Recommendation From Cables and Telephone Sector

National Optical Fibre Network (NOFN) or BharatNet, which forms the backbone of the Digital India initiative, seeks to connect 2.5 lakh gram panchayats with high-speed broadband by December 2018. The project cost is estimated to be around Rs 72,778 crore. The Centre is putting into place a policy that could make broadband infrastructure necessary in states to facilitate the ambitious Digital India programme and mitigate local Right-of-Way (RoW) issues to get the national optic-fiber initiative rolling with the laying 7,000 km of fiber across the country in three years time. Therefore we have picked a stock from this space which is amongst the world’s largest integrated fiber and cable producers.

Sterlite Technologies is a leading player in telecom (optic fiber and cables) and power conductors with domestic market share of 35 and 25 per cent respectively. It also has a portfolio of six power transmission projects on build, own, operate and maintain (BOOM) basis. In the last quarter, the company approved the demerger of the power business by segregating the telecom and power businesses into two separate entities in order to focus on each separately.

The company plans to delist the power business and continue as a pure-play telecom products and solutions company. The demerger will be completed by Q4 of FY16. The current debt allocation has been done on the basis of asset share. On the demerger scheme, each shareholder will get an option to remain invested in the power company too or exit it. For every five shares held in Sterlite Technologies, the shareholder will get the option of one share valued at Rs 112.30 (FV Rs 2) or one redeemable preference share for the same value which will be redeemed within 30 days.

Sterlite Technologies is evolving from an optical fiber manufacturer to a network solutions company. With the surge in high bandwidth availability through 4G in urban India and BharatNet programme for rural India, we see potential for high bandwidth applications inter-alia in healthcare, education, entertainment, Internet of Things, etc. In FY15, the company won a defence project worth Rs 2,500 crore and is now vying for another strategic project in the sector worth Rs 7,000 crore.

The company also plans to invest Rs 40,000 crore to set up a LCD manufacturing plant due to the huge demand that may arise for LCD display panels in India if the Digital India initiative takes off in a big way. An LCD display panel is a major component in television sets / monitors, notebooks and small screen size tablets and smartphones. India’s total market opportunity for flat/LCD display panels can be estimated in the range of USD 20-30 billion. Despite the big market opportunity, there is no LCD panel manufacturer in India who can supply LCD panels for TVs and smartphones. Therefore, we recommend buying on dips with expectation of an upside of 30-35 per cent from the current market price in the next one year.