Aksh Optifibre Ltd Management Discussions.

Industry Structure and Developments

Global Perspective

The Asia-Pacific region dominated the overall Optical Fibre market till 2017 primarily due to increase in penetration of optical fiber technologies in developing economies owing to numerous upcoming projects, such as smart cities. However, North America witnessed the highest growth rate during the period gone by in CY18. Widespread implementation of 5G, increase in adoption of fiber to the home (FTTH) connectivity, and emergence of internet of things (IoT) act as major drivers of the market. However, high installation cost & growth in the wireless communication systems are expected to hamper the global optical fiber market growth during the current period.

2018 witnessed Global demand de-growth : Slowed to 15 year low

As per the industry estimates The total of optical fibre cable installed worldwide in CY 2018 was 510 Mn FKM. The fibre demand was 4% higher than the 492 Mn FKM installed in CY 2017, witnessing the lowest year on-year growth rate in optical cable installations since 2003. Demand remained far lower than the demand CAGR for the last ten years which was 14%. The slower growth in 2018 was caused by a 1% downturn in Chinese fibre market. All other markets as a group showed a 10% increase in fibre deployments between 2017 and 2018. Wherein the non-China market fibre demand has had a 9% CAGR for the past ten years.

Global optical cable demand slowed to just 1.4%y/y in Q1 2019

Optical cable demand M F-km

Fibre prices witnessed pressure Globally

Throughout 2019, prices in China have been under extreme pressure following a no significant global demand, which started late last year in 2018. This was further aggravated following the late release of the China Mobile 2019 tender, which marked a more than 50% decrease in fibre prices since the peak shortage prices of Q3 2018, falling to multi-year lows. Facing increasing pressure and competition from low-cost imports, fibre prices in Europe continued its downward trend. It was observed that the fibre price spread has once again narrowed down significantly, for the first time in last decade, standard loose-tube bare fibre prices have fallen below $6.00 /F-Km on the lower-side.

Current Pre-form capacity overhang weighing down the Fibre market

The downtrend in Chinese fibre prices can be attributed to a key factor which is the recent over investment and rapid expansion of preform capacity (approx 90 M F-km additional preform capacity was brought online in China last year). This, however, is not just the case for China. As per estimates preform capacity expanded by 30M F-km in markets outside China also, bringing total global preform year on year capacity growth to 22% in 2018. Meanwhile, global fibre demand only expanded by 4% over the same period. Further expansions are penned for 2019, although the current market environment may delay or abandone such plans. As per current estimates preform capacity is 28% higher than fibre demand which is denting the current fibre market. Whereas a 10% excess is considered healthy for the industry, whereas an excess of 28% is highly detrimental to market conditions and pricing.

Future Market Outlook

Widespread implementation of 5G

The demand for more data and better coverage across the world is on the rise among consumers. The 5th generation wireless connection is expected to be the next leap in technology, as it can transmit more data while providing a more steady and reliable connection. The characteristics of 5G, such as high data speeds and throughputs, are greatly influenced by heavy-duty optical fiber backed networks that affect both the wireless side and wireline side of the infrastructure. Moreover, formidable network performance goals of 5G are heavily predicated on a massive availability of fiber connectivity. 5G is currently being tested in several markets and is expected to begin widespread implementation by 2020.

5G network architecture will transform away from the traditional tower model

Macro tower model poised to change

The move towards 5G is often accompanied by expectations that significant investments will be made by telcos and this will result in a much improved demand for supply chain operators, which include infrastructure plays such as tower and optical fibre companies.

Market expects 5G networks in Asia to be rolled out in 2 phases.

Phase 1, which is under way in many markets, uses frequencies around 3.5-6GHz. The technical challenges of communications at this frequency are relatively low. Macro cells used in 3G and 4G networks can be replaced or upgraded to act as 5G base stations while the use case is mainly seen in the fixed wireless access.

Phase 2, which is expected to commence from 2022, will use high frequencies (millimeter wave band) to achieve higher-speed, larger-capacity connections. Business use cases for the phase 2 will be mainly in enterprise services where low latency and reliability will be the key. In order to service this, network architectures will evolve from the traditional macro tower-led model to a fiber and small cell-led heterogeneous network. Usage of the millimeter wave spectrum for the touted network capacities will require a much denser network given the low propagation and high attenuation of high frequency (low wavelength) bands.

Demand for end-to-end ber infrastructure

We expect the end-to-end market for fiber as a natural beneficiary on the road to 5G services. Carriers around the world are more focused on deploying 5G at higher frequency bands than the spectrum used for traditional mobile services. More sites will thus be needed and the amount of data capacity that each can generate will encourage carriers to use fiber to connect those sites to their broader networks. Without sufficient fiber, carriers will be unable to support the projected last mile network performance for 5G.

Increase in adoption of ber to the home (FTTH) connectivity

FTTH is a popular integrated communication technology that uses fiber optic technology to enable faster and more effective communication. The technology connects homes to the operator through optic fiber wires. It is the most advanced technology for building the next generation of communication networks. For instance, fiber connections are used by more than 130 million homes. Also, China was expected to have almost 100 million fiber subscribers. Moreover, European countries, such as Norway, Lithuania, Denmark, Sweden, and Latvia, have been approaching near universal access to fiber.

Rising investments in IoT (Internet of Things) infrastructure

The growth of 5G is expected to be fueled by the hike in consumer data and the explosion of internet of things (IoT) devices. According to the International Telecommunications Union (ITU), the market for IoT devices is estimated to generate over $1.7 trillion by 2019. Also, owing to these developments, investments on fiber infrastructure are expected to surpass $144.2 billion by 2019. Moreover, numerous countries have invested in optical fiber deployments, which is creating opportunities for the market. For instance, the U.S. needs significantly more fiber-optic infrastructure over the next five to seven years to support upcoming 5G wireless as well as broadband competition and rural broadband coverage that is expected to deploy fiber cable of around $130 billion to $150 billion.

India Perspective

India optical fiber cables (OFC) market stood at $ 881.5 million in 2019 and is projected to grow at a CAGR of 19.7% to reach $ 2.1 billion by 2024. Growth in the market is led by rising investments in OFC network infrastructure by the Indian government to increase internet penetration across the country, which is in line with government initiatives such as Smart Cities Vision and Digital India. Moreover, growing demand for OFC from IT & telecom sector, rising number of mobile devices, increasing adoption of FTTH (Fiber to the Home) connectivity and surging number of data centers are further anticipated to fuel optical fiber cables market in India over the coming years.

Regionally, Indias optical fiber cable market is gaining traction and expanding to various regions in the country. In 2018, West was at the forefront of Indias optical fiber cable market, however south region is anticipated to grow at the highest CAGR on account of presence of major IT players and growing number of small and medium enterprises (SMEs) in the region.

Bharat Net Update

Bharat Net is the worlds largest rural broadband initiative undertaken by the Government of India (GOI). The project includes provision for on-demand affordable broadband connectivity of 2 Mbps to 20 Mbps for all households and on-demand capacity to all institutions. It is a part of the Digital India vision implemented through a partnership with states and the private sector.

The implementation of this project is taking place under three phases :-

Phase I: This phase included connecting over 1 lakh gram panchayats across India through BSNL, RAILTEL and PGCIL. Around 32,000 km of Optical Fibre (OF) cable of BSNL is being replaced by new OF cable. High-speed broadband service is provided to 2.5 lakh villages benefitting 20 crore rural Indians. This phase was successfully completed by December 31, 2017.

Phase II: Under this phase, additional 1.5 lakh gram panchayats would be connected. The target date fixed for completion of this phase was March 31, 2019. Till March 17, 2019, 125,196 gram panchayats were laid with OF cables and 117,552 gram panchayats were laid with OFC with the installation of equipment. Also, 564 gram panchayats were commissioned through satellite.

Phase III: This phase is expected to begin in 2019 and shall get completed by 2023. It will include setting up fibre networks between districts and blocks.Bharat Broadband Network Limited (BBNL) will place massive orders for implementation of this project to domestic optical fibre cable companies.

Outlook

Despite industry slowdown in 2018, telecom accounted for the largest market share in terms of revenue and is anticipated to continue its dominance in terms of size by 2025. Telecommunication is anticipated to present promising growth prospects due to growing adoption of the technology in communication and data transmission services. Fiber optics enable high-speed data transfer services in both small and long-range communications. Furthermore, increasing cloud-based applications, audio-video services, and Video-on-Demand (VoD) services will stimulate the demand.

Medical and military and aerospace application segments are poised to witness significant growth, attributed to increasing adoption of optic technology devices. Stringent regulations and standards imposed by the regulatory authorities and medical associations are further helping the market to flourish in the medical sector, eventually driving the growth.

Railway segment may be initially hesitant to make huge investments in fiber optic application installations but is predicted to witness immense growth prospects during the forecast period. The railway track maintenance achieved by fiber optics provide an opportunity to experience enhanced track repair with great ease at a cheaper price. Military and aerospace sector has moderate penetration. However, it is expected to witness high growth in near future in terms of market share.

Despite Market Volatility 5G Capex Ramp-up is a Fairly Certain Story

We expect major carriers in China, the US, and other countries to launch commercial 5G networks from 2020. It can be projected that Chinese carriers mobile-network capex to rise significantly from 2020 to 2023, with above a 14% CAGR. Therefore we see 5G-related capex as a percentage of total mobile network capex rising significantly over this period. Telecom infrastructure companies (including Optical Fibre players) and their supply chains should benefit first, followed by endpoint device-related companies and over-the-top application players. However we see US-China tension as unlikely to stop growth for Chinese telecom-equipment companies and their supply chain.

Medical and military and aerospace application segments are poised to witness signi cant growth, attributed to increasing adoption of optic technology devices 5G update

Construction of Base stations picking up for the upcoming commercial launch of 5G services in countries such as South Korea, China and the US, many telecom carriers have started constructing and installing necessary 5G base stations in the predetermined launch cities. It is being reported that in South Korea, its three major mobile operators (KT, LG, and SK) have deployed more than 50,000 5G base stations prior to launching commercial 5G services in April 2019. In China, the city of Shanghai is expected to have a total of 10,000 5G base stations installed by end-2019. Further 5G base station installations and deep fibre deployments to support 5G mobile network will propell global fibre demand moving forward. A major global telecom equipment giant Huawei expect that 6.5 million base stations will be deployed for supporting 5G networks across the world by 2025.

Also Chinas three major mobile operators, have installed a combined total of 4.8 million 4G base stations. These base stations were installed over about seven years, starting with the China Mobiles large-scale 4G field trials in 2012 and ramping up through the current decade Chinas carriers have installed more 4G base stations than the carriers in other countries. If Chinas 5G network construction proceeds at a pace comparable to its 4G construction, it is quite possible that Chinas carriers could install four or five million 5G base stations by 2025. Most mobile industry participants acknowledge that 5G networks will require a much denser array of radio heads, meaning more base stations per coverage area. Also, Chinas 5G construction will be progressing in parallel with that of other advanced telecom markets in North America, Western Europe, and the Asia-Pacific region

The figure above plots the number of base stations installed in each year by Chinas three carriers as a group. The data on base stations is from the carriers annual reports. The cumulative total of all 4G base stations installed from 2012 to 2018 is 4.8 million. This compares with a total of 1.1 million for 3G base stations indicating a four-fold increase in base stations per coverage area. The chart also indicates the amount of cabled fibre installed in local-telecom applications.

Companys Capex Update

The company is rightly positioned to harness the benefits of the capex which has taken place in the past few years. Company does not have any plans to do any further capex. Only project which is in its completion stage and which is expected to come onstream soon, is its Dubai Optical fibre drawing plant. After commissioning, the total fibre drawing capacity of the company will become 7 Mn FKM which will be sufficient to serve its existing cable capacities.