Thanks. Did the management share any guidance beyond FY’ 20?
@msahani - no specific number/guidance beyond FY20, but below link has few hints as to what to expect beyond FY20.
Wondering if there is something street knows about sterlite apart from high pledge and technicals?
I think today’s fall has something to do with the seemingly corp governance issue related to stake purchase by cairn india (group company Vedanta’s subsidiary), in Anglo American from Volcan Investments, Mr Agarwal’s family trust.
How is this related to sterlite tech???
sterlite tech belongs to the same group. also sterlite shares hav been pledged to delist vedanta on london stock exchange
The conduct of the group has been nothing less than shameful. They have accumulated enough cash and hardly care for minorities anymore. Ved Plc delisting a trailer of things to come. If it goes down a lot, they might announce a buy back to reduce public holding further while delisting from Indian stock market won’t be easy. Regret underestimating the impact of their shenanigan at the promoter level.
Outside of this, the management has also been embroiled in controversy for making decisions that are not necessarily considered investor/people friendly. Albeit none of this can be attributed to Sterlite Tech, it’s still the same bunch that control Vedanta Limited, Sterlite Power, Sterlite Industries etc. ( all different entities doing very different things) and the fallout of bad management decisions elsewhere has in the past affected Sterlite Tech as well.
They had already mentioned in their report. Great Work
barring the group / promoter level noise around pledging, as far as the OFC story / 5G communications part goes, we should be good post Corning’s Q4FY19 results (as attached):
Recently de pledging by twin star overseas (promoter group) from Morgan Stanley to volcan investment (family firm of vedanta group) will reduced the risk of vicious cycle when price of shares fall as volcan investment is a family firm of vedanta group in comparison to outsider Morgan Stanley…I think it is a better move by Promoters…It is the zee issue which is haunting the stellite technologies…All respected members are requested to share their views…
No de pledging. Promoter holding is still pledged 98% or so - I dont have the exact %
It was initially pledged with JP Morgan and now it is pledged with volcan investment…Wrongly mentioned Morgan sanket in previous post…
Went through Annual Reports, Quarterly Investor Presentations and Conference Calls. Following are some important points I found. Some points might be obvious but I have added them for coherent context.
Sterlite is the only company in India which can manufacture preform. Globally as well, there are very few companies which can manufacture preform.
Considering the fact that STL covers an entire vertical from silica to software, its possible that it will always be able to command better margins
than its Indian competition at least.
The preform stage dictates the supply side of fiber production change. There is restricted competition at this stage as a technology and
knowhow to manufacture preform is an intellectual property that serves as the competitive edge and thus derives maximum value. The fiber drawing
part of the value chain has led technology intensive and has relatively more number of players than preform manufacturing. And the cabling end of the production chain is more of localized model and requires greater degree of differentiation to drive value creation due to different dependents on the other parts of the value chain. Sterlite Tech is the only fully integrated player in Asia Pacific excluding Japan which manufactures fiber from the bare silicon ore which is the basic
raw material going upto the end user product of telcos and enterprises. Initial deployment of 5G networks, emergence of smart cities as well as the increasing propensity of broadband has driven global demand for fibers steadily upwards. In calendar year 2017, we witnessed global demand for fiber surpassing preform capacity for first time ever keeping the tightness in fiber supply demand dynamics. We expect the global demand supply mismatch to persist in 2018 and growth in global demand will continue to enable the absorption of plant capacity additions on the preform side.
Following raw materials can impact profitability : aluminium, alloys and crude. This risk is managed by hedging or passing on the movemenet in prices.
In India, less than 20% of sites are fiberised as compared
to 70-80% of sites in developed countries. With increasing
competition, a robust mobile backhaul network that ensures
seamless voice with data connectivity across 2G, 3G, and
4G/LTE technologies is very critical. Given the importance of
this infrastructure, a private capex from Indian telecos is expected to start.
Telecom industry has undergone significant disruption recently led by Jio. Right now,
it is in consolidation mode and players apart from Jio are also expected to initiate
their capex. So far, the domestic demand has been led by Jio.
Second driver is BharatNet project.
Third driver is Smart Cities. So far, 4/10 cities have been won by STL.
In 2017, government announced 30 new Smart Cities. Bids for these are in pipeline.
Total 100 new Smart Cities are to be announced.
It is important to note that, here STL has been able to sell not just its products but
also the services.
3g to 4g upgrade in India and 4g to 5g upgrade globally.
- 3g to 4g increased ofc consumption to 3x.
- 5g is supposed to be more denser and more ofc demanding.
- 3g to 4g done in 2011 to 2017 resulted in 2345 mn km of ofc consumption
- 4g to 5g should increase ofc consumption to 5x as base case and 2.5x as min case. starting 2020 5g demand should start kicking in.
Management on Indian demand (q2fy18 concall) :
the domestic market at 20 million is low. We believe
with Bharat Net project as well as some of the telcos just starting their mobile backhaul, it
should be doubling at least in between two to three years, we are pretty confident of that. (expected domestic market by 2020/2021 will be 40
million USD. vs 20 in oct 2017)
Europe : Sterlite Tech partners with global telcos
in over 100 countries to help realise these
plans. In Europe, the European Commission
has set aggressive targets to create a Gigabit
society through ultra-fast internet access
by 2025 - 1 Gbps connectivity for providers
of public services and digitally intensive
enterprises, 100 Mbps speed for all urban
and rural homes, and uninterrupted 5G
broadband coverage for all urban areas. Fibre
connectivity is imperative to realise this vision,
and as a leader in creating smarter digital
infrastructures, Sterlite Tech is enabling this
roll-out in Europe and other geographies.
China : plans on spending $400 bn in 2020-2030 for 5g
USA : $130-150 bn fibre investment required in next 5-7 years. Verizons contract of 1.35 bn with Corning for 3 years
Japan: 46 bn into 5g by 2023
Depesh Kashyap: Just one quick question. Sir currently we understand that prices are increasing mainly due to
global preform shortage? So you have mentioned in the slide that it may continue in CY18, but
can you give us some sense of how much preform capacity is in the process and going to come
by let us say CY19?
Dr. Anand Agarwal: Depesh, we keep a tab of it, it is difficult to know exactly when. The industry continues to be
slightly not very open but what we are looking essentially is that the supply demand situation
will continue to be tight, which is reflecting of the fact that we are actually now booking orders
for the calendar year 2020 as well. So we are fully booked for 2018, we are largely booked for
2019, with the expanded capacity and we are booking some for 2020 as well.
Depesh Kashyap: That is great. Sir, like the capacity shortage mainly came in CY17 according to your slide. So
if I typically look at it, it is a two year cycle for the new capacity to come, so will I be right to
assume that the capacity supply can actually come in excess in CY19 globally if all the players
are increasing it right now?
Dr. Anand Agarwal: It is difficult. As we said it is difficult. The reflection for us comes from what we hear from the
suppliers and what we hear from our customers. The fact that our customers were wanting to
give us contracts for 2020 gives us the confidence that the supply tightness might continue till
New supply coming in is pretty much at same level as the new demand.
Management did indicate that new supply is coming in accordance with new demand
and hence the shortage of ofc and of will not sustain.
For preform, $100 million new capacity is coming up between now and 2021 on the base of $500 million.
Incremental demand is coming at a rate of 12%
Company is probably running at highest range of margin because for OFC and OF
the capacity utilization is almost 100% and also the supply is tight which gives higher realizations.
Expected margins under normal situations will be between 20 to 22% vs 28 to 30% currently.
Optical Fiber Cable offers higher margin than the Optical Fiber.
Services offer least margin.
- OF manufacturing capacity to increase from 30mn to 50mn by June 2019
- OFC manufacturing capacity to increase from 18mn to 35mn in period of 12 to 18 months.
Given the comments from Choksey, it appears like the shares may be depledged/unpledged fairly soon. The institutional investors/brokers will have a much closer access and updated info. from the mgmt. Also pl. check the interview of Dr. Anand Agarwal given to Axis Capital for their institutional clients. Unnecessary panic is being created due to this pledging. Fundamentals are intact. Just hold and sit tight if you don’t need funds for the next 2 years.
This is all great but existing investors make money only when new crop of investors arrive to hand some profits to the earlier ones. If a stocks fails to attract incremental investors commensurate with its size, it is probably game over. Still watching and holding with lots of concern.
Isn’t it true for any stock at any instance? Basically you are saying you don’t know whether people would be willing to pay higher price for the business or not.
It is trading at 17 PE. The earnings have been growing at more than 30% QoQ last year and more than 40% yoy. Add to this, the capacity is almost going to be doubled from June 2019. Ultimately as @phreakv6 has mentioned its going to be the demand supply scenario which will drive the earnings of this company. The margins may taper a bit as more supply comes in stream but the demand is also looking very strong considering the local and global drivers of demand growth. My take is that company may not show margins as high as these, the absolute EBITDA will keep growing because of new demand, more capacity.
Local private capex in telecom is expected to start in a year or so. Globally as well there are many drivers for demand.
The management is guiding $100 million profit by 2020 and it seems to be very well on that track considering that they are fully booked for 2019 and have started booking capacity for 2020 as well. At $100 million USD net profit it is available at 12 PE with respect to current market cap.
Invested, looking to add more
Everything about the Business Looks good, but how about the Management ? Are they feeding another companies under them by Pledging shares of Sterlite ? Isn’t it a sign of Bad Management Practices or not Investor Friendly ?
Tried to get some more clarity on demand-supply side. Sharing some notes below.
Optical fiber preform, plays an important role in the optical fiber and cable industry chain, seizes about 70% profits of optical fiber.
In 2017, the global demand for optical fiber preform rose 11.1% year on year and reached 15.3kt, and is expected to hit 31.5kt in 2023 with the CAGR of 12.2% between
2018 and 2023 because of the growing demand for broadband like FTTx (Fiber To The X).
China is the largest consumer of optical fiber preform around the globe, as a percentage of 60.5% in global demand and the expected 61.6% in 2023.
Major Global Optical Fiber Preform Market Companies: Corning, Sumitomo Electric Industries, Shin-Etsu Chemical, Fujikura, Prysmian, Furukawa Electric, TwentscheKabel
Major Chinese Optical Fiber Preform Industry Companies: YOFC, Hengtong Optic-electric, Jiangsu Zhongtian Technology (ZTT), FiberHome Technologies, Futong Group,
Potevio Fasten Optical Communication
China, the world’s largest producer of optical fiber preform as well, produced 7.55 kt in 2017, leaving a supply-demand gap of 1.75kt or so and still being in short
supply. The short supply will continue as the demand for optical fiber and cable is growing. It is estimated after 2022, optical fiber preform in China will be
self-sufficient, and the output and demand will amount to 20.2kt and 19.4kt in 2023, respectively.
Allured by high prosperity of optical communication industry, there has been a remarkable increase of optical fiber preform industrialization projects across China
over the recent two years. Apart from such giants’ capacity expansion as YOFC, Hengtong Optic-electric and Futong Group, the key optical fiber and cable companies like
Tongding Interconnection Information, Zhongli Sci-Tech, Tianjin Xinmao Science & Technology, and Hangzhou Cable also foray into optical fiber preform field. As
estimated, the production capacity of optical fiber preform in China will be at least 25kt till 2023, showing a clear sign of overcapacity.
In 2017, the telecom fiber price increased by more than 10% to 20%, due to the shortage of fiber across the globe. In the beginning of 2017, various companies have
announced the projects to expand existing preform factories and build new preform factories. There are various on-going projects in the U.S., China and India. The
projects are expected to add up to 3,000 tons of preform capacity. In addition, the increase in capacity could bring 55 to 90 million km of new fiber capacity in the
market. There are around 20 major manufacturers across global market, including, Yangtze Optical Fibre and Cable Co., Ltd, Corning Inc, Sumitomo Electric Industries,
Hengtong Optic-electric China and Shin-Etsu Chemicals amongst other players.
China, the world’s largest producer of and source of demand for optical fiber preform, produced 6.1kt and demanded 7.668kt in 2016, 41.0% and 55.4% of the world’s
total, respectively, indicating a supply-demand gap of 1.568kt, still in a state of short supply. However, as Chinese enterprises improve optical fiber preform
technology and put production lines into operation, the gap has narrowed gradually, from 68.4% in 2010 to only 20.4% in 2016 and estimated 18% or so in 2021.
China has put anti dumping duty on fiber coming from Japan and USA. This is probably good for Sterlite as it manufactures in China as well.
Important points :
- expected demand of preform by 2023 is 31.5kt growing at cagr of 12.2% between 2018 and 2023. Demand exoected to be 25.6kt in 2021.
- In 2017, there was short supply of 1.75kt in China. New capacity of 3kt is announced. If demand grows by 12%, then there will be net additional capacity of 1kt.
This is just for China though.
- Reports indicates that China will still be net importer in 2021. Having 18% gap between demand and supply.
- References :
- This is in no way supposed to be a conclusive research, I am just sharing something I found during my exploration which is still WORK IN PROGRESS.
Good news for Sterlite, China mobile announces big order for optical fiber cable. Postponement of order from China mobile was one of the main reasons of reduction in spot prices of OF.