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Krishnan Thiagarajan

THERE seems to be no `light' at the end of the optical tunnel for Sterlite Optical Technologies (Sterlite). For the third consecutive quarter in 2002-03, Sterlite recorded net losses. To compound its woes, it was accompanied by a sharp fall in net revenues. For the period ended December 31, 2002, the company reported a 76 per cent drop in revenues to Rs 51.97 crore and a net loss of Rs 20.82 crore against a net profit of Rs 7.99 crore in the corresponding previous period. The company attributed this poor performance to the non-acceptance of an order from the State-owned BSNL for jelly-filled telephone cables due to lower prices and a decline in optical fibre (OF) and cable prices in a globally depressed market. However, on a sequential (quarter-on-quarter) basis, it has managed to reduce its losses from Rs. 41.16 crore on revenues of Rs. 57.16 crore. Sterlite appears to have achieved this with lower consumption of raw materials, interest costs and depreciation charges.

In the light of Sterlite's depressing performance over the past three quarters, what are the prospects of a turnaround, especially of its OF/OFC business? This rests on two factors. One, the recovery of demand for OF/OFC in the international markets. Two, the stabilisation and improvement in OF/OFC prices from the current levels.

Demand recovery

The last two years — 2001 and 2002 — were the most nerve-wracking years for players in the telecom industry. Fundamentally, the capital spending in telecom came to a grinding halt and knocked out the demand for optical network creation by OF/OFC players across the globe. According to Corning, the industry leader in OF /OFC, in 2002, the worldwide fibre demand registered negative growth in each of the application categories . And Sterlite too, was no exception to this trend.

According to Corning, a full-blown demand recovery of the telecom industry, especially in the US in 2003, is relatively bleak. Largely because, several structural issues of the industry such as improvement in the balance sheets of telecom carriers or emergence of viable broadband business models have not been addressed yet. For Sterlite, this essentially means that scope for sustainable exports to the US and Europe remain limited in the short term.

However, the long-term prospects for the telecom industry are expected to be fairly good. In the long run, as the demand for Internet bandwidth increases steadily, technology substitution from copper cable to OFC will become inevitable. In turn, the capital spending on substitution will help drive the long-term growth of the OF/OFC industry.

Price stability

Over the past two years, the international prices of OF/OFC have declined steadily. For instance, after touching the highs of $60-70 per fibre kilometre, the OF prices are now in the $15-20 range. Since the demand recovery is unlikely to happen in 2003, the pressure on OF/OFC prices will continue, though price declines may be more moderate than in the past.

To combat the twin pressures of slack demand and declining prices, established players such as Corning have attempted to align their cost structure in line with their revenue expectations. Over the last two years, Corning has closed or mothballed three OF factories worldwide, thereby cutting the overall OF and OFC manufacturing capacity by 50 per cent from the peak in 2001. This has helped relieve the overcapacity concerns within the industry.Sterlite's ability to continuously align its cost structure to revenues holds the key to its future profitability.

At the current market price, the downside in the stock appears limited. Shareholders who have taken exposure in the stock at higher price levels can stay invested from a medium term perspective. However, fresh exposures may be avoided as the signs of demand recovery and price stability are still sometime away.

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