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S. Vaidya Nathan

DRIVE around any city or town today, coils of multi-coloured optical fibre cables would catch your eye. Seldom does one see the black sheathed jelly-filled telecom cables (JFTC) rolled around big drums — a common sight even as late as two years back whenthe telecommunications department undertook any work.

Perhaps a sign of the times, optical fibre cables appear to have invaded not only the big cities but also many smaller cities and towns. In large-scale networks, a la Reliance or Bharti group, optical fibre cables cover parts of the hinterland too.

Does this mean the end of the road for JFTC? No. But the demand and growth are unlikely to be anywhere near the levels of the past decade. For instance, from tendering for quantities in the 300-400-lakh cable km range, the latest Bharat Sanchar Nigam Ltd (BSNL) tender is for 215-lakh cable km.

BSNL (the corporatised arm of the Department of Telecommunications) too has taken to optical fibre cables (OFCs) in a big way. Of course, it does not rely on OFCs to the same extent as the private sector players, which have OFCs except for the last mile (to connect the customer) where, world-over, the copper cable still rules.

In this backdrop, that the demand for JFTC would gradually slow down is perhaps the most certain aspect of the telecom cables industry. This is not good news given the huge capacities created by some 20 big (mainly Sterlite, Finolex Cables, RPG Cables, and Vindhya Telelinks) and small players. The latter got into the business because of the low entry barriers and a shared order-placement system adopted by BSNL.

The bigger players added capacity rapidly through the 1990s to get a larger share of the order cake. Capacities increased four-fold between 1993 and 2000. Rating agency Crisil estimated the capacity utilisation of JFTC last fiscal at 44 per cent. It has indicated that this could drop to 24.1 per cent this fiscal.

The consequence has been intense price competition in the tenders, with players having sales tax advantages, such as Sterlite, more aggressive. And with the growth in demand declining, the price competition has intensified.

The situation is well reflected in Vindhya Telelinks' — one of the more profitable players in the JFTC segment over the past decade — financial data for July-September 2002. Revenues are down 48.6 per cent to Rs 14.9 crore (Rs 28.9 crore in the same period of 2001). For the first time in many years it has made a loss. The company has attributed this to "depressed market conditions with a precipitous decline in the prices of cables."

Grim outlook

In the last fiscal, prices of JFTC, depending on pairages, declined by 14-17 per cent. This trend is unlikely to change . One can expect bigger companies such as Sterlite and Finolex to be even more aggressive as they fight to increase their share in what may, at best, be a market that is stagnant or growing at a modest rate.

Once growth rates start declining, the picture may get more skewed in favour of the bigger players. To beat the dull domestic market, companies such as Finolex Cables have started tapping export markets in Africa and West Asia

Apart from the continuing switch to OFCs, the number of new basic telephone connections has been showing a declining trend. Every new connection is key for JFTC demand. Between July 2001 and June 2002, only in one month was the growth sizeable — at 30 per cent — and in one it was a modest 3 per cent. Every other month witnessed a decline.

In April-June 2002, new connections declined 18.6 per cent vis-à-vis April-June 2001. The latter period, too, had witnessed a 15 per cent fall. With cellular services getting more attractive and growing, by 15-20 per cent, and the entry of players such as Tata Teleservices and BSNL with basic services on CDMA and WLL (wireless in local loop) technologies, the need for more copper wire connections may get increasingly limited.

What may help maintain demand levels is replacement demand as well as the thrust on improving tele-density in the rural areas, from 0.5 per cent to 4 per cent by 2010. It is perhaps this factor that has prompted the likes of Sterlite and Finolex to indicate a 10 per cent growth. This, however, appears rather optimistic And even if it is achieved, the companies may not be able to sustain it beyond a year or so.

This is clearly not an industry to invest in. If one has exposures, especially in the standalone smaller JFTC firms, consider selling. For companies such as Sterlite Optical and Finolex Cables, the JFTC business may continue to provide a steady stream of revenues and cash flows, albeit with declining profitability.

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