Nomura initiates coverage on this optical cable play: Datacentre capex to fuel 35% rally?

The optical fibre cable (OFC) industry is at a multi-year super cycle, driven by strong datacentre capital expenditure tailwinds, and one company, Sterlite Technologies, is in the middle of it all. The company is well poised to benefit from the robust OFC demand due to its integrated capacity.

Global brokerage Nomura has initiated coverage on the stock with a ‘Buy’ rating and has set a target price of Rs 1,350 apiece. This implies a nearly 35% upside from the stock’s closing price on Monday at Rs 1,001.25 apiece. Nomura has valued Sterlite Tech at 30 times December 2028 earnings per share. “Our target multiple is at 20% discount to the long-term average one-year forward P/E ratio of Polycab and KEI…,” the brokerage said.

Nomura said the demand cycle for OFC is expected to persist beyond 2030. It sees a 14% growth in OFC demand on a compounded annual growth rate (CAGR) basis over 2025-2030 in North America and Europe, the key markets for Sterlite Tech. “However, constrained supply due to limited glass preform capacity, raw material bottlenecks, and limited ex-China capacity have created a persistent deficit, forcing hyperscalers into multi-year supply agreements and opening opportunities for players such as STL,” it said.

Sterlite Tech’s integrated manufacturing capability positions it to capture market share as its non-integrated peers face “preform supply bottleneck”. The company has already secured major hyperscaler contracts and has an extensive array of data centre offerings.

“The company has a 9% share in the ex-China global OFC market (1Q1FY27) and its DC (data centre) market share, (low-single digits currently) can increase towards high single-digits, in our view, due to its superior product portfolio, established relation with hyperscalers and extensive industry experience,” Nomura said.

The company plans to invest Rs 3,000 crore over the next three years to expand capacity by 50%, supported by strong demand visibility. Its revenue from data centres is expected to rise to nearly 40% of total revenue by FY29 from 1% in FY26, Nomura said, adding that optical connectivity is also expected to scale rapidly.

This is expected to drive earnings before interest, tax, depreciation, and amortisation (EBITDA) margin to 24% from 12%, as orders from data centres fetch high margins. Nomura expects Sterlite Tech’s revenue to grow by 50% on a CAGR basis over FY26 to FY29 and EBITDA to grow by 89% CAGR over the same period.

The brokerage said a slowing capital expenditure towards artificial intelligence led data centres and faster than expected commissioning of industry capacity are the key risks to its outlook for Sterlite Tech. Nomura also believes weaker than expected optical infrastructure and execution and cash outgo due to legal claims pose significant risks.

The brokerage remains bullish on the stock, projecting a 35% upside. Sterlite Tech remains well poised to benefit from the surge in demand and capital spends on data centres, which are likely to remain till 2030.