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Sterlite Technologies Ltd.

BSE: 532374 Sector: Engineering
NSE: STRTECH ISIN Code: INE089C01029
BSE LIVE 15:59 | 15 Dec 297.50 -1.80
(-0.60%)
OPEN

303.50

HIGH

304.30

LOW

295.55

NSE 15:44 | 15 Dec 297.75 -2.15
(-0.72%)
OPEN

302.60

HIGH

304.00

LOW

296.00

OPEN 303.50
PREVIOUS CLOSE 299.30
VOLUME 215340
52-Week high 309.00
52-Week low 94.20
P/E 64.81
Mkt Cap.(Rs cr) 11,922
Buy Price 0.00
Buy Qty 0.00
Sell Price 297.50
Sell Qty 125.00
OPEN 303.50
CLOSE 299.30
VOLUME 215340
52-Week high 309.00
52-Week low 94.20
P/E 64.81
Mkt Cap.(Rs cr) 11,922
Buy Price 0.00
Buy Qty 0.00
Sell Price 297.50
Sell Qty 125.00

Sterlite Technologies Ltd. (STRTECH) - Director Report

Company director report

STERLITE TECHNOLOGIES LIMITED ANNUAL REPORT 2011-2012 DIRECTOR'S REPORT To the Members, Your Directors are pleased to present the Annual Report for the financial year 2011-12 together with the audited accounts of the Company for the year ended March 31, 2012. FINANCIAL RESULTS (Rs. in Crores) Particulars 2011-12 2010-11 Net Revenue 2,727 2,263 Profit/(Loss) before Interest, Depreciation & Tax 223 282 Less: Interest 95 47 Less: Depreciation 71 56 Net Profit/[Loss) before taxation 57 178 Provision for Taxation: Current Tax 18 32 Earlier Year Tax/[Written Back) 5 - Minimum Alternative Tax eligible for Set Off (18) (0.2) Deferred Tax (Credit) 8 6 Net Profit/(Loss) for the year after tax 44 141 Net Profit/(Loss) for the year after tax [after prior period depreciation) 44 141 Balance carried forward from previous year 712 608 Amount available for appropriation 756 749 APPROPRIATIONS Transfer to General Reserve 2 14 Proposed Dividend 12 20 Provision for Tax on Dividend 2 3.1 Balance carried forward to the next year 740 712 PERFORMANCE Fiscal year 2011-12 closed with Revenues of Rs. 2,727 Crores, EBITDA of Rs. 223 Crores, PAT of Rs. 44 Crores and EBITDA margins of 8.2 %. The telecom business earned revenues of Rs. 804 Crores at an EBITDA margin of17.3% and the power business earned revenues of Rs. 1,923 Crores at an EBITDA margin of 4.4%. During the year, good Tier-1 clients were added for all businesses, across geographies. Revenue from international sales in FY 12 accounted for Rs. 803 Crores, which is 29% of net revenues in FY 12 and this has been achieved with a right mix of repeat orders from current clients and addition of new eminent global clients. During the year, Sterlite increased the breadth of its portfolio by introducing new products and solutions etc. The Company has enhanced its intellectual property portfolio with the grant of 11more patents, taking the total up to 44. The detailed analysis of Company's operations and segment-wise performance is covered under 'Management Discussion & Analysis Report'. DIVIDEND The Board of Directors are pleased to recommend a dividend of 15% 0.30 per share of Rs.2/- each) for the financial year 2011-12. The distribution of dividend will result in payout of Rs. 11.80 Crores excluding tax on dividend. EMPLOYEES STOCK OPTION SCHEME As the members are aware, the Company had launched Employee Stock Option Schemes for the employees in June 2006 (ESOP 2006) and June 2010 (ESOP 2010) respectively, in line with Company's philosophy of sharing benefits of growth with the growth drivers. The details of the options vested during the year under review are provided in Annexure-II to this report, as required under Clause 12 of the Securities and Exchange Board of India (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999. During the year 22,24,000 options were granted on December 29, 2011 under ESOP 2010. SUBSIDIARY COMPANIES The Company has ten Subsidiary Companies, the details of which are given below: a. Sterlite Display Technologies Private Limited (SDTPL) The Company is currently exploring on new business opportunities including liquid crystal display (LCD) glass manufacturing and other related products. b. Sterlite Infra-Tech Limited (SITL) To achieve operational efficiencies, the management decided to merge SITL in the Company. The Hon'ble Court vide its order dated October 21, 2011 approved the Amalgamation wherein the appointed date was April 1, 2011 which is now in effect. c. Sterlite Grid Limited (SGL) During the year under review, the name and legal status of Sterlite Transmission Projects Private Limited was changed to Sterlite Grid Limited (SGL). SGL is a wholly owned subsidiary of the Company incorporated as Special Purpose Vehicle for transmission projects. SGL is currently executing two mega power transmission projects via its fully owned subsidiary companies Bhopal Dhule Transmission Company Limited (BDTCL) and Jabalpur Transmission Company Limited (JTCL). Sterlite Grid's current transmission portfolio consists of a network of about 2200 kilometers of transmission lines and 2 substations in the States of Maharashtra, Gujarat, Madhya Pradesh, Chhattisgarh, West Bengal, Bihar and Assam. d. East-North Interconnection Company Limited (ENICL) ENICL project involves establishment of two 400 kV Double Circuit transmission lines that would respectively connect the Indian states of Assam with West Bengal and Bihar. The project, under construction phase, is on schedule with expected commencement date before March 2013. e. Bhopal Dhule Transmission Company Limited (BDTCL) BDTCL project involves establishment of four 765 kV Single Circuit and two 400 kV Double Circuit transmission lines that would strengthen the transmission system in the Indian states of Madhya Pradesh, Maharashtra and Gujarat. The project has been awarded on a 'Build, Own, Operate and Maintain' (BOOM) basis, wherein the transmission lines would be commissioned and the Company would operate and maintain the same for a minimum tenure of 35 years. The project, under construction phase, is on schedule with expected commencement date before March 2014. f. Jabalpur Transmission Company Limited (JTCL) JTCL project involves establishment of a 765 kV Double Circuit and a 765 kV Single Circuit transmission line each, that would strengthen the transmission system in the Indian states of Chhattisgarh and Madhya Pradesh. The project has been awarded on a 'Build, Own, Operate and Maintain' (BOOM) basis, wherein the transmission lines would be commissioned and the Company would operate and maintain the same for a minimum tenure of 35 years. The project, under construction phase, is on schedule with expected commencement date before March 2014. g. Jiangsu Sterlite Tongguang Fiber Co. Ltd. (JSTFCL) The Company is a Joint Venture with Tongguang Group of China to set up an Optical Fiber Manufacturing Facility in China. During the year under review JSTFCL has started construction of the factory along with required ancillary facilities. The Project is moving as per Schedule and the commencement of commercial production is expected during second half of this financial year. h. Sterlite Networks Limited (SNL) SNL is a 100% wholly owned subsidiary of the Company that undertakes business operations in the telecom sector. It serves as an infrastructure provider, providing dark fibre, right of way, duct space, tower (IP Category 1), electronic mail and voice mail services. Major highlights during the year include 25,000 homes connected through networks, launch of the 'FiON' brand, and partnership with BSNL for its FTTH rollout in Chennai. i. Sterlite Global Ventures (Mauritius) Limited (SGVML) SGVML holds downstream investments of the Company made in Jiangsu Sterlite Tongguang Fiber Co. Ltd. j. Sterlite Technologies American, LLC (STA) STA is a limited liability corporation set up in USA to carry and manage the business operations in the Americas geographies. The Company will be operational during the current year. k. Sterlite Technologies Europe Ventures Limited - Cyprus (STEVL) STEVL, incorporated in Cyprus is a 100% wholly owned subsidiary of the Company, with an objective to carry on business operations in the European Union. In terms of the directions under Section 212(8) of the Companies Act, 1956, issued by the Ministry of Corporate Affairs vide General Circular No. 2/2011 dated February 8, 2011 granting general exemption from applicability of Section 212 of the Companies Act, 1956 in relation to subsidiaries; copies of the Balance Sheet, Profit & Loss Account, Report of the Board of Directors and the Report of the Auditors of the Subsidiary Companies have not been attached with the Balance Sheet of the Company. The Company undertakes that the annual accounts of the subsidiary companies and the related detailed information will be made available, upon request, to the members seeking such information at any point of time. The annual accounts of the subsidiary companies will also be kept for inspection by any member at registered office at Sterlite Technologies Limited, Survey No. 68/1, Rakholi Village, Madhuban Dam Road, Silvassa - 396230 Union Territory of Dadra & Nagar Haveli, India. The Company shall furnish a hard copy of details of accounts of subsidiaries to any shareholder on demand. The annual accounts of the subsidiary companies will also be available on the Website of the Company www.sterlitetechnologies.com The consolidated financial statements, in terms of Clause 32 of the Listing Agreement and in terms of Accounting Standard 21 as prescribed by Companies (Accounting Standards) Rules, 2006 issued by Ministry of Corporate Affairs, Disclosure on 'related party transaction', duly audited by Statutory Auditors, also forms part of this Annual Report. EXPLANATION ON AUDITOR'S COMMENT The remark of Auditors at Para 4 (vi) & (vii) of the Auditor's Report over Note No. 44 in Notes to Accounts regarding demand of excise duty and penalty amounting to Rs. 188 Crores is self-explanatory and does not require further comment. In the year 2004-05, CESTAT upheld the demand of Rs. 188 Crores and interest thereon for alleged breach of norms pertaining to Export Oriented Unit (EOU). The Company had filed an appeal before the Hon'ble High Court of Bombay against this order. The Department had also made an appeal against the same CESTAT order before the High Court of Bombay. The Company's appeal against this order was dismissed by the Hon'ble High Court on the grounds that appeal is not maintainable in High Court, however without prejudice to the rights of the Company. Subsequently, the Company had filed a Special Leave Petition (SLP) and appeal before the Supreme Court of India which was admitted by the Court. Hon'ble Supreme Court has also maintained the stay granted by Hon'ble High Court. The Hon'ble Supreme Court considering that the departmental appeal against the CESTAT order was still pending before the High Court, disposed of the Special Leave Petition of the Company and directed that the records of the departmental appeal be transferred to the Supreme Court and both the Appeals i.e. Departmental Appeal as well as Civil Appeal of the Company be heard together by the Supreme Court. Based on merits of the case and the legal opinion obtained, the management believes that the Company has a strong case and it has been carrying adequate provisions for contingencies in the Books of Account in this matter and does not require any further provisioning. FIXED DEPOSITS During the year, the Company has not accepted any deposits from the public or otherwise in terms of Section 58A of the Companies Act, 1956 read with Companies (Acceptance of Deposit) Rules, 1975. DIRECTORS By virtue of Section 255 of the Companies Act, 1956 and the Articles of Association of the Company, Mr. Arun Todarwal and Mr. A. R. Narayanaswamy retire by rotation at the ensuing Annual General Meeting. A brief resume, expertise, shareholding in your Company and details of other directorships of these directors are given in the Corporate Governance Report. MANAGEMENT DISCUSSION AND ANALYSIS The Report on Management Discussion and Analysis has been attached and forms part of the Annual report. CORPORATE GOVERNANCE The Report on Corporate Governance along with the Certificate from the Statutory Auditors certifying the compliance of Corporate Governance enumerated in Clause 49 of the Listing Agreement with the Stock Exchanges is included in the Annual Report. DIRECTORS' RESPONSIBILITY STATEMENT Your Directors confirm that: i) In the preparation of the annual accounts, the applicable accounting standards have been followed; ii) They have selected such accounting policies and applied them consistently, and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as on March 31, 2012 and of the profit of the Company for the financial year ended March 31, 2012; iii) They have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; iv) They have prepared the accounts on a 'going concern' basis. AUDITORS M/s. S.R. Batliboi & Co., Chartered Accountants hold office till the conclusion of the forthcoming Annual General Meeting and being eligible, offer themselves for re-appointment. The Company has received intimation to the effect that, proposed re-appointment, if made, would be within the prescribed limit under Section 224(1B) of the Companies Act, 1956. COST AUDITORS The Company had appointed M/s. Ashwin Solanki & Associates, Cost Accountants to audit the cost accounts related to the Company's products, Electric Cables & Conductors for 2010-11. The due date for filing the above cost audit reports was September 30, 2011; the actual date of filing was September 9, 2011. The Company has reappointed M/s. Ashwin Solanki & Associates, Cost Accountants for the FY 2011-12. PARTICULARS OF CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND OUTGO The particulars of conservation of energy, technology absorption and foreign exchange earnings and outgo as prescribed under Section 217(1)(e) of the Companies Act, 1956 read with the Companies (Disclosures of Particulars in the Report of Directors) Rules 1988, is given as Annexure I and forms a part of the Directors' Report. PARTICULARS OF EMPLOYEES The particulars of employees as required under the provisions of Section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 2011 forms part of the Directors' Report. However, as per the provisions of Section 219 (1)(b)(iv) of the Companies Act, 1956, the report and the accounts are being sent to all shareholders of the Company excluding the aforesaid information. Any shareholder interested in obtaining such particulars may write to the Company Secretary at Registered Office of the Company. ABRIDGED REPORT Physical (Hard) Copy of the statement containing the salient features of all the documents, as prescribed in sub-clause (iv) of clause (b) of proviso to Section 219 of the Companies Act, 1956, read with Clause 32 of the Listing Agreement, is being sent to all shareholders of the Company who have not registered their email address(es) for the purpose. Any shareholder interested in obtaining physical copies of full annual report may write to the 'Company Secretary' at the Registered Office of the Company. ACKNOWLEDGEMENT Your Directors take on record their sincere appreciation to the contributions made by the employees through their hard work, dedication, competence, support and co-operation towards the progress of your Company. Your Directors are also thankful for consistent co-operation and assistance received from its investors, business associates, customers, vendors, bankers, regulatory and government authorities. For and on behalf of the Board of Directors Pravin Agarwal Anand Agarwal Whole-time Director CEO & Whole-time Director Place: Pune Date : April 26, 2012 Annexure I to the Directors' Report Particulars of Conservation of Energy, Technology Absorption and Foreign Exchange Earnings and Outgo as per Section 217 (1) (a) of the Companies Act, 1956 read with Companies (Disclosure of Particulars in the report of Directors) Rules, 1988 for the year ended March 31, 2012. 1. CONSERVATION OF ENERGY A. The Company adopted the following measures on energy conservation: i) Conservation in electricity consumption: Implementation of various energy saving mechanisms such as roof insulation, CFL lamps, additional capacitors, auto timers for air-conditioning and street lighting. Additional mechanisms were implemented to effectively curtail energy losses such as the installation of variable frequency drives, etc. ii) Optimisation of energy consumption: Various power audits were done internally and with external consultants to assess energy consumption during various manufacturing sub-processes and to optimise the same by reengineering. Machine modifications to conserve energy consumption included modification of air pipeline, redesign of cooling tower water supply systems, VFC installation, replacement of DC motors with AC motors, improved control systems on compressed air reduction on various manufacturing lines, to state a few. iii) Conservation of furnace oil: Various engineering and process efficiency improvements were implemented across locations; for example the power conductor's facility at Rakholi started usage of Natural Gas as an alternative fuel to furnace oil. B. Additional investments and proposals, if any, being implemented for reduction of energy consumption: i) Detailed review of power distribution system, compressed air system, chilled water system, extruders and heaters, and plant lighting system to identify and implement improvements to reduce consumption of power, implementation of various energy saving mechanisms. ii) Harmonic Filters to be installed, resulting in approximately 5% of power saving. iii) Elimination of Furnace oil Usage by improving the Grid power Utilisation. 2. TECHNOLOGY ABSORPTION A. Specific areas in which the Company carried out R&D: i) Development of specialised conductor products such as dull conductors that offer superior ampacity and improve the efficiency in high current transmission, ECO conductors for low loss, particularly for wind energy, super thermal alloy conductor and ACSS/ TW conductor that can carry up to 100% more current compared with ASCR of the same size and can operate at temperatures up to 250xC, with zero creep and low susceptibility to Aeolian vibration fatigue. ii) Development of CAT6A, CAT7 with high fibre count (96F-288F) very small diameter, lightweight and flexible fiber optic cables (i.e: Microduct Fiber Optic Cables) that are suitable for indoor-outdoor duct installation in subducts within existing ducts. iii) Development of low fiber count (<12F) very small diameter, lightweight and flexible fiber optic cables (i.e: Microdrop Fiber Optic Cables) that are suitable for FTTH drop in duct, aerial and direct buried installations. iv) Development of Cat6a and Cat7 with FTP i.e. screened version of products for Cat cables will take copper to 40G compliance. v) Development of a new family of ITU-T G.657 standards compliant bend- insensitive fiber with low attenuation and improved bend sensitivity for Fiber-to-the-Home (FTTH) Networks. vi) Engineering improvements in existing manufacturing equipment aimed at improving process efficiency and productivity. vii) Development of Hybrid drums to eliminate wood consumption in packaging. B. Benefits derived as a result of above R&D Benefits to customers: i) High temperature conductors like annealed conductors and special low loss conductors offer superior thermal resistance and improve the efficiency in high current transmission. ii) Microduct Fiber Optic Cables save about 8% of the total capex for the customer, on account of reduced installation costs. iii) Bend insensitive fibers will provide cable customers to provision and end-customers to access the phenomenal capacity of optical fiber for in- home and/ or business applications such as high-definition video, high speed Ethernet and a superior Internet experience at affordable rates. iv) Reduction in damage during transportation by hybrid drum. Benefits to Sterlite: i) Introduction of specialised products developed through the year, have enabled Sterlite gain market access through product differentiation. ii) For the first time, new product sales of 6-7% of annual revenue were realised. C. Future plan on R&D i) Focus on improving efficiency of manufacturing processes of existing product lines. ii) Develop products that would serve the needs of customers' product deployment and applications. iii) Proactively assess future market applications and initiate development of products to meet customers' future needs. iv) Simulation lab for 10 G and 40 G compliance. D. Expenditure of R&D i) Capital: Nil ii) Recurring: Rs. 7.17 Crores iii) Total: Rs. 7.17 Crores iv) Total R&D expenditure as a percentage of total turnover: 0.26% 3. TECHNOLOGY ABSORPTION, ADOPTION AND INNOVATION i) Efforts, in brief, made towards technology absorption, adoption and innovation: The technology used for manufacture of various products of the Company is fully absorbed and new innovations in process control, product development, cost reduction and quality improvements are being made on a continuous basis. ii) Benefits derived as a result of the efforts e.g., product improvement, cost reduction, product development: The Company is engaged in that business where product obsolescence is inherent. Power through open access technology absorbed, adopted and innovative means of power purchase through Bilateral trading incorporated, resulting in savings of Rs. 1 Crore per month of power cost. In future, load enhancement will accrue savings of Rs. 2 Crores per month. Baghouse Technology for collection of SiO2 adopted, creating green environment and opportunity to generate revenue from waste. HCl scrubbing through Ammonia-most efficient Gas - Gas reaction is the greatest innovation leading to reducing the hazardous waste and consumption of water effectively bring savings of approx Rs. 3 Crores per annum. Installation of Flowmeters on Gas delivery system to check excess consumption and leakages, resulting in savings of Rs. 5 Crores per annum. In-house SiCl4 generation (backward integration) has resulted in savings of Rs. 2 Crores per month. iii) Information regarding technology imported during last 5 years: The Company has not imported any technology. 4. FOREIGN EXCHANGE EARNING AND OUTGO Discussion on activities relating to development of exports is covered in Directors' Report and Management Discussion & Analysis Report. Foreign Exchange Earned: Rs.813.25 Crores Foreign Exchange Outgo: Rs.67.80 Crores The Company does not fall in the list of industries which are required to give details of power and fuel consumption as per 'Form A' of Companies (Disclosure of Particulars in the Report of Directors) Rules, 1998. Annexure II to the Directors' Report Statement as on March 31, 2012 for Employee Stock Option Scheme, 2006 and 2010 as required under Clause 12 of the Securities and Exchange Board of India (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999. Sr. Particulars 2006 Scheme No. 1. Options Granted Total 69,46,750 options were granted as on March 31, 2012 the details of which are as follows: Date of Grant No. of Options 14.06.2006 23,28,500 19.03.2007 6,36,000 28.09.2007 13,07,750 14.06.2008 2,55,500 26.06.2009 24,19,000 2. Pricing formula Options vest at a nominal value i.e. Rs.2 per option. 3. Options vested 26,22,918 4. Options exercised 25,41,988 5. Total number of ordinary shares arising as a result of exercise of Options 25,41,988 6. Options Lapsed 39,19,260 7. Variation of terms of option None 8. Money raised by exercise of option Rs.25,41,988/- 9. Total number of options in force 5,24,087 10. Employee-wise details of options granted to: I. Number of options granted to Senior Managerial Personnel Dr. Anand Agarwal 3,79,500 CEO & Whole-time Director II. Any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year. None III. Identified employees who were Options during any one year, equal to or exceeding 1% of issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant. None 11. Diluted earnings per share pursuant to issue of ordinary shares on exercise of Options calculated in accordance with Accounting Standard (AS) 20 'Earnings Per Share) Rs.1.11 12. Method of Calculation of Employee Compensation Cost The Company has used fair market value method for calculation of compensation cost, using the Black Scholes opinion Pricing Model. 13. Weighted average exercise price and weighted average fair values of Options granted for options whose exercise price either equals or exceeds or is less than the market price of the stock. Weighted Average exercise price (per option) Rs.2 Weighted Average Fair value (per option) Rs.35.23 14. A description of method and significant assumptions used during the year to estimate the fair values of options. The fair value of each option is estimate using the Black Scholes Option Pricing model after applying following weighted average Assumptions. 1. Market Price (Rs.) 36.65 2. Risk Free Interest rate (%) 6.05 3. Expected Life (yrs) 3.5 4. Expected Volatility (%) 77.57 5. Expected Dividend Yield (%) 0.60 6. The price of underlying share at the time of grant (Rs.) 35.23 Sr. Particulars 2010 Scheme No. 1. Options Granted First Grant of 22,24,000 options were made on December 29, 2011. 2. Pricing formula Options vest at a nominal value i.e. Rs.2 per option. 3. Options vested N.A. 4. Options exercised N.A. 5. Total number of ordinary shares N.A. arising as a result of exercise of Options 6. Options Lapsed N.A. 7. Variation of terms of option None 8. Money raised by exercise of option N.A. 9. Total number of options in force N.A. 10. Employee-wise details of options granted to: I. Number of options granted to 1,00,000 Senior Managerial Personnel Dr. Anand Agarwal CEO & Whole-time Director II. Any other employee who receives None a grant in any one year of option amounting to 5% or more of option granted during that year. III. Identified employees who were None Options during any one year, equal to or exceeding 1% of issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant. 11. Diluted earnings per share Rs.1.11 pursuant to issue of ordinary shares on exercise of Options calculated in accordance with Accounting Standard (AS) 20 'Earnings Per Share) 12. Method of Calculation of Employee Compensation Cost The Company has used fair market value method for calculation of compensation cost, using the Black Scholes opinion Pricing Model. 13. Weighted average exercise price and weighted average fair values of Options granted for options whose exercise price either equals or exceeds or is less than the market price of the stock. Weighted Average exercise price (per option) Rs.2 Weighted Average Fair value (per option) Rs.25.87 14. A description of method and significant assumptions used during the year to estimate the fair values of options. The fair value of each option is estimate using the Black Scholes Option Pricing model after applying following weighted average Assumptions. 28.00 1. Market Price (Rs.) 2. Risk Free Interest rate (%) 8.33 3. Expected Life (yrs) 1.5 4. Expected Volatility (%) 48.31 5. Expected Dividend Yield (%) 0.73 6. The price of underlying share at the time of grant (Rs.) 25.87 Risk Management Sterlite is subject to a variety of risks and uncertainties which are no different than any other company in general and our competitors in particular. Such risks are the result of not only the business environment within which we operate but also of other factors over which we have little or no control. Sterlite is committed to effective management of risks across the organisation by aligning its risk management strategy to its business objectives. Sterlite does this through instituting a risk management structure for timely identification, assessment, mitigating, monitoring and reporting of risks early on for achievement of its business objectives and enhanced stakeholder's value. The risks are identified through a formal risk management programme with the active involvement of business managers and senior management. The risk management framework acts as an effective tool in mitigating the various risks that the Company's businesses are exposed to in the course of their operations as well as in strategic actions. Further, Sterlite's risk management practices also seek to enhance the long-term competitive advantage to the Company on a sustainable basis. Internal Control Systems and their Adequacy The Company has strong internal control systems for business processes, with regards to efficiency of operations, financial reporting and controls, compliance with applicable laws and regulations, etc. Clearly defined roles and responsibilities for all managerial positions have also been institutionalised. All operating parameters are monitored and controlled. Regular internal audits and checks ensure that responsibilities are executed effectively. The Audit Committee of the Board of Directors periodically reviews the adequacy and effectiveness of internal control systems and suggests improvement for strengthening these. Market and Competition Risks The market is highly competitive with very few barriers to capacity expansion by existing players or entry of large MNCs with inorganic growth strategies. Globally, most of the contracts are finalised through the competitive bidding process. Whilst the Company dominates in this segment, it does not have much pricing power on account of price undercuts as increased through increased competition and entry of new players. To overcome this, the Company is expanding its capacity and continues to focus on increasing its market share through access to new markets and enhancing its client footprint. Being a part of the capital goods industry, the growth of the Company primarily depends on capital expenditure plans in the power and telecom segments. Any slowdown or delay in capital expenditure plans by these utilities and service providers could adversely impact the Company's growth. Sterlite manages this by taking various initiatives in technology and product development, taking into consideration the needs of customers. Some of these initiatives include innovative product design that help customer reduce their cost of project, customising a basket of products that suit customers' needs and introducing enhanced features in products or services to improve value proposition to the customers. Additionally, the Company undertakes product approvals from new Tier 1 customers to increase its market share commensurate with its increased manufacturing capacity. As these initiatives require investment of significant time and resources, any delay or failure in this poses risks for the Company. Product Obsolescence Risks In the fast changing world, a new technically improved variant of product could put the Company's prospects at risk. In order to mitigate, Sterlite maintains a very strong focus on continuous innovation processes and hence has been introducing technologically improved products in the market in which it operates. This strategy has helped limiting the risk involved with obsolescence of products. The company strives to introduce future-proof products and solutions to exceed stringent global standards and specifications. The Company has a technically qualified team that constantly interacts with customers to understand their future needs and analyses application trends. Their inputs are an important initiator for research and product development. Sterlite also interacts with research institutions to understand the latest advances in technology. Commodity Risks The Company is exposed to the risk of price fluctuation on raw materials & energy resources. Aluminium & alloys make for a significant part of the Company's raw material purchases. As a market leader in the industry, the Company has strong policies and systems in place to minimise the price risk of its main raw material aluminium to a large extent. The Company effectively manages the price variation risk in aluminium by fully passing on the movement in prices to the customers or hedging the risk on LME or primary suppliers. In addition, furnace oil prices are also linked to crude oil prices, which are influenced by the global demand supply and outlook of the economy, and could vary significantly. These price variations, if not managed adequately, could affect the profitability of the Company significantly. The Company has limited control over passing on the adverse variations in the price of some of the raw material and energy costs to the customers and this in turn may have negative impact on the Company's profitability. The Company's policy of backward integration into critical manufacturing materials (e.g.: Hydrogen, Oxygen, Silicon Tetrachloride for optical fiber and optical fiber for Fiber optic cables) helps in minimising the effect of increase in prices of raw material. Financial Risks - Liquidity Risks The Company requires funds both for short-term operational needs as well as for long-term investment programs mainly in growth projects. The continued global financial uncertainty has significantly restricted the supply of credit in the market. Banks and financial institutions have also tightened lending norms. Sterlite aims to minimise these risks by generating sufficient cash flows from its current operations which in addition to available cash and cash equivalents, liquid investments and sufficient committed fund facilities, will provide liquidity both in the short term as well as in the long term. The balance sheet is strong and gives us sufficient headroom for raising further debt, should the need arise. Sterlite maintains a healthy debt- equity ratio as well as maintains the flexibility in its financial structure to alter this ratio when the need arises. Currently, the Company does not have any long-term debt as at the end of the year at a Standalone level. However, the Company has secured long-term finance in its subsidiary for the project being executed. The Company through its subsidiary also has a few more projects, for which it is in the process of securing long-term finance. Any adverse market condition in the banking or financial segment may affect the financial closure adversely. The Company is in the advanced stage of securing long-term funds on the strength of the project itself and hopeful of achieving the same within the current year. - Interest Risk The Company is exposed to interest rate fluctuations in both domestic and foreign currency borrowings. It uses a judicious mix of fixed and floating rate debts and rupee and foreign currency borrowing within the stipulated parameters, to mitigate the interest rate risk. This also helps to have a lower blended rate of interest. The rate of interest for rupee borrowing is largely linked to MIBOR and the rate is linked to prevailing US Dollar LIBOR for foreign currency borrowings. - Foreign Currency Risk The Company's policy is to hedge all long-term foreign exchange risks as well as short-term exposures within the defined parameters. The long-term foreign exchange liability is fully hedged and hedges are on held to maturity basis. Within foreign currency, there are two major risk categories - risk associated with the operations of the Company such as purchase or sale in foreign currency and risk associated with the borrowing of the Company denominated in the foreign currency. The Company has a defined & proven policy to manage both kinds of risk and this is reviewed frequently in the light of major developments in economic and global scenarios. Economic and Political Risks The company has multiple manufacturing facilities in India, with a significant portion (69%) of the revenue earned from sales to customers within India; including Tier-1 public and private sector clients. The balance revenue is earned through sales in international markets. Performance and growth of the company's business is dependent on the health and stability of the Indian and global economies. The risks arising out of any downturn in the economic conditions of the global markets could have adverse impact on the performance of the company. Government utilities are major customers of the company and any delay in capex allocation by the Government and utility incumbents, could adversely impact the company's growth. The presence of the Company in two verticals 'Power' and 'Telecom' provides some insulation by division of the risk. To reduce the risk of customer concentration, Sterlite has been increasing its customer base to non- government utilities within India and in overseas markets. Further, the Company has added various good Tier-1 clients for all businesses across geographies, has made a strong entry into the Indian private sector and maintains a strong focus on emerging economies. This significantly reduces the risk of dependence on one particular geography or customer. Legal and Regulatory Risks Sterlite has multiple manufacturing facilities in India and has a diversified customer base across the world. As a result, the Company is subject to federal, regional, state and local laws and regulations in each country in which it operates. These legal, fiscal and other regulatory regimes of the country play a crucial role in the performance of the Company. Any changes in government policies with respect to import tariffs or export incentives can pose risks to the Company and can also affect the competitiveness of our product in those countries and in turn affect the performance of the Company. There are a few legal cases against the Company at various stages related to custom duty, excise duty, taxation, commercial or legal disputes. Any adverse result in such cases may also affect the profitability of the Company. Some of the above risks are beyond the control of the Company. The Company continues to actively review and monitor these risks which may have a bearing on our business. Project Execution Risk As expansions continue to remain a priority for the Company, execution success for large capex projects is exposed to risks of time and cost overrun. Project execution is largely dependent on project management skills, timely delivery by the equipment suppliers and adherence to schedule by civil contractors. Any delay in project implementation will erode revenues and profit for that period. The Company has set up a dedicated project implementation team to continuously review the project execution and ensure that the implementation schedules and budgets are adhered to. Human Resource Risk A company's ability to deliver value is shaped by its ability to attract, train, motivate, empower and retain the best professional talent. These abilities have to be developed across the Company's rapidly expanding operations. The Company continuously benchmarks its Human Resources policies and practices with the best in the industry and carries out the necessary improvements to attract and retain the best talent. Counter-party Risks We are exposed to counter-party risks on our receivables and investments. We have clearly defined policies to mitigate these risks. Limits are defined for exposure to individual customers and the exposure is strictly monitored on an ongoing basis. Moreover, given the diverse nature of our businesses, trade receivables are spread over a number of customers with no significant concentration of the credit risk. Cash and liquid investments are held primarily in debt mutual funds and banks with high credit ratings, approved by CRISIL. Emphasis is given to the security of investments. MANAGEMENT DISCUSSION AND ANALYSIS By Abhas Tripathi & Vishal Aggarwal - Investor relation and corporate strategy. Way back in 1988, Stephen Hawking - the legendary scientist, philosopher and astronomer - came up with his masterpiece 'A Brief History of Time: From the Big Bang to Black Holes'. While the book was primarily aimed at educating and demystifying the complex phenomenon of start and end of the universe, one of the underlying messages he brought forth was the infiniteness of space and time. This proposition may sound overwhelming for a human mind to appreciate in totality; however, if one tries to draw a parallel of this in ones daily life, there appears an interesting correlation. In the realms of the virtual mind space, the world has been expanding. To put it more simply, the world as we see today is much bigger than what we knew years ago. Almost 100 years ago, the world for most of us would have centered around the city/country we have resided in. Fast forward these 100 years, and the perception of world would have drastically changed for the same person. So, what is it that is bringing this change in our perception of the world as we complete a decade in the 21st century? Technology; we believe is the single most determining contributor in expanding the horizons of our thoughts and opening our mind to endless possibilities that were once never envisaged. Technology is the enabler which is driving the way communication and information is disseminated which breaks through geographical barriers, time and distance, thus enlarging our view of the world we live in. Paradoxically one may argue that if technology has played the role of bringing people closer and reduced the travel time, then the world should essentially be shrinking day by day. Objectively, they are just two sides of the same coin; however the reality is that we live in a world which is virtually getting larger, while at the physical level, it continues to be shrinking. For instance, we don't have to wait for our newspaper vendor every morning to know what happened the day before. Live information is available at the click of a button. When the Pope steps out on his balcony, we can see him just as clearly as the people milling around him. Distance has become a thing of the past. News travels at lightning speed, and technology has virtually outplayed the relevance of physical presence. In this dynamic era of a shrinking/ expanding world, there is one company which continues to do its humble bit in helping people adapt to the changing the world. Sterlite Technologies Limited a leading global provider of transmission solutions, with a vision of 'Connecting every home on the planet', has been at the forefront of addressing the connectivity needs of the Telecom and Power sector. Sterlite offers a diversified portfolio of products and solutions catering to both these sectors. Since beginning, the endeavour has been to enable the utilities in providing faster, efficient and optimal medium of transmission for data and energy transfer. The recent foray of the company into the power transmission infrastructure space is another big leap in that direction, where we have taken one step forward to be in the driver's seat by setting up one of the largest private transmission networks in the country. TELECOM SEGMENT Growth in IP traffic Technology has been playing a crucial role in the evolution of telecommunication that has resulted in an exponential surge in IP traffic across the globe in the past. The global IP traffic has been doubling every two years in the last decade and is expected to emulate this growth in the future as well. Internet traffic continues to be the biggest component of IP traffic representing about 75% of the global IP traffic of 95 tbps in 2011. Do you know what happens in one minute on the Internet? In just one minute, more than 204 million emails are sent. Amazon rings up about $83,000 in sales. Around 20 million photos are viewed and 3,000 uploaded on Flickr. At least 6 million Facebook pages are viewed around the world. And more than 61,000 hours of music are played on Pandora while more than 1.3 million video clips are watched on YouTube. Computing is transforming and touching more people in a wider range of devices. From smart phones to tablets, netbooks to notebooks, everything seems to be working on getting us connected to the world outside. While it's hard to miss the proliferation of portable devices, what is even more intriguing is what goes behind and what we don't see so visibly. Today, the number of networked devices equals the world's population. By 2015, the number of networked devices is expected to be double the world's population. And by the time we reach 2015, it would take five years to view all the video content crossing IP networks each second. What many don't see is that the increase in mobile devices also has had a tremendous impact on the amount of data traffic crossing the network. It's a little easier to comprehend once we think about all that's done on a connected device like a smartphone. Listening to music, watching videos, downloading photos, playing online games, refreshing Twitter feeds and status updates - all of these activities generate network traffic. Back to the Future Internet history reveals a strong correlation between how much bandwidth consumers have at their disposal and the development of content, service and device ecosystems. Whole new communication and business models have been made possible by increases in broadband access speeds. Back in 1996, CEOs from major software companies, including Oracle, put forward the idea of network computing, which is the storing and running of applications on a server in a network. The idea was great, but dial-up Internet speeds were not. The concept of network computing was shelved. Fast forward over a decade and the accessing and sharing of resources on servers in a network - or cloud computing - is becoming a reality for users equipped with very high speed broadband. Striking changes in communications usage have also taken place for the home user. Over a decade ago, a phone ringing over a dial up connection usually resulted in a dropped connection. Consumers today would baulk at such levels of service. Instead their requirements are growing in line with the simultaneous use of several residential broadband applications. And there is no reason why the consumers' demands will not grow, with the next stage of evolution in content delivery and interactive video broadband services, demanding more capacity than today's legacy networks can provide. If service providers are to avoid their customers cancelling their subscription and switching to competition, they will need to invest in infrastructure that can cope with huge capacity requirements from both fixed and wireless usage. The question still remains.....are the networks of today equipped to handle this explosion in data traffic as anticipated and meet the consumer expectations for immediate access from multiple devices? It shouldn't come as a surprise that the answer is 'no'. It is therefore natural that the networks of tomorrow be built on a robust transmission media which offers limitless potential to address the growing bandwidth traffic and fiber comes in as a natural saviour. Whether IP Traffic drives the deployment of fiber or whether fiber deployment leads to increased IP traffic has always invoked conflicting views. As one of the top five global manufacturers of Optical fiber, Sterlite Technologies has always operated from a premise that there exits a strong positive correlation between the cumulative fiber deployments in the world viz-a-viz the global IP traffic in the past. What is clear though and has unanimous agreement of all industry experts is that fiber today is the only medium which can prepare the networks to handle the bandwidth explosion in years to come. Optical Fiber: The medium for transmitting high-speed data Though early form of optical fiber was developed in 1950's, it was nearly a decade later that the thought of using optical fibers for communication was conceived though the commercial use happened much later. Optical fibers is what permits transmission over longer distances and at higher bandwidths (data rates) than other forms of communication. When we talk about a network backbone capable of transmitting data across the globe in real time, the sole medium capable of making it possible is optical fiber. As communication has evolved, over the past two decades, both in quality and quantity, the case for deploying more fiber has increased. This can be better appreciated by mapping the fiber deployments that have taken place in the last ten years. The fiber industry has grown at a steady pace post the 2001 Internet bubble and continues to do so even now. As per estimates from CRU, the global fiber demand last year was about 215 million-fkm which is the highest ever showcasing a growth of about 10% over previous year. If we observe the fiber deployment pattern globally, different regions have contributed to the growth in fiber demand at periodic intervals depending upon the respective stage of network evolution in that region. The last few years have seen mammoth growth in fiber deployments in China on the backdrop of the 3G infrastructure build up. China presently accounts for around 45% of the global fiber demand. We believe that India market with the highest number of wireless subscribers is also at an inflexion point of growth and should witness strong growth in fiber deployments in the next few years to come. At the very fundamental level, the growth in fiber demand can be correlated to the growth in global bandwidth. As more and more data gets consumed, the bandwidth requirement continues to surge which in turn puts a strain on existing networks. Optical fiber comes as a saviour as the only medium that can support such high data traffic flow. Broadly speaking the requirement for fiber can stem from any of the following three elements of the network: the core network, the metro network and the access network. 1. Core network: Most of the developed economies today as well as the highly growing developing economies like India and China today already have in place, what we call the core network or the backbone network which is a long distance network connecting cities within a country or connecting different countries. For many underdeveloped/ developing economies today this network does not exists or exists in parts and it comes as a basic need to build this network in order to enable communication of cities with other cities or countries. Optical fiber is the most preferred transmission media for building the cross country networks. 2. Metro network: With a core network in place, countries embark upon the next stage of developing their wireless networks and fixed wireline networks across cities. As these networks grow, evolve and advance over time, adding more and more users, it becomes impossible to provide the consumers with desired service levels. Thus this part of the network becomes a bottleneck requiring continuous improvement in network infrastructure. Today, there is no other medium which can handle this capacity constraint better than fiber, thus requiring fiber to be deployed in the metro network. This fiber may be used for mobile backhaul network connecting the wireless towers or it can be used for connecting the exchanges in the city enhancing the wireline networks. 3. Access network: In developed parts of the world where the network is strong in both the backbone and backhaul the next stage in network evolution comes with strengthening the network close to the end user. Fiber deployments in this part of the network, reaching closer to the user are in common parlance referred to as FTTH (Fiber to the home) with some variants like FTTC (Fiber to the curb), FTTB (Fiber to the building) etc giving rise to the general term FTTx which we talk about in the next section. FTTH: Shaping the Future of a Content-based World Lately the word 'fibre' has started to become ubiquitous in advertisements for broadband. It's a synonym for the future, for speed and quality. The reason for the unabashed excitement about FTTH is due to the fact that the theoretical capacity of FTTH technologies is miles above what wireless has to offer. Another method of comparison is the fact that in the case of wireless technologies the actual capacity is much lower than the theoretical capacity and is affected to a great deal by factors like distance, obstructions in the form of buildings etc. Hence, to offer Next- gen services the only medium capable of supporting the network capacity is FTTH. Telecom operators, application and content providers have come a long way in building relationships with each other in recent years. Yet the next major investment in broadband networks will demand even more: The future of broadband infrastructure depends on further collaboration between application and content providers and telecom operators and a deeper understanding of how they interplay to each other's benefit. The last decade demonstrated how innovation in broadband communications can rapidly reshape the way a society communicates, works and entertains. Today, we are on the brink of much greater change. After all, only a few people building power stations in the early 20th century could have imagined the extent to which electricity networks would drive new industries for domestic appliances and revolutionise housework: Fortunately the creators of yesterday's power generators laid an infrastructure that Could accommodate a century of growth. Today's investors in broadband need to take a similar leap and create a sustainable, flexible infrastructure that can accommodate new, unexpected services and ways of doing business. Despite concerns over how actors will share both the cost of infrastructure and the benefit of new revenue flows, it remains in everyone's interest that FTTH networks are built. Telcos will be able to offer new, differentiated products and reduce the congestion on their networks that the growing consumer demand for HD video streaming and fixed-mobile convergence brings. Content, Internet and application companies will be able to create truly interactive products and services. And not building FTTH networks puts today's owners of copper networks at risk of falling behind competing mobile and cable network operators. A new generation of content and applications opens opportunities for all players to engage on different levels in defining the best business model. The value proposition of different services is based on their market potential, revenue opportunity and end-user requirements such as security, privacy, reliance, cost vs. quality preference etc. When we talk about the access network it is useful to see how countries across the globe pan out in terms of internet connectivity. Further, there is a lot of diversity in the profiles of nations with some having internet penetration that is as high as 100% while others are closer to nil. This again re-emphasises the fact that depending on the stage of network evolution, economies across the globe will have distinctive requirements. It is no surprise then that we see a higher FTTH penetration for countries that already have the basic internet infrastructure in place and higher level of internet penetration. Developed countries in Asia primarily in South East Asia such as South Korea and Japan have the highest subscribers and are also expected to grow at a much faster rate than expected from other economies of the world. Latin America and Africa lag in FTTH penetration and this trend is expected to continue for a few years, as they are at that stage of network evolution where their primary requirement is getting the backbone network ready before moving on to backhaul or the access networks. What is interesting to note is, for economies that are still at a nascent stage of their network evolution, it will take some time before they make a step towards a FTTH infrastructure. However, for other economies the pace at which they are advancing towards FTTH maturity (Defined as minimum 20% household penetration of fiber) is quite astounding. European Union, US and Australia are the major regions which are next in line. This is a good representative of the year which will trigger fiber requirements for several economies. Investments in fiber networks is a cyclical phenomenon and each cycle takes anywhere between 2 and 5 years depending upon the type and scale of investment. In this context, the FTTH maturity matrix for various countries will boost our confidence in terms of the growing fiber demand from FTTH in the next decade, which is about 60- 70% of the total fiber demand. Initiatives across the globe Not only are private telecom operators making these investments, but Governments globally realise the importance of broadband for their economies. Studies also reveal a positive correlation between broadband penetration and GDP growth for different economies as depicted below:- Region Impact on GDP growth for each 1% change of broadband penetration 5 OECD countries with penetration higher than 30% 0.023 8 OECD countries with penetration between 20% and 30% 0.014 8 OECD countries with penetration under 17% 0.008 Countries of medium and low economic development 0.138 Latin America and the Caribbean 0.016 India 0.031 Source: International Telecommunication Union - 'Impact of Broadband on the economy' Consequently, the last few years have witnessed quite a few initiatives across geographies by both private players as well as government bodies. All of these will have a direct impact on the fiber demand in the coming years. Aust