According to newspaper reports, the management of Sterlite Industries has stated that it is not averse to splitting its existing diversified business into separate entities-metals and telephone cables.
Sterlite Industries (FY99 Sales Rs 11.1 bn) is into the manufacture of copper (67% of turnover) and the telecommunication cables. The company manufactures jelly filled cables (22% of turnover), optical fiber telecom cables (3%), optical fiber (2%) and aluminium (6%).
The company's current valuations are suppressed due to concerns regarding its copper business. The copper plant has already had two breakdowns due to blasts. Then there is the environmental issue that keeps cropping up from time to time. This could limit the expansion plans, if any, for the copper business. Another factor that has suppressed valuations is the company's desire to set up an aluminium smelter. This is expected to cost approximately Rs 35 bn, and if implemented it would drain the company of its large free cash flows.
The separation of the two businesses into different companies would unlock value for the telecom cables business (60% market share). Moreover, this would give the management a clearer focus and also open the possibility of tie-ups in existing businesses. It will provide an opportunity to develop each of its businesses as independent units, catering to larger customer base. As a result, its metal business could develop into a full-fledged business catering to a large customer base.
When separated, the management could pursue different policies for the two companies. For example, the company may invite a partner for the metal business, where the resource requirement is large and there is a lack of competitiveness. It may not need to do so for the telecom cables business.
A plan to split the businesses will possibly be in the best interests of Sterlite. Under this arrangement, the telecom cables business will continue to grow without feeling the pressure of having to support large capital expenditure programs. On the other hand, the metals business will be able to pursue a high growth strategy and may even benefit from the entry of a new partner.
The stock has been rated as a 'BUY' mainly on account of the improving demand scenario emerging after large orders for telecom cables were bagged by the company. The improvement in the international prices of copper has also supported the rating.
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