Sterlite Tech: Maintain ‘buy’ with a TP of Rs 386

While there is clearly strong demand and a right-towin in the optical product and services business, its software and wireless businesses are sub-scale and might require investments.

The MD articulated Sterlite would be the technology arm of Vedanta group, similar to technology businesses established by other conglomerates such as Tata and Mahindra.
The MD articulated Sterlite would be the technology arm of Vedanta group, similar to technology businesses established by other conglomerates such as Tata and Mahindra.

Growth prospects lighting up: We interacted with the new MD of Sterlite Technologies (Sterlite), Ankit Agarwal. Key highlights: i) Demand for fibre products is robust with resources for on-ground execution being the key constraint. ii) The company has hired industry veterans for key leadership positions, and the focus is now on execution. iii) Sterlite had identified the shift to software-defined networks early on and has built capabilities to capitalise on it. iv) Confident of achieving Rs100 billion annualised revenue run rate and 0.5x net debt/equity by Q4FY23. We believe strong demand for fibre products and rising telecom capex, particularly for 5G, bode well for Sterlite’s product portfolio. Maintain ‘buy’ with a target price of Rs 386.

Sterlite to spearhead Vedanta group’s technology foray: We met the newly appointed MD of Sterlite, Ankit Agarwal, to understand his long-term vision for the company. The MD articulated Sterlite would be the technology arm of Vedanta group, similar to technology businesses established by other conglomerates such as Tata and Mahindra.

This is an important business for the group and there is adequate focus with an aspiration to grow it multi-fold over years. To this end, the company has hired industry veterans to lead each of the four verticals with a mission to scale them up. The company has focused on capability-led tuck-in acquisitions, which are easy to integrate, and that strategy would continue.

Telecom investment cycle driving buoyant demand: Sterlite is extremely optimistic in terms of product demand as it anticipates demand for fibre networks to stem not only from telecom operators, but also from private equity-backed asset owners, governments and hyperscalers. The company argues demand is so strong that resources availability to deploy the network is the key constraint to its growth.

Given this backdrop, Sterlite believes the prospects for a product like optical interconnect, which reduces the resources required for the rollout, are very strong. Optical interconnect has a potential to become as big as the OFC business, with higher profitability and lower capital requirement.

Outlook and valuation: Strong demand trend; maintain ‘buy’: We believe Strerlite’s ahead-of-time investments in building capacity for the core fibre business and expansion in related areas bode well at a time when telecom network investments are rising. While there is clearly strong demand and a right-towin in the optical product and services business, its software and wireless businesses are sub-scale and might require investments.

With 5G, FTTx and ORAN now becoming mainstream, the software and wireless businesses should get a growth tailwind. We would continue to monitor the company’s execution thereof. All in all, considering Sterlite’s strong growth prospects, high returns ratios and robust order book, we believe the stock’s valuation at 14.3x FY23E EPS is attractive. Maintain ‘buy/so’ with a TP of Rs386 (20x FY23E EPS).

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