• DECEMBER 19, 2000

Sterlite Optical: Digital play

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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407