Despite a strong data volume growth, network expansion by telcos was limited as the buffer capacity catering to increased demand and lockdown is creating logistical issues in network upgradation.
Sterlite Technologies’ Q4FY20 revenue dipped 35% y-o-y (Street estimate: 30% decline) as lockdown hit the supply chain. Despite a strong data volume growth, network expansion by telcos was limited as the buffer capacity catering to increased demand and lockdown is creating logistical issues in network upgradation. Consequently, we expect latent demand in H2FY21/FY22 and current 60-65% business run-rate to impact FY21 revenue. We also expect the government to hold back spending on broadband infrastructure projects, which will dent the services business. Considering these, we are revising down FY21/22E revenue and PAT 11.9%/9.1% and 19.0%/9.4%, respectively. That said, given Sterlite’s robust returns profile and attractive valuation (7.5x FY22E EPS), retain ‘buy’ with TP of `126 as we rollover to Q4FY22E.
Sterlite’s revenue declined 35% y-o-y, with Rs 170 crore (14.7% of revenue) impact attributed to lockdown. Revenue dip and higher services business contribution (~60% of revenue) resulted in 150bps q-o-q plunge in Ebitda margin (18.6%). The company is taking steps to reduce fixed costs, interest burden and is deferring capex to maintain profitability. It has `10,000 crore order book, of which Rs 4,000 crore is to be executed in FY21, which will ensure revenue growth.
We believe current debt level (1.8x TTM Ebitda) is manageable considering the company has managed to generate Rs 100 crore FCF in FY20 despite Rs 420 crore capex for capacity expansion. We do expect higher working capital investments in the current situation, but with Rs 480 crore cash on books there will be no stress to fund them. We do believe the current revenue weakness is purely due to logistical challenges and there is strong demand for Sterlite’s products.