Lower Fibre Cable Prices In China To Hurt Sterlite Technologies
China Mobile Ltd.’s tender results for optic fibre cables may not augur well for Sterlite Technologies Ltd. at a time the domestic supplier is planning to expand capacities.
The world’s largest consumer of optic fibre cables had set a maximum price of $17 per fibre kilo metre to source 105.4 million fkm cable. The bids, however, came in the range of $10-11 per fkm, an average 38 percent lower than the maximum price limit, according to tender documents available on the website of China Mobile.
Sterlite Technologies plans to increase its capacity to 33 million fkm from 18 million fkm over the next year and a half. Previously, the company has refrained from commenting on changes in prices as it has long-term contracts with large clients. These contracts, however, have a renegotiation clause where the prices could be revised every six months or a year.
The fall in prices could be to dump the inventory built up in anticipation of a large order from China Mobile, according to Edelweiss. The delay in ordering and shifting capex from fibre-to-home to 5G in China market caused the pricing disruption, it said in a note.
China sales account for 6-7 percent of Sterlite Technologies’ total revenue. Given the limited exposure and large order book on contracted prices, Edelweiss expects the impact of fall in price to be lower for the next financial year. For financial year 2020-21, however, it expects the company’s utilisation to fall. Its earnings before interest, tax, depreciation and amortisation will come down by 11.1 percent and earnings by 18.3 percent during the period due to lower fibre pricing, the brokerage said.
Haitong Securities said lower rates puts pressure on the global prices of optical fibre cables, even after accounting for long-term relationships and contracts. The decline, it said, would result into lower realisation, impacting margin of Sterlite Technologies.
Both brokerages lowered their earnings estimate for Sterlite Technologies for the next two years in the range of 7-29 percent.
Haitong Securities downgraded its rating on Sterlite Technologies to ‘Hold’ from ‘Buy’ and cut target price to Rs 235 apiece from Rs 425. While Edelweiss maintained its ‘Buy’ rating, it reduced the target price to Rs 288 from Rs 436.
To be sure, 10 of the 11 analysts tracking the stock suggest a ‘Buy’ rating. The 12-month consensus target price stands at Rs 403 apiece, implying a 75 percent potential upside, according to Bloomberg data.