Sterlite Technologies | Digital India play

(Lokesh) #224

As far as optical fiber cable is considered, they all adhere to internationally agreed standards. We can’t really differentiate one company’s product from others. So it is a commodity business. Their vertical integration helps in catching more money in the value chain than the rest of the players. Hence better margins etc.
As far as patents are considered, my “guess” is that they very few are about manufacturing process and majority could be in system integration.

(Pratik--Patel9) #225

@gurramlokesh @phreakv6 Can you please explain cyclicality in business model of Strerlite?

It’s a genuine question. I don’t understand how it can be compared to Avanti or other cyclical businesses related to private or public capex. Not all data or teleco providers undergo expansion at the same time. It varies domestically and more so internationally. Just trying to get more clarity here for myself.

(rupaniamit) #226

@Pratik_Patel9 - my 2 cents on why Sterlite’s Fiber Optic (FO) business is a cyclical business:

Preform dictates the supply side of the fiber production chain, and as we know globally there are fewer than 10 players that manufacture preform. As the world is moving from 4G to 5G, new networks will need to be more dense increasing the demand for FO. Lately, there is more demand than supply and hence the prices of FO are significantly higher. I’ve heard on recent Sterlite con-calls that supply is so tight that buyers are ready to pay premium price for spot delivey of FO.

Prices will remain firm as long as supply is tight. High FO prices will lead to capacity expansion increasing supply. There will come a point where supply will increase demand and prices of FO will decline. We know Sterlite is increasing its capacity from 30mn fkm to 50mn fkm. Biggest player, Corning also made announcement that it is increasing its capacity. So we know that the day when supply will be heavier than demand will come for sure. But no one would know when.

Although Sterlite may have 40-50% of Indian market, but still its realizations and margins of FO will be impacted when prices drop. Hence, its FO business is cyclical business where mostly global supply will determine the final price/realization.

Hope this is helpful.


(alphaseeker) #227

Spot price of fiber optics got corrected by approx. 30%, that’s the reason for one way decline.
Interview link with the CFO on this topic.

(MHS) #228

In the last concall sterlite tech told they are not in short term contracts also not interested and only with longterm contract players so we can ignore this noise.

(rupaniamit) #229

Current spot price trend is very important leading indicator, especially when global supply number of Fiber Optics is not known to anyone. Current lower spot price signals that either supply is increasing or demand is decreasing for spot delivery. Eventually, long-term contract rates will also be impacted depending on how spot prices behave. CFO in this video mentioned that they might have to take a cut of $0.30 to $0.40 because of this fall in spot price. Although Sterlite may not be dealing in spot price, but spot price information is very useful.


IMO, The current price weakness has something to do with trade war spat between China and US. US, EU and some others are trying to slow down pace of Chinese progress in 5G tech development. I think this might have hurt sentiment a bit in the spot market. But broadly spot market trends feed into long term pricing and they can’t remain unrelated for long.

(sgkfinance) #232

any place to find spot prices for optic cable ? Unsuccessful even after a week of Googling and enquiring around. Thanks,

(MHS) #233

I agree same has to be applicable when the spot prices are increasing.

These are normal in any business where raw material prices fluctuate as per demand and supply.


there is no public spot market as such. But like in many commodities where negotiated settlement happens, often consumers pay premium for early delivery. I assume this is what happening in OFC sector too. Once tightness or urgency to stock is reduced premium falls too.

(sgkfinance) #235

Thanks Sumit. Since the urgency premium is falling, customers are ok to take normal delivery or don’t need the product as immediately as they thought. Probably a leading indicator on the tapering of demand-supply gap.

(smehta) #236

Sterlite Technologies Ltd

Highlights Of Q2 FY19 and H1FY19 Results


  • Revenue grew by 40 % to 1100 Cr over last year same quarter.
  • EBITDA grew by 56 % driven by both in growth in product volumes as well as improving operating efficiencies over last year same quarter.
  • PAT grew by 84 % to 131 Cr over last year same quarter and it also include positive impact of consolidating part of financials of Europe acquisition.
  • EBITDA margin stood at 26 % which is best in the industry.
  • ROCE for the quarter stand at 33 %.
  • Net debt of company has increased in the end of FY18 because of growth CAPEX as well as the acquisition that company had done in this year.

Key Highlights

  • One emerging trend that is manifesting is a growing relevance of the web scale Companies like Facebook, Amazon that are adding to the existing CAPEX pool of the data network investment. The traditional data network investment was traditionally only driven by telcos at which these content driven companies are driving investments now to create ultrahigh bandwidth and very low latency networks is extremely encouraging. It starts opening door for a new CAPEX pool, which continues to grow significantly year-on-year coupled with the State Government led initiate investments to build citizen centric networks for driving the digital inclusion. So while the growth in Telco led CAPEX remains in single digit, the composition of this CAPEX is largely shifting from microwave led voice network to fiber led data network. So cumulatively, this trends of CAPEX conversion between telco CAPEX, internet content Company CAPEX and citizen network CAPEX are enlarging the total network investment tool to almost $300 billion annually, which continues to grow and is the focal area of offering.
  • There is major shift to network architecture. The legacy networks where access layers was predominantly wireless is now converting into fixed and wire line architecture, with more and more network densification. The future network will look like distributed computing where the conventional core elements of network are converging and the access is dominated by fiber. Also the network is increasingly getting virtualized where more and more operators are globally investing in trials to revamp the network to bring flexibility and agility. Hardware and software in the network is getting disaggregated with software becoming more open source and is playing a much deeper role in the networks of tomorrow. Also hyper scale data center deployment, which is mainly software led is in sharp contrast to the telco deployment of network. Company is now witnessing similar trends in the conventional connectivity industry, which would create efficiency and great quality of service.
  • Average link distance drops by one tenth, there is almost a 100 times increase in fiber required to support the network. For example, the average length of fiber use in a metro and long haul application is roughly 100 and one-tenth of the average fiber length of fiber in sub-sea application. The number of fibers required to cover all terminals have been seen to increase by a magnitude much larger than the reduction in average length of fiber led by intense network densification. The growing demand of fiber over the years as it starts coming closer to the end user substantiates the theory. As per industry estimates, the 5G architecture with multiple small cell environment may require almost 10 times more fiber connection.
  • All these trends towards increasing CAPEX pool, new network architecture as well as growing fiber relevance in network densification opens new potential opportunities for company. towards creation of digital networks of tomorrow .
  • Company is focused on building capacities for catering the needs of the next generation networks. In addition to widening the product portfolio company strategy to tap into this enlarged CAPEX pool has been to include network software as well as services, which enhances company relevance and reduces the response times to customers. So company have accordingly re-architected its customer segment into four key verticals, which is communication service providers, internet content providers, citizen networks and defense and have a very strong customer engagement model to drive deep engagement opportunities in each of these verticals. Company believe that its data network solution strategy will increase its addressable market within this multibillion-dollar CAPEX pool and aiming towards a sustainable value creation
  • Company international revenue has gone up by 3 times in last 3 years which now account for almost 45 % of total revenue.
  • Company had win several leading Tier-1 telco operators in Europe for multiyear contracts of fiber cable supplies.
  • Company new expansion plan for optical fiber cables to come on board by June 2020. With both fiber and cable expansion on track, once completed, it will place us amongst the top integrated optical fiber and cabling technology providers globally and with a relentless focus on technology and new product development, our global product and process patents now stand at almost 217.


  • What will be the opportunity size for the company going forward and apart from fiber where is company expanding capacity ? What are the other data related services that company could offer to a client to gain wallet share from customers ?
    • Scale of opportunity is in the entire data network part of business. At global level the total CAPEX is 300 billion, which telcos, internet companies and citizen network spent and that is shifting from voice and wireless towards data and fiber and that entire CAPEX, the data network CAPEX is something which becomes an addressable market for company. On one hand company have strong stable growing fiber business and at the same time company have tremendous in services side as well and order book at this time last year would have been Rs. 3,000 and Rs. 3,500 Cr is now almost close to Rs. 10,000 Cr. So that is the reflection of both the scale of the opportunities, which is becoming fair and it is increasing significantly. Earlier company was having market of about $10 billion and now company have addressable market of almost $30 to $40 billion as the data CAPEX become the significant part of the overall CAPEX.
  • From current order book of 10,000 Cr will company be able to maintain the growth rate as company have maintained in the past do company can grow at same pace for FY 2021 and FY 2022 ?
    • Past growth rate was achieved with a certain amount of global CAPEX and with a certain amount of capacity that company had. Now at the addressable market end itself, the market is increasing exponentially and company capability to access that market itself has significantly increased. Company is at an all-time high not only of the absolute number of order book, but even at the multiple of revenue run rate with two-and-a-half years clear visibility of current revenue. Revenue will grow and sustain the current level.
  • What were the main drivers for the revenue growth for the quarter? Is it mainly driven by services business because in the products business already running at almost 100% utilization?
    • Company cable operation is running at 60-65 % and it was increased. Cable business is fully running at more than 100% capacity running right now and that has been the largest driver for what so company will double the cable capacity, other than the acquisition that company did in Europe.
  • Company cost is increased by 38 % to 40 % in metallurgica business which has a lower margin than organic margin ?
    • Metallurgica margins are similar to the cables margin, it is a cables business. So the cost increase is due to company had done more cables in the current quarter than fiber.
  • In terms of Navy order how is the revenue coming in for the contract ?
    • So out of overall Rs.3,500 Cr about Rs.2,500-Rs.2,600 Cr were yet recognized between now and FY19, 20, 21 at least recognized and balance Rs.900 to Rs.1,000 Cr will be over a period of seven years, which is more flowing on
  • How do company see order outlook going forward ?
    • It will be a sum of product, services, global India and company typically see from looking at every quarter and micromanaging every part of it at macro level in terms of growth. At macro level company overall order book is growing faster than the revenue growth that company is at. At the macro level company overall order book is 2.5 times of revenue, at a macro level company pipeline continues to look strong.
  • What is company service offering that makes it a complete solutions company ?
    • There is end to end offering and in past company had done two to three Smart Cities, essentially to look at company capabilities of offerings from fiber up to the application layer and these were small orders between Rs.50 to Rs.100-Rs.150 Cr, but it created a good amount of capability and learning products. Now this order for Navy is an end-to-end offering from the very base level of transport layer, two IT layers in 30 locations across the Country and if this capability for company to create the whole network from fiber all the way to software. So company have fiber, data , services which are essential for building a full data network.
  • Kindly give break up of company order book ?
    • Overall the product is close to about Rs.5,000 Cr and services is about Rs.4,000 and Rs.4,500 Cr
  • Out of 20 million optic fiber capacity expansion how much of it will be in India and how much will be in China ?
    • 6 or 7 million is in China and about 13-14 million is in India
  • Being open source increasing so will the margin will get compress ?
    • The network which was traditionally a telecom network used to be very propriety and complicated network when there were only a few providers who used to cater to that. The way the data network is being structured, which is essentially being driven by these internet Companies, it is becoming very, very flat and it is becoming to a large extent open where companies are at one-end providing the basic conduit, which is the fiber through which the transmission happens and at the other end system integrating the entire network. The integrating the software offering along with that becomes integral part of what company do. Because of the fact that the network is becoming more and more open, more and more flat is the fact that company access towards doing an end-to-end network becomes that much more possible and flexible and doable.
  • As 5G is 10x opportunity compare to 4G but if it get adjusted for all than it is much bigger opportunity ?
    • If 5G happens in all parts of the world everywhere then it will be a much scale of opportunity. 5G will start happening in more concentrated dense areas to start off with and it will progress over a period of time to the entire globe and that is why it is going to be propagated, but for a particular area the scale of opportunity will be extremely high.
  • What is happening in India in terms of demand from the telco side and also on the Government side ?
    • On India side there is good demand essentially coming from Jio. Jio continues to drive the fiber to the home project, which will be over a period of next couple of years and it is a very, very ambitious and a large product. Also two telephone providers also fully gearing up for providing at one level the 4G backhaul and starting to prepare themselves for the next queue of access part of network. As far as non-defense is concerned, the BharatNet project is very much on offering and the spend there, which is fully funded by USO continues there, in fact right now there are several States who are issuing contracts and orders for BharatNet over the next several months. So for the basic broadband infrastructure, India still today is so underpenetrated. It is just a start of massive built cycle.
  • Who else is adding large capacities apart from company itself ?
    • There are few players who are planning for $100 million capacity expansion and demand will be there going forward to cater the new supplies.
  • Did $ 100 million is on base of $ 450 million ?
    • About $500 million
  • What is the annual incremental demand that comes each year ?
    • 12-13 % at a global range.
  • Will the $ 110 million guidance still remain same after 15 % rupee depreciation ?
    • Yes. In terms of overall impact of this rupee depreciation as company have been maintaining that by hedging the contract as soon as company receive them. So company might see some rupee realization , but that will happen almost a year and year-and-a-half later because whatever company is booking contracts right now are for delivery later and at the same time what happens is a lot of European contracts which company use to cater earlier from India they are now being to cater a lot of them from our Italy facility. So it is going to pan out over the next few quarters. Company do not see any spot increase in rupee realization.
  • Company has announced certain CAPEX for OFC capacity expansion so how it will pan out for FY21 ? and does company should expect strong earning growth similar to what company is going to see in FY21 ?
    • Essentially a lot of the CAPEX it is about 1,200 per fiber and about 300 or 320 odd for cables. So out of 1,500 up the current year, which is FY2019 is the major spend year. FY2020 the CAPEX spend tapers off and in FY2021 company will have minimum CAPEX spend corresponding to any of these announcements, but company will see the maximum benefit coming out of both 50 million and 35 million kilometers. So FY2021 would be in that aspect low-spend, but maximum benefit being realized on both the expansion.
  • In OFC will company will maintain 30 % kind of ROCE on that investment ?
    • Company will be maintaining 25 % to 35 % ROCE. Even at 75-80 % utilization level.
  • What is the execution time for 9500 Cr order book ? With the economies of scale what kind of margins improvement does company see going forward in EBITDA and PAT particularly at a PAT level and whether any advantage of lower tax rate, etc., because of the larger CAPEX which company is incurring. So does company have any kind of idea on that and when will company hit the billion dollar kind of topline over the next two to three years time, which is the first year that can bit ?
    • Overall this Rs.9,500 Cr consists of this product order book and product order book typically what company will be going to execute over the next two to three years and there is a large services contract, which is the naval one and that will get executed, a significant part of it will get executed by FY2021 and then there is about Rs.900 Cr of O&M which will continue. So this Rs.9,500 Cr over the next two to three years, a large part of it will get executed. As order book increase company will see run rate of revenue to order book and that should keep increasing as company revenue will keep increasing and the impact on the bottom-line will be clearly there. Company have done 40 % growth in H1 versus H1 and 40 % in revenue and 80 % in profit compare to Q2 versus Q2. So overall company is much focused on order book. Overall company is focused on whole lot on delivering at the right growth margin and everything just falls through after that .
  • Promoter shares that were 35 % pledged has now increased to 97 % , which accounts for 50 % of the total market cap. SO What is it pledged for and what is the timeline which promoters are to clear it off and what is the ultimate use of this pledge basically
    • This pledging has been done by the promoters for their alternate investments outside STL. The pledging is to JP Morgan for the promoter Companies taking the larger stake in M&A activities in other parts of the business and clearly the focus towards releasing this pledge at the earliest. There is nothing from any investment perspective to be concerned about from this pledge, it is more of a collateral which is essentially used for additional M&A done by the promoters for their other business.
  • Kindle brief on optical fibre pricing ?
    • The pricing continues to be closer to the higher end of the $8 per kilometer and company have more booking orders for future, company have more booking orders for FY2021, etc., and company focus is more and more on long-term order booking, so for company it is extremely important that company have a higher sdegree of visibility as well as predictability. So for company the price never increase very dramatically nor decrease very dramatically.
  • What will be the peak debt when company will expand this capacity for both fiber and cable ?
    • The current debt about Rs.1,700 Cr is with both this investments which have kicked in of the fiber investment, which company have done almost Rs.600 Cr in the current half and almost Rs.500 Cr of this acquisition. So peak debt company look at it more in terms of debt to equity. Company look at in terms of EBITDA ratio. So company do not believe it is going to reach Rs.2,000 Cr, but at the same time as the Company grows company look at various ratio. Debt/EBITDA as well as interest coverage ratio and there company is extremely comfortable.
  • Will the both expansion plan going to completed in phase manner ?
    • Fiber is fully done by June 2019 and cable by June 2020.

(msahani) #237

(ramanhp) #238

(Rohit91) #239

Yes a great positive for Sterlite Tech. This was becoming an overhang on the stock.
It has great expansion plans and very good order book thus revenue visibility

Looks a lucrative level to buy/ add more

Disc: Invested

(ramanhp) #240

Nearly 60 per cent of the towers will need to be fiberised by 2022, as outlined in the National Digital Communications Policy (NDCP) 2018, notes the study titled ‘Propelling India to a trillion dollar digital economy’.

Read more at:

(akshatverma) #241

How would one value an extremely cyclical industry like optical fibre? This industry historically gets a huge burst of demand, builds over capacity, then demand starts to shrink leading to lower margins. At a PE of 25 already, at least the next 2 years of growth is factored. It has to grow for a much longer time to compensate for the lack of growth that is bound to come at some point in time. Also, this technology is a lot more likely to get disrupted leading to zero terminal value.

(learning) #242

IMHO, it depends on how long the cycle is going to last and how does company behaves / operates in the interim. Let’s say cycle lasts for 3-5 years, capital allocation should remains high quality during the interim is another factor. So, based on 2 years looks like fairly valued but in case 5G does not come commercially by 2020, it might see a de rating.

Disc: invested.

(debanjanray2003) #243

I am surprised why the stock price is falling despite good fundamentals. From 1-Nov-2018 the price has fallen more than 25% today. In fact the price is oscillating almost around the same average value since 1-Jan-2018. If you see last qtrly performance, it is very satisfying.

(ramanhp) #244

Please check the fall in spot prices of fibre optics.