ICICI Direct’s research report on Sterlite Technologies
The fibre optic cable tender details of China Mobile, one of the world’s largest consumer of fibre optic cable (OFC) (25-30% of the world’s OFC consumption and 60% of China market demand), revealed that bids were at US$10-11/fkm, ~38% lower than prevailing price of ~US$17. We note that Sterlite Technologies (Sterlite) has less than 5% exposure to the China fibre market on a current run rate basis (13% in FY18), and is not expected to have any direct impact considering they do not operate in the spot market and their contracts are long term in nature. However, some rub-off of such steep correction in OFC prices in other geographies may result in some downward revision of prices (albeit lower than current steep erosion) when they come to renegotiation. Moreover, aggressive capacity addition across the globe for OF/OFC, also has similar risks of price erosion, going ahead, whenever supply gut (even for short term) creeps up. We build in a lower realisations (by ~10%) from H2FY20 onwards.
Outlook
Consequently, we downgrade the stock to HOLD and cut the target price to Rs 230/share. We advise investors not to take any fresh positions till stability of pricing contours. Consequently, we downgrade the stock to HOLD from BUY earlier. We roll over our valuations to FY21 and value it at 15x FY21E P/E to arrive at a target price of Rs 230. Our earnings multiple cut is reflective of both valuations rollover as well as muted growth outlook for FY21.
