Following is a snippet from latest Earnings call of Corning Glass. As it says, a lot depends on demand from China. Its hard to predict how this will play out with current data. Wuhan which is the center of Corona outbreak also produces 25% of worlds total Optical Fiber. If China mobile’s tender comes with aggressive pricing then that would be a big positive for OF prices.
Q4 Earnings Call - Corning Inc.
Steven Fox – Cross Research – Analyst
Hi, good morning. I had a question, a couple of questions on Optical actually. First of all, I was curious on your view on the, just the industry supply situation. My understanding is that there is quite a bit of excess capacity in China for fiber and cable. I understand you cannot move seamlessly across the globe. But it seems to be making its way into Europe, are you guys factoring in any of those any of that excess supply into your model, should we be concerned about pricing pressure risks as the year goes on. And then I have follow-up.
Wendell P. Weeks – Chairman and Chief Executive Officer
I think on that would, Steve. You are seeing that to the extent that is going to impact us, is already in our financials. The actual level of excess inventory in China has been trending down, there is still some to come. I think how rapidly the Chinese market tightens up will depend a lot on this upcoming tender, it will see out of China Mobile. We anticipate that is part of this, they will lay forward a little more clearly what their 5G plans are and therefore what they’ll need to densify that network. If that comes out with a very aggressive set of 5G builds, then the China market itself will tighten up very significantly. If it’s not quite as aggressive, we’ll just have a little bit longer-tail. We think we’ve got the bulk of that in these numbers.
Look at the 5G package customer numbers. With china being a huge market and it being touted to lead the world in AI in coming years. The government will try everything to not stop the edge they may be having. A centrally controlled state like china, can and is known to change directions very fast. 5G is also about power play in geo politics. So we have strong political will for a move to 5G.
This is all good for optical fibre companies as china is huge market for optical fibre.
Does all this and low price (5PE) make sterlite a nice commodity cycle bet ?
The other side argument is that, china will first absorb its own fibre capacity before importing more. Is that a right way of thinking?
This is the first of my analysis in valuepickr which looks at macro information. It is not as detailed. But I want to get feedback before I proceed to get the direction right. One earlier post was about enfield bike reviews in UK market but that was not about the future outlook.
Looking forward to feedback, so that I can dig more into commodity players. I find commodity players to be straightforward to analyze. Majorly about supply and demand and not about ‘creating’ new market etc. that technology companies have to do. Am I right about commodity Companies?
Looking at the shareholding pattern - Looks like promoters have exited the company and retail investors hold majority stake now.
Buyback might have been used to stabilize stock price & exit
.
Dec Shareholding:
Promoter Group 53.65%
Retail: 26%
Mar Shareholding:
Promoter Group: 3.7%
Retail: 60%
Even I saw this yesterday. But it is not just that these shares have been sold. The overall no of outstanding shares has also reduced by approximately the no. of shares that were earlier held by Twin Star Overseas Ltd.
Total no. of Outstanding shares held as on 31 Dec. 2019 = 40,38,80,217
Total no. of shares held by Twin Star Overseas Ltd. as on 31 Dec. 2019 = 20,94,02,750
Difference = 19,44,77,467
Total no. of outstanding shares held as on 31 March 2020 = 19,45,60,237
So, it is almost like the shares held by Twin Star Overseas Ltd. simply vanished. I have emailed their investor relations & compliance officer for the same yesterday. Will update if & when I receive a revert.
Sterlite Technologies has been on a downtrend since Nov 2019, stock has fallen almost 80-85% since then.
Promoter holding declined from 54.14% in 2017 to 53.65 %.
MF holding declined from 7.57% in 2017 to 4.65 %.
AI+FPS holding declined from 7.31 % in 2017 to 4.96 %.
Insurance holding declined from 4.39 % in 2017 to 1.29 %.
However Financials performance has been good since 2017 except for last quarter. It recently also secured a cloud contract for the 2nd biggest player. I believe Telecom consumption is here to stay, 5G testing and Rollout in near future in 1-2 years and entry into cloud storage seems to show growth areas for the company. Order book shows visibility for the next 2 years.
I wonder what are we missing that is leading to declining shareholding in-spite of pledge issues behind it.
Disclosure - No Position. Looking to enter around 55-65 upon studying further.
Yes, even I have been wondering that, especially since the pledging issue got resolved. The promoter holding should increase marginally, after the ongoing buyback.
As far as I know, the shares were pledged earlier but the pledges were removed last year around June. Where did you find this data on the invoke, I did not see anywhere that the pledges were invoked.
Again I could not find this. Where do you see this?
I think the reason is the fall in the spot prices for fiber optics, due to over supply last year. However, Sterlite has fallen much more than global players like Corning, so there may be other reasons at play too.
If I have to hazard a guess, I think the fall in the last year has been on 2 counts:
Promoter action
a) the market clearly did not like the pledge created (and subsequently freed) on the promoter shareholding in the company, especially given that it pertained to loans unrelated to Sterlite Tech’s business - I think this sent an extremely -ve message to everyone that Sterlite Tech is a cash cow that the promoters will bank upon for any/every fund raising requirement. I recall the con-call early last year when the management was asked pointed questions about the rationale behind the pledge, timeline for its release, etc. and they simply had no definitive answer - shows that while the promoters may be non-exec directors, management has very little say in running the business.
b) The second instance was when there was market talk of Sterlite Tech or its promoters acquiring Rel Comm - while this did not fructify and the management clarified the same - this did not help public perception
Services Business
Management has been driving this vertical over the last 1-2 years as a counter to the falling products business, and I would think they have been doing this well given the growth of this segment; however I think the market believes that this may not be Sterlite Tech’s core competence and while there is merit in providing integrated solutions to telecom customers and thereby adding value (and improving the company’s ROCE), they will face competition from specialists in this space over time.
Between the two, I believe 1 above has clearly led to the stock falling out of favour amongst investors which is evident from the marked decline in institutional holding in this stock.
