Optical Networking And Services Will Unlock Future Opportunities

Key Takeaways

• Focus on optical networking and strategic investments in technology may drive significant market share and revenue growth amidst rising data center demand.
  
• Project mix optimization and U.S. compliance enhance profitability and create opportunities in large-scale projects and federal infrastructure programs.
  
• Global demand contraction and competitive pressures could strain Sterlite Technologies' revenue and market share, with demerger execution adding potential risks to profitability.

Catalysts

Together with its subsidiaries manufactures and sells telecom products in India and internationally.

• The Optical Networking business is focusing on increasing its market share in optical fiber cables and enhancing connectivity attach rates, particularly in the data center and enterprise segments. This is anticipated to drive significant revenue growth as demand for data centers and enterprise solutions increases.
  
• The Global Services business aims to improve profitability by building capabilities and value-added services, optimizing the project mix, and focusing on large-scale projects, such as the ₹2,600 crore BharatNet Phase 3 Project in Jammu & Kashmir. This has the potential to improve net margins and reduce financial involvement in future quarters.
  
• STL Digital is focusing on scaling the business through strategic investments in new technology and domain capabilities while maintaining profitability. The robust deal flow and an open order book standing at ₹451 crores are expected to contribute to sustained earnings growth.
  
• The increased demand for fiber optic cables driven by data center capacity expansion and adoption of generative AI is projected to lead to a 22% annual growth in global data center capacity. This trend is likely to positively impact STL's revenue and market share in the medium to long term.
  
• Securing self-certification for Build America, Buy America-compliant optical products positions STL to benefit from U.S. federally funded broadband infrastructure projects under the BEAD program, which could yield significant revenue opportunities as demand increases.

Sterlite Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sterlite Technologies's revenue will grow by 25.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.3% today to 11.4% in 3 years time.
• Analysts expect earnings to reach ₹11.2 billion (and earnings per share of ₹22.95) by about May 2028, up from ₹-1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, up from -18.3x today. This future PE is lower than the current PE for the IN Communications industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 2.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.02%, as per the Simply Wall St company report.

Sterlite Technologies Future Earnings Per Share Growth

Risks

• Contraction in global OFC demand, particularly from reduced demand in China, could impact revenue forecasts for Sterlite Technologies, as lower demand is expected to affect the company's sales volume.
  
• Despite positive long-term demand projections, the immediate challenges of demand pressure in North America and Europe could strain earnings if not managed properly.
  
• Competitive pressures from emerging and existing market players both in India and globally could hinder Sterlite Technologies' ability to grow its market share and maintain its profit margins.
  
• The demerger of the Services business poses execution risks and could lead to structural disruptions, potentially affecting net margins during the transition period.
  
• Ongoing inventory normalization challenges, especially in the U.S., could delay revenue recovery and pressure profit margins if inventory levels do not stabilize quickly.

Valuation

• The analysts have a consensus price target of ₹132.5 for Sterlite Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹160.0, and the most bearish reporting a price target of just ₹105.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹98.0 billion, earnings will come to ₹11.2 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 17.0%.
  
• Given the current share price of ₹61.5, the analyst price target of ₹132.5 is 53.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.