Maintain ‘BUY’ with Rs 386 target price.
Riding the telecom capex cycle We recently interacted with Dr. Anand Agarwal, Group CEO, Sterlite Technologies (Sterlite). Key highlights: 1) Sterlite is on track to become a converged network solutions provider from plain vanilla telecom product player. 2) No need for additional acquisitions or capacity addition than already announced to meet the Rs 100bn annualised revenue run rate by Q4FY23. 3) OF/OFC demand is robust as telecom companies are investing in increasing capacities. We believe prudent investments have helped Sterlite expand in adjacent areas and the company is in a sweet spot bolstered by its strengthened capabilities and accelerated network investments. Maintain ‘BUY’ with Rs 386 target price.
Expanding addressable market: Entry in System Integration, Network Software, Virtualized Access, among others, has expanded Sterlite’s addressable market to a whopping $40bn from mere $7.5bn market as an optical solutions provider. The company has built capabilities organically as well as via acquisitions. Sterlite is leveraging its optical network capabilities as a hook to capture higher wallet share of the telecom capex. As the technology is also changing with virtualisation of the network, telecom operators are looking at converged telecom network providers who have capabilities in software as well as hardware—Sterlite’s forte.
US/Europe markets offer significant growth opportunities: Sterlite has systematically expanded its services portfolio from government services to Indian private service providers. The company has already bagged contract to roll out fiber network in UK. It is also looking to expand its offerings by providing more value-added services leveraging ORAN software capabilities. Similarly, after developing strong presence in the European market, Sterlite is now expanding OFC capacity in the US; this market is large with presence of regional network providers, hyperscalers, apart from the top telecom operators. The company has hired the resources and will be building OFC capacity to capture this market
Outlook and valuations: Strong demand trend; maintain ‘BUY’: We believe covid has accelerated the shift to digital, which is accelerating network investments. This is reflected in network creation cycle driven by 5G, FTTx and rural connectivity programmes. The burden of investments in digital infrastructure is shared by cloud companies, PE firms, enterprises and citizen networks, apart from telecom companies. Furthermore, new technologies like 5G, FTTx and ORAN are now becoming mainstream, which effectively brings fiber closer to consumers.
This capex cycle bodes well for Sterlite’s revenue growth as the company has built various capabilities to provide end-to-end solutions. Considering strong growth prospects, high return ratios and robust order book, we believe valuations at 12.9x FY23E EPS are attractive. We maintain ‘BUY/SO’ with TP of Rs 386 (20x Q3FY23E EPS).