Sterlite Tech’s shaky Q2 signals challenges ahead amid global demand contraction

Sterlite Tech’s shaky Q2 signals challenges ahead amid global demand contraction

STL grapples with declining revenues and profitability despite a temporary rise in quarterly sales

Sterlite Tech

Mumbai: Why, in a world ruled by the invisible hands of technology, do tech giants stumble through uneven financial terrain? Despite their omnipresence in our lives, tech companies often hit the rocks at least once each fiscal year—and Sterlite Technologies Limited (STL) is no exception. For STL, a powerhouse in optical and digital solutions, Q2 FY25 exposed more than just numbers. Faced with contracting demand, squeezed margins, and a fading grip on last year’s benchmarks, STL’s latest performance tells a tale of turbulence that reveals just how volatile the road to digital dominance can be.

STL reported consolidated revenues of Rs 1,413 crore for the quarter ending 30 September 2024, a 16 per cent increase from the previous quarter. This growth, however, fails to mask the underlying challenges. Compared to the same quarter last year, revenues have slid by 5.4 per cent, down from Rs 1,494 crore in Q2 FY24. This revenue dip reflects broader market contractions, especially in STL’s core optical fibre cable (OFC) and optical connectivity (OC) businesses, which have been grappling with supply chain constraints and price pressures globally.

In financial performance, STL’s EBITDA reached Rs 151 crore, marking a 63 per cent QoQ increase. However, this positive quarter-over-quarter rise sharply contrasts with the year-over-year trend, as EBITDA plummeted by 30 per cent from Rs 216 crore in Q2 FY24. STL’s EBITDA margin now stands at 10.7 per cent, a steep decline from 14.4 per cent last year, signalling weakened profitability across its core sectors.

The optical networking division, historically the backbone of STL’s business, continues to struggle. OFC volumes have decreased on an annual basis, underscoring the persistent demand softness that has plagued the company’s market segments. A more concerning aspect is the drop in Optical Connectivity attach rates from prior peaks, weakening STL’s market positioning. The segment generated Rs 1,027 crore in revenue this quarter, a reduction of 5.3 per cent YoY, despite modest QoQ growth. EBITDA margins within this segment also fell to 12.9 per cent, compared to 19.4 per cent in the same period last year, driven by higher operational costs and reduced OFC sales volumes.

Moreover, STL’s digital services division faced hurdles, with quarterly revenue declining to Rs 64 crore from Rs 78 crore YoY, reflecting a 17.9 per cent decrease. Losses within the digital business narrowed slightly, yet the unit continues to operate at a deficit, posting an EBITDA loss of Rs 15 crore.

Despite its revenue decline, STL achieved several key client acquisitions, securing projects in the US and UK, including a new partnership with Netomnia. However, these wins are tempered by STL’s broader market contraction and reduced OFC demand worldwide, as highlighted by a projected global market growth of only 4.3 per cent CAGR from 2022 to 2028. Although STL’s management expresses optimism for demand recovery, these short-term volume reductions underscore systemic weaknesses.

The company’s recent financials have cast doubt over its ability to maintain the growth trajectory seen in prior years. With H1 FY25 net losses mounting to Rs 60 crore, STL’s debt profile has also become a point of concern. Net debt stood at Rs 2,169 crore at the end of H1 FY25, accompanied by a debt-to-equity ratio of 0.74. This leverage, coupled with reduced earnings, limits STL’s flexibility to navigate the industry’s tightening margins and escalating global competition.

As STL embarks on its demerger of the Global Services business, the separation process itself may introduce further operational complexities and transitional costs. Scheduled for completion by Q3 FY25, this demerger aims to bolster STL’s core focus on optical and digital solutions, yet the timing appears precarious given the present fiscal constraints.

For now, STL’s path to stability appears fraught with challenges. A combination of cost restructuring and a recalibrated growth strategy may be crucial if STL is to weather the industry’s cyclical headwinds and regain investor confidence in the coming quarters.