Of A Strong Fibre - Sterlite Technologies

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With an order book of Rs 2,400 crore, Sterlite Technologies (STL), promoted by Anil Agarwal, is likely to march ahead in both the power and telecom segments that the company is catering to. Its order book consists of Rs 1,800 crore from the power segment while the rest is from the telecom sector.

In the recent past, the company has been awarded a contract by Power Finance Corporation (PFC) for its east-north inter-connection mega transmission project. The project involves establishment of two 400 KV double circuit transmission lines that would respectively connect the Indian states of Assam, West Bengal and Bihar. The project has been awarded to STL on a ‘build, own, operate and maintain’ (BOOM) basis, wherein the transmission lines would be commissioned within three years and STL would operate and maintain the same for a minimum tenure of 22 years thereafter.

The company is still in a phase of calculating the revenue and cost structure and more clarity on the project will only be available in second half of FY2011.The demand for the fibre optic cable and power conductors are witnessing an upside and to cope up with the demand the company has embarked on an expansion spree. STL is enhancing its power conductor capacities from the existing 1,60,000 metric tonnes (MT) to 2,00,000 MT making it the largest manufacturer of power conductors in the world. STL is among the top five producers of fibre optical cables globally and controls a 45 per cent market share of the domestic market. It is expanding its optical fibre facility from 12 million kms to 20 million kms by FY12. All the expansion plans are done through internal accruals.

The global consumption of fibre optic cable is at its all-time high, being partly fuelled by demand from Asian consumers to increase connectivity speed and partly due to the replacement of the old copper cables by the US and the European countries.

The realisation for the optical fibre has witnessed a hike as it rose to Rs 404/fkm (fibre kilometer) in FY10 from Rs 355/fkm. In the recently concluded fiscal FY10, the company posted topline of Rs 2,430 crore as against Rs 2,289 crore, thereby witnessing a growth of 6 per cent on a YoY basis. Its bottomline witnessed a growth of 99 per cent and was Rs 245 crore as against Rs 123 crore on a YoY basis.[PAGE BREAK]

The environment for both its products, i.e. power conductors as well as optic fibres is very conducive for investments.

The global demand for optic fibre would be driven by China and India and that for power conductors will be fuelled by additional investments in the transmission and distribution lines in India. With such expanded capacities, we believe that STL will enjoy economies of scale and improve its margins. At its current share price of Rs 114.65, the stock discounts its FY10 and FY11E earnings by 15.07x and 11.77x respectively. In our opinion, this scrip will be a good addition in the portfolio of the investors and our recommendation is to buy it with a target price of Rs 141, providing an upside of 23 per cent.