Creating value for shareholders - Sustainably

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Strategy Paper on how to generate consistent value for shareholders, and how Investor Relations can help a company do that.

Strategy Paper on how to generate consistent value for shareholders, and how Investor Relations can help a company do that.

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  • 1. www.sterliteoptical.com Creating value for Shareholders Sterlite Technologies Limited Power to every Village
  • 2. www.sterliteoptical.com Some Definitions Value (mathematics) - the value of a variable in mathematics. Value (economics) - the market worth or estimated worth of commodities, services, assets, or work. Value
  • 3. www.sterliteoptical.com To refer to the concept that the primary goal for a company is to enrich its shareholders (owners) by paying dividends and/or causing the stock price to increase. To refer to the more specific concept that planned actions by management and the returns to shareholders should outperform certain bench-marks such as the cost of capital concept. Shareholder Value Some Definitions Total Shareholder Return Close Price @ End of Year Open Price @ Start of Year Dividend Payout Shareholder Value Capital Structure Equity Debt Cost of Capital Capital Structure Equity Debt Cost of Capital Corporate Vision Strategic Plan Business / Operating Plan Revenue / Profit growth
  • 4. www.sterliteoptical.com Company Shareholder You keep asking us for more profits and returns! How much more do you want ???
  • 5. www.sterliteoptical.com Companies which can consistently grow shareholder value are the ones which are considered great by all stakeholders. Company 2007 2002 2006 2002 2006 2002 1 1 Wal-Mart 351,139 219,812 11,284 6,671 2 2 Exxon Mobil 347,254 191,581 39,500 15,320 6 6 General Electric 168,307 125,913 20,829 13,684 8 8 Citigroup 146,777 112,022 21,538 14,126 49 72 Microsoft 44,282 25,296 12,599 7,346 52 56 Motorola 43,739 30,004 3,661 -3,937 Revenues (mil USD) Profits (mil USD)Rank Fortune 500 list Consistency breeds greatness Rank by M-Cap Business Standard Forbes Business Asia 2007 2005 2000 Reliance Industries 1 1 4 Bharti airtel 4 11 N/A Infosys 7 15 2 L&T 12 22 26 ITC 14 14 8 Sterlite Industries 19 20 32 Satyam 31 47 11 But how can companies grow consistently? Shar eholder Value Shareholder Value Shareholder Value Shareholder Value Shareholder Value Shareholder Value
  • 6. www.sterliteoptical.com Introduction Growth Maturity Time 1. Innovation 2. Corporate Governance Value Ideal scenario Revenues / Profits Two Key Drivers for Creating Shareholder Value Maturity - • Corporate Governance • Focused Messaging • Cost Leadership • Operating Margins Growth - • Sustainable Ideas • M&A options • IPO • Revenues & Net Profits Introduction - • Business Idea / Vision • Strategy • Business Model • Financing Methods • Startups with disruptive business ideas are valued more during their growing phase. • Mature companies which are transparent to shareholders are valued more.
  • 7. www.sterliteoptical.com -500 0 500 1000 1500 2000 2500 3000 2003-04 2004-05 2005-06 2006-07 2007-08* M - Cap Revenues PAT 0 5000 10000 15000 20000 25000 30000 2003-04 2004-05 2005-06 2006-07 2007-08* M - Cap Revenues PAT Growth company v/s Mature company Telecom – Emerging industry v/s Auto – Maturing industry Fiber – Disruptive technology (04) Auto - New Brands, Promos (04) Power - Sourcing & customer synergies Auto - Improving governance and transparency (Bajaj Auto etc) Sterlite Optical Technologies Maruti Udyog Emerging Industry + Disruptive Technology + Cost Leadership scope + Business Development options Consistent Shareholder Value Creation Opportunities * - as per Business Plan for SOTL and Q1 annualized for Maruti
  • 8. www.sterliteoptical.com Can we quantify Shareholder Value? Cost of products sold / Revenue Cost of goods sold / Revenue Sales and marketing expense/ Revenue Fixed assets / Revenue Working capital / Revenue General and administrative expense / Revenue Other operational costs / Revenue ROCE = Margin = Asset utilization = Operational profit Fixed assets + working capital Operational profit Revenue Revenue Fixed assets + working capital X + + 1 - 1 / According to our experience (Return On Capital Employed) is the best indicator of creating value for shareholders Cost of products sold / Revenue Cost of goods sold / Revenue Sales and marketing expense/ Revenue Fixed assets / Revenue Working capital / Revenue General and administrative expense / Revenue Other operational costs / Revenue ROCE = Margin = Asset utilization = Operational profit Fixed assets + working capital Operational profit Revenue Revenue Fixed assets + working capital X + + 1 - 1 / According to our experience (Return On Capital Employed) is the best indicator of creating value for shareholders • TSR and RoCE are considered to be the best indicators for judging sustainable shareholder value. Total Shareholder Return Close Price @ End of Year Open Price @ Start of Year Dividend Payout
  • 9. www.sterliteoptical.com -10 -5 0 5 10 15 20 25 30 35 2003-04 2004-05 2005-06 2006-07 2007-08* -10% 0% 10% 20% 30% 40% 50% Basic EPS RoCE How does SOTL stack up? Backward integration projects for achieving global cost leadership New Business lines for more of customer’s capex pie (Revenue and Profit growth) New Geographies and Customers targeted for Business Development. Aggressive Push – PTB, New Sales offices, New Backward Integration projects 0 50 100 150 200 250 2003-04 2004-05 2005-06 2006-07 2007-08* -10% 0% 10% 20% 30% 40% 50% TSR per share RoCE Expansion Projects, Brand Building, IP focus, Talent Management, New Business Lines * Assuming M-Cap of Rs. 2500 crores at March 31, 2008 • Historically, shareholder returns have been growing. • In the future, shareholder returns are expected to grow faster!!! Confidential to the Company Confidential to the Company
  • 10. www.sterliteoptical.com • Targeted communication to media • Targeted communication to investors • Increased focus on R&D • Continuous search for newer geographies • Continuous search for newer product lines • Brand building • Regular awards • Six sigma, lean manufacturing, etc. Projects and Activities to ensure sustained growth Messaging Governance Cost Leadership Innovation Biz Dvlpmt
  • 11. www.sterliteoptical.com Drivers determining Company’s Valuation / Share Price
  • 12. www.sterliteoptical.com Where/How does Investor Relations help?
  • 13. www.sterliteoptical.com Thank You