Riding the Telecommunications Capital Spending Cycle We recently spoke with Dr Anand Agarwal, Group CEO, Sterlite Technologies (Sterlite). Highlights: 1) Sterlite is on the way to becoming a provider of converged network solutions from the player in plain vanilla telecom products. 2) No need for additional acquisitions or additional capacity than previously announced to achieve annualized revenue rate of Rs 100 billion by Q4FY23. 3) OF / OFC demand is robust as telecom companies invest in increasing capacity. We believe that prudent investments have helped Sterlite to expand into adjacent areas and the company is in an ideal position, strengthened by its enhanced capabilities and accelerated network investments. Hold “BUY” with a target price of Rs 386.
Expanding Addressable Market: Entry into systems integration, network software, virtualized access, among others, expanded Sterlite’s addressable market to $ 40 billion, from just $ 7.5 billion in as a provider of optical solutions. The company has developed capabilities organically as well as through acquisitions. Sterlite leverages its optical network capabilities as a hook to capture a higher portfolio share of telecommunications capital expenditure. As technology also evolves with network virtualization, telecom operators are turning to converged telecom network providers that have both software and hardware capabilities, which is Sterlite’s strong suit.
The American / European markets offer significant growth opportunities: Sterlite has systematically extended its service portfolio from government services to Indian private service providers. The company has already won a contract to deploy a fiber optic network in the UK. It is also looking to expand its offerings by providing more value-added services by leveraging the capabilities of ORAN software. Likewise, after having developed a strong presence on the European market, Sterlite is now extending its OFC capacity to the United States; this market is important with the presence of regional network providers, hyperscalers, apart from the main telecom operators. The company has hired the resources and will strengthen OFC’s capacity to capture this market
Outlook and valuation: Strong trend in demand; maintain “BUY”: we believe that covid has accelerated the digital switchover, which accelerates investments in networks. This is reflected in the network creation cycle driven by 5G, FTTx and rural connectivity programs. The burden of investing in digital infrastructure is shared by cloud companies, private equity firms, enterprises and citizen networks, with the exception of telecommunications companies. In addition, new technologies such as 5G, FTTx and ORAN are becoming widespread, effectively bringing fiber closer to consumers.
This investment cycle bodes well for Sterlite’s revenue growth as the company has developed various capabilities to deliver end-to-end solutions. Given the strong growth prospects, high yield ratios and strong order book, we believe valuations at 12.9x EPS FY23E are attractive. We maintain ‘BUY / SO’ with a TP of Rs 386 (20x Q3FY23E EPS).