Why Sterlite Tech share price fell (for last 2 months)?

The stock of Sterlite Technologies has been falling saw a considerable fall in Feb & Mar 2019. The fundamentals are strong, the numbers are nice, but still why is the stock falling?

Stock Price & Market Capitalisation Movement

In January 2018, The stock of Sterlite Technologies was trading around Rs. 400. Now in March 2019, the stock is trading around Rs. 222. The stock is down by almost 45%. In January 2018, the market cap of the company was almost Rs, 16,000 crores. And currently (March 2019) it is down to almost Rs. 8,900 crores.

Positives of Sterlite Tech

• Net Profit Increase – In March 2015 for that year end, Sterlite Technologies reported a net loss of Rs. 3 crores. In March 2016, the company reported a net profit of Rs. 225 crores. A loss-making company became a profit-making company within a year. Year ending March 2017 was also a good year for the company. The company reported a net profit of Rs. 257 crores. March 2018 being another positive year the company reported a net profit of Rs. 334 crores. In the Trailing Twelve Months (TTM), the company has had a net profit of Rs. 510 crores.

• What is PE RatioWhat is PE Ratio– The TTM PE ratio of Sterlite Technologies is close to 17.64 (Current Market Cap ÷ Net Profit, 9,000 ÷ 510). In March 2018, the PE ratio of the company was close to 40 (16,000 ÷ 334). The stock which was trading at PE levels of 40 is now being traded at PE levels of 17. The two reasons behind this are decrease in stock price and increase in Earnings Per Share (EPS).

• Loans/Borrowings- The company has loans amounting to Rs. 1,926 crores.The TTM net profit of the company is Rs,.  Crores. Comparing this amount to the amount of Rs. 1,926 crores, the loan amount doesn’t seem that huge, it is even less than 5 times the Net profit .

• Cash Reserves :
  The company has cash reserves amounting to Rs. 1,200 crores.
  This is a very healthy number.

• Free Cash Flow (FCF) :
  The FCF of Sterlite Technologies in March 2018 was positive.
  The amount (Operating Revenue) left after deducting interest payments, all types of expenses from the operating income was still positive which was Rs. 25 crores (according to the March 2018 balance sheet of the company).

• Interest Payments:
  In March 2016, Sterlite Technologies paid interests of Rs. 119 crores. In March 2017, it paid interests of Rs. 123 crores. Rs. 104 crores in March 2018 and Rs. 100 crores interest pain recently. When you look at all the numbers of the company then you get a very positive feeling about the company.

Negatives of the Sterlite Tech

Now let’s have a look at the alarming things happening with company because of which the company may be facing problems.

• Promoter Holding :
  When you look at all the numbers of the company then you get a very positive feeling about the company. The promoter holding in the company is of 53.83%. Out of this the pledges promoter holding is 52%.
  This means that 97% of the promoter holding is pledged. The notable point here is that, even with such good numbers why do the promoters have to pledge so much of their holding?
  This money was most probably raised to invest in the infrastructure business and things did not go according to the plan there.
  So, there are chances that the lenders/borrowers may have started selling the shares to recover their money. The operators and the speculators in the market are reacting on this possibility.

Summary

• There is nothing wrong with the fundamentals of the company.
• If the promoter has taken any extra debt apart from for the business, then that is dangerous, and market doesn’t like such things.
• Thus, companies which high pledged promoter holding should be avoided.
• Sterlite Technologies is related to optical fibre and there is a lot of scope and demand for optical fibre in the coming future.
• The disadvantage that Institutional investors think might be here is that, if the company is connected with government in their majority projects, then any changes in the government and government policy in the future will have direct impact on the company, which they think is not good.
• Investors should always look at the fundamentals of the company, understand their business processes, know in detail about the company and then only decide whether to invest in that company or not.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that these are bad companies, or the stock of these companies are bad
• We are also not suggesting anyone to immediately go and buy these stocks or invest in the stock markets.