Sterlite Opt: Beaten beyond recognition - Views on News from Equitymaster

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Sterlite Opt: Beaten beyond recognition

Oct 16, 2001

Sterlite Optical Technologies Ltd. (SOTL) scrip has taken a beating over the past twelve months. The stock is trading lower by 86.9% as compared to last year's level. The BSE Sensex, in the same period, is down by 20.8%. Valuations of the stock have fallen ten times from 24x to 2.4x earnings.

The global telecom sector is in the midst of turmoil with telco majors cutting back on their expansion plans to pay for 3-G (Third Generation) licenses. Consequently, markets expect the order flow of telecom equipment makers to take a hit. The company in it's latest annual report has mentioned a change in business strategy from a price driven model to a cost & volume driven model. This is on the lines of a commodity-based company model. Consequently, market valuations have adjusted for this change in industry profile. Further, optical fibre prices have softened compared to the highs seen in the previous year arising from the severe demand supply gap. All these factors have led to optical equipment manufacturers going out of favour.

That said, at some point, global telco majors are going to upgrade their networks, as internet penetration continues to increase with demand for faster data transfer. The move towards streaming audio/video on the net will further augment data transfer load on networks. Domestically, with the New Telecom Policy '99, private telecom companies are speeding up rollout of regional networks. Domestic Long Distance (DLD) has also been opened to private competition. Reliance Infocom, Bharati group and Birla-AT&T-Tata & BPL are likely to be in the race to establish a nationwide footprint. Indian Railways, Gas Authority (GAIL) and other organisations having right of way (RoW) are setting up optical networks, which could be leased out to Long distance carriers or to regional operators. Therefore, it seems, a little early for the industry to be written off.

In the current environment, sentiment is unfavourable towards optical equipment manufacturers but the industry does show potential for sustaining impressive growth into the foreseeable future. SOTL, is trading on a multiple of 2.2x trailing twelve months earnings.

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