A Basket Case?

It is certainly not the worst thing that can happen to an industry. Jelly-filled telephone cables (JFTC) manufacturers are a luckier lot since they know that demand for JFTC will slacken in favour of fibre optic cables (FOC). The developed nations will also vouch for it.

True, you have heard all this before. But, does the paranoia over JFTC really make sense? Consider this. The market for copper cables (same as JFTC) is still alive and kicking even in developed nations. In the US alone, their market was worth over $1.2 billion in 1994. Further, last October, Superior Telecom Inc., a $410-million US manufacturer of copper cables, raised $110 million in its initial cash offering. Superior Telecom makes copper wire and cable products for the local loop segment of the telecom network in the US. The local loop segment connects the customer's premises to the nearest telephone company switch or the central office. Copper wire and cable is the most widely used medium for transmission in the local loop, which comprises roughly 160 million residential and business access lines in the US.

Of course, growth rates in the US are modest and most of the gains accruing to manufacturers are through improved efficiencies. In India too, the use of copper cables will be restricted to the last 500 meters or 1,000 meters (1,000 meters is more likely and FOC will be used in long distance networks). And, this will account for most of the demand after about three years in a worst case scenario which could see demand slowing down to 22-25 million ckm by 2000.

The rapid use of FOC in emerging markets (where networks will be constructed from scratch) will see large volume growth for makers of both fibre and optical line termination equipment which will lower prices. However, that will never make them cheaper than JFTC. Also, the preference for FOC will also depend on the band-width requirement. In US, FOC is preferred over JFTC for networks built from scratch and for networks built for large organisations. The same is exoected to apply to India. In fact, this is one big assumption that pushed the JFTC sector into a state of desolation in eyes of the investor.

Basic services from private operators are yet to start. Already large cities have a well-covered copper cable network. Also, the thrust of basic services will be in rural India where use of FOC and ancillary equipment could be horrendously expensive. Industry sources feel that basic telephone operators will ask for freedom in determining their networks, a demand which they strongly feel will be conceded by the DoT. And, not to forget, new technologies permit telecom carriers, private network owners and end-user consumers to employ copper wire and cable infrastructure for high speed and band-width intensive applications. Thus it may not be the end of the road for JFTC makers. Demand for FOC will rise, but that may not exactly be at the expense of JFTC, at least in the foreseeable future.

So why is everyone making a fuss over the declining market for JFTC? Because, in the last four years, domestic JFTC capacity has risen from around 20 million ckm to 66 million ckm (DoT's latest tender is for 35 million ckm). It is felt that as demand for JFTC from DoT tapers off and private players begin operations, average selling prices of JFTC will drop. And, in an industry already saddled with excess capacity, margins will fall.

But, existing capacity is easily overstated by 15-20 per cent. Also, PSUs like Hindustan Cables with a capacity of 10.7 million ckm are nearly defunct. Further, the capacity is unevenly distributed among 28 players. Currently, small players are unable to sell on deferred payment terms. Their heads will remain over water till DoT continues to source a large portion of JFTC on cash basis and also splits its orders. However, private operators will not be so liberal. Industry observers feel that number of players will whittle down to about a handful in the next few years.

The experience of the US copper cable industry may help to silence a few bears. The industry went through a phase of consolidation after the juggernaut of the FOC saw many players losing money. Superior Telecom alone lost $1.42 million in 1994. Later, excess capacity was either shut down or equipment was sold to companies in China and India (in fact, most of the recent domestic capacity addition is through second-hand machines).

Superior Telecom, however, went on an acquiring spree and in the process more than tripled its capacities. Its sales rose from $68.5 million in 1994 to $410 million in 1996. Latest net profit was $5.4 million. Its prospectus says that due to industry-wide consolidation, total industry capacity has reduced, the number of manufacturers has declined and the size of those remaining has increased. The industry consolidation also increased demand and resulting changes in the nature of customer relationships also led to a recent improvement in the pricing environment for the company's products.

Back home, there are four players in the JFTC business which we feel can emerge as survivors. Two of them, Vindhya Telelinks and Usha Beltron are pure JFTC plays for another few years while the other two, Finolex Cables and Sterlite Industries are diversified.

Sterlite Industries, which is fully integrated, will be the biggest beneficiary of the continuing demand in JFTC and future boom in FOC and is an outright