After sliding sequentially for three consecutive quarters, Sterlite Optical Technologies Ltd. (SOTL) was able to reverse the decline over third and fourth quarters of FY02. However, the bleeding has started again and this time it seems more profuse. While the company had reversed topline performance, operating margins were severely eroded, as optic fibre prices collapsed leading to declining profits.
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In our full year earnings report, we mentioned that optic fibre prices had slumped to $20/ fibre Km (FKm) from $80/ FKm during the peak. It seems, with unremunerative rates, the company is likely to have stalled further production. The draw down in inventory, which built up in 4QFY02, seems to indicate the same. Besides realisations, the possible halting of operations has led to the sharp drop in sales. With weakening fiber prices, it is likely that domestic telecom service providers, especially Bharat Sanchar Nigam Ltd. and Mahanagar Telephone Nigam Ltd. (MTNL), are delaying purchase of cable to benefit from lower prices.
Operating margins have been steadily declining. With demand evapourating resulting in excess industry capacity, optic fibre prices steadily weakened resulting in OPM declining from 60% levels in quarter ended June '00 to 15% levels in 2HFY02 and have now turned negative. Loss at the operating level suggests that it is better to stall operations till realisations turn remunerative.
In 2000, the telecom cable industry, globally, significantly expanded capacity, which coincided with a slowdown in the telecom services sector. Troubles for telecom service providers began with inflated acquisitions during the tech boom of 1999-2000, which was followed by aggressive bids for 3-G licenses. As a result, balance sheet strength of companies was significantly lowered. The slowdown in the tech sector led to low utilisation of large networks, which affected operating rates and revenues. These factors affected the debt servicing capacity of companies. Consequently, all network expansion plans were dropped resulting in the telecom cable industry holding excess capacity. Over the last quarter, internationally, telecom service providers experienced further challenges, as accounting practices of the industry came under the magnifying glass with WorldCom declaring fraudulent practices. Subsequently, a number of service providers are bordering on bankruptcy, which has adversely affected sentiment in telecom equipment industry. Once some semblance of stability is restored in the telecom services industry, one can expect optic fibre prices to witness improvement.
At Rs 74, the stock is trading at a three year low and is technically weak with no support. The international telecom services industry could witness improvement towards the end of 2002. Several players had expressed interest to build a pan-India network, but with fear of overcapacity and rapid changes in the telecom industry, players seem to have adopted a more cautious stand.
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