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Sterlite - Lucent in the making?

Sep 20, 2000

Sterlite has shown resilience on the bourses since the meltdown in February this year. The stock has recovered and is hovering near its 52 week high of Rs 1,204. In fact, it has held its ground in the current market slide. Sterlite is the largest producer of copper cathodes (rods) in the country with a smelting capacity of 150,000 metric tonnes (MT). Its copper operations are integrated and this ensures control over the supply and quality of cathodes for manufacturing copper rods. The company has entered into strategic tie-ups with overseas copper mines to insulate itself from supply shocks of its main raw material, copper concentrate. It also has the distinction of being one of the lowest cost producers in the world.

The company is the largest manufacturer of jelly filled telecom cables (JFTC) in the country. It continues to bag the largest orders from Department of Telecom (DoT) and Mahanagar Telecom (MTNL). JFTC is a downstream product and its main raw material is copper. The company also has presence in the aluminium business. It manufactures aluminium foil, which it uses as JFTC wrap. Therefore, it has complete integration in the JFTC business.

The company is also the largest producer of optical fibre (OF) and optic fibre cable (OFC) in the country. This creates significant advantages as its activities are integrated (OF is the input for OFC). Optic fibre is a high technology product; consequently, entry barriers are significant.

However, all is not rosy, 60% of the revenue is generated by the non-ferrous metals business. This exposes the company to the commodity business, which is cyclical in nature. Currently, the telecom infrastructure market has only two main buyers, DoT and MTNL, therefore they are in a better bargaining position vis--vis the suppliers. The talks of de-merger have been doing the rounds for couple of years. It is only now that the company has acted on this by announcing the de-merger of its non-ferrous and telecom business. The failure to act earlier has caused apprehension in the minds of potential investors.

Further, the telecom sector is undergoing rapid change in technology. Newer, faster and cheaper cables are being developed, which could jeopardize the company's business. With creating infrastructure being high on the government's agenda, it has taken several initiatives in liberalizing the telecom sector to attract investments. To ensure rapid and cheap accessibility the Government may reduce import tariffs on OF and OFC. This will make the environment more competitive and adversely impact Sterlite's margins.

At Rs 1,115 the company is trading on a 1st quarter annualised earnings multiple of 25. The kickers in the stock are largely on the telecom front. The country is expecting huge investments in the telecom industry. If we are to be successful in providing telecom services across the country, telecom infrastructure will have to be created. This will boost the demand for Sterlite's core telecom products.

Power sector reforms are required to attract investments in generation, transmission and distribution. Once these issues are ironed out Sterlite could see the demand for its power transmission line aluminium conductors increase. Further, growth in the housing sector will mean more electrical wiring, for which the main input is copper. With the onset of consumerism is the country the focus on product packaging will increase, this should drive demand for aluminium foil. Sterlite's fortunes seem to be a play on Government reforms and consequently, the economy. Taking a call on the stock will depend how much faith you have in the Government to deliver.

Financial Performance
(Rs m) FY98 FY99 FY00UA
Gross Sales 14,021 20,347 29,250
Operating Profit 1,835 2,917 4,536
OPM 13.1% 14.3% 15.5%
Net Profit 1,566 1,607 2,419
NPM 11.2% 7.9% 8.3%
FDEPS 28.8 29.5 44.4
FDEPS Growth 23.6% 2.4% 50.5%

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