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
Backbone
Network
InternationalNational
Access
Network
Backbone
Network
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
13
18
60
63
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
(inMillionFkm)
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
13
18
60
63
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
(inMillionFkm)
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
inUSD
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.
480.2
544.4
659.9
1,037.6
699.8
132.0
103.2
370.6
623.9
108.5 103.7
136.8
300.8
100.2
(86.1) (45.0)
10.2
40.8
(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
inRs.Crores
(* annualized)

In order to have a turnaround,
a multi-pronged approach was adopted

CommodityTechnology
Silicon Chlorine Furnace Oil
SiCl4
Commodity Commodity
Power
Hydrogen Oxygen
Glass
Preforms
Optical Fiber
Direct 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
Indexedto100asonJanuary2001
Raw Material Cost
2002 2003 2004 2005 2006
Power
Plant
Hydrogen
Plant
Moved 100%
to SOC
Core
Production
Nitrogen
Plant
SiCl4
Plant
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)
inmillionfkm
(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)
ChinaOFMarketSize(Km-Mn)
0%
2%
4%
6%
8%
10%
12%
SterliteMarketShare(%)
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
Design&
Development
Introduction
Growth
Maturity
Decline
Revenues/Profits/M-Cap/Size
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.

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