Sterlite Technologies Ltd - Buy and hold for one year

Sterlite Technologies Limited is a play on industrial (telecom) and infrastructure (power transmission) capex in India. Solid demand is coming from other emerging markets, such as Latin America, Africa, Eastern Europe, and even Central Europe as well.

The company generated total revenues of Rs.2431 crores in FY 2009-10 as against Rs.2289 in FY 2008-09. PAT in FY10 was Rs. 246 crores as against Rs.90 crores in FY 09, a smart increase of about 173 per cent. During HY11 Sterlite Technologies generated total revenues of Rs. 1001 crores and PAT of Rs.113 crores. The corresponding figures pertaining to the previous half year was Rs.902 crores and Rs.100 crores respectively. Sales 5 year CARG stood at 31.98 per cent and 5 year PAT CARG was 43.84 per cent.

The following are three powerful triggers that will drive up revenues and marging in the years to come :

• Sterlite Technologies Limited, a leading global provider of transmission solutions for the power and telecom industries, and Jiangsu Tongguang Communication Co., Ltd. (TGCl), a leading provider of total transmission solutions for optical cable and IT industries, recently agreed to form a joint venture company –Jiangsu Sterlite & Tongguang Optical Fibers Co., Ltd. (“STFC”) in Haimen, Jiangsu Province, China to manufacture, market and distribute optical fiber used in the production of fiber optic cables.

• Sterlite Technologies Limited recently launched its new OPGW (Optical Ground Wire) solution. An optical ground wire (OPGW) is a type of cable that is used in the construction of electric power transmission and distribution lines. Such cables combine the functions of grounding and communications. The OPGW cable is run between the tops of high-voltage electricity pylons. The conductive part of the cable serves to bond adjacent towers to earth ground, and shields the high-voltage conductors from lightning strikes. The optical fibers within the cable can be used for high-speed transmission of data.

• Sterlite’s FTTH (Fiber-to-the-Home) solution comprises a comprehensive suite of passive equipments for central office locations, distribution and drop networks to connect SFUs (single-family units) and MDU (multi-dwelling units). Sterlite’s FTTH solution would be immediately available to telecom service providers, multi-service operators, system integrators and real estate developers in India, Middle East and Africa. The Company plans to soon launch this solution for all its global clients.

Telecom industry:

There is a strong momentum in optical fibre demand globally. Europe and Latin America have witnessed double-digit growth in 2010. The Indian government continues to focus on broadband penetration in the country and is planning to come up with a revised broadband policy with a new target very soon;

Power industry:

The XIth plan accounts for Rs190,000mn investments in the private segment, which is expected to rise substantially in the XII five-year plan. The company has seen strong demand from emerging markets such as Latin America, Africa and Eastern Europe.

Considering the past track record and the ongoing capex plans of GOI and private sector, the stock can give 50 to 75 per cent returns in about a years time. The scrip is currently available at a reasonably attractive valuation of PE 9.62. While the scrip peaked at Rs.124.20, it is being beaten down like most stocks and is trading at around Rs. 69/share. Buy on dips and you will get decent returns. Anil Agarwal does not promise investors the moon but he does ensure that his empire is run by smart folks who deliver the goods. And that’s what investors look forward to on a q-o-q and y-o-y basis.

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd