Sterlite Tech is betting big on technology boom driving India’s optical fibre market

For Sterlite Technologies, the last 12 months have been rocky at the bourses.

Even while recording a 60% top line growth and 68% jump in profits, the stock has lost nearly two-thirds of its value. This took down the company’s market capitalisation from Rs 13,249 crore as on September 26 last year to Rs 6,506 crore by September 26 this year.

Yet, even amid this market cap devaluation, Sterlite Tech’s net sales rose 60% — from Rs 3,177 crore in FY2018 to Rs 5,087 crore in FY2019.A sister concern of the London-headquartered mining and metals conglomerate Vedanta Group, Sterlite Tech mainly makes optical fibre and cables.

Anand Agarwal, Group CEO of the company, feels the Sterlite scrip was hit by perception issues around the optical fibre industry, general worries around mid-cap companies and foreign institutional investors pulling out of India.

“Business volatility and market volatility are often different things,” Agarwal told ET Magazine in an interview over phone from Pune, pointing out that the stock price had been rising. “We’re focused on delivering improved performances on all the right metrics.”

Improving performance also rests a lot on the company’s Rs 1,500-crore bet on capacity expansion that is nearing completion. The expansion is boosting Sterlite’s capacity to 50 million fibre km (fkm) from 30 million fkm, along with pushing up downstream capacity to 33 million km of cables from 18 million km.

The company has also built a services business over the last few years to ensure that part of the extra capacity is absorbed in-house.

In India, Sterlite Tech already enjoys a market share of 45%. That leaves little scope for it to make the pie bigger. So instead, the company is looking to expand overall market itself, says Agarwal.

The Indian market for optical fibre is only 10% of China’s, says Agarwal, to indicate the growth potential. He also gives other examples, like how 70-80% of Reliance Jio’s telecom towers are connected by optical fibre but for rivals such as Airtel or Vodafone Idea with older networks, this number is lower and presents an opportunity.

Agarwal also indicates that adoption of new technologies such as Internet of Things or 5G will mean a deeper requirement for a mesh of optical fibre that will connect hubs. While India has been slow in starting off, past trends shows it has caught up fast whenever a new technology has evolved, he says.

So, given the volatile business environment, is there scope for Sterlite Tech to push up its sales past the billion dollar mark and also deliver shareholder value?

In June, before the Q1 results, the company received a booster from its promoters when they managed to remove the entire pledge on their holding (52% stake) in the company.

Some analyst reports that came after the June quarter results were thus optimistic. KRChoksey on July 24 had valued Sterlite Tech scrip at Rs 232. Praveen Motwani, the analyst, had written: “We believe the company is on a right trajectory to deliver subsequent growth amidst increase in fibre capacity and increasing increasing execution of service orders, growing international presence and winning large number of deals.”

Agarwal is bullish on Sterlite Tech’s services business that has built an order book of nearly Rs 10,000 crore. “In four years, our services revenue has touched Rs 1,700 crore.”

Out of the total order book, around Rs 5,500 crore will be services and Rs 4,500 crore will accrue to the products parts of business. “We do not chase order book; it usually comes to us. It servesthe purpose of giving us good visibility, apart from being a captive consumer of our products,” says Agarwal.

He also feels Sterlite Tech stands out in the market due to its research & development, its ability to bring new products, investments in software and development of new network designs. R&D focus may have helped the company add value and sell its fibre at $7 per fkm compared to Chinese products that sell at $4 per fkm.

The company also exports to China where it has grabbed a market share of 4-5%. Agarwal says optical fibre is the only technology product that India sells in China.

But the pricing pressure of Chinese fibre continues to pose a danger. Optical fibre made in the US sells at $8 per fkm.

An ICICI Direct report on July 18 said: “We believe continued lower prices could have some impact on realisations going ahead while offtake from new capacity could also suffer if excess supply and pricing pressure thereof remain.”

It will be a challenge for Sterlite Tech to bring in its extra capacity to market at a time when pricing is soft, but Agarwal believes his sales footprint across the world is a good hedge against such worries.

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