Sterlite Industries (India) Ltd. has recently demerged the telecom and optic fibre business to a newly formed company Sterlite Optical Technologies Ltd. (SOTL). The telecom equipment company recently declared its 1HFY01 results reporting a 102% growth in bottomline to Rs 1,466 m.
Sterlite Optical is present in jelly filled telecom cables (JFTC), optic fibre (OF) and optic fibre cables (OFC). The company currently operates a 3 m fibre kilometer (FKm) OF plant. It now plans to augment the capacity to 13 m FKm by setting up a 10 m FKm greenfield project in a tax free zone. The capital expenditure envisaged for the project is to the tune off Rs 12 - Rs 14 bn ($250-$300 m) over a period of four years.
In light of the strong cash flows, the company anticipates that it will be able to meet 75% of the project cost through internal accruals. The management is also thinking on the lines of a U.S listing through the American Depository Receipts (ADR) route. The listing will help position the company as a global player and also facilitate in bridging the gap in finances.
As per initial reports it seems that the expansion is planned over two phases. In phase - I the company is expected to bring onstream 5 m FKm by 2002. The entire project is scheduled to be completed by 2003.
Sterlite Optical is aggressively targeting the international markets, especially the U.S, which contributes 80% - 90% of its export revenues. With focus on the international scenario the company aims at increasing its market share from 1% to 5%. The meteoric rise in export sales is a vindication of the company's product quality and marketing success. Despite the strong exports the geographic sales mix is still skewed towards domestic markets. This could be due to the large purchases of JFTC by the Department of Telecom (DoT) and Mahanagar Telephone Nigam (MTNL).
The global demand for OF is estimated to be 240 m FKm and is anticipated to grow at a compound rate (CAGR) of 30%. The domestic demand, meanwhile, is expected to report more than double the growth rates registered in the international markets. Consequently, several companies have entered the OFC business, which include Birla Ericsson, Aksh, Vindhiya Telelinks and Uniflex. In a recent ruling the Cegat (Customs, excise and gold appellate tribunal) overruled the anti-dumping duty imposed by the Commerce Ministry on OF imported from South Korea. This could adversely affect domestic prices of the commodity.
With buoyant global demand for OF several international majors have announced their intentions of ramping up capacity. The commissioning of these projects could lead to an oversupply position resulting in depressed optic fibre prices.
Future growth of the company will depend on its ability to execute the project on time and OF prices remaining favourable. Over the past 18 months OF prices have moved up significantly from $25 / FKm to $ 65 / FKm. At Rs 816 the company is trading at 12.7x 2QFY01 annualised results.