About the Company:
Sterlite is involved in the production of Optical Fibre (OF) and Optical Fibre Cables (OFC), as well as offering system integration and software offerings. Their products and services are preferred by OFC manufacturers, telecom operators, and infrastructure providers. They have a diverse presence across the broadband infrastructure value chain, including products, services, and software. Sterlite is known for being one of the most cost-effective producers of OF and OFC due to their extensive backward integration.
Sterlite the market leader in the domestic market, with a capacity to manufacture 100 million fibre km p.a, even though it faces competition from rivals such as Himachal Futuristic Communications Ltd, Vindhya Telelinks Ltd, Aksh Optifibre Ltd and Finolex Cables Ltd. Sterlite's global OFC market share has risen to 12% in the first nine months of fiscal 2023 from roughly 9% in fiscal 2022.
The medium-term demand outlook appears to be positive, with expected growth in broadband penetration, the rollout of 5G and FTTx (fibre- to-the-home), significant investments in data centers, government focus on rural digitization, and large-scale implementation of smart-city projects. Orders exceeding Rs 12,000 crore (as of December 2022) and improving OF realizations provide significant revenue visibility in the medium term.
About the Industry:
Optical Fibre Cable manufacturers are getting ready to handle a significant rise in fiberisation and capitalize on global markets to support 5G services, as well as accommodate the demand from fibre-to-the-home (FTTH) fixed broadband. Telcos predict they will spend around $1.5-2.5 billion on OFC in India over the next three to four years.
Global demand, which is on the rise due to the rollout of 5G and FTTH, is expected to increase from $9.2 billion (502 million fibre kilometres) in 2021 to more than $12 billion (610 million fibre kilometres) by 2024 - a CAGR of 10 per cent. However, India accounts for just 4% of global demand for OFC, while China has a 50% share. Nonetheless, industry experts believe there is enough capacity available to meet the increased demand and gain a larger share of the global market.
Telecom companies worldwide are committing to network investments, with Sterlite expected to increase its cable capacity by 30% in the next 6 to 9 months, from 33 million to 42 million. The US alone is expected to see over US$275 billion in investments in 2022 from telcos, internet content providers and government stimulus, according to a report from CRU. Bharti Airtel plans to invest US$15 billion in Capex through four subsidiaries. On the government side, programmes have been announced to connect the remaining 3,60,000 villages in India. Contracts for laying fibre are expected to be awarded between 2022 and 2023, with completion targeted for 2025. On the private sector side, telcos and ISPs aim to deploy more than 2,00,000 cable kms in FY23. All of these developments indicate positive prospects for the demand for cables and optical interconnect.
Business Performance:
Operating margins for the company have been observed to be increasing from 9% last year to a range of 13-14% in recent quarters. However, the company has been facing challenges related to net debt, which has risen to Rs 3,400 crore as of December 31, 2022, from Rs 2,782 crore as of March 2022. This is due to large capex, acquisitions, and a stretched working capital cycle in the services business. Despite these challenges, Sterlitehas completed capex of over Rs 3,000 crore in the last five years to expand it’s OF capacity and plans to incur moderate capex over the medium term, which will also help maintain its financial risk profile.
Revenue Mix:
Risks:
With many players in the OF/OFC market, price competition has become a key factor in winning contracts. Companies often compete aggressively on price, leading to reduced profit margins and increased pressure on companies to find ways to reduce costs.
The working capital requirement of a services business may rise due to factors such as delayed payment from customers, high operating costs and seasonality.
