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S. Vaidya Nathan

Sterlite Optical: Hold Finolex Cables: Hold Aksh Optifibre: Sell on rise

OPTICAL fibre cables may provide a high degree of connectivity. But not for their manufacturers, which seem to be on a disconnect with the stock market. The telecom cable sector stocks do not look enticing from an investment point of view, be it optical fibre cables (OFCs) or jelly-filled telecom cables (JFTC).

The prospects for relatively smaller and not well integrated players in JFTC/OFC such as GR Cables, Birla Ericsson, Vindhya Telelinks and RPG Cables do not look good. For most of these companies, the JFTC business, which had been providing good volumes and fairly steady profitability in the past five years or so, has ceased to so now.

Volumes may still be sizeable but prices have come under intense pressure. With demand unlikely to grow as in the 1990s, the scales may tilt increasingly in favour of larger players such as Sterlite and Finolex.

From an investment perspective, the three stocks that have to be kept on the radar are Sterlite Optical, Finolex Cables and Aksh Optifibre, though the prospects for these stocks too is none-too-bright in the near term. There may in fact be more downside risk in the next six months or so.

There are no signs of OFC prices stabilising at the current lower levels, leave alone any indications of recovery. The global scene is characterised by huge oversupply, sluggish demand and pricing pressures which may red the bottomline of OFC producers.

Despite this rather grim scenario for the next six months or so at least, it may be better to hold the Sterlite Optical stock. It may not post significant gains but the downside appears limited. The company is a well-integrated player which enjoys scale economies and is one of the lowest cost producers of OFC.

It has a large JFTC capacity and has traditionally bagged the biggest chunk of orders from BSNL due to aggressive bidding.

It appears to be the best placed to come out of this difficult period and show reasonable growth when the industry scenario takes a turn for the better (though that may not happen before 2004).

Aksh Optifibre is the other major player with some degree of integration though not as deep as Sterlite Optical. It also does not have the cushion of JFTC revenues to provide cash flows and at least modest profits. Being totally exposed to the OFC business, the risks in this stock are fairly high.

Investors can use any upside to cut exposures in the stock. Finolex Cables has a more diversified profile with presence in JFTC, OFC and power cables.

It has a good retail presence that should cushion revenues and profits and also has strong cash flows and balance-sheet strength. Investors can hold this stock.

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