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S. Vaidya Nathan

FOR the producers of optical fibre (OF) and optical fibre cables (OFCs), the past two years have been a vicious coil of huge excess capacities, built both by manufacturers and telecom players who put up cable networks; demand for bandwidth-based services and products not up to expectations; the consequent idling of created cable networks; and the inevitable toll on prices and profits.

Valuations torn asunder

Sample what has happened in the stock market. In the last quarter of 2000 and early 2001, there seemed to be no stopping the Sterlite Optical stock — the company in which the telecom business of Sterlite Industries was vested in through a demerger. The stock hit highs of Rs 1,100-1,180. But two years on, it now trades at a mere Rs 65 and struggles even to hold this level.

The stock of the other major OF/OFC player — Aksh Optifibre — has fared no better. From heady highs of around Rs 180, the stock is down 88 per cent, at around Rs 21.

Stocks of other telecom cable — OFC as well as jelly-filled — companies too have declined, though not as sharply because of lesser investor interest vis-à-vis Sterlite Optical and Aksh Optifibre.

These two companies attracted considerable investor interest and until about a year back, Sterlite Optical was a significant holding for most institutional investors.

All that changed as the profit outlook for the companies turned distinctly dim. The magnitude of change is clear from the losses posted by Sterlite Optical in the July-September quarter.

Prices and profits crash

The crash in OFC prices is the prime cause for the change in fortunes. The average realisation per fibre km has dropped to around $16-20. In the Indian market, the prices have halved, from Rs 8,000 per fibre km (fkm) to around Rs 4,000 . This is a far cry from the levels in 2000 and early 2001, when OFC manufacturers were riding the wave of rapid creation of cable networks across countries. .

The frenzy over the convergence of IT/media/telecom had not only gripped the stock market but the industry as well, which was eager to create the bandwidth that it thought would be needed. Any price quoted for OFCs seemed acceptable. The prices jumped from $25-30 per fkm in 1999 to $55-60 in the last quarter of 2000 and to $80-90 in the first quarter of 2001.

But the telecom imbroglio — especially in the US and, more recently, in Europe — began to take its toll. And it has been a downhill ride since with the impact being felt by domestic players as well, as prices are generally closely linked to global levels. With import tariffs for OFCs at 10 per cent, domestic prices have to be closely aligned to global price levels.

Even industry majors such as Sterlite seem clueless whether the prices have bottomed out. In January, the company had stated that performance had been affected by lower prices which, however, appeared to be stabilising at lower levels. That has unfortunately not been the case. The downtrend has continued.

The company attributes the July-September 2002 loss of Rs 27.1 crore (against profits of Rs 12.3 crore in the same quarter of 2001) , to the collapse of OFC prices and the considerable shrinkage in demand.

That an integrated producer such as Sterlite Optical has ended up in the red on top of a decline in turnover from Rs 98.6 crore to Rs 39.7 crore shows how strong the impact of lower prices has been.

Domestic demand-supply

The prospects for domestic demand growth continue to be fairly good. With private sector players such as Reliance and Bharti at various stages of rolling out national networks and Bharat Sanchar Nigam Ltd (BSNL) also increasingly using OFCs, demand is not a major worry. The private sector, as per the licence terms, is required to use OFCs except in the last mile .

In any case, no new telecom network creator is likely to invest in a big way in jelly-filled cables when the future clearly is in OFCs. According to Kessler Marketing Intelligence, India is expected to emerge as the world's fifth largest consumer of OFCs in the world, behind the US, China, Japan and Korea . And even projections by domestic sources place the growth at fairly attractive levels.

The Department of Telecommunication's perspective plan for 1997-2007 points to a growth of 35-40 per cent per annum till 2004. This kind of growth rate should normally be good news for producers. OFC manufacturers such a Sterlite, Aksh Optifibre and Birla Ericsson have waited for almost a decade for a demand surge in India.

However, the wait now appears to be futile , as they are unlikely to reap any major benefits from improvements in demand levels. In 2001, the volumes were around 25-lakh fkm. And because of the global meltdown in prices, it is network creators such as Reliance, Bharti, the Tata group and BSNL that are likely to walk away with the benefits of a lower cost network. What must also be a worry is the likelihood that much of the domestic OFC networks being in place before any significant price recovery happens.

Changing industry dynamics

The key changes in the industry in the last two years have more or less made OFCs a price taker and altered the underlying dynamics of the industry.

In the case of most products , a combination of rapid capacity creation and slowdown in demand eventually tend to take prices away from the peak levels. OFCs have not been an exception to this and the dalliance with high price levels was for a brief 12-month period.

The management discussion report of Sterlite Optical takes cognisance of this changed reality, saying that that "increased volumes and cost reduction will be the key profit drivers. The business model is being transformed from a price driven model to a volume and cost driven model. The latter is more sustainable."

In this context, the company has also pursued enhancement of capacity to the planned 5 million fkm, which will place it in an advantageous position from a long-term perspective. As an integrated producer, Sterlite Optical and, to a lesser extent, Aksh Optifibre are better placed to make this transition to the changed industry dynamics.

Finolex Cables may also eventually get there, as it too is in the process of backward integration.

Not-so-encouraging outlook

The outlook for the next 6-12 months does not appear encouraging. Quite clearly, the price levels of 2000-2001 were a one-off occurrence. But for prices to move up even modestly from the current low levels may take quite some time.

To top the excesses in capacity creation in the past three-four years, quite a few global telecom carriers and bandwidth providers such as WorldCom and Global Crossing have been mired in major controversies pushing them closer to bankruptcy.

Most venture capital-financed companies in the telecom sector are also strapped for funds and long on debt. With the US economy not showing any signs of sustained revival, telecom spending there may not look up. In Europe, telecom service providers are caught in a financial mess following outlandish bids for 3G (integrating mobile telephony and Internet) licences. For OFC producers worldwide, this is not good news.

The largest of them all, Corning, had in its outlook for 2002 noted thus: "Management does not expect recovery in this industry until late 2002 or early 2003. Recovery is dependent on capital spending by network operators and cable television entities as they add fibre to metro access networks in the US and the level of demand in the international markets. As the industry has significant excess capacity, price pressure is expected to continue throughout 2002."

Since this forecast , things have become worse and the anticipated recovery may not come about even in 2003. For companies such as Sterlite Optical, Aksh Optifibre and Finolex Cables, surviving this bruising period without too much red from their OFC business rests on hope.

After waiting for years for demand to materialise, it is now going to be a different and a more difficult kind of waiting period for these companies.

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