Sterlite Technologies | Digital India play


(rvetri) #61

I dont remember management guiding EBIDTA margins going down. On the contrary, as capacity utilisation goes up further, the ebidta margins can only go up…And as spot prices keep going up, the long term price trend must also go up…Ster tech is atleast a decade story…from here…


(ramanhp) #62

See response on concall : See Mukul, this is Anupam here and I will address this question. So overall this margin
improvement which we have seen in Q4 is a result of couple of things. One that the products
and services the ratio has been more skewed towards product. We have delivered better
volume as compared to Q3 particularly on the fiber cable side where we have seen a better
utilization coming close to 90% of capacity which was running at about 60% till last quarter.
So that is one and that is also given us operating leverage in our operating performance. So that
is sustainable. Number two, in terms of contribution of the new product continues to be there,
so that is similar to last quarter, so that again plays a role. Definitely the margin coming in
from better realization is also spanning out because we are saying that we continue to remain
in long-term order book, so we do not have any spot order booking and therefore that revenue
or that realization. But overall, we can see part of this margin sustaining. We believe in
growing the absolute value of EBITDA, the margin is a derivative of mix while if you look at
from the full year perspective, we are still at 25%, so I think as long as we continue to maintain
this kind of revenue mix, we would see that 24%, 25% margin. But absolute EBITDA we are
quite sure that it will continue to improve on quarterly basis


(Mridul) #63

Yeah…i already captured this point in my post. Please take a look at the concall post in full. What i emphasized is that ebitda will rise but not ebitda margins especially post fy19. This is exactly what mgmt has said. What else are you trying to say?

Also, we shud not be selective. Check mgmt answers to global capacity, supply demand post fy19 as well. They did not confirm anything. Rather, they said, they are not sure when will supply come online and how wd that effect overall ebitda margins.

If we just go by mgmt guidance, no point analzing. We will always be reactive rather than proactive.

Anyways, as i said, different people will have different perspectives. They see the very same line spoken as per their biases.


(kv) #64

Interview with executives of a small company trying to enter the optic fiber preform market. Has their biased views (since they are starting in this space, they are obviously seeing opportunity). They do mention on difficulty/barriers to entry but still they are entering:

http://smallcaps.us/transcripts/ATVK_Interview1.pdf

Some excerpts:



They think they will get to 40% EBITDA margins!
image


(ramanhp) #66

(ramanhp) #67

Interesting insights into 5G and Fibre technology demand and the future. The following presentation was presented at Light reading Webinar “Road to 5G, bulit on Fibre”. All credits attributed to Light Reading.

sterlitetechroadto5gbuiltonfibrefinal1528971552775.pdf (1.7 MB)


#68

Lots of tail wind for data enablers and Sterlite seems to be in pole position. This is in my watchlist for sometime but found expensive. I have toruble accepting the demand scenario being projected. There are ifs and buts beyond 2-3 yrs particularly for 5G deloyment. The key question is who will drive the adoption of 5G - consumers, telecom companies or the govt subsidies? Domestic telecom players are hardly making any FCF to enable them to commit large investments but leverage is driving investments in the hope that one day consumers will start paying true cost of the services. First 4G players need to charge true sustainbale tariffs for 4G services and see how many are ready to pay for the same. Current data explosion subsidised by Jio and in turn by the govt. appears unsustainable to me.

Let’s take China demand - we all know who funds infra spend in that country and it is already slowing down there. They have overwhelming desire to be at the forefront of new technologies as their own companies would be providing 5G PoC to the world and hence installation contracts. Can we say the same thing about other countries? Only in USA and some other developed countries adoption of 5G will be dependent on consumer demand. Even Sterlite expects govt to provide incentive for making 5G investments.

My interest in the sector was aroused after I saw Kenneth talking about whole media chain. OFC is the only place where there is some supply tightness and moderate competition currently. This makes a solid medium term play but not sure about the long term as yet. We need more evidence that private sector can fund 5G investments on its own in a rising rate environment.

Disc - not invested


(ramanhp) #69

https://www.fibre-systems.com/feature/long-goodbye


(insanemaverick) #70

I would like to stick my neck out and tell here that this is the single most powerful, secular trend playing out currently. IMHO, this is a very very long term trend and things will only accelerate as we move along over the next couple of years. Data consumption is exploding at all levels and in India, we are just at the tip of the iceberg. If you look at all the disruptive technologies that the world is moving towards- IoT, AI, SMAC etc., The bedrock of all these is high speed internet and devices which are interportable. The G series will go on as the quest of humans for faster speed will never die. Who would have thought that we will experience 5G in 2019 when 3G was launched in India. We are talking about Autonomous vehicles, IOT 4.0 Factories, Automated Homes etc. being implemented as I write. I speak to a lot of tech entrepreneurs and folks in the VC/PE ecosystem and the kind of businesses being built will completely change the way we live in the next 4,5 years.
What we must understand is that 99% of these companies are private and private capital is funding these businesses which is highly patient capital. The point is, how do you play this mega-trend through the listed space? Unfortunately, there are very very few companies available. You can count them on your fingertips. Obviously, the telecom companies would have been a great play but we all know whats happening in that space. So, we gotta go with the pick and shovel strategy. In a way, the Fiber optic manufacturers have been the biggest beneficiary of the disruption in the telecom sector.
There are 4 listed companies in the Fiber optic space but I like only these two- Sterlite Technologies and Aksh Optifiber. Aksh Optifiber, on top of being in the right sector at the right time is also a fabulous operating leverage story.
So, if in my view this sector presents the strongest and the most secular trend in the markets today with potential for outsized profits, Can Sterlite Technologies be a 50,000 Crore MCap company by 2020? Can Aksh Optifiber be a 5000 Crore Mcap company by 2020? I certainly won’t be betting against that.

P.S.: Please remember that the Optical Fiber play is not just a play on the data explosion theme. It is a play on IoT, Articial Intelligenece, Cloud, SMAC etc. and these are the biggest themes of our generation. A lot of serious private capital is chasing these sectors and because of lack of credible listed companies, you may soon have to built in scarcity premium for pick and shovel guys. Have substantial allocation to both Sterlite Tech and Aksh Optifiber. Therefore, please take my views with a pinch of salt. I may be completely wrong.


(ramanhp) #71

@maverickroger Good note. The expanding ecosystem of AI, IOT and digitalization will have a multiplier effect on high-speed data. Internet-enabled devices and infra will fuel a greater demand for a robust, high-speed internet network. One of the data demand forecast, a 7 times increase in the use of internet-enabled devices and 2 times increase in data users by 2020.
It will be interesting to watch the transition of ageing, copper wired 4G networks in the US and Europe to Fibre optic based 5G. Indeed, interesting changes unfolding right in front of us.

@maverickroger, Coming to the listed space, ST is considered to be trading at extremely expensive valuations despite a sharp fall in it stock price in past few months. Do you have any views on its valautions?


(Hamir Asher) #72

The case for 5g will not be made by the service providers but by the equipment manufacturers / OEMs. I have been working in the telecom industry from 2004 and can say this since i have witnessed this myself. The OEM have a policy of phasing out old equipment in terms of no supply and also support. Service providers are forced to adopt newer tech. Something similar will happen in this case as well. It is just a matter of time. My sense is that there will be one disruptor, maybe JIO, and everyone else will have to follow.


(sivakkri) #73

While the opportunity seems good, what can disrupt (or) slowdown fibre optic consumption,

  • Slow down of Fibre usage by China (who consume upwards of 50% of all consumption). Do we know the future plans/requirements from China ?. Where do we get this data ?

  • Satellite internet (or) other advanced tech. For example, SpaceX seem to be eyeing Satellite internet offerings and they can easily disrupt this space ( https://electrek.co/2018/05/22/tesla-spacex-satellite-constellation-internet/ ) in couple of years. How would this affect the Fibre optic requirements ?.

Beyond above, most players (including Sterlite) are increasing capacity in a big way. What will be the net capacity in couple of years from now ?.

I believe we need to answer some of the above for complete analysis of this business.


(Manohar T. Patil) #74

I have added snippet from the below article; I work for Vodafone which has business in over 25 countries. There is a tremendous focus on getting 5G launched. Vodafone UK have recently own the 5G spectrum. And the key backbone for 5G is optic fibre network(As I heard in a conference from our Network specialist). Next 2-3 yrs, all the service providers across the world are going to rush to adopt 5G. They will have to augment their fibre networks. This will lead to massive demand for next 2-7 yrs as the roll out are going to be gradual. This in to some extent caters to the risk for Space-X and optic fibre manufacturers increasing the capacity.

"Because of this, wired networks are suddenly hot again, and cable carriers have an advantage at the start.

Telecom companies like Verizon and AT&T say this shift will only expand their business, as new applications for 5G, from self-driving cars to mobile augmented reality, stoke demand. But they need to keep building their fiber-optic networks to make it happen.

AT&T plans to extend fiber near (but not directly to) 22 million homes and businesses by July 2019. Verizon currently has nearly six million customers for its fiber-optic home internet service, making it well-situated to roll out a dense, fiber-optic-powered 5G network in regions where it already offers its Fios service, says Bill Stone, vice president of network planning at Verizon.

Disc - I have holding in Aksh, HFCL and Vindhya


(ramanhp) #75

Telecom companies are naturally questioning whether they should continue these laborious, expensive deployments of fiber when wireless gigabit is only a few years away. So-called “fixed wireless” replaces a cable or fiber modem with a box that has a wireless chip like the one in your smartphone plus a strong antenna. Once 5G arrives, these boxes will be able to operate at gigabit speeds – with no new ditches to dig and no cables to lay.

At the same time, Elon Musk’s SpaceX is planning a global network of 4,000 low-orbit satellites that would blanket the entire planet with gigabit internet. If approved, SpaceX said these satellites would offer low latency in the neighborhood of 30ms, which is comparable to today’s cable and DSL connections and much faster than the 600ms that has plagued traditional satellite internet providers. SpaceX wants to start launching these satellites in 2019. Qualcomm, Boeing, Virgin, and others are considering similar plans for satellite internet


(Vivek) #76

In this article its clearly written https://telecomtalk.info/bsnl-softbank-satellite-based-internet-in-india/176276/

Shrivastava also highlighted that the new technology would not depend on a lot of factors but instead will only need customer premise equipment (CPE) thus eliminating the need for mobile towers and optical fiber cables. He also claimed that this new service would be better than the existing technologies which are being used for providing internet services to the consumers. He highlighted that services like voice communication, ultra-high speed Internet, leased circuits and TV/FM transmission would be easily enabled by this yet-to-come technology. He went on saying that if this plan takes off, the entire project would be completed in three phases over a period of five years.


#77

Spectrum limitations mean that last mile connectivity will always be based on cells and mobile towers within those cells. Optical fibers will always be required.

Satellites can help reach areas which are difficult to reach by these towers or help with certain applications like connected cars etc. which have different latency/bandwidth requirements. However, you can never do away with optical fibers.


(spachiap) #78

IMO a company like Sterlite Technologies needs to be viewed as a commodity play, with no pricing power of the product, due to several global Fiber Cable producers. Also with Globalization, global price drop affects all players.

Having said that, I think it still makes betting on Sterlite probably a good bet, at lower prices:

For:
It’s obvious that, data usage is always growing. Even in a developed country like US, the data usage is lead by Video consumption, Cloud Enterprise usage increase, more mobile data usage. These are secular long term growth trends. India is bound to have even higher growth rates.

Against:
I fear the commodity nature of the product, but that really pessimistic view is balanced by the fact that from 2020 onwards, there will be huge demand for 5G deployments, and bodes well for the whole sector. So, in that way, taking the risk on Sterlite (though I would like lower prices), is still a good bet.

(btw, I don’t fear about Satellite communication making a dent on Fiber, because, the last mile data needs to ultimately flow thru Fiber, like that for Mobile, where the data ultimately flows through fibers from the base station)

Any comments?


(insanemaverick) #79

@ramanhp: I actually find Sterlite Technologies to be quite cheap. A company which has more than 50% market share in a sector which is going to provide the backbone of the radical technological changes going on and which can easily grow its earnings at 40-50% CAGR over the next 3 years, should be valued @50K Crores MCap, at the very least (considering its scale of operations)

FY18 Capacity utlilization was 70%. Sterlite Fiber capacity will go from 30MM km in March 18 to 40MM in Dec '18 and 50 MM in June 19. The utilization for the existing capacity itself will go from 70% to 95-100% this year and that’s why the aggressive expansion is going on. I find it very difficult to build in anything less than 40-45% EARNINGS CAGR over the next 3 years, which technically means that the FY21 PAT will be around 900-1000 Crores.

On top of that, it will be unfair to compare Sterlite technologies with its peers like Aksh Optifiber, HFCL, Vindhya Telelink etc…as Sterlite Technologies is a fully integrated player and has a Silicon to Software presence. So it is present across the entire spectrum of the value chain and that provides reasonable predictability on its order book and its margins. Fiber is just one part of it. When smart city tenders will be rolled out agressively, I don’t see any other player in India except Sterlite Technologies who is placed to execute these contracts. In fact, I would go one step further and say that, There is no company in India quite like Sterlite Technologies as far as delivery capabilities are concerned. So, it will always get at least 25-30% valuation premium as compared to its peers.
In my opinion, Considering the size of opportunity, Sterlite Technologies is currently at a stage where Bajaj Finance was in 2011 and it is ready to take off. I won’t be surprised if this company commands Rs. 1Lakh Crore MCap in the next 5 years as its moat keeps getting stronger and stronger. The world that we live in is changing in fundamental ways through disruption and it would be a wise strategy to back the pick and shovel guys.

P.S.: I am a big fan of Elon Musk and Tesla, but the fact is that if you start bothering about these things you may lose out on some great opportunities. The threat of EV is much more near than the threat of Satellite Internet (SI,in my opinion this is at least 10 years away as the costs are too prohibitive). Despite the imminent threat of EVs, Maruti Suzuki is trading at 35x and not 10x. So, lets not fret about these things. Elon Musk and Tesla have a lot on their plate and they will first want to get their strategy right on EVs for the next 2 years as they have been facing a lot of investor heat over the last 2 months. What we should not forget is that, Sterlite Technoloies has the same market share as Maruti Suzuki in its industry and the moat is only getting stronger every month. Lets’s see how the story evolves. There are multiple ways to play the consumption story and in my view there is no better play on the consumption theme than the data consumption theme which is just exploding through the roof.

I am extremely keen to participate in the data consumption boom whether in the listed space or private space. Hence, if you guys feel there is a better way to play the data explosion theme in the listed space (other than Sterlite Tech/ Aksh Optifiber), please share your ideas. I will be extremely keen to hear you out.


(kv) #80

Trying to tabulate coming capacity increases, here is what I have found so far:

Chinese players also are likely adding capacity: https://www.prnewswire.com/news-releases/global-and-china-optical-fiber-preform-market-2017-2021-featuring-13-global-and-chinese-optical-fiber-preform-enterprises-300533211.html

These are all integrated players like Sterlite.

All this makes it clear demand is not in question; but would this disturb the supply demand mismatch in the next couple of years with obvious consequences?

Anybody have a consolidated view on capacity coming in next couple of years?


#81

Optical fibre is a commodity by definition. Can you differentiate the product made by Sterlite or anyone else? This industry is coming into lime light only because there is demand tailwind and capacity additions have been slow over the last few years.