Sterlite Tech a long-term play on fibre optics, power push

The central government has been increasingly focusing to develop cross-country infrastructure with efficient power transmission lines and high data capacity networks. This would benefit Sterlite Technologies, a leading global provider of transmission solutions for the telecom and power industries.

Business: Sterlite is India’s only fully integrated optical fibre manufacturer and the fifth-largest globally. The company is also the third-largest global manufacturer of power conductors.
Its business can be classified into two major segments — power transmission which contributes 62% to net revenues and telecom products and solutions segment, which contributes the rest.

The company manufactures and supplies optical fibres, fibre optic cables, copper telecom cables, structured data cables and ADSL2+ modems. It also deals in power transmission conductors and aluminium and alloy rods. It offers telecom integration and managed services.

Sterlite has a strong order-book of Rs 2,400 crore as on March 31, 2010 — with almost Rs 1,800 crore in power transmission segment and rest in telecom products and solutions. Almost Rs 900-crore worth of orders for the power segment are from government utilities, which provide strength to the company’s portfolio.

The company has a global presence with clients in over 55 countries in Asia Pacific, Africa, Europe and North America. International sales in the fiscal 2010 contributed to 23% of net revenues at Rs 554 crore on the back of repeat orders from existing customers and the addition of new customers.

Investment rationale: There are huge investments earmarked for telecom and power infrastructure in coming years, with more than 45% allocations in the 11th and 12th Five-Year Plan infrastructure investments proposed towards these segments.

The central government has rolled out restructured Accelerated Power Development and Reform Programme to tackle relatively high transmission and distribution related losses (around 27%) and has envisaged an investment of Rs 35,000 crore over the next seven years to fix these losses. The development of efficient power transmission networks would benefit Sterlite Technologies which has recently introduced unique products like optical ground wire cables and high ampacity conductors to check transmission losses.

The company’s power conductor facilities at Silvassa and Haridwar, with a total capacity of about 160,000 metric tonnes per annum (mtpa), are running at full utilisation. Sterlite is considering increasing capacity to 200,000 mtpa to meet robust demand in emerging markets. This would make it the world’s largest integrated manufacturer of power conductors by end of fiscal 2011.

Sterlite has recently ventured into bidding for independent power transmission projects, which includes evacuation of power from the generation stations, strengthening of the grid and transmission of power from pooling stations to the other grid stations and load centres.

Sterlite has won East North Interconnection mega transmission project on a build, own, operate and maintain basis, whereby it will get fixed revenues every year. This would provide additional revenue stream after 3-5 years.

There has been a strong demand for optical fibre with expanding wireless subscriber base and increasing internet usage. The global demand for optic fibres is likely to remain strong led by China and India, which together constitute more than 50% of the total global demand. Further, fibre optic cable networks are being increasingly used in sectors like railways, roadways, oil & gas, defence, real estate apart from telecom. The company has recently enhanced its product portfolio with the introduction of specialised data cables and optical fibre products that are optimised for fibre-to-the-home solutions.

The company has been focusing on getting more revenues in its telecom segment from optical fibres rather than the lower-margin copper cable business. The optical fibre project is currently on to increase capacity from 12 million km to 20 million km per annum, which would make Sterlite one of its largest global manufacturers by fiscal 2012.

The strong order-book provides revenue visibility for the coming year. The introduction of new products having better margins would improve profitability. The company, which has low-cost advantage due to integrated operations, would also gain from increased capacities leading to better economies of scale.

Concerns: The company faces currency fluctuation risk as it derives considerable revenues from exports. Also, any delays in investments or projects planned by customers would affect the revenues. The company also faces risk related to commodity prices fluctuations in its power business segment.

Valuations: The higher demand and capacity addition in coming years would see Sterlite Technologies’ revenues grow at compounded annualised growth rate of 20% over fiscal 2010 to fiscal 2012. Net profits are likely to improve further due to improved product mix and economies of scale in its operations. It is expected to grow at CAGR of 18% over the same period. At current market price of Rs 100.50, Sterlite trades at 13.09 times its FY11E earnings and 11.13 times its FY12E earnings per share. Investors can look to enter the stock on dips to gain in the medium to long-term horizon.

Disclaimer: The writer does not hold any share in the company.