Sterlite Technologies BUY - Karvy Onlinecontent.karvyonline.com/contents/Content_2014828173240.pdf1. Power & Telecom Transmission Sterlite Technologies Bloomberg Code: SOTL IN BUY

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Power & Telecom Transmission

Sterlite Technologies Bloomberg Code: SOTL IN

BUY July 21, 2014

Analyst Contact

Prashant Kanuru

+91-40-44857894

[email protected]

Research Desk - Stock Broking

Key Financials Particulars (Rs. Mn.) FY12 FY13 FY14 FY15E FY16E

Net Sales 26217.50 30923.40 25638.50 39281.03 47154.71

EBIDTA 1885.90 2228.50 2753.80 5619.25 9248.87

Adjusted Net Profit 396.40 251.90 -355.10 -2339.66 964.00

EPS (Rs.) 1.01 0.64 -0.90 -5.94 2.44

EPS Growth (%) -74.56 -36.49 -240.84 -558.29 na

P/E (X) 38.13 35.88 na na 24.23

EV/EBITDA (x) 12.36 13.92 17.99 14.92 10.13

Dividend Yield 0.78 1.31 1.30 0.49 0.49

ROE (%) 3.68 2.19 -3.13 -23.74 10.70

ROCE (%) 9.82 6.10 4.12 6.44 10.40

Book Value (Rs.) 29.11 29.46 28.19 21.83 23.86

P/BV(x) 1.32 0.78 0.82 2.71 2.48

Net Debt/equity 0.71 1.86 3.44 6.79 7.35

Equity/Total Assets 0.35 0.22 0.16 0.10 0.09

Source: Karvy Research, Company Note: E= Estimates

Robust volume growth & improving cash flows Sterlite Technologies is a leading player in Telecom (Optic Fibre and

Cables) and Power Conductors with domestic market share of 35% and

25% respectively. It also has a portfolio of 6 Power Transmission projects

on build, own, operate and maintain (BOOM) basis.

We expect 15% plus growth in Optic Fibre volumes. Power Conductors

business is expected to report normalized sales volume of 130,000 mt per

annum & EBITDA of Rs. 8000-9000 per tonne, which would lead to a

healthy growth in NOPLAT from these two business segments.

We expect annuity cash inflows from transmission business would lead to

generation of free cash flow (enterprise level) from FY16 onwards.

Adding to these, a stable and conducive macro economic situation

increases the possibility of refinancing of significant amount of debt.

Valuation and Outlook We valued Sterlite Technologies based on SOTP valuation methodology by

summing up valuations of products business (Optic Fibre & cable and Power

Conductors) and upcoming Power Transmission Projects business as two

separate parts. Products business has been valued using the EV/EBITDA

multiple and the projects business is valued by discounting the net future cash

inflows after including all the long term debt repayments. Based on the above

methodology, we arrived at a target price of Rs. 99.56 per share (Rs. 65.01 from

the Products business and Rs. 34.55 for the Projects business). We initiate

coverage on the Company with "BUY" recommendation and a target price of

Rs. 99.56 per share, which represents an upside potential of 67.75%.

Key Risks to the Call 1. Slower than expected volume growth in Optic Fibre and power

conductors business segments.

2. Delay in commissioning of Transmission Projects.

3. Delay in Annuity receipts.

Recommendation

CMP (Rs) 59.35

Target Price (Period) (Rs) 99.56

Previous Target Price (Rs) NA

Upside/Downside (%) 67.75

Stock Information

Mkt Cap Rs.bn/US$ mn 23.37/387.59

52-wk H/L 73.45/15.75

3M Avg. daily volume (mn) 2.89

Beta (x) 1.19

BSE Sensex 25715

Nifty 7684

Stock Performance (%)

1M 3M 12M YTD

Absolute -15.5 91.5 186.0 140.8

Relative to Sensex -17.5 69.5 124.2 98.3

Performance (%)

Technical View: SOTL has made a

3-1/2 year high at 73.50 during last

month and has corrected to take support

around 60 levels. The stock is in

momentum since March this year and

has gained multifold from 20 odd levels

to 70 levels. The massive price increase

was supported by huge volumes

indicating accumulation of the stock by

strong hands. The medium term trend

looks positive and can drive the stock

towards its next resistance of 76 levels

and sustenance above the same can pull

the counter towards its next resistance

of 100-110 levels in the coming months.

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For more Market updates & Stock Research, visit www.karvyonline.com

June 23, 2014

ABB India

July 21, 2014

Sterlite Technologies

Company Financial Snapshot Company Background

Exhibit 1: Profit & Loss (Rs. Mn.)

Particulars FY14 FY15E FY16E

Net Sales 25638.50 39281.03 47154.71

Op Exp 22884.7 33461.8 37590.8

EBITDA 2753.80 5619.25 9248.87

Depreciation 1333.10 2240.00 2511.00

Interest Expense 1797.80 5679.54 5756.82

PBT -305.00 -2325.29 1096.05

Tax 243.10 259.46 352.04

PAT -355.10 -2339.66 964.00

Profit & Loss Ratio EBITDA Margin (%) 10.74 14.31 19.61

Net Margin (%) -1.39 -5.96 2.04

P/E(x) NA NA 24.23

EV/EBITDA (x) 17.99 14.92 10.13

Dividend Yield (%) 1.30 0.49 0.49

Exhibit 2: Balance Sheet (Rs. Mn.)

Particulars FY14 FY15E FY16E

Total Assets 69268.8 90446.2 100784.2

Net Fixed Assets 52740.2 70358.1 77151.0

Current Assets 14289.8 17680.0 21708.9

Total Liabilities 69268.8 90446.2 100784.2

Net Worth 11308.8 8812.7 9620.2

Debt 41445.3 60770.6 72834.3

Current Liabilities 21185.6 27362.9 28249.5

Balance Sheet Ratios (%) ROE (%) -3.13 -23.74 10.70

RoCE (%) 4.12 6.44 10.40

Net Debt/Equity 3.57 6.86 7.31

Equity/Total Assets 0.16 0.10 0.10

P/BV(x) 0.82 2.71 2.48

Exhibit 3: Cash Flow (Rs Mn.)

Particulars FY14E FY15E FY16E

EBITDA 2753.80 5619.25 9248.87

Other Income 225.00 200.00 315.00

Interest 1797.80 5679.54 5756.82

Tax 243.10 259.46 352.04

Change in WC 1749.90 -1778.45 -2070.53

CF from Operations 4080.25 3519.35 7083.59

Capex -19361.90 -15950.00 -6500.00

Investment -2111.00 199.40 915.00

CF from Investing -21472.90 -15750.60 -5585.00

Change in Equity 0.70 0.70 0.70

Change in Debt 15415.10 17740.29 7233.19

Dividend 137.04 137.16 137.29

CF from Financing 12702.84 11498.61 714.37

Change in Cash -4689.81 -732.65 2212.96

Sterlite Technologies (SOTL) shares the same lineage as

that of Vedanta Resources Plc, a globally diversified

natural resources group. SOTL operates in 3 business

segments: Telecom, Power Conductors and Power

Transmission Projects. In Telecom transmission space,

it manufactures optic fibre cables, data cables and is

present in the System integration space

(Communication Network); SOTL is the country’s only

fully integrated manufacturer of Optic Fibre. In the

Power Transmission segment, SOTL’s presence is at the

two extreme ends of the value chain. In the Upstream

segment, it is into manufacturing of aluminium power

conductors and power cables (principally) and in

downstream, it has six Power Transmission Projects

being executed on BOOM basis.

It has Optic Fibre manufacturing plants in

Aurangabad, India (Waluj and Shendra); China

(through a 75% owned JV) & Brazil (through 50% JV)

and Optic Fibre Cables manufacturing facility in

Silvassa. Power Conductors manufacturing facilities

are located in Silvassa, Haridwar & Jharsuguda and

Power cables unit in Haridwar. The six Power

Transmission Projects are located across North, East

and Central India. Out of these, three transmission

projects (ENICL, BDTCL and JTCL) with a total

transmission line length of 2100 KMs are expected to

progressively come on stream in FY15 and the

remaining three projects are expected to come on

stream progressively starting from FY18. SOTL has

sales and marketing presence across the continents of

Asia, Africa, Europe and Latin America.

Exhibit 4: Segmental Revenue Contribution

40.24%

57.79%

1.97%

Optic Fibre & Cables Power Conductors Power Transmission Grid

Note: E= Estimates

3


June 23, 2014

ABB India

July 21, 2014


Exhibit 5: Revenue Breakup (FY14, Rs. Mn.)

Exhibit 6: Share Holding Pattern (%) (June 30, 2014)

Company Snap Shot (Ratings)

Low High

1 2 3 4 5

Quality of Earnings

Domestic Sales

Exports

Net Debt/Equity

Working Capital req

Quality of Management

Depth of Management

Promoter

Corporate Governance

11048.6

15868.7

541.3

Optic Fibre & Cables Power Conductors

Power Transmission Grid

54.71%

2.69% 5.51%

0.23%

1.20%

27.93%

6.18% 1.55% Promoter & Promoter Group

Mutual Funds/UTI

Financial Institutions/Banks

Other DII's

FII's

Individuals

Bodies Corporate

others

Going forward, contribution

from Telecom and power

transmission projects will

increase significantly and

thus reduce the

predominance of power

conductors in revenue

contribution.

Entities controlled by the

promoter family hold 54.71%

stake (0% pledging) and LIC

and Reliance capital are

among the prominent

institutional investors.

4


June 23, 2014

ABB India

July 21, 2014


Valuation

Absolute Valuations Sterlite Technologies has been valued using SOTP method as the nature of Telecom & Power Conductors’ (products)

businesses are very different from the progressively being commissioned Power Transmission Concessions (Projects).

Products business being cyclical in nature, has been valued using EV/EBITDA multiple and Projects business has been

valued using DCF method because of high certainty in its annuity based cash inflows. Valuations of these two businesses

have been added up to arrive at the final Price Target.

Exhibit 7: Valuation Summary

Business segments

(A+B) Capacity/Description COD

Valuation

Methodology

Equity Valuation

(Rs. Million) for

FY15

Valuation per

Share (Rs.)

A. Optic Fibre/Cable

(OF/C) andPower

Conductors

Optic Fibre – 20.5 million ofkm and Power Conductors

– 160,000 MT Operational EV/EBITDA 25624.9 65.01

B. Power Transmission Projects

East North Interconnection

Transmission Company Ltd.

(ENICL)

ENICL involves establishment of two 400 kV Double

Circuit transmission lines (with a total line length of

450 kms) that would pass through the Indian States of

Assam, West Bengal and Bihar. This project has 18

identified beneficiaries (mainly SEBs in the states of

Rajasthan, Punjab, Haryana, Uttaranchal and the city

of Delhi), who would be directly benefited by this

project. They would pay transmission tariff to Sterlite

for a period of 25 years

FY15 DCF

13616.9 34.55

Bhopal Dhule Tranmission

Company Ltd. (BDTCL)

BDTCL involves establishment of four 765 kV Single

Circuit and two 400 kV Double Circuit Transmission

lines that would strengthen the transmission system in

the Indian states of Madhya Pradesh, Maharashtra and

Gujarat. Line Length of this project is 992 kms.

FY15 DCF

Jabalpur Transmission

Company Ltd. (JTCL)

JTCL involves establishment of a 765 kV Double

Circuit and a 765kV Single Circuit transmission line

each, that would strengthen the transmission system in

the Indian states of Chhattisgarh and Madhya Pradesh.

Line Length of this project is 610 kms.

FY15 DCF

Rajasthan Atomic Power Plant

Transmission Company Ltd

(RAPP)

RAPP involves establishment of 400kV Double Circuit

transmission line that would strengthen the

transmission system in the Indian states of Rajasthan

and Madhya Pradesh.

FY18 DCF

Purulia & Kharagpur

Transmission Company

Limited (PKTCL)

PKTCL involves establishment of two 400 kV Double

Circuit transmission lines that would strengthen the

transmission system in the Indian states of West

Bengal and Jharkhand.

FY18 DCF

Northern Regions

Strengthening Scheme 29

(NRSS 29)

Northern Region Strengthening Scheme Project (NRSS

29) is a part of the National Grid and is designed to

carry over 1000 MWs of electricity from Punjab to the

Kashmir Valley The project consists of one-substation

and 800 circuit kilometers of 400 KV lines in the states

of Punjab and J&K.

FY20 DCF

Sum of the parts (A+B) 39241.8 99.56

Note: All the above Transmission Power Projects are held through 100% owned subsidiary Sterlite Grid which in turn holds 100% stake in these SPVs. The recent

issue of convertible securities to Standard Chartered has been considered as debt as conversion to equity (if any) will be happening later.

5


June 23, 2014

ABB India

July 21, 2014


1. Valuation for Telecom and Power Conductor

Businesses based on EV/EBITDA Multiple:

The EV/Ebitda Multiples of FY11 and FY12 have

been considered for valuing the products

businesses. This selection has been made

considering the fact that consolidated balance sheet

of the company did not have any long term debt in

FY12 and the debt levels started increasing only

from FY13 due to start of significant capex for

commissioning of Power Transmission Projects.

Thus, EV/EBITDA multiples for FY11 and FY12

would be the right representative set for

ascertaining the value of the products businesses.

Out of these two years, FY11 would be more

appropriate for ascertaining a multiple because, the

power conductors business saw a significant drop in

per tonne EBITDA margin in FY 12 and FY13, which

was less than the normalized Ebitda margins of Rs.

8500-9000 per Metric Tonne. Hence, the EV/EBITDA

multiple for valuing the products businesses has

been taken as 9.5.

Methodology:

FY15 Ebitda for the businesses of Optic Fibre and

Power conductors has been projected to be Rs. 3434.2

Million. Taking the EV/EBITDA Multiple of 9.5

would lead to an Enterprise Value of Rs. 32624.9

Million.

Long term and Short term borrowing assumptions:

Long Term Borrowing for these businesses would be

very low (only for Chinese JV) in long term as it was

zero in FY12 on standalone balance sheet and short

term borrowings can be assumed to be a bit less than

the FY12 proportions, say around 21% of sales, as the

contribution from PGCIL orders is low and thus this

parameter can be benchmarked to the FY14 levels.

Thus, the total borrowings can be assumed to be

around Rs. 8000 Million for FY15. For the completion of

calculations, assume cash of around Rs. 1000 Million for

FY15 (the closing level in FY11).

Valuation Calculations: Equity Value (Market Capitalization) =

32624.9 – 8000 + 1000 = Rs. 25624.9 Million.

Per Share Term: Total outstanding shares are 394.2

mn and thus the per share valuation comes out to be

Rs. 65.01

Exhibit 8: Segmental Break-up & Consolidated EV/EBITDA

Particulars FY11 FY12 FY13 FY14

OF (million fKm) 8.8 11.7 12.5 11.4

OFC (million fKm) 3.7 3.6 4.6 5.2

Conductors (MT) 124653 135658 137750 94587

Sales (Rs. Mn.) 22630 27270 33540 27260

Combined Ebitda (Rs. Mn.) 2820 2230 2600 2710

Tax outgo (Rs. Mn.) 379.6 129.3 182.9 243.1

NOPLAT (Rs. Mn.) 2440.4 2100.7 2417.1 2466.9

Optic Fibre & Cable

Sales (Rs. Mn.) 6570 8040 10560 10770

Blended realization per Ofkm(Rs.) 746.59 687.18 844.8 944.74

Ebitda (Rs. Mn.) 1680 1390 1660 1870

Realization per OF fKm (USD) NA NA NA 7

Realization per OFC fKm (USD) NA NA NA 20

Conductors

Sales (Rs. Mn.) 16060 19230 22300 15870

Ebitda (Rs. Mn.) 1140 840 940 850

Ebitda/Tonne (Rs.) 9145.39 6192.04 6823.96 8986.44

Closing Price on FY Ending date 56.46 38.44 22.97 23.15

Enterprise Value (Rs. Mn.) 26799.9 23317.8 31027 49541.6

EV/Ebitda 9.50 10.46 11.93 18.28

Exhibit 9: EBITDA Projections

FY15E FY16E

OF (million fKm) 15.87 18.25

OFC (million fKm) 6.0 7.0

Conductors (MT) 130587 135587

Sales (Rs. Mn.) 36981.0 41454.7

Combined Ebitda (Rs. Mn.) 3434.2 3833.9

Tax outgo (Rs. Mn.) 259.5 352

NOPLAT (Rs. Mn.) 3174.8 3481.8

Optic Fibre & Cable

Sales (Rs. Mn.) 1520.71 1921.57

Blended realization per OfKm 958.23 1052.92

Ebitda (Rs. Mn.) 2259.0 2681.4

Realization per OF fKm (USD) 7.5 7.5

Realization per OFC fKm (USD) 22.96 22.96

Conductors

Sales (Rs. Mn.) 21773.9 22239.0

Ebitda (Rs.Mn.) 1175.3 1152.5

Ebitda/Tonne (Rs.) 9000.00 8500.00

6


June 23, 2014

ABB India

July 21, 2014


2. Valuation for Transmission Business

Assumptions for the Discounted Cash Flow

Long term Borrowing Repayment Schedule:

The total tenor of the debt has been taken as 14.5 years from the start of construction and the principal repayment

being spread over 11.5 years from the start of the power transmission project. It is assumed that the last 3 projects i.e.

NRSS 29, ERSS and PKTCL will be fully commissioned by the end of FY20.

65% of the debt is assumed to be repaid in quarterly installments and the remaining 35% will be repaid as bullet

repayments.

Discount rate: The discount rate for the 25 to 35 year net cash inflow has been assumed to be 8.75% which is the long term

Govt. bond yield. The reason for assuming 8.75% is the high certainty of cash inflows as these are annuity cash payments.

Annuity payments: Annuity payments have been assumed to be Rs. 2300 Million for FY15, Rs. 5700 Million for both FY16

& FY17 and Rs. 6900 Million for both FY18 & 19. Rs. 11300 Million from FY20 to FY40; from there on, till FY50 it has been

assumed to be Rs. 9400 Million; Rs. 8400 million for FY51 & 52, and Rs. 4400 million till FY55.

Interest Rates have been assumed at 10.5% for FY15, 10% in FY16 to FY18, 9.5% for FY19, 8.5% for FY20 and 8% till FY53.

Ebitda margins have been assumed to be uniform at 95% throughout the years

Tax outgo have been assumed to be zero till FY29, considering heavy losses at PBT levels till FY19 and section 80IA

exemptions. Tax out go in FY30 has been assumed to be at MAT rate. For subsequent years assumed to be 30% till FY55.

Present Value of Net Future Cash Inflows: Based on the above assumptions, the net present value of these cash inflows

comes out to be close to Rs. 13616.9 Million which on a per share basis, based on the projected paid up capital of FY15,

comes out to be Rs. 34.55 per share.

Valuation: Adding 1 and 2, the Target Price comes to Rs.99.56 per share

Sensitivity Analysis

Parameters which are sensitive to the forward projections and valuations are as follows:

Delays in commissioning of Power Transmission projects

Less than expected volumes in Power Conductors business

Delays in commissioning of Power Transmission Projects: This parameter will have the maximum impact in terms of

Revenue and Ebitda projections for FY15 and FY16 on a consolidated basis. The impact of this parameter on absolute

valuations of the company will however be low because the company has been valued using the Sum of the Parts

methodology and in that Power Transmission Project has been valued using the Discounted Cash Flow Method. As the

positive Net Cash Inflows will start only from FY20, thus the net impact of delays in commissioning will be minimal on

the target price.

Less than expected volumes in Power Conductors Business: This parameter is the most sensitive parameter in terms of

its impact on absolute valuation of the company. Any drop here will impact the EV/EBITDA valuation given to the

products businesses. Based on the financial model developed for Sterlite Technologies, its sensitivity is highest in terms

of change in volumes of power conductor business. For every 10,000 tonne drop in volume, the enterprise value will come

down by around 2% and the target price would come down by approximately Rs. 2 per share.

Valuation for Telecom and

Power Conductor Businesses

(Rs.65.01 per share)

Valuation for Power

Transmission (Rs.34.55

per share)

Target

Price of Rs

99.56 + =

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June 23, 2014

ABB India

July 21, 2014


Less than expected EBITDA Margin per tonne in Power Conductors Business: If the Per Tonne Ebitda margin comes

down by around Rs. 1000 per tonne, based on the expected volumes, the valuation target per share would come down by

approximately Rs. 0.325 per share.

Thus, the company is relatively more sensitivity to volume drop than the Ebitda margins in Power Conductors business.

Sensitivity to volume and price realization in Optic Fibre & Cable business has not been considered because, the estimates

used for the volume growth in this business is significantly less than what has been guided by the management and also

price strength is not a concern here as the existing demand scenario provides it with sufficient protection from any

significant downside in Optic Fibre segment.

Cross Cycle Valuations Company is expected to see a P/B rating revision post the improvement expected in FY15 and FY16. This will be the case

more so, starting from FY16, when the first 3 Power Transmission Projects are expected to fully come on stream.

Company is then expected to go back into the 4x and above band. This would also be supported by bullish demand

scenarios being seen in Optic Fibre and Cable businesses and an expected revival in PGCIL order inflow for Power

Conductor business starting some 2 to 5 quarter away from now.

Investment Argument

Higher Operational Profitability and Improving Cash Flows

1. Optic Fibre (OF) and Optic Fibre Cable (OFC) volume increase

2. Higher realization from Optic Fibre Cable business.

3. Sustenance of higher operating margins (per tonne basis) for Power Conductor business

4. Higher NOPLAT levels for the Telecom (OF + OFC) and Power Conductors business

5. Transmission income

1. Higher Optic Fibre & Cable Volumes and Power Conductor Volumes:

Optic Fibre and cable volumes: Company is expected to reap the benefit of higher OFC volumes owing to the following

factors – National Optic Fibre Network (NOFN) (4 lakh Kilometers), Defense Optic Fibre Network/NFS (60,000 Kms),

Increasing volumes for FTTH (Fibre to the Home) due to digitization of cable services and the most important and the

biggest factor is the increasing data usage which is expected to get an increased boost by the roll-out of 3G & 4G networks

ably supported by increasing rollout of Wi-Fi hotspots thus increasing the need for FTTA (Fiberization of Telecom towers

as a part of the back haul network). These domestic market dynamics along with export demand from Europe, Middle

East and Latin America will support the demand growth for OFCs and OFs.

Exhibit 10: I Yr forward P/B

4x

3x

2x

1x

0

20

40

60

80

100

120

140

Jul-

2009

No

v-2

009

Mar

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Mar

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Jul-

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011

Mar

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Jul-

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v-2

012

Mar

-201

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Jul-

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No

v-2

013

Mar

-201

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Jul-

2014

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June 23, 2014

ABB India

July 21, 2014


Volume Potential: i) National Optical Fibre Network (after netting off the existing networks of BSNL, RailTel, PGCIL and

GAILTel) requirement is estimated to be around 400,000 kms (approx.) which at an average fibre count of 50 makes it an

opportunity of 20 million Optic Fibre Kilometers. Sterlite Technologies presently has a market share of 22% in this segment.

ii) NFS (Network for Spectrum) is the Optic Fibre network to be laid for the defence forces in the country in lieu of 150 MHz

of spectrum to be surrendered by Defense Forces in the 1700-2100 MHz band. This is a 60,000 km network connecting 129

army, 162 air force and 33 navy stations. This will need OFC’s which will fetch higher per Optic Fibre Cable KM realization.

iii) FTTA potential is very high because presently only 7% of the towers are fiberized.

The NOFN and NFS present 23 million Optic Fibre kilometer opportunities for which the tendering has already started. In

case of NFS almost half of the OFC requirements orders have already been placed. Considering the present stated market

share of (22%) Sterlite Technologies in the NOFN, this comes out to be around 4.4 Million of Km opportunity. In NFS

space, Sterlite Technologies has already bagged an order for 1.5 Million Fibre Kms of Optic Fibre Cable.

The spurt in domestic demand will increase the revenue contribution from India which presently stands at around 40% of

the revenues. This is expected to go up to 50%.

Volume Numbers: The present capacities of the company in OF and OFC are 20 Million of Km (including the China JV)

and 6 Million of Km respectively. Sales volumes in FY14 were 13.8 million Fibre Kilometers and 5.2 million OFC Kms.

This is expected to increase by at least 15% on yearly basis for the next two years.

Power Conductor Volumes: Power Conductor volumes were anemic in FY14. This was on the back of a very weak

operating environment in FY13.

Revival in Power Conductor Volumes: Company has an order book of Rs. 22000 Million in this segment which was at Rs.

16000 Million at the beginning of FY14.

Exhibit 11: Order Book (beginning of FY)

Order Book (Rs. Mn.) FY12 FY13 FY14 FY15

Power Conductors 19500 20500 15500 22000

Telecom 2500 2500 3500 3500

Total 22000 23000 19000 25500

Export Strength: The revival in order book is due to increase in export orders which constitute 51% of the current order

book. SOTL was able to win a big 32,000 MT order from Latin America. This is a positive sign in terms of higher capacity

utilization considering the present low order inflow from PGCIL.

The following two exhibits indicate the decreasing order inflow from PGCIL and also a decrease in top-line contribution

from PGCIL orders. The ability of the company to increase its international market penetration augurs well for the

company. And, this is expected to help increase the capacity utilization in the next two years.

Exhibit 12: Total PGCIL ordering (Rs. Mn.) Exhibit 13: Sterlite Technologies PGCIL Dependence History

FY Overall Conductors FY PGCIL(MT) Exports & Non PGCIL(MT)

11 184000 29840 11 54 70

12 222000 53740 12 73 62

13 161000 9720 13 74 63

14 107600 11500 14 36 58

Source: Company Investor Presentation

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June 23, 2014

ABB India

July 21, 2014


Domestic Order Inflow recovery: Probability of PGCIL order inflow recovery after 3 to 5

quarters is high as going forward, the inventory of conductors with PGCIL is expected to

come down and thus we expect increased order inflow from PGCIL. The below exhibit

which shows the progress of CWIP (Capital Work in Progress) of conductors with PGCIL

leads to this inference.

2. Higher NOPLAT in Telecom and Power Conductors businesses on the back of higher volumes and margins:

The power conductors business is expected to report higher volume of sales on the back of order book visibility, higher

international market penetration and an expected demand revival in the domestic market on the back of higher expected

ordering from PGCIL.

Exhibit 15: NOPLAT (Net operating profit less adjusted tax)

FY11 FY12 FY13 FY14 FY15E FY16E

OF (million fKm) 8.8 11.7 12.5 11.4 15.87 18.25

OFC (million fKm) 3.7 3.6 4.6 5.2 6.0 7.0

Conductors (MT) 124653 135658 137750 94587 130587 135587

Sales (Rs. Mn.) 22630 27270 33540 27260 36981.0 41454.7

Combined Ebitda (Rs. Mn.) 2820 2230 2600 2710 3434.2 3833.9

Tax outgo (Rs. Mn.) 379.6 129.3 182.9 243.1 259.5 352.0

NOPLAT(Rs. Mn.) 2440.4 2100.7 2417.1 2466.9 3174.8 3481.8

Optic Fibre & Cable

Sales 6570 8040 10560 10770 15207.1 19215.7

Blended realization per Ofkm (Rs.) 746.59 687.18 844.8 944.74 958.23 1052.92

Ebitda 1680 1390 1660 1870 2259 2681.4

Realization per OF fKm (USD) NA NA NA 7 7.5 7.5

Realization per OFC fKm (USD) NA NA NA 20 22.96 22.96

Conductors

Sales (Rs. Mn.) 16060 19230 22300 15870 21773.9 22239

Ebitda (Rs. Mn.) 1140 840 940 850 1175.3 1152.5

Ebitda/Tonne (Rs.) 9145 6192 6824 8986 9000 8500

Note: The Ebitda and Sales projections of Telecom Segment does not include the Rs. 1500 Crore Turnkey Project being executed for BSNL

Till FY14, revenue contributions from Chinese operations (started in 2nd half of FY13) have not been included. In FY15 & 16, contribution from Chinese

subsidiary has been assumed to 2.4 million Optic Fibre Kilometers.

Reasons for Sustained Higher Operating Profits: In the Power Conductors segment, Ebitda per tonne is expected to be

maintained at around Rs. 8000 to 9000 per tonne, as we see a revival in product demand and also because SOTL has been

able to increase its international presence. In case of Optic Fibre, the realization per Optic Fibre Kilometer is expected to

remain stable in the range of USD 7.5 to 8.5 (it has been stable in this price band for the last few quarters). In Optic Fibre

Cable segment, the 1.5 million Optic Fibre Cable order from BSNL is at a realization of close to USD 55 per Optic Fibre

Kilometer (leading to a value of Rs. 5000 Million). The higher per Fibre Km realization for the Optic Fibre order under

NFS will increase per fKm realization from USD 20 to 22.96.

3. Transmission Projects Cash Flow

SOTL is going to see an increasing cash inflow from Power Transmission Projects starting from FY15 and reaching the

level of Rs. 11000 Million starting from FY20. The first three projects namely, East North Interconnection (ENICL)

Transmission Project; Bhopal Dhule Transmission Company Ltd and Jabalpur Transmission Company Ltd are expected to

see cash inflows starting from the second half of FY15. Similarly the remaining three projects are expected to see full

potential cash inflows progressively starting from FY18. Based on the outflow assumptions explained in the absolute

valuation section, this business has been valued at a per share valuation of Rs. 34.55.

Exhibit 14: PGCIL - CWIP

(Rs. Mn.) – Conductor

FY Rs. Mn.

11 28000

12 40640

13 70380

14 40500

10


June 23, 2014

ABB India

July 21, 2014


Key Downside Risks

1. Lower than expected volumes in Power Conductors business.

2. Drop in per Tonne Ebitda margin of Power Conductors business.

3. Delay in commissioning of Power Transmission Projects and thus annuity cash inflows.

Exhibit 16: Business Assumption

(Rs mn) FY13 FY14 FY15E FY16E Assumptions

India Business (Standalone)

1. Optic Fibres and Cables:

realizations for OF stood at USD

7.5/ofKm and OFC at USD

22/ofKm.

2. Power Conductors: Normalized

Ebitda per tonne of Rs. 8500 per

metric tonne.

Revenue 30923.40 24288.50 35981.03 40454.71

Revenue Growth (%) 17.95 -21.46 48.14 12.43

EBITDA 1957.10 2245.35 5121.15 8457.37

EBITDA Margins(%) 6.33% 9.24% 14.23% 20.91%

Global OF Plants + Power Transmission

Revenue Na 1350.00 3300.00 6700.00

Revenue Growth (%) Na na 144.44 103.03

EBITDA Na na 2281.00 5465.00

EBITDA Margins(%) na na 69.12 81.57

Consolidated

1. Chinese operations are expected

to contribute Rs. 1000 Mn. to the

top-line with volume

contribution of 2.4 million Ofkm

and Ebitda margins of 5%.

2. Power Transmission Projects are

expected to contribute Rs. 2300

Mn. for FY15 and Rs. 5700 Mn

for FY16 with Ebitda Margins of

95%.

3. Turnkey Contract of BSNL:

These revenues and profits do

not include Rs. 15000 Mn.

turnkey order from BSNL as it is

not a recurring business.

Revenue 30923.4 25638.5 39281.0 47154.7

Revenue Growth(%) 17.95 -17.09 53.21 20.04

EBITDA 1957.10 2600.90 5394.25 9048.87

EBITDA Margins (%) 7.21 10.74 14.31 19.61

PAT (normalized) - for OF/OFC & Power Conductors 778.80 457.22 1167.87 1151.06

Normalized PAT Margins for OF/ Power Conductors(%) 2.52 1.88 3.25 2.85

Normalized PAT Earnings for Transmission Power Projects 0 -487.5 -4075 -913.2

Combined Normalized PAT 778.80 -30.28 -2907.13 237.86

Fully Diluted EPS (le) 1.98 -0.08 -7.38 0.60

Fully Diluted EPS Growth(%) -9.88 -103.89 -9490.89 NA

Capex (ex. Acquisition) - cash capex 14588.7 19361.9 15950 6500

Net CFO 2829.80 4080.25 3519.35 7083.59

Net Debt 21989.50 40425.10 60483.03 70333.69

Free Cash Flow -11758.90 -15281.65 -12430.65 583.59

Source; Karvy Research

11


June 23, 2014

ABB India

July 21, 2014


Financial Overview Net sales to start growing again after a year of de-growth

Sterlite Technologies is expected to report a significant

increase in net sales in FY15 on the back of higher volumes

in Optic Fibre and Cable space and also higher capacity

utilization in power conductors segment. Power

conductors’ business segment is also well supported by an

order book which has increased by close to 40% on year-

on-year basis. In FY16, Power conductors business is

expected to continue to benefit from export orders as well

as an imminent pick-up in orders from PGCIL.

Growth in EBITDA

Company has been incurring a huge capex for its

Transmission projects starting from FY13. This capex

infusion will start showing results in terms of higher

operating profits starting from FY15 and will scale up

significantly starting from FY16. Added to this, higher per

tonne Ebitda earnings in power conductors business

segment will also aid in Ebitda growth.

Revival in Profits

Company’s net income is expected to bottom out in FY15

and see a revival starting from FY16. This will reverse the

decline in profits seen for three consecutive years. Decline

in profits was because of fall in per tonne Ebitda margin

for Power Conductors business and high interest cost

being incurred for long term borrowings taken for Power

Transmission Projects (BOOM basis).

Improving profitability ratios

With the commissioning of transmission power projects,

company will be seeing a significant improvement in

profitability ratio. Return on Capital Employed is expected

to improve after bottoming out in FY14. This is due to

commissioning of transmission projects and sustenance of

margins in the existing businesses. Ebitda margins are

expected to go up significantly as the Power Transmission

Projects progressively come on stream.

Exhibit 17: Net Sales & Growth

Exhibit 18: EBITDA & Growth

Exhibit 19: Profit & Growth

Exhibit 20: RoCE & EBITDA

-40%

-20%

0%

20%

40%

60%

0

10000

20000

30000

40000

50000

FY12 FY13 FY14 FY15E FY16E

Net Sales (Rs.

Million) Growth (%) (RHS)

-50%

0%

50%

100%

150%

0

2000

4000

6000

8000

10000


Ebitda (Rs. Million)

Growth (%) (RHS)

-600%

-500%

-400%

-300%

-200%

-100%

0%

-3000

-2500

-2000

-1500

-1000

-500

0

500

1000

1500


Profit (Rs.

Million)

Growth (%)

0%

5%

10%

15%

20%

25%

0%

2%

4%

6%

8%

10%

12%


ROCE (%) (LHS)

EBITDA Margins (%)

12


June 23, 2014

ABB India

July 21, 2014


Financials - Consolidated

Exhibit 21: Income Statement

Data Source: Company, NSE, Karvy Research, Bloomberg

YE March (Rs. Mn.) FY12 FY13 FY14 FY15E FY16E

Revenues 26k217.50 30923.40 25638.50 39281.03 47154.71

Growth (%) 15.90 17.95 -17.09 53.21 20.04

EBITDA 1885.90 2228.50 2753.80 5619.25 9248.87

Growth (%) -28.98 18.17 23.57 104.05 64.59

Depreciation & Amortization 715.30 890.90 1333.10 2240.00 2511.00

EBIT 1021.00 1066.20 1267.80 3154.25 6537.87

Growth (%) -44.13 14.27 6.21 137.86 99.39

Interest 924.00 1062.80 1797.80 5679.54 5756.82

Other Income 271.40 152.90 225.00 200.00 315.00

EBT 368.40 156.30 -305.00 -2325.29 1096.05

Income Taxes 129.30 182.90 243.10 259.46 352.04

Extra-ordinary items 0.00 0.00 0.00 0.00 0.00

Reported net income 388.7 244.8 -395.2 -2359.76 944.00

Adjustments -7.7 -7.1 -40.1 -20.1 -20

Adjusted net income 396.4 251.9 -355.1 -2339.66 964.00

Growth (%) -71.93 -36.45 -240.97 -558.87 NA

Adj. EPS (Rs.) 1.01 0.64 -0.90 -5.94 2.44

Growth (%) -74.56 -36.49 -240.84 -558.29 NA

Exhibit 23: Cash Flow

YE March (Rs. Mn.) FY12 FY13 FY14E FY15E FY16E

PBT 518.00 427.70 -152.10 -2100.29 1296.05

Depreciation 715.3 890.9 1333.1 2240 2511

Interest Expense 924.00 1062.80 1797.80 5679.54 5756.82

Other adjustments 258.70 179.80 -405.35 -261.99 -57.70

Change in debtors 875.10 1248.30 -19.40 -3041.49 -2528.29

Change in inventories -792.30 -289.80 -185.30 -1018.55 -241.23

Change in loans & advances -61.60 72.70 853.80 554.00 551.20

Chg in other current assets -1.6 -106.1 580.3 -571.2 -304.4

Change in current liabilities 934.8 -274.9 525.1 2405.15 452.06

Change in provisions 26.3 -171.2 -4.6 -106.36 0.12

Change in working capital 980.70 479.00 1749.90 -1778.45 -2070.53

Direct taxes paid -163.50 -210.40 -243.10 -259.46 -352.04

Cash Flow from Operations 3233.20 2829.80 4080.25 3519.35 7083.59

Purchase of fixed assets -6534.20 -14588.70 -19361.90 -15950.00 -6500.00

Purchase of investments 1980.10 -362.20 -2111.00 199.40 915.00

Cash flow from investing -4554.10 -14950.90 -21472.90 -15750.60 -5585.00

Issue of equity 902.2 35.1 0.7 0.7 0.7

Proceeds from borrowings 2452.3 17834.7 15415.1 17740.29 7233.20

Interest Paid -636.00 -2284.90 -2850.00 -6379.54 -6656.82

Dividend Paid, including

taxes -219.30 -136.00 137.04 137.16 137.29

Cash Flow from Financing 2499.20 15448.90 12702.84 11498.61 714.37

Net Cash Generated 1178.30 3327.80 -4689.81 -732.65 2212.96

Cash at beginning 999.7 2162.4 5712.1 1020.2 287.55

Cash at end of year 2178.00 5490.20 1022.29 287.55 2500.51

Exhibit 22: Balance Sheet


Inventories 2720.70 3010.50 3195.80 4214.35 4455.58

Sundry debtors 6687.10 5761.00 5780.40 9181.89 11310.18

Loans & Advances 1854.4 1781.1 1957.5 1850.5 2210.5

Other Current Assets 215.10 586.70 2335.90 2145.70 1232.00

Cash & Cash Equivalents 2162.4 5712.1 1020.2 287.55 2500.6

Current Assets 13639.70 16851.40 14289.80 17680.04 21708.88

Net Fixed Assets 16852.3 32977.2 52740.2 70358.1 77151

Non Current Investments 0.00 0.00 0.00 0.00 0.00

Long term loans and

advances 1236.6 3077.2 2047 1600 688.8

Other Non Current Assets 1205.7 739.5 182 752.8 1065.7

Deferred tax Asset 0 21.7 9.8 55.3 169.8

Total Assets 32934.30 53667.00 69268.80 90446.2 100784.2

Short Term Borrowings 6643.70 8586.00 6589.70 8050.00 11404.15

Trade Payables 5383.50 6068.80 5943.90 8365.45 9397.71

Other Current Liabilities 3763.00 6956.60 8366.90 10810.45 7310.45

Short Term Provision 153.00 190.00 285.10 137.04 137.16

Current Liabilities 15943.2 21801.4 21185.6 27362.94 28249.48

Long-Term debt 3720.00 19115.60 34855.60 52720.59 61430.13

Other Long Term Liabilities 597.60 21.90 1016.40 1100.00 1219.80

Long Term Provisions 398.50 158.00 58.30 100.00 100.00

Deferred tax liability 735.10 849.80 844.10 350.00 164.50

Shareholder's Equity 11539.90 11720.30 11308.80 8812.70 9620.24

Total Liabilities 32934.30 53667.00 69268.80 90446.2 100784.2

Exhibit 24: Ratios


EBITDA margin (%) 7.19 7.21 10.74 14.31 19.61

EBIT margin (%) 3.89 3.45 4.94 8.03 13.86

Net Profit margin (%) 1.51 0.81 -1.39 -5.96 2.04

ROE (%) 3.68 2.19 -3.13 -23.74 10.70

ROCE (%) 9.82 6.10 4.12 6.44 10.40

Receivables (Days) 91.82 67.07 81.16 84.15 86.35

Inventory (Days) 37.36 35.05 44.87 38.62 34.02

Payables (Days) 107.69 104.43 136.29 135.60 149.62

EV/Sales (x) 0.89 1.00 1.93 2.13 1.98

EV/EBITDA (x) 12.36 13.92 17.99 14.92 10.13

P/E (x) 38.13 35.88 na na 24.23

P/BV (x) 1.32 0.78 0.82 2.71 2.48


13

June 23, 2014

ABB India

KARVY STOCK BROKING - RESEARCH DESK

Name Role Phone Number E-mail Id

JK Jain Head of Research 040 - 4467 7482 [email protected]

M Rajendra Prasad Research Analyst 040 - 4485 7902 [email protected]

Joyjit Sinha Research Analyst 040 - 4485 7906 [email protected]

De Arul Kaarthick Research Analyst 040 - 4485 7902 [email protected]

Kaushal Kumar Jaitliya Research Analyst 040 - 4467 7494 [email protected]

Prashant Kanuru Research Analyst 040 – 4485 7894 [email protected]

Sai Prabhakar Research Analyst 040 - 4467 7489 [email protected]

Varun Chakri Research Analyst 040 - 4485 7891 [email protected]

Deepak Ranjan Sahu Research Analyst 040 - 4485 7904 [email protected]

Vivek Agarwal Research Analyst 040 - 4485 7892 [email protected]

Connect & discuss more at

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Toll - Free : 1800 425 8283 E-mail Id : [email protected]

Disclosures Appendix

Analyst certification

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recommendation(s) or views contained in this research report.

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