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Sterlite Opt: Victim of tech meltdown?

Feb 22, 2001

Sterlite Optical, the erstwhile telecom business of Sterlite Industries, is seeing new 52-week lows as technology continues to get routed in the global market place. The recent 3-generation telephony auctions for circles in Western Europe and US attracted astronomical valuations from global majors. In the fear of losing out to competition these companies made huge bids for the circles. Consequently, the strength of their balance sheet was adversely affected as they raised debt to fund their shopping spree. This could be one of the reasons for markets punishing these stocks. Global Telcos too are seeing new 52-week lows.

The telco majors face a cash crunch, as balance sheets are highly leveraged and equity markets are giving a thumbs down to new capital raising. To fund the acquisitions the companies planned to list their cellular businesses. This plan however, has come a cropper with the recent listing of Orange. Firstly, France Telecom lowered the issue price of Orange (acknowledging lower valuations) to ensure a favourable response. Despite this, the stock opened even lower on listing. With markets not offering favourable valuations this plan is seeing a re-thinking.

With new money not available, the markets anticipate these majors to cut back on their telecom network expansion to pay for the 3-G licenses. The fear of a cut back on telecom infrastructure spend seems to have affected the valuations of telecom infrastructure companies.

Corning is one of the global majors in the telecom equipment business including optic fibre. It also has an information display (LCDs) and advanced materials division (ceramics). The share price has come off in the last six months and is at its 52-week low.

    Sterlite Optical* Corning Inc.
CMP Rs 700.9 1,409.0
Mkt Cap Rs bn 39.2 1,286.1
Turnover Rs bn 10.6 338.2
EPS Rs 52.4 21.9
P/E x 13.4 64.5
Mkt Cap / Turnover x 3.7 3.8
OPM   33.4% 9.5%
NPM   27.8% 3.9%

The valuations are similar to its Indian peer, Sterlite Optical, on the basis of m-cap to sales. However, there is a wide disparity in the P/E ratios of the two companies. Despite the decline in share price, Corning is trading at a valuation of 5x that of Sterlite Optical on earnings multiple.

For FY01, Sterlite Optical Ltd is expected to come in with 100% growth in bottomline. The company also accrues a large percentage of its sales from the domestic market. This could act as a buffer in the case of international telecom spending slowing down.

  YoY growth QoQ growth
  1QFY01 2QFY01 1HFY01 2QFY00 2QFY01
Net sales 56.0% 40.0% 46.0% 74.0% 58.0%
Operating profits (EBITDA) 85.0% 78.0% 81.0% 34.0% 28.0%
OPM 19.0% 27.0% 24.0% -23.0% -19.0%
PAT 103.0% 101.0% 102.0% 58.0% 57.0%
PAT margin 30.0% 43.0% 38.0% -10.0% -1.0%
EPS 40.9 64.0 52.4    
P/E* 24.1 13.7 16.8    
* annualised          

The company has broken its earlier lower support level (approx. Rs 725) and could head towards its next support level (approx. Rs 625). Breaking this could see the stock dip lower. At Rs 654 the company trades on an earnings multiple of 12.4x 1HFY01 annualised earnings.

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