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STERLITE

TECHNOLOGIES
CONTENTS:
COMPANY OVERVIEW…………………………………………………………………………………………..…………1
INVESTMENT SUMMARY……………………………………………………………………………….…………………3
BUSINESS DESCRIPTION………………………………………………………………………………………………..…5
MANAGEMENT & GOVERNANCE……………………………………………………………………………………14
INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING……………………………………………..…19
VALUATION………………………………………………………………………………………………………..…………27
FINANCIAL ANALYSIS…………………………………………………………………………..………………..………29
INVESTMENT RISKS………………………………………………………………………………………………….……31
1
COMPANY OVERVIEW:

Industry: Optical Communications

CMP: INR 362.80

52 Week Range: INR 414.50/INR 210.30

M Cap: INR 14,548.28 Cr

Share in Issue: 40.10 Cr

P/E: 43.55

Avg. Daily Vol. : BSE/NSE – 2,211,200

Promoter: 53.96 % Holding

Rating: BUY

Research Analyst: CA Viplove Dalmia


(viplovedalmia95@gmail.com)

Date of Report: August 16, 2018


2

Sterlite Technologies (STL) was incorporated in year 2000 after demerger from Sterlite
Industries Limited. Sterlite Group was founded in 1979 by Mr. Anil Agarwal who is also the
founder of Vedanta Limited. STL is engaged in developing and delivering optical
communication products, network & system integration services and software solutions for
telecoms globally.
STL HQ is based out of Bangalore and has manufacturing plants located at Aurangabad &
Silvassa in India and in China, Brazil and Italy globally. It Manufactures Glass Preform only at
its Aurangabad Plant. Optical Fibre is drawn at Aurangabad, Silvassa and China and Optical
Fibre Cable is manufactured at Silvassa, Italy and Brazil.

The below image lays out significant milestones in the history of the company. In 2015, the
power business of STL was demerged into a separate company making it a pure play telecom
focused company. In the same year, STL acquired Elitecore Technologies from which it has
acquired its software business. In 2018, STL acquired Metallurgica Bresciana – European
Specialized Optical Cable Manufacturer in all cash deal for Euro 47 Million.
3
INVESTMENT SUMMARY:
1) Sterlite Technologies Limited (STL) is the only company in the world to be fully vertically
integrated manufacturing the optical fibre cables from the very basic raw material silica
and also providing software as well as system integration services.

2) STL is the only company in India and among the only 9 companies in the world who
manufactures Glass Preform from which the Optical Fibre is drawn. Manufacturing of Glass
Preform is an extremely precision sensitive and intellectual property protected process. It
dictates the supply side of the fibre production chain and since globally there are fewer
than 10 players that manufacture perform, STL has a competitive edge.

3) Due to the above constraints and the world being on a brink of transforming from 4G to
5G to cater to its ever increasing demand for high speed data, there has been a shortage in
supply of optical fibre cables which would replace the existing copper cables.

4) STL is in the process of expanding its Glass Preform Manufacturing and Optical Fibre
Drawing Capacity from existing 30 million fibre km to 50 million fibre km. Half is scheduled
to complete in Dec 2018 and Half in June 2019.

5) STL was sitting on Order Book worth INR 6,034 Cr (1.8x of TTM Revenue) as on June 30,
2018 excluding INR 3,500 Cr of Advance Purchase Order received from Indian Navy. This
gives the company great visibility for the future revenue.

6) STL claims to have 40-45% market share in India and 7% globally with highest EBITDA
Margins in the World.

7) STL has 196 patents to its name and is present in 100+ countries.

The above factors place Sterlite Technologies in a Unique Position to take advantage of
the growing Demand for Optical Fibre Cables which is the preferred medium for carrying
high speed data as nothing travels faster than the speed of light.
4
Earnings Forecast:

1) STL’s PAT has more than doubled in past 2 yrs from INR 154 Cr in FY 16 to INR 334 Cr in FY
18 growing at a CAGR of 47%.

2) STL has recently acquired a European Company named Metallurgica Bresciana which adds
another INR 35 Cr to its bottom line at 66% Capacity Utilization.

3) STL has a strategic target of achieving PAT of US $ 100 Million by FY 20 (INR 680 Crores
approx). After declaring its Q1 FY 19 results, Management was of the opinion that it would
achieve this target even before FY 20.

4) Given the STL’s past record, strong order book, recent acquisition and positive
management commentary, we expect STL to comfortably achieve its strategic target by FY
20.

Valuation Summary:
(Amount in INR Crores)

Particulars BEAR BASE BULL


FY 20 EBITDA Estimate 1,354 1,354 1,354
EV/EBITDA Multiple 12 14 16
Enterprise Value 16,248 18,956 21,664
Less: Net Debt (884) (884) (884)
Add: Cash 138 138 138
Market Cap 15,502 18,210 20,918
No. of Shares 40.10 40.10 40.10
Target Price (INR/Share) 387 454 522
Upside % * 24% 46% 68%
*We initiated coverage of Sterlite Technologies at the Market Price of INR 263 and have average Market Price of INR 311
for all of our holdings. Accordingly we have calculated the upside based on INR 311.
5
BUSINESS DESCRIPTION:
Manufacturing Process:
STL 75% of the revenue comes from its Product Business. Manufacturing of Optical Fibre
Cable is a 3 step process:
1) Glass Preform is manufactured using vapor deposition technique. In this technique, a
cylindrical preform is made by depositing layers of specially formulated silicon dioxide on
the surface of a hollow substrate rod. Silicon dioxide is formed by adding Sodium
Tetrachloride (SiCl4) to the stream of oxygen applied to the rod. STL manufactures in
house its own SiCl4 whose basic raw materials are Sand and Rock Salt which is available in
abundance. At this point, the core and the cladding part of the optical fibre cable is
formed. Refractive index of Cladding is higher than the Core so that the Data which is
being transferred in the form of light remains inside the core. The difference in refractive
index is within the range of +1%. Refractive Index = Speed of Light in Vaccum / Speed of
Light in Glass. There are only 9 players in the world who manufactures Glass Preform and
STL is the only one in India giving it a competitive edge.

2) Optical Fibre is drawn from the above manufactured Glass Preform using a fibre drawing
system which is two stories high. This system consists of a furnace to melt the end of the
preform, senors to monitor the diameter of the fibre pulled down from the preform, and
coating devices to apply protective layers over the outer cladding. The protective layer
applied is of acrylate to protect the core and cladding from any damage. There are less
than 50 players in the world in this space.

3) Optical Fibre Cable usually includes several optical fibres around a central steel cable after
which various protective layers are applied depending upon the harshness of the
environment where the cable would be used. The Protective layer are of materials like
aluminum, Plastic etc. This space is highly competitive with around 200 players in the
world.

Structure of an Optical Fibre Cable


6
Manufacturing Capacity and Utilization:
Currently, STL has Glass Preform and Fibre Drawing Capacity of 30 million fibre km
which is at 100% utilization and it is in the process of expanding the same to 50 million
fibre km with a capital expenditure of INR 1,200 Cr entirely funded through internal
accruals. 10 million fibre km is expected to be achieved by December 2018 and the
balance 10 million fibre km by June 2019. As per the discussion with Management, it is
expecting to achieve 100% utilization of the additional capacity as well given the strong
order book of the company.

STL has Optical Fibre Cable Manufacturing Capacity of 15 million fibre km which was at
70% utilization as on March-18. The company is expecting to achieve 85-100% utilization
by FY 19.

Also with its recent acquisition of Metallurgica Bresciana, STL has added Optical Fibre
Cable Manufacturing Capacity of 3 million fibre km to its existing 15 million fibre km. It is
running at 66% utilization. Also it can be expanded to 5 million fibre km with minimal
capex.
7
Order Book:
As on June 30, 2018, STL had an order Book of INR 6,034 Cr which is 1.8 times of its TTM
Revenue. Mgt expects to execute majority of it in FY 19 and FY 20 with some spill over in
FY 21. This gives a great visibility for the future revenue and earnings to the company. In
a Concall, Management also mentioned that instead of taking advantage of the Higher
Spot Prices they are more comfortable in booking a long term order with the customer.
This shows the intent of the Management.

Also the order book has almost doubled in just last one year as can be seen in the image
below. This proves that there is shortage in the supply side and therefore the telecom
companies are happy booking the Supply in advance for their future capex
expenditures. Also if one sees the composition of the order book, product accounts for
almost 82% of the total order book which has a significant higher realization than the
services & Software.

The Order Book of INR 6,034 Cr does not include the advance purchase order of INR
3,500 Cr received from Indian Navy. Management is expecting it to materialize in Q2
and contribute towards revenue in H2. 75% of it pertains to system integration which
Mgt expects to execute in 12-18 months and the balance 25% pertains to O&M for 7yrs.
8
Global Presence:
STL has presence in 100+ countries. As on March 31, 2018 Exports accounted for 54% of
the company’s total revenue as compared to just 24% as on March 31, 2016. This
increase is majorly contributed by company’s increasing presence in European Region
which now accounts for 27% of the total revenue as compared to just 11% in FY 17. This
share will further increase in the future owing to the recent acquisition made by STL of a
European Company.

Also out of the current order book of INR 6,034 Cr, Exports accounts for INR 5,000 Cr
with Europe accounting for 30-35% of the Total Order Book.

On discussion with the Management regarding the future prospects of the domestic
market, management informed that they are already in talks with a number of telecom
providers and expect some of them to materialize in the FY 19. Also it was positive on
the 2nd phase of Bharat Net Program which is soon going to be launched.
9
Acquisition of Metallurgica Bresciana:
1) STL has acquired 100% stake in this European Specialized Optical Cable Manufacturer in all
cash deal for Euro 47 Million.

2) This transaction will be funded with a mix of internal accruals and Euro Debt Instruments.

3) It has a manufacturing base in Italy with 3 million fibre km cabling capacity running at 66%
utilization. This can be further expanded to 5 million fibre km with minimal capex.
10
Revenue and PAT:
STL has given strong Financial Performance since past few years with its Revenue
growing at a CAGR of 29% (FY 14-FY18) and PAT growing at a CAGR of 47% (FY16-FY18).
Management expects the same to continue in the future on the back of its strong order
book and has therefore accordingly given a strategic target of achieving $100 million
PAT by FY20.

EBITDA & EBITDA Margins:


STL EBITDA has been growing at a CAGR of
44% (FY14-FY18) and has also been
continuously improving its EBITDA Margins
over the years owing to increasing capacity
utilization, increasing internal efficiencies
and increase in the contribution of new 25%

products which are at higher margins and 21% 21% 21%

now accounts for 14% of the total revenue. 16%

Going forward Management expects to


have a sustainable margin in the range of
24-25 %.

FY 14 FY 15 FY 16 FY 17 FY 18

EBITDA Margin (%)


11

Debt:
STL has managed to reduce its debt over time from
over INR 1,000 Cr in FY 16 to INR 884 Cr in FY 18.
This has resulted into Debt Equity Ratio going below
1 for the first time standing at 0.7x as on FY 18. STL
has been continuously expanding its production and
has still managed to reduce its debt owing to its
healthy cash flows from operations. Company is in
the process of expanding its capacity where it will
incur INR 1,200 Cr but the same would have no
affect on debt as it will be entirely financed through
its internal accruals. The acquisition will be partly
financed through European debt instruments and
therefore Going forward company expect the debt
to be at INR 1,000 levels or even lesser once the
expansion is over.

Cash Flow:
The Increasing CFO/EBITDA % shows the Increasing Earning Quality of the Company and
the Decreasing Total Debt/CFO shows Healthy Balance Sheet Position of the Company.

90% 93% 4.7

45%
1.9
1.2

FY 16 FY 17 FY 18 FY 16 FY 17 FY 18

Total Debt/CFO
CFO/EBITDA (%)
12
ROE and ROCE:

27% 28%

22% 21%
20% 20%

FY 16 FY 17 FY 18

ROE (%) ROCE (%)

Du Pont Analysis – 5 Level Decomposition of ROE:


The below table helps us in understanding the factors contributing to the increase in
ROE. We can see that the major factors contributing to the increase in ROE are
improvement in Operating Profit Margin and Asset Turnover Ratio. It is a positive sign as
it infers that the company is making higher profit out of its revenues and making better
use of its assets (as can be seen from increasing capacity utilization). Also the decrease
in Interest Expense Rate and Equity Multiplier is a positive sign as it shows that the
company is carrying out the expansion relying on internal accruals and not on debt.

Particulars FY 2016 FY 2017 FY 2018


Operating Profit Margin 15% 15% 19%
Asset Turnover 1.3 1.4 1.5
Interest Expense Rate 7% 7% 5%
Equity Multiplier 2.3 2.0 1.7
Tax Retention Rate 72% 85% 74%
ROE 20% 22% 27%
13

Shareholding Pattern:
Particulars Q1 FY 2019 Q4 FY 2018 Q3 FY 2018
Promoters* 53.9% 54.0% 54.1%
MF’s, FI’s & BK’s 11.2% 11.2% 12.2%
FII’s 8.5% 8.5% 7.1%
Others 26.2% 26.2% 26.6%
*Promoters Pledged Shares = 35.97% of the Total Shares Held.

Top Ten Shareholders:


Particulars % Holding Particulars % Holding
Twin Star Intl Limited 52.16% Life Insurance Corp 3.3%
L&T Mutual Fund 2.86% DSP Blackrock Invest 2.77%
Aditya Birla Sunlife Ins 1.59% Macquarie Emerging Fund 1.55%
Dimensional Fund Adv 1.48% Reliance Capital 1.35%
Vedanta Ltd 1.19% Vedanta Limited 1.19%

Bulk Deals:
Date Acquirer/Seller B/S Qty Traded Price
12 Oct 2017 Serum Institute of India Pvt Ltd Buy 40,46,732 263.63
12 Oct 2017 Adar Cyrus Poonawala Sell 40,46,732 263.63
21 Jul 2017 Adar Cyrus Poonawala Buy 20,57,000 230.09

Insider Trades:
Date Acquirer/Seller B/S Qty Traded
14 Feb 2018 Pravin Agarwal Sell 53,250
12 Feb 2018 Pravin Agarwal Sell 1,50,000
24 Jan 2018 Pratik Agarwal Sell 1,30,000
01 Aug 2017 Ankit Agarwal Buy 25,000
01 Aug 2017 Pravin Agarwal Buy 46,500
14

MANAGEMENT AND GOVERNANCE:


Key Management:
Name Designation Profile

Mr. Anil Agarwal Non Executive Mr. Anil Agarwal is the founder of Sterlite
Chairman Group. He is also the Executive Chairman of
Vedanta Resources Plc, a London Listed
Company and Chairman Emeritus of Vedanta
Limited. He has over 40 years of entrepreneurial
and business experience.
Mr. Pravin Agarwal VC and WTD Mr. Pravin Agarwal has rich experience in
general management and administration that
spans across almost three decades. He is the
brother of Mr. Anil Agarwal and is also the Non
Executive Chairman of Sterlite Power
Transmission Limited. He has been involved with
Sterlite Group’s operation in India since
inception.
Dr. Anand Agarwal CEO and WTD Dr. Anand Agarwal is a BTech from IIT Kanpur
and an MS and Ph.D. in materials engineering
from the Rensselaer Polytechnic Institute, USA.
He joined Sterlite in 1995 and has been CEO of
Sterlite Technologies since 2003. He also serves
as WTD in Sterlite Tech JV’s in Brazil and China.
He is also a Director at AvanStrate Inc., and LCD
substrate glass-manufacturing company
headquartered in Japan.
Mr. Anupam Jindal CFO Mr. Anupan Jindal is a Chartered Accountant. He
began his professional journey with Vedanta
group in 1998. He joined Sterlite Tech in 2006 as
CFO.
15

Capital Allocation:
Management has been consistently deploying the incremental cash flows generated
from operations year on year for the following four purposes:

1) Maintaining a healthy dividend payout year on year.


2) Reducing the debt levels and thus bringing debt equity ratio below 1 in FY 2018.
3) Organic Growth – Continuously investing in the OF and OFC capacity expansion to
cater to the exponential growth in demand.
4) Inorganic Growth – Continuously investing in strategic acquisition of companies
which expands STL’s product portfolio offerings and increases its customer base and
global presence.

The increase in ROE year on year indicates that the above capital allocation is increasing
the shareholders wealth as the Management is able to re-invest the cash flows
generated at a higher return.

Particulars FY 2016 FY 2017 FY 2018


Dividend Payout 26% 25% 24%
Debt/Equity 1.3 1 0.7
Capacity Expansion OFC - 8 to 15 OF - 22 to 28 OF – 28 to 30 &
(Million fibre km) 30 to 50
(in process)
Acquisition Elitecore - Metallurgica
Technologies – INR Bresciana – INR 385 Cr
180 Cr (Cash Deal financed
(Cash Deal partly through
financed entirely internal accruals &
through internal partly through Euro
accruals) Debt Ins. )
ROE 20% 22% 27%
16

Compensation:
Ratio of Remuneration of Directors/KMP to median remuneration of employees is on a
higher side as STL is a manufacturing company and employs a lot of factory workers
whose remuneration is very low. When we take remuneration as % of PAT, it is well
within the acceptable limit of 5%.

Name of Designation Remuneration Ratio to median Remuneration


Director/KMP for the FY 18 remuneration of as a % of PAT
(INR Cr.) employees for FY 18
Mr. Pravin Agarwal VC & WTD 13.72 249 4.11%
Dr. Anand Agarwal CEO & WTD 10.04 182 3.01%
Mr. Anupam Jindal CFO 2.78 50 0.83%
Mr. Amit Deshpande CS 0.73 13 0.22%

Stock Holding:
Mr. Anil Agarwal – Non Executive Chairman holds 52.22% of the Total Shares of the
Company through his investment vehicle Volcan Investments via Twin Star Overseas
Limited.

Name of Director/KMP Designation Number of % of Total Shares


Shares as on of the Company
Mar 31, 2018
Mr. Pravin Agarwal VC & WTD 11,29,750 0.28%
Dr. Anand Agarwal CEO & WTD 8,92,900 0.22%
Mr. Anupam Jindal CFO 1,78,420 0.04%
Mr. Amit Deshpande CS 34,274 0.01%
Mr. Pratik Agarwal Non Executive Director 1,18,340 0.03%
Mr. Arun Todarwal Independent Director 1,925 0.00%
Mr. Sandip Das Independent Director 3,420 0.00%
17

Composition of BOD:
5 out of 9 members are Independent which gives them the majority. This is a positive.
Name of Director/KMP Category
Mr. Anil Agarwal, Chairman Promoter, Non-Executive
Mr. Pravin Agarwal, VC & WTD Promoter, Executive
Dr. Anand Agarwal, CEO & WTD Executive
Mr. Pratik Agarwal Promoter, Non Executive
Mr. Arun Todarwal Independent
Mr. Sandip Das Independent
Mr. A.R Narayanaswamy Independent
Mr. C V Krishnan Independent
Ms. Avaantika Kakkar Independent

Composition of Audit Committee:


4 out of 5 members are Independent. This is a positive.
Name of Director/KMP Category
Mr. Arun Todarwal, Chairman of Committee Independent
Mr. Sandip Das Independent
Mr. A.R Narayanaswamy Independent
Mr. C.V Krishnan Independent
Mr. Pravin Agarwal, VC & WTD Promoter, Executive

Composition of Nomination & Remuneration Committee:


All the 3 members are independent. This is a positive.
Name of Director/KMP Category
Mr. Arun Todarwal, Chairman of Committee Independent
Mr. Sandip Das Independent
Mr. A.R Narayanaswamy Independent
18
Composition of Stakeholders Relationship Committee:
3 out of 4 directors are independent. This is a positive.
Name of Director/KMP Category
Ms. Avaantika Kakkar, Chairperson Independent
Mr. Arun Todarwal Independent
Mr. Sandip Das Independent
Mr. Pravin Agarwal, VC & WTD Promoter, Executive

Composition of Sustainability and CSR Committee:


2 out of 4 members are independent but as chairman of committee is an independent
member it is a positive.
Name of Director/KMP Category
Mr. Arun Todarwal, Chairman of Committee Independent
Mr. A.R Narayanaswamy Independent
Mr. Pravin Agarwal, VC & WTD Promoter, Executive
Mr. Anand Agarwal, CEO and WT Executive
19

INDUSTRY OVERVIEW AND COMPETITIVE


POSITIONING:
According to a Business Wire (A Berkshire Hathaway Company) 2018 Report on India
Optical Fibre Cables Market, the Market is projected to grow at 17% CAGR through
2023 in India. Growing demand for OFC from IT & telecom sector, rising number of
mobile devices, increasing adoption of FTTH (Fiber to the Home) connectivity and
surging number of data centers is anticipated to fuel optical fiber cables market in India
over the coming years.

Past Trend:
Historically, market has been growing at a CAGR of 17% globally from 2005-2017, main
driver being China. The future growth projected for India can be achieved seeing the
past trend and this being in line with the govt initiatives such as Smart Cities Vision and
Digital India.
20
There has been an increasing trend in the demand of Optical Fibre Cable as we moved
from 2G to 3G to 4G as can be seen in the image below.
21
Why 5G will require the highest fibre deployment?
2G to 4G were launched in India in the telecom spectrum starting from the frequency of
0.8 GHz and going upto 2.3 GHz. But for launching 5G the frequency range starts from
24GHz (10x) which have been identified by World Radio Congress because at this
frequency range the greatest bandwith can be found and highest data rates can be
achieved.

Though higher frequency offers greater bandwith and higher data rates, it comes with a
number of disadvantages – The range lowering considerably as compared to lower
frequencies and signals becoming less capable of penetrating obstructions. Because of
these limitations, the number of towers also called Base Transceiver Station (BTS),
which we see around us, required in case of 5G would be 5-10x more than they were
required in 4G as can be seen in the image below.

In case of 4G, fibre was used to connect the Base Station Controller with the Back End
and these towers (BTS) were connected with the Base Station Controller (BSC) through
copper cables but in case of 5G, copper cables will have to be replaced by the Optical
fibre Cables due to capacity constraint of Copper Cables (depicted in next page).
22
Why Copper Cable needs to be replaced?
Primary reason for replacing Copper Cables with Fibre is its capacity constraints but fibre
has several advantages over copper as can be seen from the table below.

Particulars Copper Cables Optical Fibre Cables


Capacity < 100 Mbps Multiple Gbps
Attenuation/Loss of Signal 15,000 feet 40 km (24.8 miles)
Security Lower Higher
Reliability Lower Higher
Latency 100 Milliseconds + Negligible
Impact from Electromagnetic Susceptible Immunr
Interference/Severe Weather

Why we need 5G?


Primary reason is to cater to our ever increasing demand for data as depicted below.
23

Demand and Supply Dynamics:


We have seen that there is an Ocean of Demand for the product that STL Manufactures.
But what about Supply? (Refer image below)

It can be seen that there is a gap in demand of fibre and supply of glass preform which
forms the base to manufacture fibre with Supply being on a shorter side. The Supply is
restricted as there are only 9 companies in the world who manufactures Glass
Preform. There is a high entry barrier to this business as Manufacturing of Glass
Preform is an extremely precision sensitive and intellectual property protected
process.

We do not expect the Supply to Overrun the Demand in the near future given the high
entry barrier to new players, huge capital expenditure requirement for capacity
expansion (approx 600 Cr and 1-2yrs for 10 million fkm) and exponential growth in
Demand which the Supply can’t keep up the pace with.

STL is set to benefit the most as it is the only player in India who manufactures Glass
Preform on its own and the only player in the world to fully vertically integrated.
24
Porter’s Five Forces Analysis:
1) Threat of New Entrants:
As we have already discussed, there is a high entry barrier to this business as
manufacturing of Glass Preform is an extremely precision sensitive and intellectual
property protected process and STL patent portfolio of 196 is indicative of this fact.
Glass Preform is the base for manufacturing Optical Fibre (OF) and Optical Fibre
Cable (OFC). There is not much barrier in manufacturing OF and OFC but even if a
company starts manufacturing it, the company would have to depend on the only 9
companies in the world which manufactures glass preform where 60-70% of the
value is already being captured leaving very low margin.

2) Threat of Substitutes:
Data is transferred through optical fibre cable at the speed of light and nothing
travels faster than light.

3) Bargaining Power of Customers:


As we have seen that supply is on a shorter side and there is a high entry barrier.
Also Customers are booking the supply in advance – Strong Order Book of INR 6,034
Cr is indicative of this fact and there is continuous improvement in EBITDA Margin of
the Company. All this indicates very low bargaining power of the customer.

4) Bargaining power of Suppliers:


Basic raw material that is required to manufacture the company’s product are sand,
rock salt, acrylate and plastic. All of this are available in abundance which leaves very
low bargaining power with the suppliers.

5) Industry Rivalry:
STL has 40-45% market share in India and 7% Globally. It is the only company in india
which manufactures glass preform on its own and has the highest industry margins.
Also it is the only company in the world which is fully vertically integrated. Hence
threat from existing competition is negligible in india.
25

9 Companies that Manufacture Glass Preform:

1) CORNING – US Based Company – Market Leader in Optical Communication Business.


2) PRYSMIAN – European Company (Italy)
3) SHIN-ETSU CHEMICAL – Japanese Company
4) STERLITE TECHNOLOGIES – Indian Company
5) FUJIKURA – Japanese Company
6) FURUKAWA ELECTRIC – Japanese Company
7) SUMITOMO ELECTRIC INDUSTRIES – Japanese Company
8) YANGTZE OPTICA FIBRE AND CABLE (YOFC) in JV with SHIN ETSU and PRYSMIAN –
Chinese Company
9) HENGTONG OPTIC ELECTRIC in JV with FURUKAWA ELECTRIC – Chinese Company

1 US, 1 Europe, 4 Japan, 1 India, 2 China in JV (No pure Chinese players).

Competitive Analysis: (Amount in INR Crores)

Company: Sterlite Technologies Corning Prysmian


Particulars Revenue EBITDA % Revenue EBITDA % Revenue EBITDA %
2018 3,205 789 25% 24,815 5,390 22% 10,064 1,648 16%
2017 2,594 542 21% 21,035 4,088 19% 9,312 1,264 14%
2016 2,275 475 21% 20,860 3,829 18% 8,872 952 11%

We have compared Sterlite Technologies with Corning and Prysmian as they are two of
the largest players in the world.

Sterlite cannot be compared with other Indian Players like Aksh Optifibre, HFCL, Finolex,
KEC etc as all of them do not manufacture the Glass Preform on their own and purchase
from other companies making them incomparable.

As can be seen from above, though Corning and Prysmian have significantly higher
revenue as compared to Sterlite (Almost 8x and 3x) and would be enjoying high
economies of scale, Sterlite has considerably higher EBITDA Margin.
26
Global Outlook:
1) Capacity expansion plans of Global Companies:

Company Name Capacity Expansion Plan


Corning US $250 million – INR 1,750 Cr – approx 30 Million Fkm capacity p.a
Prysmian US $250 million – INR 1,750 Cr – approx 30 Million Fkm capacity p.a
Shin Itsu US $160 million – INR 1,120 Cr – approx 20 million Fkm capacity p.a
Furukawa Electric US $150 million – INR 1,050 Cr – approx 20 million Fkm capacity p.a
YOFC Preform = 57 to 97.5 million fkm & Fibre = 38 to 57 million fkm

It is quite evident that all the companies are in the process of capacity expansion
given the shortage in supply. Also it can be seen that the expansion taken up by all
the companies are in the same range as even Sterlite is expanding by 20 Million Fkm
p.a.

2) Recently, Verizon – a US Based Telecommunications Company, has awarded contract


of US $ 300 million to Prysmian for supply of 17 million fibre km over next 3 years.
Also it has awarded contract of US $ 1.05 billion to Corning for supply of 60 million
fibre km over next 3 yrs.

Remarks of Viju Menon, Verizon's chief supply chain officer: "Our plans identified a
shortfall in fiber supply, and Verizon has been working with business teams to
forecast demand and fill supply gaps with existing suppliers. Securing the required
volume of optical fiber and hardware solutions with Corning will ensure we meet our
planned rollout schedules."

3) Depreciating Rupee against Dollar and Euro would benefit Sterlite as it does not
import anything and 54% of its total revenues come from Export. On the other hand,
it would prove to be negative for other Indian Players like Aksh, Finolex who depends
upon companies like Shin Itsu, Corning for their Glass Preform and Optical Fibre
Requirement.
27

VALUATIONS:
EV/EBITDA Methodology:
(Amount in INR Crores)

Particulars FY 2018 FY 2019E FY 2020E


EBITDA 750 965 1,354
EV (31/05/2018) 13,979 13,979 13,979
EV/EBITDA 19x 14x 10x

As on 31/05/2018, Sterlite was trading at an EV/EBITDA multiple of 19x, One year


forward EV/EBITDA multiple of 14x and Two year forward EV/EBITDA multiple of 10x.

The below table represents the Adjusted EV/EBITDA of Corning which is a US based
Company. As we have already discussed, there is no comparable company of Sterlite in
Indian Market and hence we have considered Corning. We have considered EBITDA of
only the Optical Communication (OC) Segment of Corning and have accordingly adjusted
the EV by multiplying it by the % contribution of OC to the Total Revenue. We have
calculated the Adjusted EV/EBITDA of Corning for past three years.

We know that Corning operates in US Market which is much matured than Indian
Market but still it was trading at Adjusted EV/EBITDA multiple of 12x, 16x and 14x in
year 2017, 2016 and 2015 respectively. In 2017, it significantly dropped as Display
Technologies segment of Corning was not doing well and Corning reported overall loss
as this segment has the highest contribution.

(Amount in $ Millions)

Particulars CY 2017 CY 2016 CY 2015


EBITDA for Optical 770 584 547
Communications Segment
Total Enterprise Value 26,766 28,355 24,316
OC Segment Revenue to Total 35% 32% 33%
Revenue (%)
Adjusted EV 9,380 9,074 7,894
Adjusted EV/EBITDA 12x 16x 14x
28

On a conservative basis, we have calculated the Price Target of Sterlite based on


Corning’s trailing 3 yrs EV/EBITDA multiple. We can expect the multiple to be only
higher and not lower given the opportunity size in the Indian Market and the pace at
which Indian Market and Sterlite is growing.

(Amount in INR Crores)


Price Target:
Particulars BEAR BASE BULL
FY 20 EBITDA Estimate 1,354 1,354 1,354
EV/EBITDA Multiple 12 14 16
Enterprise Value 16,248 18,956 21,664
Less: Net Debt as on 31/03/2018 (884) (884) (884)
Add: Cash as on 31/03/2018 138 138 138
Market Cap 15,502 18,210 20,918
No. of Shares 40.10 40.10 40.10
Target Price (INR/Share) 387 454 522
Upside % * 24% 46% 68%
*We initiated coverage of Sterlite Technologies at the Market Price of INR 263 and has average Market Price of INR 311 for
all of our holdings. Accordingly we have calculated the upside based on INR 311.
29

FINANCIAL ANALYSIS:
(Amount in INR Crores unless mentioned otherwise)

Particulars Particulars 2017 2018 2019E 2020E


Revenue (a+b+c) 2,594 3,205 4,039 5,719
Optic Fibre: Capacity (in crore fkm) 2.2 2.9 3.25 4.75
Utilization 100% 100% 100% 100%
Sold in Open Market
1.6 1.85 1.63 2.75
(in crore fkm)
Rate (in INR) 528 561 561 561
Amount (a) 845 1,038 914 1,543
Optic Fibre Cable: Capacity (in crore fkm) 1.5 1.5 1.8 2
Utilization 40% 70% 90% 100%
Rate (in INR) 1,056 1,122 1,188 1,188
Amount (b) 634 1,178 1,925 2,376
Services: Amount (c) 1115 989 1200 1800
EBITDA (d+e+f) 518 750 965 1354
EBITDA Margin % 20% 23% 24% 24%
Optic Fibre: Margin % 27% 28% 29% 29%
Amount (d) 228 295 265 447
Optic Fibre Cable: Margin % 24% 27% 28% 28%
Amount (e) 152 323 539 665
Services: Margin % 12% 13% 13% 13%
Amount (f) 138 133 161 241
Other Income 24 39 30 30
Depreciation 159 182 212 283
Interest 123 104 120 130
PBT: Amount 260 503 663 971
Margin % 10% 16% 16% 17%
Tax 40 133 186 272
Tax Rate % 15% 26% 28% 28%
PAT post MI: Amount 201 334 437 659
Margin % 8% 10% 10% 10%
No of Shareholders 40.1 40.1 40.1 40.1
EPS (in INR) 5.01 8.33 10.90 16.44
30

Growth Ratios:
Particulars 2017 vs 2018 2018 vs 2019E 2019E vs 2020E
Revenues 24% 26% 42%
EBITDA 45% 29% 40%
PBT 93% 32% 47%
PAT 66% 31% 51%
EPS 66% 31% 51%

Key Assumptions:
1) We have assumed that the additional capacity will be operational as per the target
given by the management (1Cr fkm by Dec 2018 and another 1Cr fkm by June 2019)
and has accordingly calculated the Capacity Number for Optical Fibre. Also we have
included the Metallurgica OFC Capacity above and its expansion from 0.3 Cr fkm to
0.5 Cr fkm.
2) Utilization % of OF and OFC has been taken as per the management guidance.
3) Rate has been taken as per the past trend and management guidance.
4) Services revenue in the future years has been taken based on Company’s current
order book value of INR 1,094 Cr and advance purchase order of INR 3,500 Cr
received from Indian Navy. These contracts are generally of 12-18 months period.
5) Margin % has been taken as per the past trend and management guidance. In case of
OFC, Operational Efficiency due to increasing capacity utilization is also taken into
account.
6) Depreciation is calculated taking into account INR 600 Cr getting capitalized in Dec
2018 and INR 600 Cr getting capitalized in June 2019.
7) Interest Cost is taken as per the past trend and management guidance of keeping the
Debt levels at INR 1,000 Cr or less.
8) Tax Rate is assumed at 28% for the future years.
31
INVESTMENT RISKS:
1) 35.97% of the shares held by the Promoters are being pledged in the FY 17-18.

2) PWC has given a Qualified Opinion due to its inability of commenting on the
adequacy of provision made towards an excise/custom matter of Rs.188 Crore
currently pending disposal at the Supreme Court Level.

3) Margins in Service Business are significantly lower which can adversely affect as this
business grows in the future.

4) In India, Government is one of the biggest customer through its various initiatives
like Bharat Net, Smart City etc but their orders come with uncertainty.

5) With increase in exports, forex volatility will increase.

6) Due to entry of Reliance Jio and beginning of price war in the telecom industry, debt
levels on the balance sheet of other Telecom Companies has significantly increased
due to which there is a risk of delay in capital expenditure spend by telecom
companies on 5G infrastructure.

7) China accounts for 13% of the Company’s revenue and their spending pattern can be
a risk.

8) If any of the 9 companies in the world who manufactures Glass Preform starts
ramping up the capacity significantly and start a price war, it may result into
contraction in the Company’s margin as well as market share.