Does anybody have information on the impact of BSNL cash strapped situation on Sterlite. Would Sterlite have to make provision for Receivables from BSNL
You mean to say, the increase in demand may not translate to revenue growth because of chinese capacity?
Over capacity is not expected to come soon, expected year after which there might be over supply is 2023. So for next two years the demand may remain strong. Being a commodity company we have to keep monitoring demand supply gap every year.
Any data points/reports as to what is the status of Demand and supply in the OFC market currently and also what is the Spot/contract prices currently?
Is there a website which provides summary of this?
It seems there is a deep cut in the spot price due to over supply in China, today’s interview with the CEO.
A bit from the above video -
Speaking on the pledged shares, the management said, “The promoter pledges which has happened over the last few months is related to areas outside the purview of the company. It’s short-term, and over the next 3-6 months, all pledged shares should be released from the company.”
Yes Pledge is for the purpose of Delisting of Vedanta from LSE. Not directly related to Stech business operations.
Good to know that it will be over soon.
Its not just the spot prices, long term contract of China mobile was also made at 35% discount price.
Needs to be seen how this shapes up in coming quarters. Important question is, whether and how it can affect the global prices.
Thank you for the informative posts. Our investment thesis is based on supply catching up with demand only 3 years from now. If that was the case, I’m trying to figure out why then there was so much competition to supply to China mobile at 35% long term discount.
- Is the original assumption (supply is so scarce) wrong then ?
- Why such a large 35% long term discount ? Is demand tapering so that any order is good, or there’s so much supply chasing fewer orders ?
- If this is short-term as Sterlite has recently claimed, what is the justification for it ?
- What stops the same Chinese manufacturers to discounting like-wise in other geographies for orders ?
Invested and trying to analyze
well, China mobile order is not strong enough to keep spot prices elevated. Sooner than later this spare China capacity will spill over to the ex-China market. That is the fear and it is quite justified. The market balance has come sooner than most folks imagined. There could still be good earnings here for 1-2 years but bull market is certainly over. Quite a few AMCs were long here and it will take a lot to stabilise price. On % basis this is the single largest loss I have booked since 2008. Important lesson learnt despite the fact that I had noted down all the risks that is coming now.
I am sitting on loss and it is largest I will have to book. Learnt lessons to be wary of investing in companies that have commodity business, absent pricing power and too much of hype built around them. If that was not enough, the promoters actions are doubtful too. Very expensive but crucial lessons learnt here.
This is certainly a negative impact, but let’s see the broader picture, Does the current supply sufficient to cover the entire Fiber/FTTH/5G demand for next few years? Does any one have any research or notes on the total demand / supply scenario currently and how it stacks up against upcoming demand?
Just doing a scenario planning, We should rather focus on what is the likely outcome in case 5G picks up across countries vs 5G taking couple of years to come down. That too me is bigger risk. All the Telcos will try to squeeze RM supplier in case they are the largest/only one with the demand.
Any inputs will help to decipher the future course of action better.
Guys. You know irrespective of the business (here some are saying cyclical but I have been noticing of all types) among the most important lessons I have seen we have all to learn is never to invest in a company where the promoter pledges shares.
There are ample examples like even Emami which is not cyclical.
Luckily I have learnt this lesson without financial cost but I feel if I ever break this rule then this lesson will be learnt financially.
Promoter shares pledged; forget the benovelent intentions of the promoter talk et al, walk away.
True but it might so happen that promoter suddenly pledges their shares after you bought in. The market usually reacts with stock price erosion and you can exit only by paying a price. My point being their is no way to pre-empt.
Agreed. I mean if the pledging happens even post our investment we should forget all the hard work on the story and press sell button then. There are enough fishes in the sea, why swim with pledged fishes.
Don’t think there has to be a blanket ban on stocks with promoter pledging. I think in these types of stocks insiders know much more than we all. I am 100% sure that marketing dept of Sterlite would be aware of the looming China fiasco and it came out in the market for the select few. Even today they are not ready to accept that things have changed. At least they are acknowledging that there is an issue in China.
Stock fall during raging pledging issue was just an aberration. I am also 100% sure that Vedanta group would not let go off this company for stupid reasons like pledging. They have many corp governance issues but losing ownership control due to pledging is not among them. I mean there is no past and they have enough ammunition to come out of this. It did suffer from some not so transparent transactions in other group entities and that was always a risk.
Sure. I am just saying I have not seen money being made by shareholders in companies with pledged shares. There are one or two outliers but they don’t justify me taking a risk.
I have generally seen that promoters who need to pledge cause shareholder anguish.
And of course, the promoters are not going to let go of this company. The other promoters like those of Omkar and Lasa also still own their companies, draw salaries, do god knows what else to make cash, but shareholders lose.
Anyhow, it was just my personal opinion and it has saved me now a few times, so I just thought of sharing.
The capacities coming online this year were quite obvious as early as June/July or even before that last year. The spot prices falling in December was yet another solid warning. This followed by fresh pledge was yet another warning that the insiders knew better while laughing-off concerns about spot prices affecting long-term prices.
Things aren’t looking good here. We should look forward to dropping sales due to lower realisations, reduction in demand, drop in margins, inventory write-downs (30% of roughly 500 Cr or so inventory?) and some trouble with working capital as well.
To me, it has come as a surprise because I could not find new supply related information anywhere in con calls etc with specific details.
New capacity was expected to be coming on line but not too soon at least from what I had gathered.
The management always gave an impression that the demand supply balance is stable. I know not to trust promoters but even other reports did not mention anything alerting. Having said that, it is a mistake which we have to acknowledge but am I selling my position here yet? I am not sure. I would still like to get more clarity here. Besides, let’s not forget that there are many potential triggers to ramp up demand and it would be interesting to see how it plays out. If at all, when everyone is talking about dumping sterlite its certainly not right time for me to do so until I get more clarity and know that supply is supposed to be in excess for long time even if some positive triggers were to be played out. And I am not sure of that as yet.
As for pledge, I am personally not worried much because the business is solid and no promoter would let it slip off. It’s not a micro cap or small cap neither it is a loss making business. Yes the media and market would create volatility and panic but I dont want to participate in it for now.
I will keep studying this development and for now I have decided to hold and not sell.
What I have noticed in my limited time in the markets is that, when the information is negative, it never comes out in specific details. It has to be discerned.
Take this for eg. from Q4, FY18 Concall
The second question especially is a simple Yes/No question to which the answer was trying to convince (“contracts till 2020”) than acknowledging the basic truth of what happens when capacities come online (tragedy of the commons).
Think of it this way - Sterlite Technologies’ Fixed assets was Rs.1200 Cr and they were planning Capex of 1200 Cr! They had capacity of 15 million km and they were expanding by another 20 million km - by June 2019, of which 10 million km was to come online by Dec '18. That means a large player is more than doubling capacity and there is ample evidence (Aksh Otifibre around the same time announced its expansion plans, more than doubling OF capacity) that implies that every other player is doing the same. In a B2B commodity, there is only one way this ends and that is what is underway now.
However, there is ample scope in the long-term when 5G goes mainstream because of the fractal nature of network reach - more and more cables will be used in last-mile connectivity. But that is some distance away and markets react to YoY/QoQ changes of commodity prices in commodity businesses.