Sterlite Technologies Rating: Buy; IDS buy to boost EPS from first year itself

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Published: October 1, 2019 1:09:25 AM

Sterlite has acquired an 80% stake at an EV of £12 mn, and it would acquire a 20% stake based on an earn-out model over the next few years.

The acquisition will be EPS-accretive from the first year itself. We believe the acquisition’s success hinges on institutionalisation of know-how and retention of top management.

Sterlite Technologies (Sterlite) has acquired an 80% stake in Impact Data Solutions (IDS) Group, a British data centre network infrastructure design and deployment specialist. The acquisition will help Sterlite build capabilities in the fast-growing data centre design space, which it can cross-sell. The acquisition also helps Sterlite expand addressable geographies for its suite of services to Europe. We believe the acquisition is in line with the company’s stated goal of expanding its addressable market to $75 bn by 2023.

Given its small scale, the acquisition would have limited impact on financials— about 1.5% each on revenue and Ebitda, and ~£15 mn overall consideration. Clearly, Sterlite is scaling up its services business as its product business is facing pricing headwind. However, a consistent performance of the services business is crucial for the stock’s re-rating. Maintain Buy with a TP of Rs 296.

Strategic move to expand addressable market

IDS Group is a niche solutions provider of design and deployment offerings for hyper-scale data centres for cloud, and co-location providers. IDS is a key partner to two of the top four global cloud companies for their data centre connectivity needs—with one relationship more than ten years old. This will help Sterlite cross-sell products and services. Sterlite has acquired an 80% stake at an EV of £12 mn, and it would acquire a 20% stake based on an earn-out model over the next few years.

Outlook: Value-accretive acquisition

The IDS acquisition indicates Sterlite’s focus on building capabilities in the services business. The acquisition will be EPS-accretive from the first year itself. We believe the acquisition’s success hinges on institutionalisation of know-how and retention of top management. We believe that the stock is available at an attractive valuation (10.1x FY20e EPS) considering its strong earnings growth (14% CAGR over FY19–21e) and high return ratios; maintain ‘BUY/SO’ with a TP of Rs 296.

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