The company could end the full year with sales at Rs 2700 crore, which wouldimply a 30 rise in sales year over year. The earning per share could jump toRs 50 from the Rs 35 level. Its book value was at Rs 291 in FY 99. Normally,this performance should lend support to the stock price at the currentlevel. However, the restructuring exercise could end up creating someconfusion. In a plan drawn up by Arthur Andersen, the telecom business willbe demerged into a separate company. With the telecom story growing strongerby the day, obviously its market value will continue to be buoyed. But apartfrom the inherent strength of the cable business, it is not clear howfurther value additions will come about.

The new telecom company, it is said, is in collaboration with two globaltelecom networking solutions providers. Sterlite's telecom businesscurrently boils down to optic fibre, optic fibre cables and jelly filledtele-cables. It accounts for Rs 532 crore of the turnover. No one candispute that there is a convergence of technologies going around, which willhelp in increased demand for optic fibre cables. But the only way Sterlitecan gain is by its turnover of obtic fibre sales.

The group has, it is reported, plans to double optic fibre capacity to 3 mfibre kilometer in 2001, and further to 10 m km by 2005. The consolidationof the cable subsidiaries will certainly help in terms of operationalefficiency and profit margins. However, value addition can take place onlyvia the technology route. And here, I find it difficult to assume that therewill be any gains in the absence of any further information as to what newproduct evolution will take place after the collaboration with telecomnetworking solutions provider. If the solutions business is similar toothers in the field, which I strongly suspect it would be, Sterlite standsto no great value addition. It would end up competing with other solutionsproviders in the field.

The metal business, after the demerger, will in my view essentially bevalued by the market, in a fashion similar to Hindalco. Its valuations willdepend primarily on the copper price trends. Of course, the company canincrease its operational efficiency learning from global players. But themarket would value it basically as a metal unit. And investors have enoughexperience on how markets price such companies. I find it difficult to seeany values being unlocked here. That brings one to the ultimate question.

Would the demerger help in bettering the valuations for the SterliteIndustries components post demerger.?

The answer is simple. The telecom business has great potential and to thatextent, the market will price it favourably. The company can even hype thepossibilities of future business potentials. The metal business in thedemerged entity will get subdued. Investors might as well await the detailsof valuation and swap ratios. The scope for recovery in the scrip price hasnot acquired any new edge because of the demerger proposals.