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Sterlite Tech’s Margin Expands For The First Time In A Year

The company expects its full-year margin to be closer to 20 percent.

Data cables feed into a telecommunications server (Photographer: Chris Ratcliffe/Bloomberg)  
Data cables feed into a telecommunications server (Photographer: Chris Ratcliffe/Bloomberg)  

Sterlite Technologies Ltd.’s operating margin widened for the first time in four quarters on the back of higher revenue contribution from product segment and stable fibre prices.

The Vedanta Group-controlled optical fibre cable supplier’s operating margin expanded by over 500 basis points though the previous quarter to 22.6 percent in the April-June period.

The company’s high-margin product segment contributed nearly 60 percent to its revenue. Realisations from the fibre business remained firm due to stable fibre prices and higher sales of value-added products.

Sterlite Tech’s Margin Expands For The First Time In A Year

“The fibre demand is expected to be around 500 million fiber kilometres in 2019 despite a slowdown in China,” Anupam Jindal, Sterlite Technologies’ group chief financial officer, told BloombergQuint in an interaction. “As the pricing scenario is stable in China, the deployment of 5G and data centre will lead to higher fibre demand in 2020.”

The company had earlier seen a drop in its margin as low-margin services business contributed more to its revenue and fibre prices were down. The cable maker had lowered its Ebitda margin guidance to 18-20 percent.

“The product business is witnessing expansion in margin. The service business’ margin is expected to expand to 14 percent in the current financial year,” Jindal said.

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Despite the outperformance in the first quarter of financial year 2019-20, the company expects its full-year margin to be closer to 20 percent. “Quarter-on-quarter margin would vary, but Sterlite Technologies continues to focus on increasing absolute Ebitda,” the company’s management said in a post-earnings conference call.

Debt Burden

Jindal said higher working capital led to increase in net debt in the June quarter. “The capital expenditure could lead to higher debt. However, we are aiming to maintain the debt-to-equity ratio at about 1.”

Project Completion

The company’s two data projects—MahaNet and Navy—have been completed 30 percent and 50 percent, respectively, Jindal said. He also expects both projects to close in the current year.

Q1 Review

(Year-On-Year)

  • Revenue up 63.3 percent at Rs 1,432 crore versus Rs 877 crore
  • Ebitda up 32 percent at Rs 323 crore versus Rs 245 crore
  • Margin at 22.6 percent versus 27.9 percent
  • Net profit up 17.1 percent at Rs 141 crore versus Rs 120.7 crore

Highlights of Q1FY20

  • Debt increased 14 percent to Rs 1,980 crore versus Rs 1,730 crore as of March 2019
  • Finance costs up 52.6 percent and depreciation up 101 percent due to commissioning of new plant
  • Order book down 6 percent to Rs 9,853 crore versus Rs 10,516 crore QoQ
  • Order book break-up product-service is 57:43

Conference Call Takeaways

  • Broadly fibre contract prices have remained in the range of $7-8/fibre kilometer.
  • Fiber prices have bottomed out; fibre demand continues to move up.
  • Order inflow slowed down; see many more orders on pipeline.
  • Believe fibre demand in China to grow in 2020.

Brokerages’ Take

Edelweiss

  • Higher contribution of product business and sticky fibre realisation led robust margin.
  • Q1 performance demonstrates Sterlite’s ability to manage fibre realisation.
  • Sterlite is well placed to sustain growth momentum.
  • Maintain Buy; hike target price to Rs 296 from Rs 285.

Equirus Securities

  • Pressure on fibre realisations to continue in near term.
  • Services business execution faster than expected.
  • Lower valuation multiple given the continued softness in demand amid a delay in 5G implementation.
  • Maintain ‘Long’; cut target price to Rs 294 from Rs 340.

Watch the full interaction here.