Sterlite Technologies Ltd. – Investometry

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About:

Sterlite Technologies is an industry-leading integrator of data networks. They design, build and manage data networks for our customers. They also partner with global telecom companies, cloud companies, citizen networks and large enterprises to deliver solutions for their fixed and wireless networks for current and future needs. STL has a strong global presence with next-gen optical preform, fibre and cable manufacturing facilities in India, Italy, China and Brazil, along with two software-development centres across India and one data centre design facility in the UK. STL has offices in 16 countries with more than 3100 employees and now the company serves over 100 countries around the globe.

Their portfolio includes optical interconnect products, virtualized access products, network software products and system integration service. They also provide solutions such as optical connectivity solutions, FTTx access network solutions, network modernization solutions, etc.

Key Management:

  1. Dr. Anand Agarwal- Group CEO and Whole Time Director
  2. Mr. Anupam Jindal- Group chief financial officer
  3. Mr. Anil Agarwal- Non-executive chairman
  4. Mr. Pravin Agarwal- Vice-chairman and Whole-time Director

Remuneration:

Let’s have a look on the salaries of KMP, Dr. Anand Agarwal and Mr. Pravin Agarwal of random years.

Remuneration (in Rs Lakhs) FY09 FY12 FY15 FY19
Dr. Anand Agarwal 149.5 213.8 318 1,240
Mr. Pravin Agarwal 408.6 647.7 779 1,434

Looking just at the numbers alone, salaries look too high but if you look at the net profits it won’t seem a very high number. According to the compliances, salaries of KMP should not exceed 11% of the net profit and the company has followed this law.

More About Business:

Earlier the company’s business was divided into 3 parts which are:

  1. Power conductors
  2. Optical fibre and communication cables
  3. Telecom solutions.

In June 2009, the capacity of OF was 6 Million fkm (annual) which went under expansion to 12 Million fkm. The plan was to expand its capacity to 20 Million fkm with a CAPEX of INR 250 Cr. By this expansion STL would be among the top 3 global players. The market share of OF and cables in India was 45% and was exporting to 55 countries.

The capacity of power conductors in 2009 stood at 115,000-160,000 metric tonnes and they aimed to further expand to 200,000 metric tons by FY11. 25% of India’s national grid runs on Sterlite conductors as per data of 2009.

At that time the international revenue was around 23% of net revenue. Major exports include China, Africa, and the Middle East. 46% of the global fiber was consumed in China being the largest market for optical fiber. Global fiber consumption in 2009 was 183 Million fkm and China consumption was 85 Million fkm. The demand for fiber increased drastically between 2007-2009 because the wireless subscribers skyrocketed from 31 Million to 150 Million.

The domestic revenue from power contributed around 63% whereas 37% was from the telecom sector in 2009. If we look at the expenses, majority of it comes under raw materials which stands at 78% of the total expense. Only 3% of the expense comes under personal expense which includes salaries, bonuses, travel, etc.

Major raw materials used by the company are:

Name Percentage
Aluminium/Alloy 63%
Copper rods 3%
Galvanised steel wire 7.3%

In FY11, the company got a little affected by natural disasters (Tsunami and earthquake) in Japan. This year the company also did a joint venture with Jiangsu Sterlite Tongguang Fiber Company Ltd in China for optical fiber. STL did a strategic relationship with CTC cable Corporation, USA for manufacturing ACCC Power conductors for the Indian market. This year they also introduced and increased their portfolio by new products and solutions like bend free fiber, OPGW cables, and fiber connectivity solutions. This year china accounts for 40% of global fiber demand.

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In FY12, STL was physically present in 10 countries and client footprint in 75 countries. They recieved a major project to establish world class connectivity to 120 universities for promotion of higher education in India. 30 universtities in FY12 and 90 universities by FY 14 and also manage the network for 5 years.

This year the exports grew to 29.4% of the net revenue. The company’s manufacturing capacities was concentrated in India and China only and planned to diversify.

In FY12, company introduced new products under their conductor segment which are HTLS conductor and also G657 optical fiber under their OF segment.

There were 3 transmission projects on Build, operate, own and maintain (BOOM) which are 1) ENICL 2) ITCL 3) BDTCL. Size of these projects was 4,000 Cr which started generating revenue from FY15.

In F15, the demerger of telecom and power business took place. The power business got delisted and the company became a pure telecom company. The demerger was effective from April 1, 2015. The demerger was mainly because they wanted their entire focus on the telecom business. The demand from the telecom sector was continuously increasing. This year 5g was officially launched in India. Airtel launched LTE in few cities and BSNL will launch in the second half of FY15 plus 5g deployment was then seriously taken as driverless and shared cars need 5g and even there was an increase in the need to increase the broadband of networks.

In FY16, they acquired Elitecore Technologies, a global telecom software product company. You will see a drop in the revenue of the company in this period due to the demerger. The manufacturing capacity of OF is in India, China, and Brazil. Telecom business has 3 verticals:

  1. Products which includes OF and cables
  2. Services which includes System and network integration
  3. Software which include OSS and BSS domain.

Till FY16, the capacity of OF stood at 22 million fkm and capacity of cable stood at 15 Million fkm.

The concern about the debt before and after demerger was cleared as the management said that INR 4208 Cr of debt has been moved to power business and by this STL became debt light company (not debt-free). The business is capital intensive which means that the company has to take debt in order to keep its business running. After the demerger, the debt of the telecom business was approx INR 1000 Cr. Debt increased from 647 Cr and the reason for that is expansion funding, acquisition of Elitecore and working capital.

In the FY17, the sales crossed over 100 countries and exports grew around 75%. The company has broadband networks in the world’s toughest terrains including Iceland and Amazonian rainforest. From this year company works with 8 of the top 10 global telecom operators on fiber for data backhaul. 40% of all data in India travel on the STL’s Fiber and is the market leader in India and also achieved 30 million fkm fiber capacity this year and announced to expand it’s capacity to 50 million fkm.

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Demonetization by Modi was positive for STL as it boosted digitalisation.

In June 2019, expansion from 30 million fkm to 50 million fkm of tower in Aurangabad was on track in which the company invested 1200 Cr.

In FY18, Sterlite setted up sterlite technology academy which was training 10,000 semi skilled workers of OF cable each year.

In FY19, STL recieved largest order book of 10,516 Cr. and acquired one company in Italy in order to make new customers and increase their product portfolio in Europe. Also partnered with 2 of top 5 global cloud companies for hyperscale data networks.

Sterlite started project Varun with Indian navy, BSNL, DoT and 42 other partners. In FY19, 90% of the revenue came from India, Europe and Latin America. Less than 5% of revenue came from China.

Successfully acquired Metallurgica Bresciana s.p.a, Italy by taking debt in FY19 and also used that debt in expanding capacities. Metallurgica manufactures special precision OFC and specialized copper cables.

In FY20, they acquired IDS, UK for the cloud customer segment and also invested in ASOCS for which is a virtual radio solution company. Not to forget the collaboration with VMWARE for 5g access solutions for large enterprises and IIT Madras for the advancement of 5g in India. Now the top 20 customers account for more than 70% of their revenues and India accounts for 66% of the revenue followed by Europe which accounts for 22%.

List of on going projects which I took from the presentation.

One of the biggest product launches that they had this year was ‘Stellar’, the industry’s first universal fiber. This leading-edge innovation from STL’s optical connectivity solutions guarantees best-in-class data transfer, negligible data loss even with high-fiber bends, and compatibility with all fibers in use today. They also launched the second-generation of our hyper-scale network modernization solutions called ‘Lead 360 Degrees 2.0′.

Looking at the inventory is one of the important things while analyzing such companies. If we compare inventory of FY19 and FY18 we get to see that it has increased from 337.8 Cr to 589.6 Cr. Let’s dig a little bit to find out the amount of raw materials and finished goods.

In Cr. FY19 FY18
Raw Material 209.62 91.24
Finished Goods 219.3 55.6

From the above table we can see that inventory has increased with an increase in both raw materials and finished goods. I don’t see increase in finished goods as a good sign as it tells us that company is not able to sell their products therefore increasing the inventory. Increase in raw material is not a major concern as I see because they can use them anytime to manufacture more products.

The share price started to fall in 2019 due to 2 reasons which I think are low profitability and pledging of shares. Pledging of shares by promoter indicates that they don’t have faith in the company’s future performance and if they have then it indicates that company is not able to raise funds so they are pledging shares to gain some capital which is very risky way to do it as they might lose shares if they don’t repay.

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Twin star overseas holds more than 50% of the stake and if you look at the holding of management, it does not exceed 1-2%. Twin star overseas started pledging their shares from Sept 2017 and continuously increased their pledging to 100% by Sept 2018. The reason behind it was they needed some capital for an external reason which I guess isn’t disclosed. Check out the image given below.

Investors considered that the company is not able to raise cash to operate and management is losing faith due to decreasing demand for fiber. The share price fell heavily. But if we look at the management’s holding, none of the shares were pledged till now. Dr. Anand Agarwal, CEO said that there was a perspective problem among investors. The way I see, management is very bullish of the future demand which will be driven by 5G. Of course, the profits were coming down as 2019 and 2020 are the pause period for transition from 4g to 5g. The demand will again increase in 2021 driving the revenue and profits of the company up.

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Being an innovative company, they filed many patents. Let’s look at how the number of patents increased until now.

Year FY11 FY12 FY15 FY16 FY17 FY18 FY19 FY20
No. of patents 30 44 50 123 146 189 271 358

Financials:

Let’s view a bigger picture of Revenue and PAT of the company from FY09

In Cr. FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Revenue from operation 2,389.70 2,495.50 2,198.21 2,566.95 3,024.09 2,500.98 3,027.09 2,241.34 2,550.96 3,137.49 4,996.23 5,154.40
Profit after tax 90.64 245.92 141.35 38.87 24.48 -39.52 -3.58 165.35 220.54 365.05 577.79 424.44
Consolidated data

As you can see that post demerger Revenue dropped from 3027 Cr to 2241 Cr in FY 16. After that, the Revenue is generated from the telecom segment only not from the power segment. Looking from the financial point of view, profit after tax has been increased after the demerger. Before that company was reporting a loss for 2 years and a low margin before that. Since FY16, the company’s revenue was increasing at 25% CAGR and PAT grew at 33% CAGR which is quite good. PAT was consistently increasing since FY16 but it reduced in FY20 due to lower demand for fiber which decreased the price of fiber and also due to the COVID crisis. But just looking at the revenue and profits is not just enough. We must also check the cash flow from operating activities as well. Let’s look at the numbers from FY16.

In Cr. FY16 FY17 FY18 FY19 FY20
Cash flow from operating activities 214.67 488.5 731.6 631 592
Cash and Cash Equivalents 60.48 129.81 120.76 149 153.5
Consolidated data

It is important to check the cash flow from operations as it shows how much money is coming from the business at a particular period of time. Here we can see that it is growing at 40% CAGR but decreasing since FY19. The actual reason behind this is that FY19 and FY20 are at a pause period as the transition is happening from 4G to 5G. Management is expecting that the demand will boost up once the operations start and implementation of 5G gets started. In the present situation our telecom companies like Bharti Airtel and Voda-idea are in huge debt plus the AGR burden so I think the 5g will take more years to come in India and even the management of STL said that the cycle of 5G will take 8-10 years.

Let’s look at the revenue break up of the segments and how the company diversified.

FY16
FY20

Here is the Balance sheet on Consolidated basis.

BALANCE SHEET OF STERLITE TECHNOLOGIES (in Rs. Cr.) MAR 20 MAR 19 MAR 18 MAR 17 MAR 16
  12 mths 12 mths 12 mths 12 mths 12 mths
Equity Share Capital 80.79 80.51 80.20 79.66 79.04
TOTAL SHARE CAPITAL 80.79 80.51 80.20 79.66 79.04
Reserves and Surplus 1,838.99 1,638.79 1,095.12 800.41 675.60
TOTAL RESERVES AND SURPLUS 1,838.99 1,638.79 1,095.12 800.41 675.60
TOTAL SHAREHOLDERS FUNDS 1,919.78 1,719.30 1,175.32 880.07 754.64
Minority Interest 103.18 95.40 81.95 45.20 31.21
NON-CURRENT LIABILITIES
Long Term Borrowings 969.99 934.84 630.54 427.07 467.84
Deferred Tax Liabilities [Net] 71.72 74.39 22.16 0.00 38.16
Other Long Term Liabilities 165.02 47.23 72.68 126.60 115.27
Long Term Provisions 0.89 1.01 25.12 22.90 14.57
TOTAL NON-CURRENT LIABILITIES 1,207.62 1,057.47 750.50 576.57 635.84
CURRENT LIABILITIES
Short Term Borrowings 1,230.57 982.69 462.74 591.00 354.20
Trade Payables 1,430.30 1,912.75 656.18 448.64 372.21
Other Current Liabilities 1,307.53 1,233.21 556.98 355.71 466.03
Short Term Provisions 10.02 11.46 28.07 13.76 10.39
TOTAL CURRENT LIABILITIES 3,978.42 4,140.11 1,703.97 1,409.11 1,202.83
TOTAL CAPITAL AND LIABILITIES 7,209.00 7,012.28 3,711.74 2,910.95 2,624.52
ASSETS
Tangible Assets 3,070.58 2,317.46 1,143.98 1,192.09 993.97
Intangible Assets 0.00 43.06 16.17 17.05 18.97
Capital Work-In-Progress 0.00 419.44 357.02 65.91 172.32
FIXED ASSETS 3,070.58 2,779.96 1,517.17 1,275.05 1,185.26
Non-Current Investments 100.28 35.30 19.60 14.12 7.24
Deferred Tax Assets [Net] 14.47 0.00 0.00 3.41 10.06
Long Term Loans And Advances 36.59 42.69 35.01 7.08 0.00
Other Non-Current Assets 97.00 68.90 109.83 34.93 53.06
TOTAL NON-CURRENT ASSETS 3,440.71 3,034.20 1,755.54 1,438.16 1,388.83
Current Investments 233.04 100.17 155.00 35.01 0.00
Inventories 451.81 589.65 337.85 333.49 205.31
Trade Receivables 1,563.12 1,354.86 867.19 686.69 708.40
Cash And Cash Equivalents 244.54 233.68 138.48 137.41 77.72
Short Term Loans And Advances 0.00 0.00 0.00 0.00 0.00
OtherCurrentAssets 1,275.78 1,699.72 457.68 280.19 244.26
TOTAL CURRENT ASSETS 3,768.29 3,978.08 1,956.20 1,472.79 1,235.69
TOTAL ASSETS 7,209.00 7,012.28 3,711.74 2,910.95 2,624.52
Contingent Liabilities 0.00 1,699.74 0.00 0.00 0.00
Bonus Equity Share Capital 0.00 39.37 39.37 39.37 39.37

Dividend Table:

Date 25-08-2016 29-06-2017 21-06-2018 18-07-2019
Dividend (%) 50 37.5 100 175
Dividend per share 1 0.75 2 3.5

Conclusion:

Looking at the PE ratio and comparing it to the industry PE, there ain’t a major difference. The stock is right now trading at twice the book value. The company is also generating consistent cash from the business despite lower demand for fiber which was balanced by their other verticals. The company has a capital intensive business, so you will see the debt going higher. Debt is expected to increase in 2021 as the model itself says that they will need debt for working capital and expansion. If you don’t like leveraged business models then this company is not for you. There is always a risk associated with high debt but as we see in the past that company is comfortable taking debt and can handle nicely. Valuation of the company is fair neither undervalued nor overvalued and I think with an increase in fiber demand in upcoming years, the valuation of the company might increase. From the past we can observe that the company is focused on expanding capacities, entering new markets, and innovating new products and services which adds more value to the company. For a long term perspective, I feel the company is good to invest in. The price is possible to move down but is more likely to increase from 2021 with the deployment of 5g services across the globe.

Thank you for reading this article on Sterlite technologies. I hope it was helpful. If you liked the article then share it with your friends and family and don’t forget to subscribe!



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Meet Mehta
21 | Small & Mid Cap Investor | CFA L1 candidate | Blogger | Reader | Engineer | Life-Long Learner
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