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Sterlite – Firing on all cylinders

Sep 14, 2000

Sterlite Industries Ltd. (SIL) has set a unique example by announcing the de-merger of its telecom business. All its four lines of business - aluminium, copper, jelly filled telecom cables (JFTC) and optic fibre cables (OFC) are booming. The company is a market leader in the latter three of its four business segments. The telecom business of Sterlite currently contributes around 23% of total sales. Sterlite along with its subsidiary Sterlite Telecom are the largest private sector players in the telecom business. It is a unique player in India’s telecom cable business, with a clear market leadership and fully integrated operation. In the past 5 years its telecom business has grown at a CAGR of 34% and profits at CAGR of 30%. The company expects to grow at the same rate in future with effective cost control and technology upgradation.

As a part of business restructuring and to enhance its focus on each line of business Sterlite has decided to de-merge its telecom business into a separate company. It has also decided to merge all the non-ferrous mining and metal business of both Sterlite and Malco together.

Consequently, all existing shareholders of SIL will receive one fully paid up equity share of face value Rs 5 in the new telecom company for every one fully paid up equity share of face value Rs.10 held by them in SIL. The face value of equity share of SIL after de-merger of the telecom business will be reduced to Rs 5 per share. The de-merger will lead to value unlocking for the high growth telecom business. It has planned to list its telecom company Sterlite Optical Technologies Ltd. (SOT) by the end of October.

In the telecom business, the company aims to leverage its expertise in the fibre business into other areas such as telecom turnkey solutions, optical fibre components, network bandwidth, and other related business. SOT has made a strategy to form multiple alliances with several telecom majors like Alcatel of France and Telstra of Australia for implementing telecom related turnkey projects across the country. SOT aims to benchmark against global majors like Corning and Lucent.

In optical components, the company plans to derive around 10% of its total revenues from Photonics equipment. This product transforms information via light resulting in higher data transmission capacity, less disturbances and low bandwidth cost. In India the technology is not yet introduced by any other player. The Indian market still uses the electronic medium for data transmission. Globally Photonics market is growing at the rate of 15% per annum with US being the main driver. The untapped Photonics market with a huge growth potential indicates good signal for SOT.

Sterlite manufactures both the key cables that the telecom industry needs, i.e. JFTC and OFC. Both the businesses are witnessing phenomenal growth rates of around 25% and 100% respectively. With the huge growth being witnessed by the telecom industry this growth is expected to accelerate in time to come. Also, both these businesses are insulated from imports, as cables are too bulky to transport.

The company is an integrated player producing copper that is an essential raw material for manufacture of cables. It also manufactures aluminium foils that are required for wrapping cables. For OFCs, Sterlite has integrated backwards into optical fibre, which makes the core of OFC. The optic fibre technology is a closed-door technology with only 5 players in it- Corning, Alcatel, Lucent, Sumitomo and Pirelli. Sterlite has received this technology from Nokia. The company’s R&D expenditure is 12% of optic fibre revenues. The optic fibre capacity is fully booked till beginning 2001. The company is planning to increase its capacity from 1.5 m km to 3 m km by 2001 and to 10 m km by 2005 to meet the increasing global demand which is growing at 38%. Sterlite is thus fully geared up to ride the telecom and IT boom.

Apart form these positive developments, the only apprehension about the company is the past controversies. However the perception regarding the management will change, shortly given the strong performance and radical change in the business model. The company has decided to present the accounts in US GAAP, which will bring more transparency to its reports.

At the current market price of Rs 1,107 Sterlite is trading at a P/E multiple of 25 times its FY00 earnings. With the de-merger of telecom business, the company’s valuations are likely to be improved further. Globally Alacatel gets P/E of 87 times and Corning’s current P/E is 163 times.

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