However, at CMP, the stock trades at 13x/12x FY20E/FY21E EPS — which implies correction has been overdone.
Sterlite Tech reported a strong Ebitda number, though revenue growth disappointed as Q4FY19 was strong due to execution of the Navy order. Higher depreciation and interest cost led to a marginal beat (4%) on profit. As services contribution (45% of order book) remains elevated, we expect the Ebitda margin to remain restricted to 20%. We expect revenue CAGR of 17% to translate into only 9% earnings CAGR over FY19-21.
We cut Ebitda estimate by 6-8% as we expect moderation in services revenue once the Navy/MahaNet projects are executed; we also factor in risks of soft OF & OFC demand/pricing pressure. However, at CMP, the stock trades at 13x/12x FY20E/FY21E EPS — which implies correction has been overdone. Maintain ‘Buy’ with a TP of Rs 195 (14x FY21E EPS) against Rs 230.
As per the management, the pricing trend (due to glut in China) would have limited impact in near term as it has no exposure to spot market. However, if pricing pressure sustains, there would be challenges for long-term contracts also. We see the pressure to restrict growth outlook of products business in FY20-21.
Also, rising share of services in revenue would compress margin to 19-20% from low 20s earlier as the Ebitda margin of services business is in low tens (11-12%). Moreover, services would have higher working capital requirement. We believe the change in business mix would restrict any margin upside in near term.
We believe revenue trajectory would continue moderation through FY20, but recovery likely in FY21 as (i) volumes from 10×2 mn fkm OF capacity expansion becomes operational and (ii) additional volumes from optical fibre cable expansion to 33 mn km (by June 2020 in a phased manner) starts to kicks in. Delays in 5G related capex along with change in capex plan of Chinese telcos pose key risk for the stock as it may lead to pricing and volume pressure. We expect near term pressure on stock price due to moderation in revenue.