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Sterlite: Does it offer value?

Oct 10, 2000

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.

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