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Sunday, February 25, 2001













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Sterlite Optical: Hold

Recommendation: Hold

Suresh Krishnamurthy

At around Rs 650, the stock of Sterlite Optical is trading at a price to earnings multiple of close to 13 times its annualised per share earnings for the half-year ended December 2000. At this price, an investment in the stock has the potential to deliver decent returns, commensurate with the risk involved.


Also, it is possible that the per share valuations for the Sterlite stock may not improve substantially, given the company's corporate governance track record. In the short term, there are also considerable uncertainties associated with the impact of any slowdown in the global economy which may, in turn, slow Sterlite Optical's export growth rates. Only investors comfortable with such a risk profile should consider investing in the stock.

The stock, however, has a few positives. For one, the present per share valuations considering the fundamentals of the company appear low. In the first-half-ended December 2000, the company reported 46 per cent growth in sales, backed by a sharp rise in operating profit margins which lead to a 101 per cent growth in net profits. Moreover, the growth rate in exports in at least the next six months should not decelerate, since the company has export orders worth Rs 800 crore. Additionally, the growth in demand from the domestic sector for OFC, which is expected to remain robust, provides a strong buffer.

Sterlite Optical manufactures optical fibre, optical fibre telecom cables and jelly-filled telecom cables. Optical fibre and optical fibre telecom cables accounted for 62 per cent of the company's total sales. Around 90 per cent of the optical fibre and cables sales is exported. The company also plans to expand into telecom turnkey solutions, and has a strategic alliance with Alcatel.

Sterlite has also unveiled plans to set up a 10-million km optical fibre plant in India in two phases. The project's cost is expected to be Rs 1,100-1,300 crore and the first 5 million km phase is expected to go on stream by 2002. Sterlite, at present, manufactures 1.5 million km annually.

Sterlite may also come out with an overseas float for funding its expansion plans and the shareholders' approval for such a float has already been obtained. Sterlite has entered into a memorandum of understanding with General Cables Corporation, US, for a cable manufacturing joint venture that would source its fibre requirements from Sterlite Optical. The size of the venture and the financial implications for the company are, as yet, unclear. This, however, is a measure of the company's aggressive business plans.

Overall, the present sharp downtrend in the stock price presents an opportunity for investors, although risks compared to the market average are high. Investors comfortable with the risk profile can make an investment with a two-year perspective. Those with a lower risk profile should seek to exit when the per share valuations correct and **rise around 20 times the present levels.


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