ICICI Securities Limited Sterlite Technologies (STEOPT)

ICICI Securities Limited 

Result Update 

Rating matrix 

Rating : Switch/Sell on rallies 

Target : Under Review 

Target Period : 12-15 months 

Potential Upside : - 

Trailing 4 quarters growth (| Crore) 

Q4FY10 Q1FY11 Q2FY11 Q3FY11 

Net Sales 662 492 509 579 

EBITDA 110 83 91 43 

PAT 72 56 58 17 

Valuation summary 

Year to March 31 FY10 FY11E FY12E FY13E 

NP (| crore) 246 168 241 320 

Adj. NP(| crore) 246 168 241 320 

EPS (|) 6.9 4.5 6.5 8.6 

Growth (%) 152.3 -34.7 43.0 32.4 

P/E (x) 12.4 11.2 9.2 9.2 

Price / Book (x) 3.3 2.5 2.0 2.0 

ROCE (%) 27.8 16.2 17.7 21.3 

RoNA (%) 

Stock data 

32.0 15.8 18.2 19.9 

Market Capitalisation | 1970 crore 

Net Debt (Q3FY11) | 490crore 

EV (Q3FY11) |2420 crore 

52 week H/L | 124/51 

Equity capital | 71 crore 

Face value | 2 

DII Holding (%) 14.0 

FII Holding (%) 5.6 

Price movement 

(| crore) . 

135 

115 

95 

75 

55 

35 

May-10 

Jun-10 

Analyst’s name 

Jul-10 

Sep-10 

Chirag J. Shah 

shah.chirag@icicisecurities.com 

Oct-10 

Dec-10 

ICICIdirect.com | Equity Research 

Jan-11 

Sterlite Tech Nifty (RHS) 

Sanjay Manyal 

sanjay.manyal@icicisecurities.com 

8000 

6000 

4000 

2000 

0 

(Index) . 

WHAT’S CHANGED… 

February 1, 2011 

Sterlite Technologies (STEOPT) 

PRICE TARGET ..........................................................................................Under Review 

EPS (FY11E) ..................................................................................... From | 7.7 to | 4.1 

EPS (FY12E) ...................................................................................... From | 9.4 to | 6.2 

RATING .....................................................................................................Under Review 

Power segment EBITDA margins tank… 

Sterlite Technologies (STL) reported a disappointing set of numbers for 

Q3FY11, which were below Street consensus and our estimates. 

Though the revenues were in line at | 580 crore (I-direct estimate: | 595 

crore), the huge negative came in from operating margins at 8%, down 

1000 bps QoQ and 460 bps YoY. This was mainly driven by the stiff fall 

in EBITDA margins in the power segment, which came in at 2.9% for 

Q3FY11 as some of the low value jobs were executed during the 

quarter. Overall margins came in at 7.4% in Q3FY11. As a result, PAT 

came in at | 17 crore vs. our expectations of | 60 crore, implying degrowth 

of 77% YoY and 70% QoQ. 

� Weak power segment performance 

Though power segment revenues registered a sequential growth, EBITDA 

margins of the same disappointed as they came in at a dismal 2.9% for 

Q3FY11. This, we believe, was the key culprit for the pathetic 

performance for the quarter as overall EBITDA margins came in at 7.4% 

vs. 12% in Q3FY10 and 18% in Q2FY11. On the other hand, telecom 

segment revenues came in at | 157 crore, a decline of 12% QoQ mainly 

due to the fall in realisation of optic fibre and no sales registered in the 

broadband access network segment. The power segment order book 

stood at | 1400 crore while the overall order book stood at | 1700 crore. 

� FY12 guidance optimistic but we remain conservative 

| 54 

Base EBITDA of | 400-500 crore in FY12E (implying a jump of 38% YoY) 

and strong volume growth in all business verticals in FY12E (power 

conductor volume of 160,000 MT, optic fibre sales of 12 million km) does 

render confidence amid the disappointing results over the last couple of 

quarters. However, we have built in conservative estimates for the same 

in our FY12E and FY13E estimates to build in cushions against any further 

disappointments, going ahead. 

Outlook & Valuation 

Though the stock looks reasonably priced after recent correction (it is 

trading at 8x and 6.5x its FY12E and FY13E EPS), we believe that in 

medium-term, the stock price will be under pressure. 

Exhibit 1: Key financials 

| crore Q3FY11 Q3FY11E Q3FY10 Q2FY11 YoY Gr(%) QoQ Gr(%) 

Total Revenues 579 595 867 509 -33.2 13.7 

EBITDA 43 98 104 91 -58.7 -52.4 

EBITDA Margin(%) 7.4 16.5 12.0 18 - - 

Reported Net Profit 17 60 74 58 -76.8 -70.3 

Source: Company, ICICIdirect.com Research



A negative surprise for the quarter came in the form of dismal power 

segment margins, which came in as low as 2.9% vs. our double digit 

expectations. The correction in the stock price over the last couple of 

months has more than factored in the negatives given the guidance of 

the management for FY12E. However, at the same time, we expect the 

stock to languish in the near to medium term. 

Though the stock looks reasonably priced after the recent correction (it 

is trading at 8x and 6.5x its FY12E and FY13E EPS), we believe that in 

the medium-term, the stock price will be under pressure owing to the 

dismal Q3FY11 performance, volatility in earnings QoQ and highly 

volatile market conditions. Hence, we are tempering down our 

expectations and advising investors to switch/sell on rallies. We feel 

that there are better opportunities available given the broader 

correction in the markets particularly large caps and quality midcaps. 

Page 2


The order book of STL stood at | 1700 crore in Q3FY11. 

Of the total order book, the power transmission 

business order book was at | 1,400 crore 

Revenues grew at a moderate rate of -33% YoY and 14% 

QoQ to | 579 crore in Q3FY11. The telecom segment 

disappointed in terms of revenues due to the fall in 

realisations from the optic fibre segment 

Power transmission revenues grew 28% QoQ whereas 

telecom segment revenues de-grew 12% QoQ due to the 

fall in optic fibre realisations and no sales in the 

broadband access network segment 


Exhibit 2: Trend of order book 

(| crore) . 

3,000 

2,250 

1,500 

750 

0 

1,320 

Q2FY09 

1,415 1,370 

Q3FY09 

Q4FY09 

Source: Company, ICICIdirect.com Research 

Exhibit 3: Trend of revenues 

(| crore) . 

1,000 

750 

500 

250 

0 

666 642 

578 

1,600 

Q1FY10 

436 

1,725 

Q2FY10 

466 

2,150 

Q3FY10 

867 

2,400 

Q4FY10 

662 

2,600 

Q1FY11 

492 

2,200 

Q2FY11 

509 

1,700 

Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 


Exhibit 4: Trend of segment-wise sales 

(| crore) . 

600 

450 

300 

150 

0 

388 

278 

Q2FY09 

427 

215 

Q3FY09 

401 

177 

Q4FY09 


296 

329 

140 136 

Q1FY10 

Q2FY10 

419 

448 

Q3FY10 

Power Telecom 

480 

182 

Q4FY10 

340 330 

152 

Q1FY11 

Q2FY11 

579 

422 

179 157 

Q2FY11 

Q3FY11 

Page 3


EBITDA margins have declined 460 bps YoY in Q3FY11 due 

to execution of low margin orders in the power segment, 

which pulled the overall margins to 7.4% in Q3FY11 


Exhibit 5: Trend of EBITDA margin 

(%) 

35 

30 

25 

20 

15 

10 

5 

0 

Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 


Estimate changes 

Power Telecom Overall 

Though the management has given a robust FY12 guidance, we have 

built in conservative estimates for FY12E and FY13E given the huge 

volatility and disappointment in earnings over the last couple of 

quarterly results. We have revised our FY11E and FY12E sales volume 

assumptions for both the power transmission and telecom products & 

solution businesses. We expect the volumes in the power division to 

grow at a CAGR of 18% over FY11E-FY13E. We also expect volumes in 

the telecom segment to grow at a CAGR of 36% over FY11E-FY13 given 

that new capacity addition will come into play. 

Due to disappointing EBITDA margins in Q3FY11, we have revised down 

our estimates. We have reduced our FY11E-12E revenue estimates by 

16% and 14%, respectively, and our FY11E-12E PAT estimates by 41% 

and 31%, respectively (Note: our earlier and current estimates are lower 

than consensus estimates). 

Exhibit 6: Changes in earning estimates 

FY11E FY12E 

(| crore) New Old % change New Old % change 

Sales 2,171 2602 16.6 2,727 3174 14.1 

EBITDA 299 433 30.8 393 513 23.4 

PAT 168 286 41.3 241 350 31.0 


Page 4



Exhibit 7: Financial Summary 

Year to March 31 FY09 FY10 FY11E FY12E FY13E 

NP (| crore) 91 246 168 241 320 

Adj. NP(| crore) 91 246 168 241 320 

EPS (|) 2.7 6.9 4.5 6.5 8.6 

Growth (%) 152.3 -34.7 43.0 32.4 

P/E (x) 20.2 12.4 11.2 9.2 9.2 

Price / Book (x) 2.9 3.3 2.5 2.0 2.0 

ROCE (%) 16.5 27.8 16.2 17.7 21.3 

RoNA (%) 15.3 32.0 15.8 18.2 19.9 


Given the weak performance over the past few quarters, we have tried to 

construct the valuation matrix depending on the various business and 

market driven parameters. We expect the stock to trade between our 

projections of Bear case and Base Case target prices .i.e. between | 45 

and | 75 per share in the medium term. For this reason we recommend 

the investors to switch/sell on rallies as there are relatively better 

opportunities present in large and quality mid caps after the recent 

correction/volatility in the markets. 

Exhibit 8: Valuation Scenarios 

Bear Case Base Case Bull Case 

Order Inflows Weak In line Hihger than expected 

Expansion in margins Tepid Normative High 

Disocutning of earnings FY11E EPS FY12E EPS FY13E EPS 

P/E mulitple accretion (x) 10 12 13 

EPS for respective years(| 4.5 6.5 8.6 

Target Price (|) 


45.2 74.3 111.2 

Page 5


ICICIdirect.com coverage universe (Capital Goods) 

BHEL 

NP (| Cr) EPS (|) PE (x) P/BV (x) RoCE (%) RoE(%) 

THERMA CMP 2200 FY10 4311 88.2 25.0 6.9 37.5 29.2 

Target 2641 FY11E 5155 105.4 20.9 5.7 39.3 29.9 

Mcap (| Cr) 110514 Upside (%) 20.0 FY12E 6504 133.0 16.5 4.6 36.3 27.3 

Thermax 


Idirect Code THERMA CMP 677 FY10 141 11.9 57.0 7.7 34.2 14.1 

Target 730 FY11E 363 33.2 20.4 6.0 43.3 31.2 

Mcap (| Cr) 7901 Upside (%) 7.8 FY12E 518 39.5 17.1 5.0 45.3 35.3 

BGR Energy 

NP (| Cr) EPS (|) PE (x) P/ABV (x) RoCE (%) RoE(%) 

Idirect Code BGRENE CMP 560 FY10 201.0 27.9 20.1 7.9 23.0 31.8 

Target UR FY11E 304.8 42.3 13.2 5.9 25.2 36.9 

Mcap (| Cr) 4032 Upside (%) - FY12E 372.0 52.7 10.6 4.5 23.6 33.8 

Hindustan Dorr Oliver 


Idirect Code HINDOR CMP 90 FY10 56 7.7 11.7 2.9 38.6 27.8 

Target UR FY11E 79 11.0 8.2 2.2 36.0 30.4 

Mcap (| Cr) 648 Upside (%) - FY12E 106 14.7 6.1 1.7 36.2 31.0 

Sterlite Technologies 


Idirect Code STEOPT CMP 54 FY10 246 7.0 7.7 2.1 27.8 32.0 

Target UR FY11E 170 4.8 11.2 1.6 24.5 26.1 

Mcap (| Cr) 1917 Upside (%) - FY12E 241 6.8 7.9 1.2 23.0 24.1 



Exhibit 9: Recommendation History 

140 

120 

100 

80 

60 

40 

20 

0 

May-10 

May-10 

Jun-10 

Initiaing Coverage: CMP-|95 

TP: |125 (Strong Buy) 

Jun-10 

Jun-10 

Jul-10 

Jul-10 


Aug-10 

Aug-10 

Sep-10 

Sep-10 

Oct-10 

Oct-10 

Q3FY11: CMP-| 

54 

Nov-10 

Nov-10 

Nov-10 

Dec-10 

Dec-10 

Jan-11 

Jan-11 

Page 6


RATING RATIONALE 

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns 

ratings to its stocks according to their notional target price vs. current market price and then categorises them 

as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the 

notional target price is defined as the analysts' valuation for a stock. 

Strong Buy: 20% or more; 

Buy: Between 10% and 20%; 

Add: Up to 10%; 

Reduce: Up to -10% 

Sell: -10% or more; 

ANALYST CERTIFICATION 


Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com 

ICICIdirect.com Research Desk, 

ICICI Securities Limited, 

7 th Floor, Akruti Centre Point, 

MIDC Main Road, Marol Naka, 

Andheri (East) 

Mumbai – 400 093 

research@icicidirect.com 

We /I, Chirag Shah PGDBM, Sanjay Manyal MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect 

our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) 

or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 

Disclosures: 

ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading 

underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of 

companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities 

generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts 

cover. 

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and 

meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without 

prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and 

employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities 

from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities 

policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances. 

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This 

report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial 

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circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment 

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate 

the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any 

loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the 

risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to 

change without notice. 

ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received 

compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment 

banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three 

months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific 

transaction. It is confirmed that , Chirag Shah PGDBM, Sanjay Manyal MBA research analysts and the authors of this report have not received any compensation from the companies mentioned in the 

report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. 

ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the 

research report. 

It is confirmed that , Chirag Shah PGDBM, Sanjay Manyal MBA research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board 

member of the companies mentioned in the report. 

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use 

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This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, 

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described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and 

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Page 7

ICICI Securities Limited Sterlite Technologies (STEOPT)

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