Sterlite controls a 18 per cent market share in jelly filled telecom cables (JFTC), 28 per cent market share in optical fibre cables and it is the only manufacturer of optical fibre in the country. In Sterlite's case, while it dominates all segements, the above average growth in its portfolio from the higher value products of optical fibre cable and optical fibres as well as its fully integrated operations is having a tremendous impact on its margins. JFTC volumes increased 26 per cent year-on-year (y-o-y) in Q3, while fibre cables volumes improved by 116 per cent and optical fibre capacity improved by 217 per cent.

The y-o-y impact on operating margins could be seen from the fact that it improved from 10 per cent to 15 per cent. However, the 5 per cent fall in the 9 month net profit is due to the steep increase in interest and depreciation, attributable to the copper smelter.

The other point that comes out is the change in the nature of the industry from a supply driven one to a demand driven one. In order to generate higher profits all that these companies have to do is increase the capacity available to them, which Sterlite is doing quickly. Last year it picked up the JFTC division of ARM Ltd, and now is presently negotiating the purchase of another two JFTC plants. The finalisation of the deal will improve Sterlite's market share in JFTC to 25 per cent. The market size for JFTC has grown 24 per cent to Rs 3,300 crore for 1999-2000 and is expected to cross Rs 10,000 crore in the next couple of years. Hence, larger the capacity, larger will be the benefits.

Sterlite has the reputation of being one of the lowest cost producers of copper in the world. This edge has been highlighted recently given that international TC/RC charges are the lowest in the last 15 years. But while Sterlite recieves a price of 14.9 cents per pound from the mines, its cost of refining is just 12 cents per pound, the difference accruing directly to the bottomline (nonetheless the spread has reduced). The management has claimed that these concentrate terms have bottomed out, in which case the benefits can only increase. In addition, the recent union budget has given Sterlite's business the benefit of a higher duty differential. Earlier, the duty differential between imported concentrate and copper cathode was 30 per cent which has now increased to 33 per cent. This higher differential means an additional saving of over Rs 30 crore in the current year.

The Sterlite management has remained non-commital with regard to the continuation of its greenfield aluminum project. Effectively this could mean that the project has been scrapped. The trend within the aluminium industry has been to scrap all greenfield ventures, globally as well as in India. There have been some reports that Hindalco has also scrapped its Aditya Aluminium project.

Global aluminium prices have dipped to a level where further production has become unremunerative, prompting smelters to go slow on capacity additions, besides shutting down existing plants. The positive impact that is being seen in aluminium prices worldwide is as a result of these smelter closures. The threat of an enlarged balance sheet being done away with is being positively discounted Sterlite. Sterlite's stock is trading at a little above half its book value at Rs 155.

The unfortunate part about Sterlite's valuations is that many market players and most FII's have a mental block with regards to the copper smelter, given its troubled history. But the fact of the matter is that the plant has had a virtual uninterrupted production in the last few months and is already running at a 90 per cent capacity utilisation. Copper production should see atleast 20 per cent growth by the year end. Last years copper production was 51,085 tonnes.