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Sterlite Optical: Digital play

Dec 19, 2000

Sterlite Industries Ltd. (SIL) demerged its copper and telecom business with effect from July '00. Subsequently, the copper and telecom business is conducted under Sterlite Industries (India) Ltd. and Sterlite Optical Technologies Ltd. (SOTL) respectively. With the demerger every shareholder in SIL was offered a share - face value Rs 5 - in the telecom company SOTL. Further, the management undertook capital reduction in the copper company reducing the face value of the shares from Rs 10 to Rs 5.

The telecom offshoot, SOTL, has two main businesses; jelly filled telecom cables (JFTC) and optic fibre (OF). The optic fibre operations are integrated, as the company is also present in the downstream optic fibre cable (OFC) business. Currently, OFC consumes 45% of the company's OF production the remaining is sold to cable manufacturers. Internationally, most of the majors sell OFC as the final product and not OF. The manufacturing of OF is a closed-door technology with only 5 players having access to the technology globally.

The company anticipates to shift its revenue mix in favour of optic fibres. Currently, the mix is 68:32 in favour of JFTC, which is likely to change to 30:70 in favour of optic fibre business. SOTL plans to further expand OFC capacities in order to exploit the demand growth in this sector. The company has said it is open to acquisitions as a strategy to augment capacities and believes that higher capacities will offer cost advantages.

The company expects global demand of OFC to grow at a compounded rate (CAGR) of 17% till FY04. Meanwhile, the domestic demand is estimated to grow at 41% CAGR for the next two years. Further, in the case of materialization of private sector investments in broadband backbone and last mile connectivity the demand for fibre could foster stronger growth.

In an attempt to stay ahead of the technology curve the company is investing 12% of its revenues in R&D. SOTL has obtained patents for three of its products and aims to acquire more. Further, the company is also moving towards higher end technologies, which are greater value add, through investments in optical component technology.

However, most companies have been able to obtain patents through small modifications in technology and to that extent patents do not create significant entry barriers. Further, the demand projections could be suspect with AT&T, the leading telecom company, postponing it purchases of optic fibre equipment. Nevertheless, SOTL is the sole producer of OF in the country and is a chance for riding the digital wave.

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