Nomura sees a multi-year optical fibre upcycle driven by data-centre spending, supply constraints and rising demand for high-speed connectivity
Shares of Sterlite Technologies (STL) rallied nearly 5 per cent on Tuesday after Nomura initiated coverage on the optical fibre cable manufacturer with a ‘Buy’ rating and a target price of ₹1,350 per share.
The stock climbed to an intraday high of ₹1,051.10, its 52-week high, and was trading around ₹1,050 during the late-morning session. The sharp move came even as the broader market was advancing at a more measured pace, with the Nifty 50 trading around 22,683.
Nomura's coverage has brought renewed investor attention to STL's long-term growth prospects, particularly its exposure to data centres, optical connectivity and the expanding global requirement for fibre infrastructure.
Data Centre Spending Seen Driving Multi-Year Demand
Nomura believes the optical fibre cable industry is entering a multi-year demand cycle, supported by strong spending on data-centre infrastructure.
The brokerage expects this investment cycle to continue beyond 2030 as hyperscalers and technology companies expand computing capacity to meet growing demand from artificial intelligence, cloud computing and digital services.
The expansion of AI infrastructure is particularly important because large data centres require extensive high-speed connectivity within and between facilities. This is creating additional demand for optical fibre and related connectivity solutions.
Supply Constraints Could Benefit STL
While demand is increasing, the industry is also facing supply-side constraints.
Nomura highlighted limited glass-preform capacity, raw-material bottlenecks and restricted manufacturing capacity outside China as factors contributing to a persistent supply deficit.
Glass preforms are a critical input for manufacturing optical fibre. Limited availability can restrict the ability of cable manufacturers to increase output even when demand is strong.
According to Nomura, these constraints have encouraged large hyperscalers to enter into multi-year supply agreements, providing greater visibility for companies capable of securing long-term contracts.
Integrated Manufacturing Gives STL an Advantage
Nomura believes STL's vertically integrated manufacturing capabilities could help the company capture market share as competitors face challenges in sourcing glass preforms.
The company has already secured contracts with major hyperscalers and has developed a broad portfolio of products for data-centre connectivity.
The ability to control more stages of the manufacturing process could become particularly valuable in a supply-constrained market, allowing STL to respond more effectively to large customer requirements while reducing dependence on external suppliers.
₹30,000 Crore Capacity Expansion Planned
STL plans to invest around ₹30 billion, or ₹3,000 crore, during FY27-FY29 to expand its manufacturing capacity.
According to Nomura, the investment programme is expected to increase capacity by around 50 per cent and is being undertaken against a backdrop of strong demand visibility.
The planned expansion is central to STL's strategy of increasing its exposure to higher-growth optical connectivity and data-centre applications.
Data Centre Revenue Share Could Rise Sharply
One of the most significant changes expected in STL's business mix is the increasing contribution from data-centre-related business.
Nomura estimates that data-centre revenue could increase from around 1 per cent of STL's revenue in FY26 to approximately 40 per cent by FY29.
Such a shift would materially change the company's earnings profile, as data-centre and advanced optical-connectivity products are expected to command better margins than traditional cable products.
Margin Expansion Could Strengthen Earnings
Nomura expects STL's EBITDA margin to expand from around 12 per cent to 24 per cent as the company's product mix shifts towards higher-margin data-centre and optical-connectivity solutions.
The brokerage forecasts revenue to compound at around 50 per cent annually between FY26 and FY29, while EBITDA could grow at an even faster 89 per cent CAGR.
Nomura also expects profit after tax to increase significantly during the period, reflecting both revenue expansion and operating leverage.
If these projections materialise, STL could see a substantial improvement in profitability as the contribution from higher-value products increases.
QIP Could Help Reduce Leverage
STL completed a ₹15 billion qualified institutional placement in July, which Nomura expects to support the company's deleveraging efforts.
The capital raised provides additional financial flexibility as the company undertakes its planned capacity expansion.
Despite the planned capital expenditure, Nomura expects STL to remain largely free-cash-flow positive, supported by an improving EBITDA-to-cash-flow conversion ratio.
The ability to fund expansion while simultaneously improving the balance sheet could become an important factor for investors as the company scales its data-centre business.
AI Infrastructure Adds Another Growth Catalyst
The rapid expansion of artificial intelligence infrastructure has become a major structural driver for the global optical-fibre industry.
AI-focused data centres require substantially higher computing and networking capacity, increasing the need for high-bandwidth connectivity. As hyperscalers continue to invest in AI infrastructure, demand for optical connectivity could remain strong for several years.
For STL, this creates an opportunity to move towards higher-value products and reduce its dependence on conventional optical-fibre cable markets.
Key Risks Remain
Despite the bullish outlook, the company's expansion strategy also carries execution risks.
STL will need to successfully commission additional capacity and convert its order visibility into sustainable revenue growth. Large capital expenditure requirements could also place pressure on cash flows if demand or project execution falls short of expectations.
The optical-fibre industry is also exposed to fluctuations in raw-material prices, global technology spending and competitive conditions.
Investors will therefore monitor order wins, capacity utilisation, data-centre revenue contribution, margins and balance-sheet improvement as key indicators of whether the expected growth cycle is materialising.
Market Outlook
Sterlite Technologies' sharp rally reflects strong investor interest in its potential exposure to the global data-centre and AI infrastructure investment cycle. Nomura's ‘Buy’ rating and ₹1,350 target price have added to the positive sentiment around the stock.
The key structural triggers are expected to be rising data-centre spending, constrained global optical-fibre supply, STL's planned capacity expansion and a shift towards higher-margin connectivity products.
The immediate focus will be on whether STL can execute its ₹3,000-crore expansion programme while converting its hyperscaler contracts and data-centre opportunities into sustained revenue and margin growth. The stock's move to a fresh 52-week high also means valuation and execution expectations will become increasingly important for investors going forward.