Sterlite: Does it offer value?

Sterlite Industries, the non-ferrous and telecom cable major, has undergone a business restructuring process. Under the new structure the operations of the business have been demerged into two separate companies. Sterlite Industries Ltd. (SIL) and Sterlite Optical Technolgies Ltd (SOT).

The demerger will be in the ratio of 1:1. The shareholder will receive 1 share in SOT for every share held in Sterlite Industries Ltd. The aggregate number of shares in the two companies will increase to 108.8 m. Each company will have 54.4 m shares. However, the aggregate share capital will remain the same as the company has halved the face value to Rs 5 from Rs 10.

Businesses	FY99		FY00
Telecom Division	Rs m	% share	Rs m	% share
Jelly Filled Cables	4,394.4	21.6%	4,006.9	13.7%
Optic Fibre Cables	552.0	2.7%	1,078.7	3.7%
Optic Fibre	493.6	2.4%	1,513.1	5.2%
Division Revenue	5,440.0	26.7%	6,598.7	22.6%
Copper Division
Continuos Copper Rod	7,143.4	35.1%	9,099.8	31.1%
Copper Cathods	5,944.3	29.2%	9,714.2	33.2%
Sulphuric & Phospheric acid	577.7	2.8%	1,615.5	5.5%
Division Revenue	13,665.4	67.2%	20,429.5	69.8%
Aluminium Division
Aluminium Foils	676.7	3.3%	883.2	3.0%
Pow.Trans. Alu. Conductors	565.3	2.8%	1,338.6	4.6%
Division Revenue	1,242.0	6.1%	2,221.8	7.6%
Total Revenue	20,347.4	100.0%	29,250.0	100.0%

We have assumed the non-ferrous and telecom business to contribute in the proportion of 70:30 to the bottomline. This gives the non-ferrous and telecom business a NPM of 7% and 11% respectively. Under this scenario, the non-ferrous business is valued at 4.4x FY00 earnings.

	FY00
	Non-Ferrous	Telecom
Contribution to Sales	77.4%	22.6%
Contribution to PAT*	70%	30%
PAT	1,693.6	725.8
No. of Shares	54.4	54.4
EPS	31.1	13.3
CMP	138.0
P/E	4.4
* Estimates

Hindalco and Nalco, other players in the non-ferrous business, reported a NPM of 26.5% and 23.9% respectively in FY00. If we benchmark Sterlite's non-ferrous business against the industry standard the contribution at the PAT level will be much higher. Hindalco and Nalco are trading at 9.8x and 5.2x FY00 earnings.

Sterlite's optical fibre business is growing at 100%. Further, it is part of the new economy. This should help it obtain new economy valuations. The stock is expected to be listed by the end of October.