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.
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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.
Demand :
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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.
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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.
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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
Supply :
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Q4FY18:
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
then. -
New supply coming in is pretty much at same level as the new demand.
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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%
Margins :
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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.
Capex :
- 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.