Sterlite flirts with demerger…once again - Views on News from Equitymaster

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Sterlite flirts with demerger…once again

Mar 23, 2000

Sterlite Industries Limited (SIL) has once again decided to reconsider the proposal to split its businesses into two companies – telecommunications and non-ferrous metals. Sterlite Industries (FY99 Sales Rs 11.1 bn) is into the manufacture of copper (67% of turnover) and the telecommunication cables. The company manufactures jelly filled cables (22% of turnover), optical fiber telecom cables (3%), optical fiber (2%) and aluminium (6%).

Splitting the two businesses is likely to bring a semblance of focus in the company’s operations. However, it must be mentioned that the company’s copper venture was termed as a move to vertically integrate its operations as the copper could be used in its cable manufacturing business. Therefore initially a hive off could lead to a rise in costs of inputs for the telecom operations. Nonetheless the move is desirable.

This is because the company could then invite global leaders for alliances in its two areas of operations. This would enable it to effectively compete in the domestic markets as competition picks up. Moreover, in view of the cyclical nature of its non-ferrous metals business the demerger would benefit the telecom business, which is likely to witness an extended period of growth in view of the large planned spending in the sector. Fs

However it must be cautioned that the issue of splitting its has been in the air for quite sometime and it is uncertain whether this time the company will go ahead with the plan.

Market View:
The stock has been rated as a 'BUY' mainly on account of the improving demand scenario emerging after large orders, totaling 33.3 m cable km, already having been placed with cable companies.

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