Sterlite has shifted gear to restructuring mode from acquisition mode. The company is demerging its telecom business to a separate company from April 2000 and will be entering the telecom infrastructure and solutions business. It is also planning to merge its subsidiary company Madras Aluminium (Malco) with itself and divest the paper business. It has shelved its greenfield aluminium project as part of its restructuring exercise, which has been framed by Arthur Andersen. Tarun Jain, director (finance) spoke to Rakesh P Sharma on the expected benefits from the restructuring.
Q: Sterlite is now aiming to grow through a demerger of the telecom and metals business, whereas the company had embarked on an integration earlier. How do you justify this move?
A: It was felt by our investors that Sterlite is being perceived as a commodity play despite being well diversified and integrated and there was a bundling up of values leading to incorrect market perception regarding the inherent strengths of each line of business. More importantly, our technological strengths in the high-technology fibre optic business were also de-leveraged. I must mention that we are among the top ten fibre optic manufacturers in the world with global capacities and competitiveness.
Moreover, copper production was earlier under the purview of public sector units. After liberalisation, the industry was opened for private sector investment. Sterlite was the first company to embark upon copper manufacture in the private sector in India to take advantage of the favourable domestic demand-supply dynamics. Also, production of jelly filled telecommunication cables business provided in-house consumption. In other words, it was primarily a backward integration so as to ensure control over a key raw material _copper. However, a changed business scenario and a need to enhance shareholder value led us to take the decision to separate the two businesses. Arthur Andersen has recommended that the non-ferrous mining and metals business and the telecommunication business be separated to unlock values for shareholders and provide the base for future value creation in each individual business. The demerger will also facilitate strategic alliances in the telecommunication business and provide the company the necessary platform to emerge as a total telecommunication solutions provider, the core strength of which will be optical fibre.
Q: What are the prospects in the telecom business in a post-demerger scenario?
A: The world is fast changing towards the electronic medium, be it for high tech voice and data applications or for business transactions between companies and clients. Large strides have also been made in the area of entertainment and knowledge sharing across international borders. The core of this phenomenon is an optical fibre network which has broadband capability. We believe that this has tremendous growth potential and we want to be become a major player using this capability. While it may be presumptuous to put down a growth figure at this stage, it is reasonable to expect that the entire telecom business of the company will have a very healthy growth both in its top and bottom line, given the pace at which the information revolution is moving. I can assure you that investors will not be disappointed.
Q: How will the margins of telecom business remain and how will it grow from its current margins?
A: It is our stated objective to maintain a ROCE of around 50 per cent in the telecom business which, given our competitiveness and the new areas that we are planning to enter, is achievable. We plan to achieve this objective through substantially increased volumes in both optical fibre and optical fibre cables, coupled with attendant reduction in costs due to increased throughput. Moreover, realisations of optical fibre and optical fibre cables are improving in line with international trends consequent to increased demand from the ASEAN region. We are also focusing on working capital reduction which will reduce interest costs and increase earnings.
Q: Sourcing of metal from JFTC will continue from the metal company. What will be the transfer pricing and what will be the transparency?
A: Each of our businesses operates as a profit centre and is accountable for the return on investment made. Control is through the annual business plan for each business, which sets the targets and monitoring is done through a detailed monthly top management review. We draw up a monthly profit and loss and balance sheet for each business, which incidentally will be audited by reputed firms like Ernst & Young, PricewaterhouseCoopers. Regarding transfer pricing, the copper unit sells to the JFTC unit at the same price at which it sells to any other party. The same is the case with aluminium foils or optical fibre. This has been the practice since the inception of these businesses. This instils profit orientation, establishes total transparency and eliminates any cross subsidisation.
Q: What kind of changes in the quality of earnings do you estimate from the telecom business and how will metal business generate value for shareholders?
A: We will stick to our core competencies in the above two areas. The total telecom solutions business is a forward integration effort and adds tremendous value to our optical fibre business. We have clearly stated that we are shelving the earlier proposed green-field aluminium smelter and at the same time we have already mandated Arthur Andersen for sale of our investment in the paper business, clearly demonstrating our intent to focus on what we know best.
No major capital investment is planned in the copper business. We are evaluating international mine acquisitions to increase profitability of the copper business given the upswing in copper prices.
