virtual Radio Access Networks
      3. Partnered with VMware which a leading provider of the cloud virtualization infrastructure.
      4. Contracted with VVDN which is a developer of focused radio hardware solutions
      5. Aligned with IIT Madras for research and technological advancements in 5G
   5. The company was the first fibre manufacturer in the world to achieve zero waste to landfill certification across glass, fibre, and cable manufacturing companies around the world.
   6. Exports accounted for 35% of revenues in FY20. The company also announced a final dividend of Rs 3.5 per share for FY20.
   7. The company launched stellar, Trueribbon, LEAD360, pFTTx, and dTelco in FY20.
   8. Top 20 customers account for 70% of revenues for the company.
   9. The client base breakup is as follows:
      1. Telcos: 50%
      2. Enterprises: 23%
      3. Citizen Networks: 24%
      4. Cloud Players: 2%
   10. The completion of various data network projects for the company are as follows:
       1. Intrusion Proof Smarter Network for Indian Army: 100%
       2. Network Modernisation for Indian Navy: 76%
       3. MAHANET: 74%
       4. T-Fibre for Telangana: 3%
       5. FTTH rollout for a large Indian Telco: 1%
   11. The company expects fibre demand to rise form 2021 onwards and 5G deployment cycle to last around 8-10 years.
   12. The order book spread across customer segments is as follows:
       1. Telcos:                    39%
       2. Citizen networks: 45%
       3. Enterprises:           16%
       4. Cloud:                       3%
   13. Around Rs 4000 Cr of the order book is to be collected in FY21 while the rest is beyond FY21.
   14. The company is carrying cash & cash equivalents of Rs 478 Cr as of 31^st March 2020.
   15. The company has also announced open market buyback with a max buyback price of Rs 150 per share.

Investor Conference Call Highlights

1. The company had launched Stellar fibre which is the first universal fibre in the world.
2. The company is focussing on 3 key areas which are key account management to drive wallet share, tech-led end to end solutions to address larger customer set and partnerships & investments to enhance capabilities.
3. All of the company’s plants in the word remain operational.
4. The management is confident that the company has enough cash reserves to meet its fixed costs if the lockdown is extended.
5. The management expects fibre demand to go down in H1FY21 mainly due to logistical issues.
6. The management believes that the COVID-19 impact should transform digital communications and shall provide an inflection point for change in the communications sphere.
7. Data demand has risen 30-40% since the start of COVID-19. This should drive data providers to make more and more resilient networks.
8. Cloud migration and work from home phenomenon are also bringing in demand for low latency networks and cloud infrastructure.
9. Data traffic is also shifting to residential areas and thus the demand for fibre for home is expected to rise.
10. The management expects large telcos to be the frontrunners in the 5g expansion.
11. The three key trends going forward according to the management are:
    1. Significant network expansion by telcos driven by data growth which should spur deep fibre growth
    2. Large scale network creation by non-telco companies like cloud companies, campus connectivity by large enterprises and government institutions, data centers, etc
    3. The emergence of open-source software expected to drive next-gen data networks.
12. The management is looking to defer Capex for the cable side for 6-9 months. The company is also looking to undergo cost optimization.
13. The negative impact of COVID-19 on revenues is estimated to be Rs 170 Cr.
14. The company has also delivered Rs 100 Cr of free cash flow in FY20.
15. The management expects project progress to be slow in Q1 and to come back to its normal pace in Q2 onwards.
16. Realizations have stayed flat QoQ while utilization was ta 80-85% of capacity before expansion.
17. The management has stated that the shift to software was mainly to remove the dependence on fibre realizations which are mostly out of the company’s hands.
18. The working capital stretch in Q4 was mainly due to the lack of sales and project implementation in the last 2 weeks in March.
19. The CAPEX for FY21 is expected to be Rs 500 Cr which is largely on fibre side.
20. The management has guided for total net debt reduction for the year forward. The management wants to set debt to equity target of less than 1.
21. Only fibre sales are less than 10% of total revenues. Thus broad market rate for pure fibre sales does not affect the company’s margin as much as it did a few years ago.
22. The utilization is expected to be around 90-95% of non-expanded capacity.
23. The depreciation right now is taking the expansion into account fully.
24. The company does not have any plans for issuing any dollar-denominated debt or foreign investment yet.
25. The revenue breakup between products & services is 40:60 but it is moving more towards an integrated solution involving both products and services.
26. The T-Fibre project is of Rs 1500 Cr and it is expected by FY22.
27. 52% of sales were in pure-play services while 48% is from products, some of which are sold bundled along with integrated solutions.
28. The average margin profile of products is 24% while the margin profile for services is 14%. The blended margin profile for integrated solutions should be around 18-19%.
29. Out of Rs 500 Cr Capex, 225-250 Cr is for fibre, 50-60 Cr is for sustainable while 200 Cr is for cable.
30. The management believes that the ROCE of 20-22% is definitely sustainable for the company.
31. Close to 20% of the order book is from the government of India specifically Bharatnet.
32. Right now only 30% of towers in India are connected with fibre. The current focus for India is expected to be largely on strengthening and enhancing the range of 4G before going for 5G.

Analyst’s View

Sterlite Technologies saw a big revenue and profit decline in the current quarter. The company has had a dismal quarter mainly due to delays in sales and project implementation in the last 2 weeks of March. The management expects Q1 to be tough for the company with subdued demand mainly due to logistical issues. The way forward for the communications industry seems to have been pushed towards data much faster due to COVID-19. As remote working and cloud infrastructure becomes more and more relevant, the demand for an end to end network solutions providers like Sterlite is also expected to rise. The company is making good investments and partnerships in the industry to enhance its capabilities and take advantage of the upcoming demand wave for stronger networks and more and more data centers. It remains to be seen how the uncertainty around COVID-19 unravels and how fast will the company be able to adapt and take advantage of the post COVID world. Nonetheless, given the company’s capabilities in providing integrated and tailored network solutions, its expanded production capacity, and long-running order, Sterlite Technologies looks like a pivotal stock to watch out for in the communications technology space.

Q3 2020 Updates

Financial Results & Highlights

* Contains Exceptional Item of an additional provision for Rs 50.71 Cr.

Detailed Results

1. 1. The quarter saw a moderate revenue decline of 10% YoY in consolidated terms but 9M revenues were up 21% YoY.
   2. Consolidated net profit declined 65% YoY and 15% YoY for the quarter and 9M periods respectively.
   3. PAT in the quarter was down mainly due to a provision of Rs 50.71 Cr made by the company towards the settlement of a pending litigation.
   4. The company has completed 65% of the Indian Navy project and 55% of the Mahanet project has been delivered.
   5. It was awarded a T-fiber project for Rs 1100 Cr to provide digital infrastructure to 6 million citizens of rural Telangana.
   6. The company acquired a 12.8% stake in ASOCS which is a pioneer in radio wireless networks to expand the company’s expertise in wireless networks.
   7. Exports for the company stood at 31% of revenue in the quarter.
   8. EBITDA for Q3 declined 17% QoQ and 18.75% YoY. This was because both volumes and realizations declined in the quarter. The company hopes to stop this volume decline by entering into new markets and improve realization by instituting cost reduction in optical fiber. It has also introduced Project Junoon to do the same.
   9. The current order book stands at Rs 8535 Cr. The proportion of new product to revenue stood at 20%.
   10. The client base breakup is as follows:
       • Telcos: 52%
       • Enterprises: 22%
       • Citizen Networks: 24%
       • Cloud Players: 2%

Investor Conference Call Highlights

1. Global Telco industry saw a pause in Capex in 2019 due to the transition from 4G to 5G while global fiber demand fell 17%.
2. The company sees profitability rising for the Indian telecom industry due to the rise in tariffs earlier this year.
3. The management expects the demand for fiber to rise in the year going forward as Capex for the industry resumes. The management also expects this mainly because the requirement for optical fiber is far higher in 5G networks as compared to previous 4G networks.
4. The company also expects the business from the citizen networks to grow going forward as part of the BharatNet mission.
5. The company is operating at 46% utilization of the expanded optical fiber capacity and 76% utilization in cable capacity in Q3.
6. The management expects the demand for the industry to remain subdued till H2FY21 but the company plans to expand sales volumes by expanding into new geographies.
7. The company’s new product Trueribbon which was launched last year is received well in the industry. The company has also launched StellarFibre which is the industry’s first universal fiber in October.
8. The margins in the services business have improved to 17% and the projects continue to yield 20-22% and the management expects the margins to improve further as the scale of operations expands.
9. The company expects a rise in domestic demand for optical fiber in the near future.
10. The company has opted for a flat 25% tax rate.
11. 63% of the new order book is in new projects which are expected to have a time period of 12-18 months while the rest 37% is in O&M which is to distribute evenly across 7 years.
12. The company is shifting its focus to value-added and specialized products to earn higher realization.
13. The current days of receivables for the company stands at 100 days. The company has received Rs 133 Cr from its Rs 300 Cr dues from BSNL in Q3. The rest of the dues is expected to be received in the next 6 months.
14. The management has maintained that their capacity utilization for FY20 should be almost flat YoY.
15. The management has indicated that the company does not have any new Capex plans and it will concentrate on completing existing plans for the time being.
16. The management expects the leverage of the company to come down going forward as no new Capex is being planned.
17. The management expects capacity utilization in FY21 to reach 75%-80% of the expanded capacity.
18. The management expects QoQ revenue growth in Q4 due to greater geographical reach and anticipated volume growth from advance orders and expected project revenues.
19. The management maintains that it is confident of achieving good performance in the near future.

Analyst’s View

Sterlite Technologies saw severe revenue decline in the current quarter. The sales volume for the company has been contracting and the management has indicated that it expects volumes to stay flat for the year. Despite the dismal quarter, the company saw encouraging signs from the good acceptance of its value-added products like Trueribbon and Stellarfibre. The company plans to overturn this fall in volumes by expanding and selling in new geographies that it has reached this year. Furthermore, it is also looking to enhance its realization by engaging and instituting cost savings initiatives. The company’s performance in the services business has been encouraging with the company expecting to gain more orders both from defense forces and citizen networks. It remains to be seen whether the company will be able to bounce back as quickly as the management expects. But given the company’s market position and the increasing importance of fast and secure networks going forward, Sterlite Technologies remains a potentially good growth stock to watch out for.

Q2 2020 Updates

Financial Results & Highlights

Detailed Results

1. 1. The quarter saw good revenue growth of 25% YoY in consolidated terms.
   2. Profit growth was dismal with PBT declining 1.5% YoY and 21% YoY in standalone and consolidated terms.
   3. PAT growth in the quarter was mainly due to a reduction in taxes for the company.
   4. The company has commissioned a new glass manufacturing plant in Aurangabad.
   5. It has also completed the Kakinada Smart City project.
   6. The company acquired the IDS group in the UK marking STL’s entry into specialized Inside Data Centre space with design and deployment capability.
   7. Exports for the company stood at 38% of revenue. The export revenues also rose 33% YoY.
   8. The EBITDA for the quarter also rose 7% YoY while ROCE stands at 23%.
   9. The number of patents for the company rose to 283
   10. The current order book stands at Rs 8132 Cr. The proportion of new product to revenue stood at 20%.
   11. The client base breakup is as follows:
       • Telcos: 56%
       • Enterprises: 23%
       • Citizen Networks: 20%
       • Cloud Players: 2%

Investor Conference Call Highlights

1. The company had 3 launches in the network services division which were 360 degrees 2.0, FTTx Mantra and iCore.
2. In connectivity solutions, the company launched TruRibbon and Stellar Fibre.
3. The company added 26 new customers in the quarter.
4. The company has noted trends in the telecom industry which suggest that most telcos are taking a pause and delaying Capex investments. The company expects the structural demand drivers for our industry to remain intact and the telco Capex to grow once the 5G investment cycle starts.
5. The global consumption of fiber is expected to stay muted as compared to last year.
6. The management expects flat volumes for the year due to low order booking and signs of customers delaying pickup of other existing order books.
7. The company also expects some pricing pressures on contract renegotiations for 2020 because of the short-term industry oversupply situation.
8. The management remains confident of the company’s position in the industry based on its product portfolio and end to end service offerings.
9. The management wants to highlight the clear opportunity for the company as 25 countries as looking to offer multicity commercially available 5G services by the end of this year and the overall addressable market of more than $ 75 billion for the company by 2023.
10. The management has also mentioned that they may bring down debt by Rs 300 Cr in the year.
11. The utilization rate for the fiber plant was at 100% with 7 million in volumes. In terms of cable, the utilization rate was at 80% with volumes of 18 million. The cost of realization was at $7.
12. The management has guided that they will be looking for flat revenues and volumes for the year with margins >20%.
13. The total capacity in optical fiber is around 50 million with cables at 18 million which is set to rise to 33 million by June 2020.
14. The navy and MahaNet projects are on schedule and the company may even be able to complete before estimated deadlines. The company has also added almost Rs 7000 Cr of opportunities to its funnel in H1FY20.
15. The new tax rate for the company is at 25% and the company has a deferred tax liability of Rs 15 Cr.
16. The company is looking to start international projects with a size of around Rs 100-200 Cr.
17. The management is expecting the demand environment to revive in FY21 and thus they are going forward with their proposed capex plans.
18. In new contracts, the realization of the optical fiber is at $6 to $6.5.
19. The R&D spend for the year till date is around Rs 85-90 Cr.
20. Services revenue for the quarter was roughly at Rs 950 Cr which accounts for 50% of total revenues for the company.
21. The growth for this year is expected to be driven by growth in services revenue while product revenue is expected to be flat for the year.
22. The management has stated that the services business margin profile is better than the 11% that they had achieved last year.
23. The company is getting timely collection on its due from BSNL with collection of close to Rs 300 Cr done.
24. The margin for the product business is around 25%.
25. Close to Rs 800 Cr has been deferred and taken out of the order book.
26. The company is in talks with Reliance Jio and is expected to derive some business from the rollout of Jio fiber offerings.

Analyst’s View

Sterlite Technologies has been able to continue its revenue expansion in the current quarter. But the margin profile for the company has fallen YoY, largely due to the increase in the services business and its contribution to total revenues. The company has guided that they expect the volumes to stay flat this year and this should prove to be a dampener for the company. The management has expressed that the company’s growth in the rest of the year is to be driven by the services businesses. It remains to be seen whether the company will be able to expand its services business at the pace that they are projecting. Nonetheless, given the company’s expertise and industry position and the enormous opportunity for the company in the upcoming 5G transition, Sterlite Technologies remains an investment prospect to keep an eye out for.  Valuation has come down drastically in the last year due to various reasons. It would be interesting to see how it fares in the next couple of quarters in terms of revenue mix, margin profile and ROE.

Q1 2020 Updates

Financial Results & Highlights

Detailed Results

1. 1. The quarter saw good revenue growth of 63% YoY in both standalone and consolidated terms.
   2. Profit growth was at 32% YoY and 11% YoY in standalone and consolidated terms.
   3. The company has successfully implemented a pan India communications network for the Indian Navy.
   4. They have also commissioned their integrated “Silicon to Fibre” plant in June 2019.
   5. The company has launched Intellza which is a business intelligence data solutions product for telecom companies.
   6. Exports for the company stood at 36% of revenue. The export revenues also rose 33% YoY.
   7. The EBITDA for the quarter also rose 32% YoY while ROCE stands at 28%.
   8. The number of patents for the company rose to 273 which has risen 45% YoY.
   9. The client base breakup is as follows:
      • Telcos: 56%
      • Enterprises: 25%
      • Citizen Networks: 18%
      • Cloud Players: 1%
   10. The current order book stands at Rs 9853 Cr.

Investor Conference Call Highlights

1. The company has emphasized that each of the top 25 cities in USA needs at least 6-7 million km of fibre to achieve 5G integration.
2. India’s per capita fiberization is 17 times lower than the USA and 14 times lower than China, thus emphasizing the huge opportunity for fiberization in the country.
3. The new facility will be brought up to full capacity by the end of this year.
4. The company is also doubling their capacity in their Italian plant.
5. The plan to expand total capacity from 18 million km to 33 million km is on track to be completed by June 2020.
6. The new products to revenue ratio was 21% in the current quarter.
7. The main reason for the dip in QoQ numbers is due to lower revenues in the services business due to timing issues where most contracts get recognized in March.
8. The early commissioning of the new plant has also led to higher depreciation for the quarter.
9. India and EU remain important target markets for the company.
10. The new orders coming in this quarter stood at Rs 750 Cr.
11. The breakup of revenues stands at 60:40 for product and services respectively.
12. The net debt for the company stands at Rs 1980 Cr currently.
13. The company broadly ran at almost full capacity for the current quarter.
14. The order book breakup is almost 55-57% is from products while the rest is from services.
15. The company expects good revenue in this year as they are yet to complete the Mahanet and Indian Navy projects.
16. The company is also going to undergo capex of Rs 550 Cr. The debt to equity is expected to stay around 1.
17. The working capital days has risen a bit in the current quarter.
18. The company is also anticipating margin appreciation in the cable product business due to higher instances of customized cable orders.
19. The EBITDA margin is expected to stay above 20% for the year due to the current revenue mix. The company is also targeting to keep ROCE above 25% at all times.

Analyst’s View

Sterlite Technologies is continuing on the path of revenue and profit expansion as new projects are getting executed. The company has done well to bring up the revenue contribution of the services segment to 40% of total revenues. Market was worried about the promoter group pledging of shares for some time. In the month of June, the company has resolved that by removing the pledge. Sterlite Tech has time and again emphasized the potential for growth of its segment in India and it is in pole position to capture any such opportunity. This is evident from the big projects of Mahanet and Indian Navy. But the road to this big opportunity is still long and it remains to be seen how market reacts to these development going forward. At the moment, the price of the shares reflect extreme pessimism from investors. It seems like there is still an overhang of the pledging issue in the minds of investors. Nonetheless, Sterlite Technologies is a company to watch out for any investor believing in the theme of optical fibre networks and 5G transition for India.

Q4 2019 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company has delivered another stellar quarter with more than 100% growth in revenues both in standalone and consolidated levels.
   2. Overall FY19 consolidated revenues were up 58% YoY with consolidated PAT growing 59% YoY.
   3. The order book is at an all-time high at Rs 10,516 Cr.
   4. The company has also launched 6 new solutions and 35 new customer wins.
   5. In the fibre deployment space, the company saw YoY growth of 13% in EU, 16% in India and 7% in LATAM and Middle East.
   6. The company has also reduced their dependence on Telco industry with newer customer segments of enterprise solutions and citizen networks increasing their revenue share from 15% in FY19 to 37% in FY20.
   7. The company has also increased their optical fibre capacity to 50 million km from 30 million km in FY18.
   8. The company has also increased their patent tally to 271 from 234 a year ago.

Investor Conference Call Highlights

1. The company has maintained that their exposure to the China fibre slowdown is small as China revenues only account for <5% of overall revenues.
2. The company has partnered with two top telco companies in India for their BSS/OSS software platform. They have also secured network rollout under the Bharat Net and Smart Cities initiatives in Maharashtra.
3. The company’s new silicon to fibre plant is under final installation and should start production from Q2 this year.
4. The company’s acquisition of Metallurgica Bresciana has significantly improved their reach into EU markets and they are observing good synergies between their India and Italy plants.
5. The company sees new demand drivers coming into place. These include increased FTTx penetration in India and EU and the 5G rollout in 2020.
6. The company is also looking for opportunities in rural connectivity and network modernisation in large state enterprises like Defence, Railways and Oil & Gas.
7. The company has identified their total addressable market size at $ 75 billion where they currently have <1% market share.
8. The company is now looking to add new businesses with a less capex intensive model to their umbrella. This should help raise ROCE at the cost of a lower blended EBITDA margin as compared to their current fixed asset heavy business model.
9. The company expects EBITDA margins in the range of 18%-20% with ROCE >25% from these proposed changes.
10. The revenue mix for the quarter has been 52% in services and 48% in product sales.
11. In the product side of the business, the utilization rate currently is now at almost 100%.
12. The company expects the revenue mix for products and services to reach 50-50 in the next couple of years.
13. The management has said that the material volumes from the capacity expansion of 10 million fibre km should start from H2FY20 onwards.
14. The new facility should be running at full capacity by FY21 onwards.
15. In their product sales mix, almost 70% of it count as exports, most of which go to the EU.
16. The proposed capex for FY20 should be around Rs 500-550 Cr, most of which would be going to the cable facility.
17. The rise in receivables of Rs 2500 Cr should be from the contracts from the Indian Navy and the Bharat Net initiative.

Analyst’s View

Sterlite Technologies is in a midst of a transformation where they are moving from an asset heavy products business to a blended product/service provider. This period is critical for the company and the next couple of years will chart its journey for the future. So far, the company has shown good growth in their new business segments and have amassed a massive order book. However it remains to be seen if the momentum carries on going forward as well. The looming threat of the promoter pledge has now gone out of the picture. In a recent communication to stock exchange they have informed about the removal of entire pledge on company’s shares. But the market does not seem to be excited by it. In their recently released Annual Report of FY18-19, they have laid out plans for fund raising in tune of a thousand crores. Hence, FY19-20 would be an interesting year for Sterlite. We at SSS, are also keeping a close watch.

Q3 2019 Updates

Financial Results & Highlights

Detailed Results

1. 1. Revenues are up 60% YoY and EBITDA is up 46% YoY. Order Book has crossed Rs 10000 Cr.
   2. Ongoing capacity expansion of 50 million fibre km and 33 million fibre cable.
   3. Maintaining a healthy ROCE of >25%.
   4. Witnessed the best ever quarter for the company with revenues, EBITDA and PAT at highest ever levels.
   5. Have witnessed a 50% growth YoY in European sales and have initiated a partnership with Red Hat to develop open and agile solutions to accelerate telco’s digital transformation.
   6. Have also established a new point of presence in Europe through acquisition of Metallurgica.
   7. Well on track to fulfil strategic aspirations of delivering PAT of $100 million by FY20.

Investor Conference Call Highlights

1. As networks move from 4G to 5G, global consumption is going up as well, which has led to massive investment and money going in by all cloud players like Google, Microsoft and Amazon.
2. The industry is ripe for disruptive change as ARPU of telcos remain flat despite high capex by above mentioned companies.
3. Sterlite maintains specialization in providing high amount of data per user base while keeping capex at reasonable levels.
4. Management believe that they are uniquely positioned to leverage the increasing consumption of data due to their resident expertise and growing proficiency in being able to create data networks in the most agile and open architecture mode.
5. Underlying growth in fibre has been 5 times world growth rate, signalling that this market is here to stay.
6. Sterlite aim to maintain a two pronged approach for the future:
   1. Participate in the data network creation capex wave.
   2. Offering application based solutions leveraging their strong position in optic products and network solutions.
7. Sterlite’s patents have increased from 212 to 234 this quarter, thus highlighting their commitment to be at the cutting edge in this space.
8. They expect their addressable market to increase to $75 billion by 2023 from $20 billion in 2017.
9. Current growth in revenue is being driven from software services orders.
10. Revenue split is <30% in services and >70% in product.
11. Current capacity utilization rate is close to 100%.
12. Sterlite aims to position themselves as an end to end data network solutions provider for all layers.

Analyst’s View

Sterlite Technologies has been on a fast upward trajectory for a while and the management is still optimistic in their forward outlook. The company has recorded their best ever quarter and have increased their order book to record levels highlighting their credentials as one of the industry leaders in their segment. Their renewed push to expand both their physical fibre capacity and their network services segment show their robust forward outlook and their ambition to establish themselves in this upcoming segment. Thus considering how network solutions are going to be increasingly important in the future, Sterlite Technologies is in for the long game and is comfortably positioned to fulfil their aspirations both in the domestic and world stage. Thus, Sterlite Technologies looks like a stellar investment opportunity that is destined to deliver superior returns year after year, given they stay on their defined path and continue to break records both in India and abroad.  Moreover, recent fall in the broader market has brought the stock price to a very reasonable valuation.

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