Evolution to Revolution - Why disruption of Status Quo is important

January 19, 2007 www.sterliteoptical.com

Evolution

to

Revolution

Dr. Anand Agarwal


Sterlite Optical Technologies Ltd.

Infrastructure Equipment Makers (Wire & Cable)

Mobile Network

Operators

Network Equipment

Manufacturers

The Content Chain

The Application Providers Chain

Subscription and

Connection Retailers

Accessories and

Handset Retailers

END USER

Infrastructure Equipment Makers (Wire & Cable)

Mobile Network

Operators

Network Equipment

Manufacturers

The Content Chain

The Application Providers Chain

Subscription and

Connection Retailers

Accessories and

Handset Retailers

END USER

BackboneNetwork

InternationalNational

Access

NetworkBackboneNetwork

InternationalNational

Access

Network

We are present at the start of

the value chain.

We manufacture Optical Fiber,

Telecom Cables and provide

Wireless Integration solutions.

Our products carry your voice,

data and video at all stages of

the network.


Agenda - Evolution to Revolution

• The Evolution of the Telecom and IT Bubble

• The Boom and the Bust

• Evolution to Revolution – The Optical Fiber Industry

– Sterlite Optical Technologies Limited

– The Indian Industry

• Think Global, Act Glocal – Paradigm Shifts in the Industry

– Case Study: The acquisition of Hutch

• Bringing it all together


At the turn of the Century - The World was evolving

• Predictions talked about bandwidth multiplying like transistors on PCBs

• Telecom equipment majors were busy putting up capacities to cater to

the humongous demands of Service Providers.

• It seemed like good times were on a roll for Telecom and InfoTech.


A Variant of Murphy’s Law:

“Everything will go wrong at one

point of time.”

Extension of the above Variant:

“That time is always when you

least expect it.”

www.mkschubert.de

But Murphy had other plans


Telecom Equipment Majors

During the Telecom / IT Bubble

Service Providers suddenly

backed out of CAPEX promises.

Telecom Service

Providers:

T: AT&T

VZ: Verizon

Telecom Eqpmt.

Majors:

ALU: Alcatel-Lucent

#1 – System Integrator

CSCO: Cisco

#1 – Network Eqpt

GLW: Corning

#1 - Optical fiber

Resurrection

initiated

Telecom and InfoTech The Boom and the Bust


Revolutionary Ideas are either

• Accidents – with no/low financial costs incurred

• High R&D efforts – Million/Billion $$$ investments

Key Takeaway:

Be alert for disruptive ideas

and technologies – you will

always come across one when

things have gone wrong.

Teacherlink.ed.usu.edu

The Eureka moment …


Evolution to Revolution … … …

• The bubble burst saw Equipment majors suffering huge losses. - This forced them to look for Cost reduction possibilities.

• The Outsourcing industry and the Software cycle emerged as radical

opportunities. - The IT revolution is the fastest growing contributor to the Indian GDP now.

The Bust was immediately followed by a

period of gains for the Indian IT majors.

Bloomberg

Was this sudden

shift – an

accident of epic

proportions?


Evolution to Revolution … … … The World is Flat

• According to Thomas Friedman – YES !!! He says: - The accident happened around the millennium

- Ushered in the third era of Globalization,

- A revolution happened that made Beijing, Bangalore and Bethesda as next

door neighbours.

• Three flatteners that revolutionized the World. - The fall of the Berlin Wall succeeded by the rise of Microsoft Windows 3.0.

- The Netscape browser, commercialization of open transmission standards and

investment of USD 1 trillion in fiber optic networks.

- The Workflow revolution - development of application-to-application talking

software (middleware) which connected the PC with the deployed bandwidth.

The investment in fiber optic and submarine networks linked

opportunity seeking nations like India & China with loss-

making/profit-seeking nations like the US.

This gave birth to the Outsourcing Industry


Back to the Optical Fiber industry

1318

6063

75 75

108

108

62

108

37

53

7

23

75

29

0

20

40

60

80

100

120

1990 1992 1994 1996 1998 2000 2002 2004 2006

E

(in M

illi

on F

km

)

27%

’90-’97

CAGR

49%

’97-’00

CAGR

GROWTH

Deployments due to IT Boom

DECLINE

Market correction

on over deployments

(CRU Monitors)

19%

’03-’06e

CAGR

RESURRECTION

FTTx and 3G

driving fiber usage

100.3

Q3 A

1318

6063

75 75

108

108

62

108

37

53

7

23

75

29

0

20

40

60

80

100

120

1990 1992 1994 1996 1998 2000 2002 2004 2006

E

(in M

illi

on F

km

)

27%

’90-’97

CAGR

27%

’90-’97

CAGR

49%

’97-’00

CAGR

49%

’97-’00

CAGR

GROWTH

Deployments due to IT Boom

DECLINE

Market correction

on over deployments

(CRU Monitors)

19%

’03-’06e

CAGR

19%

’03-’06e

CAGR

RESURRECTION

FTTx and 3G

driving fiber usage

100.3

Q3 A

Market Value (US$ bn)

2.2

3.4

5.3

6.8

2.6 2.5 3.02.9

8.1

-

1

2

3

4

5

6

7

8

9

1997 1998 1999 2000 2001 2002 2003 2004 2005

US$

Billion

Standard Single Mode OF

0

10

20

30

40

50

'2001 '2002 '2003 '2004 '2005 '2006

in U

SD

The meltdown in 2001-2002 had major repercussions on every

company in the industry.


Sterlite Optical Technologies Ltd. Revenues and Profits

Revenues and Profits took a nosedive… forcing us to develop a

comprehensive turn-around plan and unparalleled differentiators.

480.2544.4

659.9

1,037.6

699.8

132.0103.2

370.6

623.9

108 .5 103 .7136 .8

300 .8

100 .2

(86 .1) (45.0 )

10 .240 .8

(200)

-

200

400

600

800

1,000

1,200

1997-98 1998-99 1999-00 2000-01* 2001-02 2002-03 2003-04 2004-05 2005-06

in R

s. C

rore

s

(* annualized )


In order to have a turnaround,

a multi-pronged approach was adopted


Com

modit

yT

echnolo

gy

Silicon Chlorine Furnace Oil

SiCl4

Commodity Commodity

Power

Hydrogen Oxygen

Glass

Preforms

Optical FiberDirect Sales

Optical Fiber Cables

Drawing

Commodity

Technology

Costs - Indexed to Oct. 2001

0

20

40

60

80

100

120

O J A J O J A J O J A J O J A J O J A J O

Ind

exe

d t

o 1

00

as o

n J

an

uary

20

01

Raw Material Cost

2002 2003 2004 2005 2006

Power

Plant

Hydrogen

Plant

Moved 100%

to SOC

Core

Production

Nitrogen

PlantSiCl4Plant

Glass

Production

Glass

Production

Go on drilling into the

Value chain to make a

Technology product from

Commodities.

Capture inefficiencies in

the Value Chain.

Challenge every norm

– there are no holy cows.

Keep trying ‘long-shot’ &

‘sure-shot’ projects.

1. Attain Cost Leadership

Confidential to

Company


Indian OFC Market Size

2.2 1.9 1.5 2.0 2.3 3.1-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2001-2 2002-3 2003-4 2004-5 2005-6 06-7 (e)

in m

illi

on f

km

(CRIS-INFAC, Company Estimates)

27% ’03-’07e

CAGR

Infrastructure / Real Estate Applications

BPO & KPO

Telecom

Utilities

Relationships with

all stakeholders

are the Key to

Success.

2. Grow the Indian Market


Do not be afraid of venturing into

something new, if your

fundamentals are correct and you

have belief in your capabilities.

10.5 13.3 13.9 15.0 17.9

11.4

2% 2%

4%

8%

11%

0.4%

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

2001-2 2002-3 2003-4 2004-5 2005-6 2006-7 (e)

Chin

a O

F M

ark

et

Siz

e (

Km

-Mn)

0%

2%

4%

6%

8%

10%

12%

Ste

rlite M

ark

et

Share

(%

)

China Market Size (Km-Mn)

Sterlite Market Share (%)

Source: CRU, KMI, Company

Geographical Focus Areas

0

20

40

60

80

100

120

140

FY02 FY03 FY04 FY05 FY06 H1 07

0%

5%

10%

15%

20%

25%

30%Export

Export % of total

3. Enhance our Global Footprint

Confidential to Company


P

A

T

E

N

T

S

Inform

ation

Techno

logy

S

I

X

S

I

G

M

A

SOTL

• Widespread use of

six sigma

• Every employee

trained on its usage

• End to end data

collection & analysis

• Reduced /eliminated

errors

• 42 Global patents

filed in Last 2 years

• 4 Patents awarded

• 3 so far in FY 06-07

Global

presence

Market

Leadership

4. Focus on R&D, IT and Quality


Continuing

Dominance

Knowledge The New Differentiator

Indian Companies are

increasingly realizing that

they need to –

“Think Global, Act Glocal”

Revolution in the Indian Industry

• India is turning local to global. - Internal to External

- Profits to Value

- Short-term to Long-term

- Operations focus to Customer &

Shareholder focus

Value Proposition

Applications

New Ways to Work

Entrepreneurship

Productivity

Ubiquity

ROI

Marketplace

Availability

Licensing Agreements

Advertising / Awareness

Pricing Models

Substitutes

Cost

Technology

Interoperability

Standards and Protocols

Optimize available resources

Innovate existing products

Security

QoS

New Path to

Dominance


Think Global, Act Glocal … … … ???

• Indian Companies are interacting, buying and selling internationally to

grow their businesses. - Heads of international bigwigs are PIO’s (Vodafone, Pepsi, Arcelor-Mittal, …)

- Indians are taking over foreign companies (Wipro, Tata, Dr. Reddy’s, …)

- Exports have grown significantly (Auto ancillary, Software, Pharma, …)

• Focusing on global partners or customers who have - Robust business processes and systems.

- Sustainable business models.

- Adaptability/Flexibility towards change.

• Indian co’s are acting increasingly for Customer and Shareholder benefit. - Intangible benefits and cost advantages passed on to customer ensuring

Customer Delight factor.

- Management’s key role is to deliver on these stakeholders’ expectations.

- Organizational capabilities are being developed having them as the focus.

As mentioned by Tom Friedman,

this is the new mantra of Collaboration and Convergence.


Focus of Any Business Stakeholders on the Business Lifecycle Curve

Desi

gn &

Develo

pm

ent

Intr

oducti

on

Gro

wth

Matu

rity

Decline

Revenues

/ P

rofi

ts /

M-C

ap /

Siz

e

Time

Consumer:

Focus on Customer Applications.

Design Solutions as per His Needs.

Develop IP for these applications.

Find customized differentiators.

Shareholder:

Expects continuous business growth

in Revenues and Profits.

Expects sustainable Returns on

Investment.

Govt.

Vendors

Mgmt.

Community

Employees

Pressure groups


What has this led to: The Current Paradigm Shift in Valuations

INTANGIBLES are IMPORTANT in the New Economy

Technology

Related

Human Capital

Related

Market

Related

Skilled Manpower

Efficient Management

Man Management Systems

…

Know-how (Expertise)

Documentation

Intellectual Property

Customer Certifications

…

Brand

Distribution Channel

Customer Database

Customer Relationships

…

Currently, Value of a Business =

Customer Access + IP + Sustainable Growth + Competitive Differentiation


Hutch

Price Subscribers EV / Subscriber Subscriber Base

Min Bid 14 bn 23 mn 610 Wireless

Max Bid 22 bn 23 mn 950

Assets Value for Hutch

Value Subscribers EV / Subscriber Subscriber Base

Mid-2006 11 bn 17 mn 650 as per Morgan Stanley report

Comparable Listed Companies

M-Cap Subscribers EV / Subscriber Services

Bharti 28.54 bn 31 mn 920 Wireless + Internet

Reliance 11.83 bn 29 mn 408 Wireless + ILD

MTNL 2.27 bn 2 mn 1135 Wireline + Wireless + Internet

Case Study: Hutch Valuations!

Vodafone picked up a 10% stake in Bharti at an EV/Sub of $1000 in Nov 2005.

Maxis picked up 74% in Dishnet Wireless at EV/Sub of $360 in Dec 2005.


These intangibles are considered as Business and Intellectual

Property of the Company and a corresponding premium is added

while deciding on the final value of the Company.

Case Study: Hutch Valuations!

Valuations based on

Number of Subscribers – 23 million

Quality of Subscribers – Majority Post-paid

Applications on offer - 1st to offer TV on Mobile

- Chhota Hutch recharge

- … …

Avg. Revenue per User - # 2 (over Rs. 350 p.m.)

Retention of Subscribers

Technological Capability - to offer better services

- to upgrade network


What does this mean for you

• Technology is becoming a key differentiator between a Good

and a Great Company.

• Ability to manage and focus technology towards customer

applications is the key role of the Company’s management.

• Adaptability and flexibility in changing technological and value

offerings to customer is key.

• The value of a company/individual is more on its ‘knowledge

capabilities’ and ability to deliver value from this knowledge –

rather than only on Physical Assets.


Thank You


Key Takeaways Evolution to Revolution

• Predictions on the exponential rise of Telecom and IT companies were

not fulfilled. This was a boon for India and China. - Evolution of fiber optic networks in US facilitated the outsourcing

revolution in India.

- Opportunities need to be identified in adversity.

- Companies that succeed are those who successfully adapt their business

models to the prevailing situation.

• Sterlite Optical has turned around successfully after the IT meltdown. - Technology and Knowledge based revolution acted as the base.

- Challenge all norms and assumptions.

- Focus on your core competencies.

- Do not be afraid to venture into the unknown.

• The Indian industry is beginning to reap the fruits of the IT revolution. - Global opportunities have changed the outlook of Indian companies.

- Organizations with differentiators that focus on customers and

shareholders are the most likely to succeed.

- The value of an individual or a company is now more in terms of their

intangible value than their physical assets.