CRISIL Research Ier Report Sterlite Technologies 2012

7/31/2019 CRISIL Research Ier Report Sterlite Technologies 2012

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MAKINGMARKETS

FUNCTIONBETTE

R

YEARS

Apollo HospitalsEnterprise Ltd

CRISIL IERIndependentEquityResearch

Enhancing investment decisions

Detailed Report

Sterlite TechnologiesLtd

Detailed Report


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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysisof Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a

five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-

point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL

Fundamental Grade Assessment

CRISIL

Valuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (


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MAKINGMARKETS

FUNCTIONBETTER

YEARSSterlite Technologies LtdReturning to normal profitability

Fundamental Grade 3/5 (Good fundamentals)

Valuation Grade 4/5 (CMP has upside)

Industry Technology, hardware and equipment

1

July 24, 2012

Fair Value Rs 40

CMP Rs 33

For detailed initiating coverage report please visit: www.ier.co.in

CRISIL Independent Equity Research reports are also available on Bloomberg (CRI ) and Thomson Reuters.

Sterlite Technologies Ltd (Sterlite Tech) has stepped into FY13 with better business

prospects in both its segments telecom and conductors. The optical fibre plantsstabilisation issues have been resolved and the conductor segment has a healthy flow of

Power Grid Corporation of India Ltd (PGCIL) orders. However, competition in both segments

has increased. We believe that the company will bounce back from FY12 lows and, hence,

retain the fundamental grade of 3/5, indicating that its fundamentals are good relative to

other listed securities in India.

Expanding fibre capacity to capture market growth; profitability to improve

According to the company, the stabilisation issues in the newly commissioned capacity in its

fibre plant at Aurangabad (Maharashtra) have been resolved in Q4FY12. Further, the

capacity expansion from 12 mn fibre-Km to 20 mn fibre-Km and established presence in the

global markets will ensure that Sterlite Tech is able to cater to the increase in demand for

optical fibre. Driven by these factors, the segments EBITDA is expected to grow at 31%

CAGR over FY12-14 to Rs 2,279 mn.

Healthy PGCIL order book to drive conductor segments profitabilityAfter the gap of one year, PGCIL released the order backlog in H2FY12, resulting in healthy

order book of Rs 21 bn (62% from PGCIL) for Sterlite Tech, as of FY12, executable over

FY13-14. As PGCIL orders are relatively high margin orders, EBITDA per tonne is expected

to improve to Rs 9,200 in FY14 from Rs 6,187 in FY12. However, we do not expect

profitability to return to historical levels of Rs 12,000-13,000 per tonne as competition has

intensified. Further, the company is expanding its conductor capacity from 1.6 lakh MT to 2

lakh MT by FY13, which will enable it to meet the demand CAGR of 15% over FY13-15 in the

domestic conductor industry. Also, the company is executing three transmission grid projects

entailing equity investment of Rs 10 bn by FY15. Though returns are low, the projects will

provide a steady cash flow to Sterlite Tech.

Key monitorables/Risks

a) Capacity expansion by Chinese players which could reduce Chinas dependency on

imports, (b) PGCILs order flow and increase in competition in the domestic conductorindustry, and c) successful execution of the ultra mega power transmission projects.

Standalone earnings to grow at a CAGR of 71% over FY12-FY14

Sterlite Techs standalone revenue is expected to grow at a CAGR of 15% to Rs 36 bn in

FY14 driven by capacity expansion in both telecom and power transmission segments.

Further, following an improvement in both segments profitability, standalone PAT is projected

to grow from Rs 438 mn in FY12 to Rs 1,279 mn in FY14.

Valuations: Current market has upside

We have used the sum-of-the-parts method to value Sterlite Tech and maintain the fair value

of Rs 40. Based on the current market price of Rs 33, the valuation grade is 4/5.

KEY FORECAST- STANDALONE

(Rs mn) FY10 FY11 FY12# FY13E FY14EOperating income 24,311 22,641 27,275 29,588 35,931

EBITDA 3,813 2,709 1,996 3,214 3,925

Adj Net income 2,565 1,405 438 1,113 1,279

Adj EPS-Rs 7.2 3.9 1.1 2.8 3.3

EPS growth (%) (46.6) (45.4) (71.7) 153.8 14.9

Dividend Yield (%) 0.6 1.6 1.0 1.0 1.0

RoCE (%) 27.8 14.7 7.4 11.9 12.4

RoE (%) 33.4 14.4 4.0 9.2 9.6

P/E (x) 12.2 7.8 27.5 10.8 9.4

P/BV (x) 3.4 1.1 1.1 0.9 0.9

EV/EBITDA (x) 8.4 5.5 8.5 6.4 6.2

Source: Company, CRISIL Research estimates

# Based on abridged financials, NM: Not meaningful; CMP: Current market price

CFV MATRIX

KEY STOCK STATISTICSNIFTY/SENSEX 5118/16877

NSE/BSE ticker STRTECH

Face value (Rs per share) 2

Shares outstanding (mn) 393

Market cap (Rs mn)/(US$ mn) 10,914/198

Enterprise value (Rs mn)/(US$ mn) 15,710/285

52-week range (Rs)/(H/L) 59/27

Beta 1.6

Free float (%) 45.3%

Avg daily volumes (30-days) 1,033,168

Avg daily value (30-days) (Rs mn) 35

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKET

Returns

1-m 3-m 6-m 12-m

Sterlite Tech 9% -15% -6% -38%

NIFTY 2% -2% 3% -7%

ANALYTICAL CONTACTMohit Modi (Director) [email protected]

Pravesh Rawat [email protected]

Vishal Rampuria [email protected]

Client servicing desk

+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

FundamentalGrade

Poor

Fundamentals

ExcellentFundamentals

Stron

g

Downs

ide

Stron

g

Upsid

e

54.7% 54.7% 54.7% 54.7%

2.2% 1.8% 1.4% 2.4%

11.6% 11.5% 11.5% 9.9%

31.5% 32.0% 32.4% 33.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun-11 Sep-11 Dec-11 Mar-12

Promoter FII DII Others


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2

Table 1: Sterlite Technologies: Business environment (Standalone)

Product / Segment Telecom Power transmission conductors Grid projects

Revenue contribution

(FY12)

30% 70% NA

Revenue contribution

(FY14)

29% 71% NA

Product / service offering Manufactures optical fibre, fibre

optic cables, structured data

cables, and offers telecom

integration and managed services

Power transmission conductors, optical

fibre composite overhead ground wire

(OPGW ) cables

Setting up of high capacity transmission

lines on a build, own, operate and

maintain basis (BOOM)

Geographic presence India, China, Middle-East, Africa and Europe India

Market position 5% market share in global fibre

industry

24% market share in India for

optical fibre and cables

8% share in Africa, 7% share inChina and 5% share in Russia

for fibre optic cables

25% market share in India

8% market share in Africa

Won three out of nine projects

awarded so far released by the

government

Sales growth

(FY09-FY12 3-yr CAGR)

-3%* 8% NA

Sales forecast

(FY12-FY14 2-yr CAGR)

17% 16% NA

Demand drivers Domestic

Laying out of fibre network in

rural areas under the national

broadband policy

Increased penetration of FTTx#

Growth in bandwidthrequirement in India due to

increase in demand for video

content

International

Increase in FTTx penetration

Increase in wireless and

broadband network penetration

in developing countries

Domestic

Increase in power generation

PGCILs power transmission corridor

project for evacuation of power from

surplus regions and supplying it to

deficit regionsInternational

Improvement in power infrastructure

in developing nations

Thrust on renewable sources of

energy in developed nations

Upgradation of national grids of

developed nations

Increase in power generation

PGCILs power transmission corridor

project for evacuation of power from

surplus regions and supplying it to

deficit regions

Key competitors Domestic: Aksh Optifibre, Finolex

Cables, Birla Ericsson Opticals

International: Sumitomo Electric,

Prysmian Inc, Nexans Inc, Draka,

General Cables, Furukawa,Fujikura, Corning

Domestic: Apar Industries, Diamond

Power Infrastructure

International: Alcan, ZTT China,

Southwire, Midal, Prysmian Inc, General

Cables

PGCIL, Reliance Infrastructure, Simplex

Infrastructure

Key risks Competition from global players

Increase in fibre capacity in

China

Stabilisation of incremental

capacity installed

Competition from domestic players

High dependence on PGCIL

Cost overrun

Delay in payment from SEBs (state

electricity boards)

*Due to the decline in the optical fibre realisation and lower system integration business

Note: Revenue contribution of the telecom and power transmission conductor segments is for the respective standalone business

#Fibre to the x (FTTx) is a generic term for any broadband network architecture that uses optical fibre to replace all or part of the usual metal (copper)

local loop used for last mile telecommunications. The various configurations are FTTN (fibre to the node), FTTC (fibre to the curb), FTTB (fibre to the

building and FTTP (fibre to the premise)

Source: Company, CRISIL Research


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Sterlite Technologies Ltd

3

Grading Rationale

Last year was tough but future looks promising

Sterlite Tech has stepped into FY13 with better demand prospects and expects profitability to

improve over FY12 in both its businesses optical fibre/cable and conductors. FY12 was a

subdued year for Sterlite Tech as its newly commissioned optical fibre capacity faced

stabilisation issues and the demand for conductors was low due to delay in PGCIL orders.

The company has resolved the stabilisation issues in the optical fibre plant and currently holds

a healthy order book of Rs 21 bn (62% PGCIL orders) in the conductor segment. Further,

demand for both its products optical fibre/cables and conductors - is expected to be healthy

over the next two years. The companys prospects have improved from the previous year and

we expect standalone earnings to grow at a two-year CAGR of 71% over FY12-14. The

growth number appears to be large on account of a low base; the standalone earnings de-

grew significantly by 59% CAGR during FY10-FY12.

Optical fibre: Expanding capacity to capture demand surge

Capacity expansion

Sterlite Tech is expanding its optical fibre capacity to 20 mn fibre-Km from the existing 12 mn

fibre-Km to capture the expected demand growth in the global optical fibre industry. According

to the management, the company will become the third largest manufacturer of optical fibre

post the expansion from being the fifth largest currently.

Of the incremental 8 mn fibre-Km, the company is setting up 4 mn fibre-Km in China in a JV

with a local partner to improve its market share. The preform required for this capacity will be

imported from India. The capex for the total capacity addition in India (preform manufacturing

for 8 mn fibre-Km and 4 mn fibre-Km optical fibre capacity) is estimated to be ~Rs 1.5 bn,

which will be largely funded through internal accruals. We expect capacity to come on stream

in Q2FY13 in India and in Q1FY14 in China.

Figure 1: Optical fibre and cable capacity expansion trend

*includes 4 mn fibre-Km installed in China for FY14


4.0

6.0

9.010.0 10.0

12.0

16.0

20.0

3.2 3.2 3.24.5 4.5

5.5 5.5 6.0

0.0

5.0

10.0

15.0

20.0

25.0

FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

(mn fibre-Km)

Optical fibre* Optical fibre cable

Sterlite Tech, with an installed

capacity of 12 mn fibre-Km, is

currently the fifth largest global

and the only domestic

manufacturer of optical fibre


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4

With an established presence in global markets

Over the years, Sterlite Tech has established itself in various geographies. Exports comprise

~85% of total revenues of optical fibre business in FY12. The company exports optical fibre

and cables to China, Africa, Middle East, South Africa, Europe and the US. According to the

management, the company has ~10% market share in Europe, ~6% in China, ~7% in Latin

America and ~2% in North America. It has supplied optical fibre and cables to six of the top 10

global telecom service providers.

Figure 2: Geographical break-down of optical fibre sales (FY12)

Source: Company

To equip Sterlite Tech to reap benefits from increase in global demand

CRU a UK based research agency, expects the global optical fibre demand to grow by 9%

in 2012 driven by demand from Asia. Compared to earlier expectations of nil growth in CY11,

the global demand for optical fibre grew by ~7% to 204 mn fibre-Km, the highest ever

recorded by the industry. Strong demand from China, Europe and North America led this

growth.

Chinese demand, which de-grew by ~8% in 2010, bounced back in 2011. In 2012 too,

demand from China is expected to increase driven by fibre capex of the three main Chinese

telecom service providers - China Mobile, China Telecom and China Unicom. These players

are collectively expected to purchase ~100 mn fibre-Km of optical fibre in 2012. Demand from

Australia, Brazil and the US is also expected to be strong. FTTx installations and growth in

bandwidth demand are expected to be key drivers for optical fibre demand in most

geographies.

China34%

Europe26%

Middle East andAfrica

22%

US6%

India12%

Sterlite Tech is an established

players in global markets such as

China, Africa, Middle East, South

Africa, Europe and the US

Poised to benefit from the

global demand of optical fibre


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5

Figure 3: Global optical fibre demand

Source: CRU, Company, CRISIL Research

Profitability projected to move towards normalcy

We expect the optical fibre segments EBITDA margin to move towards normalcy in FY13 as

the company has resolved the stabilisation issues with the new capacity of 2 mn fibre-Km. The

company expanded its optical fibre capacity from 10 mn fibre-Km to 12 mn fibre-Km in FY12.

This incremental capacity faced stabilisation issues due to which the yields from this capacity

were low. This impacted Sterlite Techs profitability in this segment. According to the

company, the stabilisation issues have now been resolved and the plant is operating at

optimum yields.

However, the expansion in EBITDA margin of telecom segment in FY13 is expected to be

limited to only 278 bps as we factor in the stabilisation issues in the upcoming capacity of 4

mn fibre-Km, which is coming on stream in H2FY13. Post the expansion, we expect EBITDA

margin to expand to 21.6% in FY14.

Telecom segments EBITDA margin - yearly trend Telecom segments EBITDA margin quarterly trend

Note: Telecom segment includes optical fibre, fibre optic cables, data cables and system integration business

Source: Company, CRISIL Research Source: Company, CRISIL Research

65

90 92

59 59 6275

95

118

140

174190

204

222

0

50

100

150

200

250

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012E

(mn fibre-Km)

14.2%

16.0%

22.7%

25.6%

17.5%

20.3%21.6%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY08 FY09 FY10 FY11 FY12 FY13E FY14E

28.8% 28.8%

24.2%

21.6%23.3%

15.6% 15.9%16.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Stabilisation issue in the optical

fibre plant has been resolved


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6

Increase in Chinese capacity a threat to profitability

According to Research in China (a China-based research agency), China will become self-

sufficient in preform (glass used for making optical fibre) by 2013 driven by capacity expansion

by the six small fibre manufacturers in China. Preform imports have already declined from

70% in 2010 to 48.9% in 2011. Since China accounts for ~40% of the global demand for

optical fibre, decline in Chinese imports will have an adverse impact on the global players

volume growth and their capacity utilisation levels. Also, over the past year, realisations of

optical fibre have been stable at US$7.5-8 per fibre-Km since the demand-supply situation has

been stable. When the Chinese capacities come on stream, supply will exceed demand and

will put pressure on fibre realisation, which will adversely impact profitability of players like

Sterlite Tech.

According to the management, Chinese manufacturers have not been able to stabilise the

preform capacities in the past and, hence, China has always remained an importer of opticalfibre. Also, the gestation period for optical fibre capacities is high. Accordingly, the company

believes that China will take some time to become self-sufficient.

Conductors: Sterlite Tech has the largest capacity in India

Expanding the capacity in conductor business

Sterlite Tech is on track to expand its conductor capacity from existing 1.6 lakh MT to 2 lakh

MT by FY13-end, following which, according to the management, it will become the largest

global manufacturer of power conductors in terms of capacity.

Given the existing healthy order book, we expect the capacity to run at 90% utilisation rate.

The total capital expenditure is estimated at ~Rs 500 mn which will be funded through internal

accruals only.

Figure 4: Increasing capacity... Figure 5: ... to fuel the growth

Source: CRISIL Research Source: CRISIL Research

160,000 160,000 160,000 160,000

200,000

0

20,000

40,000

60,000

80,000100,000

120,000

140,000

160,000

180,000

200,000

FY10 FY11 FY12 FY13E FY14E

(Tonne)

15,370 16,073 19,210 20,577 25,777

2,060

1,137

838

1,295

1,656

-

500

1,000

1,500

2,000

2,500

-

5,000

10,000

15,000

20,000

25,000

30,000

(Rs mn)(Rs mn)

Revenue (Conductor segment)

EBITDA (conductor segment) (RHS)

Reduction in Chinas dependency

on imports is a threat


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7

Sterlite Tech is not only an approved but also one of the largest vendors of PGCIL (which

accounts for ~50% of total domestic demand for conductors). As per the company, 25% of

Indias national grid uses conductors manufactured by Sterlite Tech. Its other clients include

SEBs and a few private players in India. The contracts are awarded based on competitive

bidding.

Table 2: Domestic peers installed capacity Table 3: Share of players in PGCILs total orders released since 2008

Company UnitInstalled capacity

(FY12)

Sterlite Technologies MT 1,60,000

Apar Industries MT 1,35,000

Diamond power and

infrastructure MT 50,500

Company Till August, 2011 Till March, 2012

Sterlite Technologies 33% 28%

JV of Apar, Deepak and Gupta Cables 17% 6%

Apar Industries 8% 13%

Gupta Power Infrastructure 3% 6%

Deepak Cables 3% 6%

Others 36% 59%


To benefit from industry-wide opportunities

Sterlite Tech, leveraging its leading position in the industry, is likely to benefit from the

upcoming demand in the Rs 60-65 bn conductor industry. Demand for conductors, which

account for 25-30% of the total transmission capex, is expected to grow at a CAGR of 15%

over FY13-15 to Rs 96 bn, driven by the following factors:

Investment in generation to grow at a CAGR of 14%

CRISIL Research expects 87 GW power capacity to be added over the next five years as

compared to only 42 GW added in the past five years. Consequently, the investment in power

generation is expected to grow at a five-year CAGR of ~14% to Rs 6,706 bn by FY16.

Investment in transmission to grow at a CAGR of 19%

Investment in transmission is expected to gain momentum due to PGCILs capacity addition

plans, which plans substantial augmentation of the inter-state transmission system with high

voltage transmission corridors required for evacuating power from the upcoming generation

capacities. Private sector projects will also heighten the momentum of investments in the

sector. Investments in the transmission sector are expected to rise at a CAGR of 19% over the

next five years, aggregating to Rs 1.8 tn, which is almost 2.5 times the investment of Rs 739

bn during the past five years.

Profitability set to improveWe expect the conductor segments EBITDA per tonne to improve from Rs 6,187 in FY12 to

Rs 8,750 in FY13 and to Rs 9,200 in FY14, driven by the execution of relatively high-margin

PGCIL orders.

The profitability (EBITDA per tonne) of the conductor segment has declined significantly over

FY11-FY12 due to the delay in orders from PGCIL, which makes up ~50% of the domestic

conductor demand. During that period, PGCIL was evaluating new players to include them in

its approved vendor list. Sterlite Tech had to take up low-margin orders with shorter lead time

to maintain capacity utilisation at an optimum level. This caused the EBITDA per tonne to

decline from Rs 16,540 in FY10 to Rs 6,187 in FY12. However, PGCIL released the order

backlog in H2FY12 by awarding conductor contracts worth Rs 46.5 bn. As a result, the

Healthy order book from

PGCIL; profitability to

improve


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8

EBITDA per tonne improved in H2FY12; the company reported EBITDA per tonne of Rs 8,844

(adjusted for bad debt write-off of Rs 50 mn) in Q4FY12. PGCIL constitutes 62% of Sterlite

Techs total conductor order book of Rs 21 bn as on March 31, 2012.

Figure 6: Decline in PGCIL contracts... Figure 7: ...Resulted in decline of EBITDA per tonne

Note: There is a lag of close to one year in order winning and the

execution of the order.

Source: PGCIL, Company Source: PGCIL, Company

But will remain lower than historical high levels

While we expect the profitability to improve due to higher PGCIL order book, it is not expected

to return to the historical average of Rs 12,000-13,000 per tonne due to increase in

competition in this segment. Over the past one year, a number of new vendors have been

included in PGCILs approved vendor list; they have bagged ~5.5% of the orders awarded in

FY12. Additionally, the three big players (Sterlite tech, Apar and Diamond Infrastructure) are

expanding capacities. The threat of new entrants, since this industry is not high fixed-capital

intensive, cannot be ignored. Hence, we expect the competition to intensify in future, which

will impact all players profitability.

Figure 8: Market share in PGCIL orders has declined due to

competition...

Figure 9: ... which will keep EBITDA per tonne below

historical levels

Note: There is a lag of close to one year in order winning and theexecution of the order.

Source: PGCIL, Company Source: Company, CRISIL Research

2.1

11.4

12.7

11.5

1.01.4

3.6

9.3

3.22.4

4.4

19.4

0.0

6.7

16.3

30.2

0

5

10

15

20

25

30

35

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

(Rs bn)

16,55615,407

3,591 3,9452,665

6,458

7,890 7,428

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

(Rs/tonne)

30.3% 29.5%

37.8%

21.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

FY09 FY10 FY11 FY12

14,318

11,603

16,540

9,120

6,187

8,7509,200

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY08 FY09 FY10 FY11 FY12 FY13E FY14E

(Rs)


11/28


9

Table 4: New vendors awarded PGCIL contracts in FY12 Table 5: Expansion plans of conductor manufacturers

Companies Installed capacity

(MT)ICOMM TELE LTD. NA

Galaxy Transmissions Pvt. Ltd 24000

Cabcon India Pvt Ltd 12000

Aravali Infrapower Ltd 45000

Shashi Cables Limited NA

North Eastern Cables & Conductors Pvt Ltd

(NECCON) NA

Company Unit

Installed

capacity(FY12)

Installed

capacity(FY14E)

Sterlite Technologies MT 1,60,000 2,00,000

Apar Industries MT 1,35,000 1,50,500

Diamond power and

infrastructure MT 50,500 1,00,000

Source: PGCIL Source: CRISIL Research

Grid project executions on track; low IRRs a key concern

According to the management, execution of the three ultra mega power transmission projects(UMTP) is on track. The first project is 60% complete and will be operational in FY14. The

company has recently received Rs 22 bn as debt syndication for the second and third

projects. So far, Rs 6.7 bn has been invested in these projects, out of which Rs 3 bn is

contributed by Sterlite Tech as an equity infusion. The company expects to further infuse Rs 3

bn in FY13 and Rs 4 bn in FY14 as equity. The debt-equity for these projects is expected to

be 70:30.

These projects have been awarded on a BOOM basis wherein post the tenure of the projects,

the company will own the assets. Each project is part of a separate special purpose vehicle

(SPV). We expect Sterlite Tech to earn an IRR (internal rate of return) of 10-11% from these

projects.

Table 6: Details of UMTP projects won by Sterlite Tech

Details of project

Year of

commencement

Capex

(Rs bn)

Levelised tariff

(Rs bn)

Tenure

(years) Status of the project

East North Interconnection

Project (project 1)FY14 10 1.2 25

60% complete. The company expects to complete this

project by March 2013 and generate cash flows from

the same in FY14.

Bhopal-Dhule Transmission

Project (project 2)FY15 18 2.3 35

Moved from the survey stage to the design and

engineering stage, and most key orders related to this

project have been awarded.

Jabalpur TransmissionProject (project 3)

FY15 13 1.5 35 The orders are yet to be finalised and the companyexpects to award them in H1FY13.


Execution is a monitorable

Sterlite Tech is a new player in the asset-heavy business and does not have any track record

of setting up transmission lines. Though the company has outsourced the ground work to EPC

players and has recruited an experienced team, successful execution of these projects is a

key monitorable. Also, given the low IRRs (10-11%), funding mix (including foreign currency

funding) is key for value accretion to equity holders. Accordingly, we prefer to wait for further

development in the BOOM projects before factoring them into our valuations.


12/28


10

Key Risks

Delay by PGCIL in awarding contracts

Sterlite Techs profitability in the power segment is driven by the contribution of PGCIL orders

to the total orders executed. The companys margins in FY11 and FY12 were depressed as

PGCIL delayed orders. PGCILs orders for FY12 are strong and we expect the profitability to

bounce back, albeit not at historical levels as the competition in this segment has increased.

However, any delay in PGCIL orders in the future will impact the conductor segments

profitability.

Delay in investments in transmission

The demand for conductors is a function of the governments investments in transmission.

Transmission lines are being laid to strengthen the national grid and for evacuation of power

from new generation capacities. The generation segment is in troubled times due to shortage

of coal and there is uncertainity over policy reforms. Driven by this, there may be some delays

in investments in transmission lines.

Crystallisation of contingent liability

Sterlite Tech had received an order from Custom, Excise and Service Tax Appellate Tribunal

(CESTAT) upholding a demand of Rs 1.9 bn (17% of shareholders equity in FY12) in a

pending excise/custom matter. The companys appeal in the High Court of Mumbai was

rejected on grounds of jurisdiction. It has appealed to the Supreme Court against this order

and the decision on the matter is pending. The company has made a provision of Rs 50 mn in

FY11 against the aforementioned liability. However, its profitability will be impacted in case the

Supreme Court rules in favour of CESTAT.


13/28


11

Financial Outlook

Standalone revenue to grow at 15% CAGR over FY12-14

Sterlite Techs standalone revenue is expected to grow at a two-year CAGR of 10% to Rs 36

bn in FY14 driven by capacity expansion in telecom and power transmission segments. The

demand for both products - optical fibre/cable and conductors is expected to remain healthy,

hence we expect the company to operate both capacities at optimum utilisation levels.

Figure 10: Increase in capacity of both segments Figure 11: Capacity expansion to drive revenue growth

Capacity FY10 FY11 FY12 FY13E FY14E

Conductor (Tonne) 160,000 160,000 160,000 160,000 200,000

Optical Fibre (mn f ibre-Km) 10 10 12 16 20

India 10 10 12 16 16

China 0 0 0 0 4


Standalone EBITDA margin to expand and stabilise at 11% inFY13- FY14

We expect standalone EBITDA margin to improve and stabilise at 11% in FY13 and FY14

from 7.3% in FY12. The EBITDA margin contracted by 460 bps y-o-y in FY12 on account of

poor performance in telecom segment (due to stabilisation issues in newly commissioned

optical fibre capacity) and the power transmission segment (due to the delay in PGCIL

orders). However, the company has resolved the stabilisation issues and has a healthy order

book of Rs 21 bn (62% from PGCIL) in the power transmission segment. Also, expected

increase in the demand for optical fibre and conductors will support margins.

Figure 12: Improvement in profitability of both segments Figure 13: To drive the overall standalone margins


Conductor segment

(EBITDA per tonne) 16,540 9,120 6,187 8,750 9,200

Telecom segment margin 22.7% 25.6% 17.5% 20.3% 21.6%


15,370 16,07319,210 20,577

25,777

9,264 6,588

7,9479,469

10,711

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


(Rs mn)

Power Trans mis sion segment Telec om s egment

3,813 2,709 1,996 3,214 3,925

15.7%

12.0%

7.3%

10.9%10.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


(Rs mn)

EBITDA EBITDA margin (RHS)

15% growth in the standalone

revenue driven by capacityexpansion


14/28


12

Standalone PAT to grow by 71% over FY12 - FY14

Following the growth in sales and improvement in operating performance, standalone PAT is

expected to grow to Rs 1,279 mn in FY14 from Rs 438 mn in FY12. PAT margin is expected

to expand by 215 bps to 3.8% in FY13. However, we expect a slight contraction in PAT

margin in FY14 on account of increase in depreciation and interest expenses. The

deprecation is expected to increase y-o-y in FY13 and FY14 as the company capitalises both

the optical fibre (FY13) and conductor (FY14) capacities. Further, interest cost is expected to

go up in FY13 and FY14 on account of increase in long-term loans, which the company will

borrow to fund the equity portion (30% of total capex) in grid projects.

Sterlite Tech is expected to report EPS of Rs 2.8 and Rs 3.3 in FY13 and FY14, respectively.

The standalone RoE and RoCE are expected to improve from FY12 level but will remain

subdued, as the investment in three grid projects will start giving returns from FY15.

Figure 14: Healthy growth in PAT over FY13 and FY14 Figure 15: Standalone RoE to improve from FY12 level


2,461 1,405438

1,113 1,279

10.1%

6.2%

1.6%

3.8% 3.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0

500

1,000

1,500

2,000

2,500

3,000


(Rs mn)

PAT PAT margin (RHS)

33.4%

14.4%

4.0%

9.2% 9.6%

27.8%

14.7%

7.4%

11.9% 12.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%


RoE RoCE


15/28


13

Change in standalone earnings estimate

Particulars Unit

FY13E FY14E

Old New % change Old New % change

Exchange rate Rs 49.5 52.0 5.1% 51.0 48.0 -5.9%

Net Revenue Rs mn 30,798 29,588 -3.9% 36,835 35,931 -2.5%

EBITDA Rs mn 3,160 3,214 1.7% 3,965 3,925 -1.0%

EBITDA margin % 10.3% 10.9% 60bps 10.8% 10.9% 16bps

Depreciation Rs mn 875 830 -5.2% 925 880 -4.9%

Interest cost Rs mn 1125 1105 -1.8% 1470 1477 0.4%

Other income Rs mn 203 166 -18.2% 108 92 -15.2%

PAT Rs mn 1,050 1,113 6.0% 1,291 1,279 -1.0%

PAT margin % 3.4% 3.8% 35bps 3.5% 3.6% 5bps

EPS Rs 2.7 2.8 6.0% 3.3 3.3 -1.0%

Source: CRISIL Research

Reasons for changes in estimates

Line item FY13 FY14

Revenues Higher than expected depreciation of rupee

Lower-than-expected volume for conductor

segment due to delay in additional capacity

Expect rupee to appreciate to Rs 48 per US$ against previous

expectation of Rs 51 per US$

EBITDA margins Higher-than-expected margin in fibre optic cable Largely maintained

PAT margins Higher than expected EBITDA margin Due to lower than expected other income. Based on the

management discussion, we have revisited our assumptions related

to cash outflow for grid projects.



16/28


14

Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of management

quality, apart from other key factors such as industry and business prospects, and financial

performance.

Experienced management with strong parent backing

Sterlite Tech has an experienced management headed by Dr Anand Agarwal, CEO and

whole-time director, who has been associated with the company for the past 15 years. He is

supported by Mr Pravin Agarwal, whole-time director, who has been with the group since its

inception. Mr Anupam Jindal is the CFO and has been associated with the Sterlite group since

1998. Additionally, the company can leverage on the management strength of the Sterlite

group.

Demonstrated strong capabilities in the pastSterlite Tech was formed in 2000 to do business of telecom cables. However, due to the

slowdown in the telecom segment in 2003-2004, the company posted a net loss of Rs 1 bn in

FY03 and Rs 821 mn in FY04. It rebounded with a profit of Rs 164 mn in FY06. In FY07, the

company acquired the power conductor division from Sterlite Industries for Rs 1.5 bn. Over

the years, the company has shown continuous growth and sustained profitability. In FY10, it

reported revenues of Rs 24 bn and a net profit of Rs 2.5 bn. Also, to stay ahead of

competition, the company is continuously working towards developing new products and has

a research and development facility. It has recently introduced overhead power ground wire

(OPGW) cables in the market, which are power cables that can also carry data.

Limited access to the management

Our interaction has been limited to only the CFO and AGM Corporate Strategy and Investor

Relations. We have not been able to get access to business heads and other personnel in the

second line of management.


17/28


15

Corporate Governance

CRISILs fundamental grading methodology includes a broad assessment of corporate

governance and management quality, apart from other key factors such as industry and

business prospects, and financial performance. In this context, CRISIL Research analyses the

shareholding structure, board composition, typical board processes, disclosure standards and

related-party transactions. Any qualifications by regulators or auditors also serve as useful

inputs while assessing a companys corporate governance.

Overall, corporate governance at Sterlite Tech meets the desired levels supported by

reasonably good board practices and an independent board.

Board composition

Sterlite Techs board comprises six members; Mr Anil Agarwal is the non-executive chairman.

The company has three independent directors, which exceeds the requirement under Clause

49 of SEBIs listing guidelines. The independent directors have strong industry experience and

are highly qualified. Given the background of directors, we believe the board is well

experienced.

Boards processes

The companys quality of disclosures can be considered adequate judged by the level of

information and details furnished in the annual report, websites and other publicly available

data. The company has all the necessary committees audit, remuneration and investor

grievance - in place to support corporate governance practices. The audit committee is

chaired by an independent director, Mr Arun Todarwal.


18/28


16

Valuation Grade: 4/5

We continue to value Sterlite Tech based on the sum-of-the-parts method. We have assigned

a fair value of Rs 39 to the companys standalone business based on P/E of 12x FY14E EPS

of Rs 3.3. The investment in the China subsidiary is valued at book value of Rs 350 mn to

arrive at a fair value of ~Rs 1 per share. Accordingly, we maintain our fair of Rs 40. At the

current market price of Rs 33, the valuation grade is 4/5.

One-year forward P/E band One-year forward EV/EBITDA band

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

P/E premium / discount to NIFTY P/E movement

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

Global peers

Companies

Adj EPS (US$) RoE (%) P/E EV/EBITDA P/Book

Country CY11 CY12E CY13E CY11 CY12E CY13E CY11 CY12E CY13E CY11 CY12E CY13E CY11 CY12E CY13E

Corning Inc USA 1.8 1.4 1.5 13.9 9.7 10.0 7.1 9.0 8.0 5.8 5.2 4.8 0.9 0.8 0.8

General Cable Corp USA 1.8 2.7 3.5 5.8 9.6 12.2 14.1 9.6 7.4 5.5 5.4 4.6 0.9 0.8 0.8

Nexans Sa Europe 0.7 3.8 5.1 -8.8 5.1 6.6 na 10.0 7.5 4.7 3.2 2.7 0.6 0.5 0.4

Prysmian Spa Europe 0.7 1.5 1.9 -15.1 20.0 22.0 na 9.7 7.7 5.8 6.4 5.5 2.0 2.1 1.7

Sumitomo Electric* Japan na 0.9 1.3 na 6.1 7.8 na 15.3 8.8 na 7.7 4.9 na 0.9 0.7

Fujikura Ltd* Japan na -0.2 0.2 na -3.5 3.0 na 0.0 15.1 na 5.9 5.1 na 0.6 0.4

Furukawa Electric* Japan na -0.2 0.2 na -7.2 5.7 na 0.0 12.1 na 9.1 7.1 na 1.1 0.7

* March ending; Exchange rates considered for the conversion are 1.2 US$/Euro and 78.2 Yen/US$

Source: CRISIL Research, Industry sources

-50

0

50

100

150

200

250

300

Apr-06

Jul-06

Oct-06

Feb-07

May-07

Sep-07

Dec-07

Mar-08

Jul-08

Oct-08

Feb-09

May-09

Sep-09

Dec-09

Mar-10

Jul-10

Oct-10

Feb-11

May-11

Aug-11

Dec-11

Mar-12

Jul-12

(Rs)

Sterlite Tech 1x 5x 12x 24x 36x

0

5,000

10,000

15,00020,000

25,000

30,000

35,000

40,000

45,000

50,000

Apr-06

Jul-06

Oct-06

Feb-07

May-07

Sep-07

Dec-07

Mar-08

Jul-08

Oct-08

Feb-09

May-09

Sep-09

Dec-09

Mar-10

Jul-10

Oct-10

Feb-11

May-11

Aug-11

Dec-11

Mar-12

Jul-12

(Rs mn)

EV 3x 5x 8x 10x

-200%

-100%

0%

100%

200%

300%

400%

Apr-

06

Ju

l-06

Oc

t-06

Fe

b-0

7

May-0

7

Sep-0

7

Dec-0

7

Apr-

08

Ju

l-08

Oc

t-08

Fe

b-0

9

May-0

9

Sep-0

9

Dec-0

9

Mar-

10

Ju

l-10

Oc

t-10

Fe

b-1

1

May-1

1

Sep-1

1

Dec-1

1

Mar-

12

Ju

l-12

Premium/Discount to NIFTY Median premium/discount to NIFTY

0

10

20

30

40

50

60

70

Apr-

06

Ju

l-06

Oc

t-06

Fe

b-0

7

May-0

7

Sep-0

7

Dec-0

7

Mar-

08

Ju

l-08

Oc

t-08

Fe

b-0

9

May-0

9

Sep-0

9

Dec-0

9

Mar-

10

Ju

l-10

Oc

t-10

Fe

b-1

1

May-1

1

Aug-1

1

Dec-1

1

Mar-

12

Ju

l-12

(Times)

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev

We continue to value Sterlite

Tech at Rs 40 per share


19/28


17

CRISIL IER reports released on Sterlite Technologies Ltd

Date Nature of report

Fundamental

grade Fair value

Valuation

grade

CMP

(on the date of report)

17-Aug-11 Initiating coverage* 3/5 Rs 68 5/5 Rs 39

09-Nov-11 Q2FY12 result update 3/5 Rs 55 5/5 Rs 40

01-Feb-12 Q3FY12 result update 3/5 Rs 51 5/5 Rs 39

11-May-12 Q4FY12 result update 3/5 Rs 40 5/5 Rs 31

24-July-12 Detailed report 3/5 Rs 40 4/5 Rs 33



20/28


18

Company Overview

Sterlite Tech has three main lines of business: telecom products, power transmission

conductors and transmission grid projects. Sterlite Industries entered the telecom cable

business in 1988 with copper cables. It started producing fibre optic cables in 1992 and

backward integrated into optical fibre production in 1995. In 2000, the telecom cables

business was demerged into Sterlite Optical Technologies Ltd. In 2006, the company acquired

the power conductor business from Sterlite Industries and the company was renamed Sterlite

Technologies Ltd.

Milestones

1988 Started the copper cables business

1992 Started the fibre optic cables business

1995 Backward integrated into optical fibre manufacturing

2000 Telecom business demerged into Sterlite Optical Technologies Ltd

2006 Acquired the power conductors business from Sterlite Industries and was renamed


2006 Started manufacturing broadband and access networks

2010 Won its first UMTP project

Business segments

Telecom products

Under the telecom products business, the company manufactures copper cables, optical fibre,

fibre optic cables, structured data cables and provides telecom integration and managed

services. This segment contributed ~30% of total revenues in FY12. The company procures

silica, the main raw material used in optical fibre, from China. While optical fibre is a

standardised product, fibre optic cables is customised.

Power transmission conductors

Under this business, the company manufactures power conductors, which are used for power

transmission. It also manufactures OPGW cables. This segment contributed ~70% of total

revenues in FY12.

Ultra mega power transmission projects

Sterlite Tech has diversified into the asset heavy, transmission grid business. It has

successfully won three projects on a build, own, operate and maintain basis wherein post the

tenure of the projects, it will own the assets.


21/28


19

Annexure: Financials (Standalone)

# Based on abridged financials

Note: FY12 financials are not strictly comparable with that of the previous years due to the

new format of disclosure under Schedule VI of the Companies Act


Income statement Balance Sheet

(Rs mn) FY10 FY11 FY12# FY13E FY14E (Rs mn) FY10 FY11 FY12# FY13E FY14E

Operating income 24,311 22,641 27,275 29,588 35,931 Liabilities

EBITDA 3,813 2,709 1,996 3,214 3,925 Equity share capital 711 713 787 787 787EBITDA margin 15.7% 12.0% 7.3% 10.9% 10.9% Reserves 8,449 9,646 10,702 11,978 13,118

Depreciation 483 560 714 830 880 Minorities - - - - -

EBIT 3,330 2,149 1,282 2,384 3,046 Net worth 9,160 10,359 11,489 12,764 13,905

Interest 381 474 951 1,105 1,477 Convertible debt - - - - -

Operating PBT 2,949 1,675 331 1,279 1,569 Other debt 3,582 6,198 6,644 9,144 13,144

Other income 220 107 237 166 92 Total debt 3,582 6,198 6,644 9,144 13,144

Exceptional inc/(exp) (104) 0 - - - Deffered tax liability (net) 602 660 735 735 735

PBT 3,065 1,782 568 1,445 1,660 Total liabilities 13,344 17,217 18,868 22,643 27,784

Tax provision 605 377 129 332 382 Assets

Minority interest - - - - - Net f ixed assets 6,168 6,982 9,671 10,341 10,462

PAT (Reported) 2,461 1,405 438 1,113 1,279 Capital WIP 570 1,608 410 1,110 360

Less: Exceptionals (104) 0 - - - Total fixed assets 6,737 8,589 10,081 11,451 10,822

Adjusted PAT 2,565 1,405 438 1,113 1,279 Investments 61 1,003 1,763 5,346 9,555

Current assets

Ratios Inventory 1,709 1,914 2,727 2,999 3,544

FY10 FY11 FY12# FY13E FY14E Sundry debtors 6,574 9,193 7,840 8,512 10,336

Growth Loans and advances 1,261 2,062 3,706 2,959 3,593

Operating income (%) 6.1 (6.9) 20.5 8.5 21.4 Cash & bank balance 2,097 1,301 1,848 763 887

EBITDA (%) 61.0 (28.9) (26.3) 61.0 22.1 Marketable securities 1,000 1,000 - - -

Adj PAT (%) 194.1 (45.2) (68.8) 153.8 14.9 Total current assets 12,642 15,469 16,121 15,232 18,360

Adj EPS (%) (46.6) (45.4) (71.7) 153.8 14.9 Total current liabilities 6,193 7,924 9,097 9,387 10,954

Net current assets 6,448 7,545 7,023 5,846 7,407

Profitability Intangibles/Misc. expenditure 97 80 - - -

EBITDA margin (%) 15.7 12.0 7.3 10.9 10.9 Total assets 13,343 17,217 18,868 22,643 27,784

Adj PAT Margin (%) 10.5 6.2 1.6 3.8 3.6

RoE (%) 33.4 14.4 4.0 9.2 9.6 Cash flow

RoCE (%) 27.8 14.7 7.4 11.9 12.4 (Rs mn) FY10 FY11 FY12# FY13E FY14E

RoIC (%) 30.3 16.0 11.3 15.7 17.6 Pre-tax prof it 3,169 1,782 568 1,445 1,660

Total tax paid (562) (318) (54) (332) (382)

Valuations Depreciation 483 560 714 830 880

Price-earnings (x) 12.2 7.8 27.5 10.8 9.4 Working capital changes 118 (1,893) 69 93 (1,437)Price-book (x) 3.4 1.1 1.1 0.9 0.9 Net cash from operations 3,207 131 1,296 2,035 722

EV/EBITDA (x) 8.4 5.5 8.5 6.4 6.2 Cash from investments

EV/Sales (x) 1.3 0.7 0.6 0.7 0.7 Capital expenditure (750) (2,396) (2,125) (2,200) (250)

Dividend payout ratio (%) 7.2 12.7 27.4 10.6 9.2 Investments and others (141) (941) 239 (3,583) (4,209)

Dividend yield (%) 0.6 1.6 1.0 1.0 1.0 Net cash from investments (891) (3,337) (1,886) (5,783) (4,459)

Cash from financing

B/S ratios Equity raised/(repaid) 441 30 1,113 - -

Inventory days 33 37 39 42 40 Debt raised/(repaid) (1,384) 2,616 446 2,500 4,000

Creditors days 102 138 123 123 118 Dividend (incl. tax) (208) (208) (120) (118) (118)

Debtor days 97 148 107 103 103 Others (incl extraordinaries) 154 (29) (301) 281 (20)

Working capital days 51 69 70 63 59 Net cash from financing (998) 2,410 1,137 2,663 3,862

Gross asset turnover (x) 2.4 2.0 2.0 1.9 2.1 Change in cash posiiton 1,318 (797) 547 (1,085) 124

Net asset turnover (x) 4.2 3.4 3.3 3.0 3.5 Closing cash 2,097 1,301 1,848 763 887

Sales /operating assets ( x) 1.3 1.0 1.0 1.0 1.0

Current ratio (x) 2.0 2.0 1.8 1.6 1.7 Quarte rly financials

Debt-equity (x) 0.4 0.6 0.6 0.7 0.9 (Rs mn) Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Net debt/equity (x) 0.1 0.4 0.4 0.7 0.9 Net Sales 6,822 5,473 7,073 6,635 8,093

Interest coverage 8.7 4.5 1.3 2.2 2.1 Change (q-o-q) 18% -20% 29% -6% 22%

EBITDA 490 302 504 522 667

Per share Change (q-o-q) 14% -38% 67% 4% 28%

FY10 FY11 FY12# FY13E FY14E EBITDA margin 7.2% 5.5% 7.1% 7.9% 8.2%

Adj EPS (Rs) 7.2 3.9 1.1 2.8 3.3 PAT 103 52 127 95 165

CEPS 8.6 5.5 2.9 4.9 5.5 Adj PAT 103 52 127 95 165

Book value 25.8 29.1 29.2 32.5 35.4 Change (q-o-q) -40% -49% 142% -25% 74%

Dividend (Rs) 0.5 0.5 0.3 0.3 0.3 Adj PAT margin 1.5% 1.0% 1.8% 1.4% 2.0%

Actual o/s shares (mn) 355.5 356.4 393.3 393.3 393.3 Adj EPS 0.3 0.1 0.3 0.2 0.4


22/28


20

Annexure: Financials (Consolidated)

# Based on abridged financials

Note: FY12 financials are not strictly comparable with that of the previous years due to the

new format of disclosure under Schedule VI of the Companies Act


Income statement Balance Sheet

(Rs mn) FY10 FY11 FY12# FY13E FY14E (Rs mn) FY10 FY11 FY12# FY13E FY14E

Operating income 24,311 22,645 26,218 27,765 34,921 Liabilities

EBITDA 3,811 2,717 1,886 3,099 4,906 Equity share capital 711 713 787 787 787EBITDA margin 15.7% 12.0% 7.2% 11.2% 14.0% Reserves 8,474 9,664 10,662 11,978 13,036

Depreciation 483 560 715 830 1,317 Minorities 3 - 91 91 91

EBIT 3,328 2,157 1,171 2,269 3,589 Net w orth 9,188 10,376 11,540 12,856 13,914

Interest 381 452 924 1,105 2,284 Convertible debt - - - - -

Operating PBT 2,947 1,705 247 1,164 1,305 Other debt 3,587 7,678 10,364 21,353 35,175

Other income 221 88 271 166 313 Total debt 3,587 7,678 10,364 21,353 35,175

Exceptional inc/(exp) (104) 0 - - - Deferred tax liability (net) 602 660 735 735 735

PBT 3,064 1,793 518 1,330 1,619 Total liabilities 13,377 18,714 22,639 34,944 49,824

Tax provision 605 380 129 332 415 Assets

Minority interest - 1.1 (7.70) - - Net f ixed assets 6,168 6,983 10,676 10,341 19,635

PAT (Reported) 2,459 1,412 396 998 1,204 Capital WIP 852 3,926 6,176 18,552 22,223

Less: Exceptionals (104) 0 - - - Total fixed assets 7,019 10,909 16,852 28,893 41,857

Adjusted PAT 2,563 1,412 396 998 1,204 Investments - - - - -

Current assets

Ratios Inventory 1,709 1,928 2,806 2,999 3,544

FY10 FY11 FY12# FY13E FY14E Sundry debtors 6,290 8,665 7,859 8,512 10,435

Growth Loans and advances 1,280 2,132 3,091 2,959 3,593

Operating income (%) 6.1 (6.9) 15.8 5.9 25.8 Cash & bank balance 2,103 1,810 2,162 4,197 2,550

EBITDA (%) 60.9 (28.7) (30.6) 64.3 58.3 Marketable securities 1,070 1,120 130 - -

Adj PAT (%) 192.3 (44.9) (71.9) 151.8 20.6 Total current assets 12,452 15,655 16,049 18,667 20,122

Adj EPS (%) 165.3 (45.0) (74.6) 151.8 20.6 Total current liabilities 6,216 7,964 10,296 12,649 12,189

Net current assets 6,236 7,691 5,753 6,017 7,933

Profitability Intangibles/Misc. expenditure 121 114 34 34 34

EBITDA margin (%) 15.7 12.0 7.2 11.2 14.0 Total assets 13,377 18,714 22,639 34,944 49,824

Adj PAT Margin (%) 10.5 6.2 1.5 3.6 3.4

RoE (%) 33.2 14.4 3.6 8.2 9.0 Cash flow

RoCE (%) 27.8 14.0 5.9 8.1 8.6 (Rs mn) FY10 FY11 FY12# FY13E FY14E

RoIC (%) 30.0 14.5 8.8 9.1 9.9 Pre-tax profit 3,168 1,793 518 1,330 1,619

Total tax paid (562) (321) (54) (332) (415)

Valuations Depreciation 483 560 715 830 1,317

Price-earnings (x) 4.6 8.3 32.7 13.0 10.8 Working capital changes 403 (1,698) 1,301 1,640 (3,563)Price-book (x) 1.3 1.1 1.1 1.0 0.9 Net cash from operations 3,491 334 2,480 3,468 (1,042)

EV/EBITDA (x) 3.5 6.1 8.8 5.3 9.3 Cash from investments

EV/Sales (x) 1.3 0.7 0.8 1.1 1.3 Capital expenditure (1,032) (4,443) (6,578) (12,871) (14,281)

Dividend payout ratio (%) 7.2 12.6 29.8 11.8 9.8 Investments and others (143) (50) 990 130 -

Dividend yield (%) 0.6 1.5 0.9 0.9 0.9 Ne t cas h from inve stm ents (1,176) (4,493) (5,588) (12,741) (14,281)

Cash from financing

B/S ratios Equity raised/(repaid) 441 30 1,113 - -

Inventory days 33 38 42 44 43 Debt raised/(repaid) (1,379) 4,091 2,686 10,990 13,821

Creditors days* 102 139 146 180 141 Dividend (incl. tax) (208) (208) (139) (118) (118)

Debtor days 93 140 112 110 107 Others (incl extraordinaries) 154 (47) (199) 436 (28)

Working capital days 49 63 57 35 38 Net cash from financing (992) 3,866 3,461 11,307 13,675

Gross asset turnover (x) 2.4 2.0 1.9 1.7 1.6 Change in cash position 1,324 (294) 353 2,035 (1,647)

Net asset turnover (x) 4.2 3.4 3.0 2.6 2.3 Closing cash 2,103 1,810 2,162 4,197 2,550

Sales /operating assets (x) 1.3 1.0 0.9 0.7 0.6

Current ratio (x) 2.0 2.0 1.6 1.5 1.7 Quarte rly financials - s tandalone

Debt-equity (x) 0.4 0.7 0.9 1.7 2.5 (Rs mn) Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Net debt/equity (x) 0.0 0.5 0.7 1.3 2.3 Net Sales 6,822 5,473 7,073 6,635 8,093

Interest coverage 8.7 4.8 1.3 2.1 1.6 Change (q-o-q) 18% -20% 29% -6% 22%

EBITDA 490 302 504 522 667

Per share Change (q-o-q) 14% -38% 67% 4% 28%

FY10 FY11 FY12# FY13E FY14E EBITDA margin 7.2% 5.5% 7.1% 7.9% 8.2%

Adj EPS (Rs) 7.2 4.0 1.0 2.5 3.1 PAT 103 52 127 95 165

CEPS 8.6 5.5 2.8 4.6 6.4 Adj PAT 103 52 127 95 165

Book value 25.8 29.1 29.3 32.7 35.4 Change (q-o-q) -40% -49% 142% -25% 74%

Dividend (Rs) 0.5 0.5 0.3 0.3 0.3 Adj PAT margin 1.5% 1.0% 1.8% 1.4% 2.0%

Actual o/s shares (mn) 355.5 356.4 393.3 393.3 393.3 Adj EPS 0.3 0.1 0.3 0.2 0.4


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21

Focus Charts

Expanding capacities of both segments... ...To drive revenue growth

Capacity FY10 FY11 FY12 FY13E FY14E

Conductor (Tonne) 160000 160000 160000 160000 200000

Optical Fibre (mn fibre-Km) 10 10 12 16 20

India 10 10 12 16 16

China 0 0 0 0 4


Improvement in profitability of both segments... ...To drive the overall margins (standalone)


Conductor segment

(EBITDA per tonne) 16,540 9,120 6,187 8,750 9,200

Telecom segment margin 22.7% 25.6% 17.5% 20.3% 21.6%


Standalone returns ratios to improve from current FY12 level Fair value movement since initiation

Source: Company, CRISIL Research Source: NSE, BSE, CRISIL Research

15,370 16,07319,210 20,577

25,777

9,264 6,588

7,9479,469

10,711

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


(Rs mn)

Power Transmission Business Telecom segment

3,813 2,709 1,996 3,214 3,925

15.7%

12.0%

7.3%

10.9%10.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


(Rs mn)

EBITDA EBITDA margin (RHS)

33.4%

14.4%

4.0%

9.2% 9.6%

27.8%

14.7%

7.4%

11.9% 12.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%


RoE RoCE

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0

10

20

30

40

50

60

70

80

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

('000)(Rs)

Tot al Traded Quant ity (R HS) C RISIL F air Value

Sterlite Tech


24/28


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25/28

MAKINGMARKETS

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R

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This page is intentionally left blank


26/28


CRISIL Research Team

President

Mukesh Agarwal CRISIL Research +91 22 3342 3035 [email protected]

Analytical Contacts

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Sudhir Nair Director, Customised Research +91 22 3342 3526 [email protected]

Mohit Modi Director, Equity Research +91 22 4254 2860 [email protected]

Jiju Vidyadharan Director, Funds & Fixed Income Research +91 22 3342 8091 [email protected]

Ajay D'Souza Director, Industry Research +91 22 3342 3567 [email protected]

Ajay Srinivasan Director, Industry Research +91 22 3342 3530 [email protected]

Rahul Prithiani Director, Industry Research +91 22 3342 3574 [email protected]

Business Development

Siddharth Arora Director, Customised Research +91 22 3342 4133 [email protected]

Vinaya Dongre Director, Industry & Customised Research +91 22 3342 8025 [email protected]

Sagar Sawarkar Associate Director, Equity Research +91 22 3342 8012 [email protected]

Deepak Mittal Associate Director, Funds & Fixed Income Research +91 22 3342 8031 [email protected]

Prosenjit Ghosh Associate Director, Industry & Customised Research +91 22 3342 8008 [email protected]

Business DevelopmentEquity Research

Ahmedabad / Mumbai

Vishal Shah Regional Manager, Business Development

Email : [email protected] I Phone : 9820598908

Bengaluru / MumbaiShweta Adukia Regional Manager, Business Development


Chennai / Hyderabad

Urmil Shah Regional Manager, Business Development


Delhi

Arjun Gopalkrishnan Regional Manager, Business Development


KolkataPriyanka Murarka Regional Manager, Business Development



27/28

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