Perspectives

Corporate View: Abhijit Lahiri, Sterlite

Published: Mar 2012

Sterlite Technologies Limited is a leading global provider of transmission solutions for the power and telecom industries. The company has approximately 1,000 employees across sites worldwide, including China, India, Russia and South Africa. For the year ending 31st March 2011, the company recorded net revenue of $503m. Jiangsu Tongguang Communication Co. Ltd. (TGCl) is a leading provider of total transmission solutions for optical cable and IT industries.

Abhijit Lahiri

Chief Financial Officer

Abhijit Lahiri is the Chief Financial Officer (CFO) of Jiangsu Sterlite Tongguang Fiber Co. Ltd, a joint venture between Sterlite Technologies and Jiangsu Tongguang Communication Co. Ltd. He has worked in the fields of financial management, internal auditing, corporate finance and accounting over the past 13 years.

He is a gold medallist in commerce from Calcutta University, India and a rank holder certified public accountant from India. He is also a qualified internal assessor of Tata Business Excellence Model which is in line with Malcolm Baldrige National Quality Awards of USA.

Abhijit Lahiri is a very busy man. In his current role, he is responsible for setting up a green field joint venture (JV) project at Haimen in Jiangsu Province to manufacture optical fibre for the Chinese telecoms industry.

Prior to joining Jiangsu Sterlite, he was CFO at Zhejiang Tata Tea Extraction Co. Ltd, a joint venture between Tata Global Beverages, which is a subsidiary of Tata Group of India, and Zhejiang Tea Group Co. Ltd. The JV involved setting up a green field manufacturing facility in Anji where instant tea and tea polyphenols were manufactured.

The highlights of Abhijit’s time at Tata Global Beverages included the de-merger of a business division into a new company, getting the buy-in of potential investors to invest in the new company, financial modelling for the new entity, getting the valuation of the new entity done and the implementation of an SAP ERP.

Before his move to China, Abhijit worked in India for a number of Indian multinational companies, including Larsen & Toubro and Britannia Industries in various capacities. He was appointed Jiangsu Sterlite Tongguang’s CFO a year ago, during which time he has overseen the successful implementation of the JV project.

“Conversations with our JV partner started in June/July 2010. Our business licence was granted in January 2011, at which time the treasury team started to be assembled. By the end of April 2011, the entire team was in place.”

Tongguang Group, a leading Chinese cable manufacturer, was chosen as partner for the JV, Abhijit explains, because “we understand each other’s corporate culture. We have worked together in the past. We have had a good relationship and understand their culture and that has helped us a lot”.

The Indian parent company has already injected $5m in equity. Another $5m from the parent company is expected in the future. A term loan of $13m from a China-based Indian bank will cover the rest of the capex and other costs the JV is expected to incur.

We are in an era of globalisation where strategic ties constitute the basis of overall relations between countries. China and India are two of the largest global economies and both have established comprehensive industrial sectors.

“Seventy-five percent of the equity is held by Sterlite and 25% is held by the local Chinese company. We expect the project to be completed by the end of 2012,” Abhijit explains.

In this interview, Abhijit discusses his treasury and the joint venture with Tongguang.

How many people work in your finance team?

There are currently four other members in my team – a finance manager, a cashier, a project co-ordinator and a translator, who liaises with government agencies and EPC contractors. Our team is based out of Shanghai and Haimen, our project site.

Only the project co-ordinator is an Indian, whilst all the others are Chinese nationals. We intend to grow our team, once operations have formally commenced, and we also have plans to implement advanced systems such as an ERP.

Who do you bank with?

We bank with the Bank of China and the State Bank of India. We have a revolving credit facility with the State Bank of India, which is about $13m. We have the flexibility to borrow in US dollars and RMB. When we import machinery we will use dollar-denominated loans and for domestic expenses and local procurement we will use the RMB facility. There is an interest rate differential between the two of course.

Perhaps when we need additional funds for expansion when our operations have stabilised, we might explore other options like the dim sum bond market in Hong Kong. But that is something for the future.

Can you tell us about the JV that you are about to embark on?

The rise of China and the rise of India have become focuses of world attention. We are in an era of globalisation where strategic ties constitute the basis of overall relations between countries. China and India are two of the largest global economies and both have established comprehensive industrial sectors. At the same time, the economic strengths and aspirations of our two countries are very much complementary to each other, for manufacturing and infrastructure development.

Industry experts forecast that mobile broadband will grow faster than fixed broadband, and will account for almost 70% of total broadband connections by 2014. China’s broadband subscriber base is expected to double in the next two and a half years.

China has the largest broadband subscriber base globally and is the world’s largest optical fibre market (fibre sales in 2010 were approximately 80m FKM). China is also adding more subscribers per quarter than any other country. Industry experts forecast that mobile broadband will grow faster than fixed broadband, and will account for almost 70% of total broadband connections by 2014. China’s broadband subscriber base is expected to double in the next two and a half years.

The fibre market in China is expected to grow at 10-12% CAGR for the next five years. The drivers of sustained demand in China are:

  • 4G, 3G and FTTH (Fibre To The Home).
  • Government stimulus.
  • Multiple data network rollouts.

Like many other international companies, China is an extremely important world market for Sterlite Technologies. We are glad that in a short while, we have become the preferred optical fibre vendor to leading cable and telecom companies here. However, we believe that a collaborative approach is crucial to ensure a strong connection with the needs of our stakeholders.

In this regard, in November 2010 we announced a $20m JV between Sterlite and Tongguang Communication Co. Ltd (TG), to manufacture optical fibre. We believe that this joint venture represents a significant strategic development in China. The joint venture at Haimen, Jiangsu Province will be committed to offering high-quality and competitive optical fibres and services to customers. As part of the joint venture agreement, Sterlite brings expertise in optical fibre technology and TG brings significant fibre cable manufacturing and local market expertise.

With the benefits of extended product lines, the Sterlite-TG joint venture company will make it faster, easier and more cost-effective for utilities and service providers to build new age communication infrastructures. With our joint venture in place, we believe this will help strengthen the competitive edge for China and India in the telecoms space. We remain committed to promoting a greater degree of collaboration between our countries.

What are the advantages and disadvantages of undertaking a JV in China?

Market opportunities in China are plentiful for interested foreign companies. However, these companies face a strategic decision to figure out how to achieve success in a market where there is already significant indigenous competition. Sterlite examined the following options for setting up a local presence in China:

  • JV with local Chinese cable companies to set up a fibre draw tower (DT).
  • Investment into local fibre DTs.

The first option of setting up a JV with a fibre optic cable manufacturer was more suitable to Sterlite’s requirements due to the following reasons:

  • Secure volume through captive supply agreements.
  • Access to our JV partner’s customer network.
  • Licences and statutory compliances.

As of now, we do not see any disadvantages of this JV as it was a carefully considered strategic decision.

How long do you expect the process to take?

We have already completed all the formalities and procedures related to company formation, JV registration and land allotment. We had our ‘ground breaking ceremony’ on 29th November 2011. The construction of the facility is well on schedule for completion by the end of 2012.

What challenges does China present when setting up a JV/new company? How do you plan to overcome them?

In my opinion, the following are the major challenges that a foreign investor generally faces in setting up a company in China:

  • Regulation. Although regulations in China are clearly defined, there is scope for improvement in implementation of the same.
  • Funding options and cost of funding. In the absence of interest rate deregulation and internationalisation of RMB, there are some challenges in corporate borrowing.
  • Talent management. Like all competitive markets in the world, recruiting appropriate talent and retaining them continues to be a challenge.

We believe that we can leverage the relationship developed by our JV partners to alleviate most of these challenges. Our key focus right now is to channel our collective resources towards meeting our time schedules for the set-up of the manufacturing facility.

What will the JV mean for the company in long run?

With the continued rollout of 3G and FTTx, China has retained its position as the largest market for optical fibres in the world. We believe that China will continue to develop and upgrade its telecommunications infrastructure to remain globally competitive and this will ensure that the demand for optical fibres will be sustained over the long term.

The internationalisation of the RMB is something we are closely monitoring. We have to do a lot of hedging because the currency is constantly appreciating against the US dollar.

Considering the importance of China to our market access and future business growth, it is critical for us to have a local presence. Our joint venture at Haimen, Jiangsu Province will be committed to offering high-quality and competitive optical fibres and services to customers. Also, as one of the world’s largest integrated optical fibre manufacturers, we are in a strong position to support our customers from a product development, service and solutions standpoint.

How do China’s currency controls affect your business?

In terms of funding, it is a challenge. Deregulation of interest rates hasn’t happened yet. The internationalisation of the RMB is something we are closely monitoring. We have to do a lot of hedging because the currency is constantly appreciating against the US dollar.

The interest rate is controlled by the PBoC. Capital control convertibility is happening in a phased manner. There are certain challenges in converting equity from US dollars into RMB unless you have end-user contracts in place. Additionally, there is a strict monitoring of actual usage of loan funds, which was mainly put in place to control the real estate bubble. We are adapting to this.

Do you have any plans to establish other JVs in China?

We have a team that periodically and routinely reviews various opportunities that could have synergies with our business and growth plans. Sterlite periodically issues news releases informing stakeholders of key developments as and when these events happen.

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