Sterlite Technologies Ltd: A Cautionary Tale of Growth, Debt, and Investor Expectations
Sterlite Technologies Ltd (STL) is a leading manufacturer of optical fiber (OF) and optical fiber cables (OFC). The company specializes in designing, building, and managing data networks, focusing on optical fiber and cables, hyper-scale network deployment, and software-defined networking.
Promoter of Sterlite technologies- Anil Agarwal is a prominent Indian industrialist and the Founder and Executive Chairman of Vedanta Resources Plc, a global natural resources conglomerate. He is also the Non-Executive Chairman of STL, a company he founded in 1988. With over four decades of entrepreneurial experience, Agarwal has been a pioneering force in India's industrial growth, particularly in sectors such as metals, mining, power, and technology. He initially started trading in scrap metal in the mid-1970s and later founded Sterlite Industries, which became the first private company in India to establish a copper smelter and refinery in 1993.
In October 2019(FY20), after analyzing the stock's fundamentals and technical, we pick this stock by analyzing it using a top-down approach (Industry>Company>Management). I entered the stock based on the below analysis in the price range of 130-140.
The telecom industry was growing rapidly with the rollout of 5G networks, offering faster speeds and enabling new technologies like virtual reality and smart agriculture. Telecom companies were also investing in fiber networks and expanding data centers, while governments focused on improving internet access and building smarter cities.
STL stood out as a key player, offering end-to-end solutions for building next-gen networks. With its expertise across all layers of the network, STL was well positioned to meet the growing demand for hyper-scale connectivity. At the time, the company showed strong financials, with an increasing PAT margin (11.51%), EPS (13.98), and solid ROE (41%), reflecting a bright future.
Despite knowing debt to equity (1.22) was on the higher side, we took a bet to invest in this stock as the management guided that they would focus on reducing debt in coming years and bring debt to equity below 1.
(Extract from Q04FY20 Con call)
During that time management was also very optimistic about the future of the company and this optimism was also reflected in the numbers as well.
In FY20, STL delivered a strong performance with record revenues of Rs. 5,154 crore and a healthy order book of over Rs. 10,000 crores building more confidence to invest. The company launched innovative products like 'Stellar' fiber and expanded its footprint with key acquisitions and partnerships, enhancing its position in 5G and data solutions. Despite industry challenges, STL secured major FTTH deployments and international contracts, positioning itself for growth in next-gen data networks.
On Q01FY21 Con-call, management gave guidance to achieve 10,000 Cr of net revenue by the end of FY23 by focusing on executing new based solutions, service-based value-added product-based strategy to their customer. Management clearly states that “we have done it, albeit at a lower base, in the past 3 years also, we have doubled our revenues while maintaining the high-return capital deployed, gives us a high degree of confidence as well as credibility”
This statement clearly reflects the confidence of the management towards the high growth of the company.
In Q2FY21 Con-call, Management states that they are on track on their commitments towards delivering their vision to achieve Rs. 10,000 crores of revenue.
(Extract from Q02FY21 Con call)
In Q4FY21 Con-call, Management said highlighting the same debt to equity will start reducing in FY 22. Below the snapshot of the Con-call-
What went wrong-
After Q4FY21, Sterlite Technologies stopped holding quarterly conference calls and public updates for some time. While they continued to share presentations on the exchange until Q3 FY22, these included a slide about their commitment to meeting financial targets. However, in the Q4FY22 presentation, that slide was removed.
(Extract from Feb 2022 PPT)
In Q04FY22, management did con-call giving the revised guidance to grow revenue by 23% to 25% in FY23 keep debt levels flat and will achieve a ROCE of 20%.
The debt-to-equity ratio continued to rise, and the management failed to meet the targets they had previously committed to.
(~StockEdge)
Despite the optimistic guidance given by management in Q1 FY21 (with a target of Rs. 10,000 crores in revenue by FY23), STL was unable to meet those expectations. The company was unable to deliver the promised growth in revenues, which is a significant disappointment for investors who had based their investment decisions on these projections
(~StockEdge)
We took an exit from this stock in May,2023 at the price of Rs. 155-160 and since then the stock is not on our watch list. However, the revised guidance that the management gave in Q04FY22 was achieved in Q04FY23. As you can see in picture below.
(~Extract from Q04FY23 PPT)
Current Performance of the stock-
In FY24, STL faced a challenging market environment but showed resilience in its performance. The company continued to focus on reducing its debt, with a notable reduction of ₹334 crores in net debt, primarily through internal accruals. Now they are focusing on bottom line growth instead of giving guidance on revenue. STL has focused on expanding its optical networking and global services businesses, while driving growth through new data center products and strategic investments in digital technologies. The company remains committed to improving profitability and maintaining its leadership in cost and technology innovation.
Conclusion:
STL’s journey highlights the importance of transparency, consistent communication, and the need to manage expectations. The current price of the stock is Rs. 118. The price has corrected from Rs. 160 since I exited the stock in May 2023. While the company showed potential in its early years, the mismanagement of expectations, rising debt, and failure to meet growth targets contributed to its failure to deliver on its promises. For future investors, the key takeaway is to closely monitor a company's ability to meet its stated goals and to assess whether the management is living up to its promises. If a company stops communicating its progress or revises its targets downward without clear justification, it's a red flag that should not be ignored.
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