CMP: Rs 183 Target Price: Rs 230
Sterlite Technologies (STL) has announced further expansion of its optic fiber capacity from 12mn fkms to 20mn fkms with capex outlay of Rs2.5bn (capex at US$6.5/fkm). The new capacity to be functional by FY2011 would be a mix of brown field and green field expansion and would make STL 3rd largest (from 5th now) manufacturer of optic fiber in the world after Corning and Furukawa. The expansion would be partly funded by further issue of 7.3mn preferential warrants to the promoters (at ~Rs150/share) and the rest by mix of internal accruals and debt.
We highlight that STL is currently at the end of expansion of optic fiber capacity from 6mn fkms to 12mn fkms and OFC capacity from 2mn fkms to 6mn fkms. While it has announced the expansion of optic fiber capacity from 12mn to 20mn fkms, we believe that further expansion of OFC capacity beyond 6mn fkms also looks likely given that the bare optic cable has to be cabled before use and also lower capex involved.
The new capacity expansion plans together with partial equity funding of the project not only provides further visibility of earnings growth beyond FY11 but also keeps balance sheet leverage in check with D/E at 0.6x and 0.4x in FY10E and FY11E respectively. With tripling of optic fiber capacity over FY09-11E and increased contribution of high margin business, we estimate overall EBIDTA margins of the company to improve from 10.2% in FY09 to 11.7% in FY11E and 12.3% in FY12E respectively.
While we have increased our PAT estimates for FY10E and FY11E by 2.5% and 6.4% mainly due to lower interest expense on equity infusion, our EPS estimates are reduced by 2.2% and 3.6% due to 17.5% equity dilution over FY09-11E. Since the full benefit of new planned capacity would be available in FY12, we have introduced estimates for FY12 with EPS of Rs35.1. Our revised estimates imply Revenue, PAT and EPS CAGR of 17.3%, 46.1% and 37% respectively over FY09-12E. Considering better profitability, strong earnings CAGR, improved balance sheet health, absence of forex loss uncertainty and ROE's improving from 14% in FY09 to ~20% from FY10 onwards we believe that the stock warrants re-rating. We are revising our price target on the stock to Rs230 per share (from Rs126 earlier) based on ROIC/WACC multiple to the IC which is at an implied P/E of 8x FY11E FDEPS of Rs28.3. Reiterate BUY.
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