Sterlite Optical Technologies Ltd Intiating Coverage Key Data |
CMP | Rs 180 |
Date | Sept 21st, 2006 |
Sector | Optic Cables & Power Cables |
Face Value | 5/- |
BSE Code | 532374 |
52 Week H/L | Rs 194 / 73 |
Market Cap | Rs 1058 Cr |
Investment Rationale
Sterlite Optical Technologies Ltd. (SOTL) is the largest cable player in India and has varied products amongst two broad technologies i.e. telecom and power. The company is about to take a big leap forward in terms of overall operating performance after acquisition of the power transmission conductors business of Sterlite Industries and the sustainable improvement in the telecom cables business. The global market for uncabled optical fiber will increase by CAGR of 9.5 percent and for Fiber Optic cable by CAGR of 6.7% between 2005 and 2010. The domestic market is expected to grow by 15 percent CAGR over 3 years and SOTL with its leadership position will continue to grow faster. The power conductor sector will witness the growth at CAGR of 20 percent till 2012. The acquisition of the conductor business is a very profitable diversification for the company, bringing to table alternate revenue and profit stream, improving the overall quality of earnings. SOTL has successfully turnaround its telecom business by cost control and restructuring. The company is in the expansion mode through capacity additions in both telecom and power segments. The overall business mix of the company is going a dynamic change as power segment's contribution would be major. Sensing this rightly, the promoters are infusing Rs. 84 crore to raise their stake, which further boosts investor confidence.
The stock at present is due for re-rating owing to robust growth outlook, market leadership position of the company to make maximum use of opportunities, cleaner balance sheet due to cost control and restructuring, diversifying revenue stream by entering into lucrative power conductor business. This has made a strong case for SOTL to be valued richly in comparison with its peers.
Company background
Sterlite Optical Technologies Ltd. (SOTCL) was incorporated in 2000 after it was demerged from Sterlite Industries. It is a part of the Sterlite Group. The company mainly manufactures Jelly Filled Telephone Cables, Optical Fiber and Optical Fiber Cables. The company is the largest telecom cable player in India and has varied products amongst two technologies. The company has recently acquired power conductor business from Sterlite Industries Ltd. In FY 06 the company reported a profit of Rs. 40.77 crore on the turnover of Rs. 547.37 crore. The business has been segmented into
1 Optical Fiber Business - Fiber Optics (measured in km, uncabled) and Optic Fiber Cables (measured in fiber-km or fkm, cabled) and,
2 Access Division - Copper telecom cables (Jelly Filled Telephone Cables or JFTC), broadband products and network integration.
3 Power Transmission and Conductors Business - Recently acquired power transmission conductors business of Sterlite Industries for Rs. 148.50 crore.
Key Developments:
Acquired Power transmission conductors business from Sterlite industries Ltd.
SOTCL has acquired the power transmission business of Sterlite Industries engaged in the business of manufacturing power conductors for Rs. 148.50 crore. It is India's largest manufacturer with a capacity of 75000 MT per annum. It is market leader with approximately 45% share in the high voltage power conductors market in India. For FY 06, the division had net revenues of Rs. 586 crore and profit before tax of Rs. 48 crore. The acquisition though appearing non-core to SOTCL telecom business, the synergies are present in the form of running the business. The customer profile is similar for both the business involving government companies and also provides locational advantages in terms of operational synergies. This makes the entry of the company in the fast growing power sector which is witnessing robust investments in generation, transmission and distribution. Thus the company is about to witness remarkable change in the quality of earnings on back of sustainable growth in the telecom and power sector.
Financial Performance:
Q1 FY 07 result driven by robust top line growth of 66 percent
In Q1 FY 07, the company has continued its improved performance as witnessed from the fact that it has registered 66 percent growth in top line to Rs. 97.17 crore. Operating profit however shown some decline basically on account of 96 per cent growth in raw material cost to Rs. 57.94 crore from 29.57 crore . The raw material as a percentage of sales has up from 42.50 percent to 53.71 percent. The company has able to reduce its cost of debt. The interest expense has reduced by 31 percent to Rs. 1.99 crore from 2.89 crore. The interest expense as percentage of sales also dropped to 2.05 percent in Q1 FY 07 from 4.94 percent of Q1 FY 06. Lower tax outgo of Rs. 6 lakhs as compared to Rs. 25 lakhs as of Q1 FY 06, improved bottom line to Rs. 3.31 crore with net profit margin of 3.41 percent. This has translated into EPS of Rs. 0.56 for Q1 FY 07, a growth of 50 percent over EPS of Rs. 0.37 as of Q1 FY 06.
Valuations:
Based on its FY06 earnings, FCL is quoting at P/E multiple of 25.96x at CMP of Rs. 180. EV/EBIDTA stands at 14.42 x whereas Market Cap/Sales stands at 1.934x.
Industry Scenario
The telecom cables industry was in the midst of a boom in the early 2000. However, since then, the industry has been plagued by intense competition, popularity of wireless telecom services, fall in demand and excess capacity resulting into extreme pressure on profit margins. Market for telecom cables has shrunk considerably since 2001 to 2003. The global Optic Fiber market reached its peak demand in 2000 with 110 Mn KM. The capacities of major players also increased in tandem. However, in 2002 the demand dropped very sharply to just 60 Mn Km. This led to several players going out of the business and making losses, ultimately selling out the assets or business. This has led to significant reduction in capacities and consolidation. In 2005, the Optic Fiber demand increased again to 75 Mn Km. However, the available capacities are less and hence supply is not matching the growth in demand, resulting in delayed supply. The Optic Fiber prices could be inching up higher, going by the present demand and supply trends. Marginal players would exit this business leaving a select few such as FCL and Sterlite Optical Technologies in the reckoning.
Indian Power Sector is expected to witness Rs. 5 lakh crore of investment in XIth Plan (Rs. 4 lakh crore in Xth Plan). Out of this, T & D sector would require Rs. 1.79 lakh crore (Rs. 1.42 lakh crore in X Plan). It will get translated into robust demand for company's products like transmission conductors.
For the conductor segment, establishment of an integrated National Power Grid by 2012, which entails massive outlay of Rs. 71000 crore for transmission network of 60,000 CKm (Cable Kilometers) would offer significant opportunity for the company to grow.
Developments and Impact
Acquired Power transmission conductors business from Sterlite industries Ltd.
SOTCL has acquired the power transmission business of Sterlite Industries engaged in the business of manufacturing power conductors for Rs. 148.50 crore. It is India's largest manufacturer with a capacity of 75000 MT per annum. It is market leader with approximately 45% share in the high voltage power conductors market in India. For FY 06, the division had net revenues of Rs. 586 crore and profit before tax of Rs. 48 crore. The acquisition though appearing non-core to SOTCL telecom business, the synergies are present in the form of running the business. The customer profile is similar for both the business involving government companies and also provides locational advantages in terms of operational synergies. This makes the entry of the company in the fast growing power sector which is witnessing robust investments in generation, transmission and distribution. Thus the company is about to witness remarkable change in the quality of earnings on back of sustainable growth in the telecom and power sector.
Promoters infuse Rs. 84 crore - sign of confidence
During FY 06, 28 lakhs equity shares allotted on preferential allotment basis to the promoters at the rate of Rs. 100. Besides this 56 lakhs warrants were issued during the year with option to exercise Equity conversion for 28 lakhs warrants before March 07 and balance 28 lakhs warrants by September 07. Thus, the capital infusion of Rs. 84 crores is being done by promoters latest by September 07. Out of which Rs. 33.60 crores have already been received in March 06.
Corporate Restructuring helped in earning efficiency
From 2000 to 2005, the severe downturn years of SOTL, it has restructured itself. It has worked on its cost efficiencies during this period and now out sources only silicon and rest of the items are made in-house for greater cost control. It claims the lowest cost of Optic Fiber production in the world at present. Its debt has come down and the long term debt is only for working capital purpose. In FY 06, SOTL produced 3.1 Mn KM Optic Fiber. Of this, it sold 1/3rd in domestic market, 1/3rd in exports and 1/3rd was used captively. In the current year, it is targeting 4.2 Mn KM OF production. Its Access business comprising of Jelly Filled Telephone Cable, Telecom hardware, Networking etc. is likely to be flat in FY 07. The Optic Fiber Cable price realization in domestic market is likely to be 10 per cent higher than in the previous year
Financials
Results ( Rs.Crore)
Particulars | Q1 FY07 | Q1 FY06 | % Ch | FY06 | FY05 | % Ch |
Net sales | 97.17 | 58.55 | 65.96 | 547.37 | 326.88 | 67.46 |
Other income | 3.00 | 4.35 | -31.03 | 19.46 | 5.18 | 275.68 |
Total Income | 100.17 | 62.90 | 59.25 | 566.84 | 332.06 | 70.70 |
Total Expenditure | 88.60 | 50.35 | 75.96 | 483.55 | 284.72 | 69.84 |
(as % of sales) | 91.18 | 85.99 | 88.34 | 87.10 | ||
-Total material cost | 57.94 | 29.57 | 95.94 | 391.94 | 215.43 | 81.94 |
(as % of sales) | 53.71 | 42.49 | 71.60 | 65.91 | ||
-Staff cost | 5.40 | 3.54 | 52.54 | 14.85 | 11.44 | 29.86 |
(as % of sales) | 5.01 | 5.09 | 2.71 | 3.50 | ||
-Other expenditure | 25.26 | 17.24 | 46.51 | 76.76 | 57.85 | 32.68 |
(as % of sales) | 23.41 | 24.77 | 25.69 | 30.59 | ||
Operating profit (Excl OI) | 8.57 | 8.20 | 4.51 | 63.82 | 42.16 | 51.38 |
Operating profit (Incl OI) | 11.57 | 12.55 | -7.80 | 83.28 | 47.34 | 75.93 |
Interest | 1.99 | 2.89 | -31.14 | 16.14 | 10.41 | 54.98 |
Gross Profit | 9.58 | 9.66 | -0.82 | 67.15 | 36.93 | 81.83 |
Depreciation | 6.21 | 7.31 | -15.01 | 28.99 | 26.68 | 8.68 |
PBT before extraordinary items | 3.37 | 2.35 | 43.40 | 38.16 | 10.25 | 272.18 |
Extraordinary items | 0.00 | 0.00 | 0 | 0.00 | 0.00 | 0 |
PBT | 3.37 | 2.35 | 43.40 | 38.16 | 10.25 | 272.18 |
Tax | 0.06 | 0.25 | -76.00 | -2.61 | 0.03 | |
Net profit | 3.31 | 2.10 | 57.61 | 40.77 | 10.22 | 298.88 |
Equity Capital | 29.40 | 28.00 | 5.00 | 29.40 | 28.00 | 5.00 |
EPS | 0.56 | 0.37 | 50.11 | 6.93 | 1.83 | 279.89 |
Cash EPS | 1.62 | 1.68 | -3.64 | 11.86 | 6.59 | 80.06 |
Ratios (%) | ||||||
OPM (excl OI) | 8.82 | 14.01 | 11.66 | 12.90 | ||
OPM (incl OI) | 11.91 | 21.43 | 15.22 | 14.48 | ||
Interest/Sales | 2.05 | 4.94 | 2.95 | 3.19 |
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