MUMBAI, November 2: A leader in polyethylene insulated jelly filled cable industry, Sterlite Industries has 16 per cent market share. The industry has 28 players and with an installed capacity of 8.0 MCKM. Sterlite is the largest manufacturer of JFTC in the private sector. Sterlite has huge orders at present from DoT which has spilled over to the present financial year.

According to the company, the JFTC division would contribute around 45 to 50 per cent to the total operating profits in the future. On the sheer strength of its balance sheet, the company has been able to gather large orders from DoT on deferred credit.

Copper Smelter unit: Sterlite's copper smelter unit at Tuticorin was commissioned in November 1996. Due to environmental concerns, the project was shifted from Ratnagiri to Tuticorin in Tamilnadu. The state-of-the-art plant uses the `Isa-smelt' technology. The plant at present has an installed capacity of 1 lakh tpa. The plant has been operating at 35 per cent capacity.A point to be noted is that copper prices do not determine the profitability of a merchant smelter like Sterlite. A merchant smelter does not produce its own ore, but buys the concentrate and processes it into copper metal. At present, global prices of copper have bottomed out.

Though the company had obtained environmental clearances, a gas leak at its Tuticorin plant followed by a bomb blast had stalled its operations. The company had made plans to increase its capacity to about 1.5 lakh tpa within the next 18 months. In the long-run, the integration of continuous copper rod production with the smelter augurs well for the company. For it will provide the company with in-house copper for its unit at Silvassa.

Since copper usage is mainly in the electrical and telecable sectors, India has tremendous market potential for copper consumption, which is good news for Sterlite. Phosphoric acid which is a by-product has a ready market at SPIC's di-ammonium phosphate plant in Tuticorin.

The Tuticorin plant has been incurring a huge expenditure daily due to fixed costs. As a result, Sterlite's scrip has already taken a beating and is hovering around Rs 180. The copper smelter is extremely crucial for Sterlites' future plans. Since India imports 80 per cent of its copper, the company had made elaborate plans to increase its copper capacity from 1 lakh tpa to 1.5 lakh tpa within the next 18 months. With the current happenings, the expansion plans may just remain a pipe dream.

As planned by the company, the integration of CCR (continuous copper rods) production with the smelter may be delayed due to frequent breakdowns in its operations at Tuticorin. The company actually has plans to ship its copper anodes from Tuticorin to Silvassa for refining into cathodes and subsequent conversion into continuous copper rods.

Financials: For fiscal 1997, Sterlite Industries saw a 9.45 per cent decline in net profit to Rs 126.92 crore compared with Rs 140.16 crore in the previous fiscal. The operating profit margin works out to 10.8 per cent against 13.9 per cent in the previous fiscal. In 1995-96, Sterlite had an extraordinary forex loss of Rs 21.4 crore, which indicate that actual profits were even higher and the decline in 1996-97 correspondingly more precipitate. Sales are up only 6 per cent, a decline in real terms. This attributed to the lower volume of sales of telecom cables on account of delay in receipt of orders from DoT. This probably accounts for the fall in margins too. The situation looks rosier in this segment in the near future as orders have recently been received and sales are expected to increase by more than 60 per cent in volume terms in fiscal 1998. However, since prices are much lower, margins may remain depressed. Net interest cost is lower.

The copper smelter was supposed to increase margins, but the project is facing lot of problems. Apart from this, the company's ambitious aluminium project is another factor making for lower discounting for the stock. They have recently invited bids for setting up a captive power plant in Jharsuguda, Orissa for providing power to the aluminium smelter. The group company, Malco, though experienced in the aluminium businesses, seems unlikely to carry the whole project on its shoulders as the project is huge. Also, an independent entity would find it very difficult to bear the interest costs for a greenfield project. In the absence of sizeable cash flows from the copper smelter, Sterlite would be forced to go in for an equity dilution. Optic fibres and paper: With the merger of Sterlite Communications and Sterlite Industries, the company has acquired a 1.5 lakh FKM optic fibre capacity. This actually provided further backward integration. This business would become profitable in the future only with a good export market. The management claims that the company is aiming to be a major player in the South-East Asian market. Sterlite Communications to date has invested about Rs 95 crore in setting up a bagasse-based paper project.

Although the company plans to set up a 60,000 tpa writing/printing paper project at a total cost of Rs 160 crore by February 1998, it plans to hive off its paper business or set up a joint venture. This is because, according to the management, in the future the company is going to concentrate only on its core competency, i.e., the metals business.

Aluminium smelter potential: Malco, a Sterlite group company, is setting up an aluminium smelter project in Orissa. It has already signed an MOU with the Orissa state government for lease of bauxite mines for a smelter capacity of 2.5 lakh tpa. Sterlite at present has a 20,000 tpa capacity at its aluminium alloy sheets and foils plant in Pune. Company sources claim that since JFTC/OFC businesses are not capital intensive and expanding copper capacity beyond 1.5 lakh tpa being not economically viable, the huge cash generation from the group is to be deployed in the aluminium business. The company is, therefore, aiming for a small project with a total capacity of 1.25 lakh tpa at a cost of around Rs 2200 crore. There is conjecture among analytical circles, if the project is undertaken in Sterlite, Malco would be merged with Sterlite. At present, the Aggrawal family has 74 per cent stake in Malco. According to analysts, if at all the merger takes place, the promoters stake in Sterlite will increase to 38 per cent.

However, the project is at a feasibility stage and a formal announcement will be made only after some time.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.