The story is the same for telecom equipment manufacturers namely optic fibre cables. Sterlite Industries Ltd. demerged the telecom equipment division into Sterlite Optical Technologies Ltd. (SOTL) with effect from FY01 (July '00). Subsequently, SOTL changed its year end to March from June. Therefore, FY01 numbers declared by the company were for 9 months. We have annualised the numbers for better comparison.
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SOTL has registered a significant drop in sales in FY02, as compared to a strong 49% growth in the previous fiscal. The lower sales are due to weakness in the international optic fibre cable (OFC) market. Much of the company's exports have been wiped out, declining by an estimated 84%. To take advantage of falling optic fibre prices, BSNL also delayed orders during FY02. Having said that, domestic sales have grown by an estimated 5%, which could be due to private sector telecom service providers and incumbent players installing OFC networks. The shift towards OFC is likely to have affected the company's Jelly Filled Telecom cables (JFTC) business, which reported a 6% drop in volumes.
With a slump in the global telecom business, equipment manufacturers have taken it on the chin. Operating margins of the company are down sharply. Competitor, Aksh Optifibre Ltd., also reported similar slide in margins for 4QFY02. Operating profits have taken a double hit with slide in sales and OPM. Realisations came under pressure, as international optic fibre prices plummeted from highs of $80/ fibre km (FKm) to $20/ FKm. The higher volumes in OF and OFC were not able to mitigate the slide in sales from depressed realisations.
Global telecom service providers continue to be in the wilderness, as they attempt to correct excesses built during the indulgent ninties. Large network expansion, inflated acquisitions and high price bids for 3-G licenses has severely tested cash flow of companies. Consequently, demand from western markets -- largest consumers of OF & OFC -- are not likely to turnaround any time soon. However, India and China could offer some succour to equipment manufacturers. Optic fibre prices seem to have bottomed out, which could signal improvement in industry pricing power going forward. SOTL has completed a 4 mFKm optic fibre expansion and plans to add another 1 mFKm of capacity in the current fiscal. However, significant presence in the upstream business will expose the company to volaitlity in optic fibre prices (commodity). Consequently, over the next few years we could see the company expand downstream capacities.
At Rs 134, the scrip is trading on a multiple of 7.5x FY02 earnings. Telecom equipment manufacturers have been trading in a band of 5x-8x. Over the past few months these counters have moved in on the ceiling. The worst for the industry seems to be over.
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