Ladies and gentlemen, good day, and welcome to STL's Q3 FY24 Earnings Conference Call. I'm Chetan Wani, and I'm responsible for investor relations at STL. To take us through the results and to answer your questions, today, we have Ankit Agarwal, MD, STL, and Tushar Shroff, Group CFO, STL. Please note that all participant lines are in listen-only mode as of now. There will be an opportunity for you to ask questions after the presentation concludes. Please note that this call is being recorded. You can also download a copy of the presentation from our website, that is www.stl.tech. Before we proceed with this call, I would like to add that some of the elements of today's presentation may be forward-looking in nature and must be viewed in relation to the risk pertaining to the business.
The safe harbor clauses indicated in the presentation also apply to this conference call. For opening remarks, now I hand over the call to Ankit Agarwal. Over to you, Ankit.
Thank you, Chetan. Good day, everyone, and thank you for joining our Quarter three FY 2024 Earnings C all. I wish all of you a very, very happy Republic Day. I look forward to our conversation, questions at the end. Just to reiterate, our strategic priorities remain the same and as follows: firstly, we shall continue to grow our optical business by increasing optical fiber cable market share and optical connectivity attach rate. We will continue to drive these initiatives to optimize the raw materials and the fixed cost of the businesses to improve our overall cost competitiveness. Secondly, we shall continue to consolidate our global services business in select segments, work towards achieving profitability in the UK operations. Last but not the least, we shall build the digital business through focused investments in building technology and domain capability, and as discussed, progress towards EBITDA breakeven.
On the ESG front, we remain committed to achieve net zero emission by 2030. Our ESG ratings by MSCI stands at A. We're very proud that we continue to be one of the leading companies in the world, in our sector, in the ESG domain. Let us talk about optical business first. About the demand outlook, CRU has recently updated the estimates from 2022 to 2028. The short-term headwinds in the main markets of North America and India continue to continue, with demand projected to contract by 10.8% and 1.7% respectively in 2023, against the 2022 revised estimates. For North America specifically, the demand is estimated to have contracted by 12% during nine months of calendar year 2023, over nine months over the same period in 2022.
The demand in Europe is estimated to have contracted by 5% during quarter three calendar year 2023, compared to quarter two calendar year 2022. The near-term downturn in North America is on account of inventory digestion, which is expected to correct steadily towards by quarter two FY 2025 onwards. While the near-term demand contraction, the medium-term demand volumes are revised upwards to 684 million fiber kilometers by 2028, up from 577 million fiber kilometers in 2022. The global demand ex-China is expected to increase to 417 million fiber kilometers by 2028, up from 293 million fiber kilometers in 2022.
STL's focus markets of North America, Europe, and India are high potential and estimated to grow at CAGR of 11.4%, 5.2%, and 15.6% respectively during the period from 2023 to 2028. This is an important slide, which shows how the global data consumption across traffic categories is expected to rise multifold in coming years, and there's simply no alternative than to expand fiber networks to support such massive traffic expansion. Be it network parameters, such as bandwidth offered, latency, data loss, or energy savings, and in fact, even environmental friendliness and reliability, fiber is undoubtedly the most efficient and reliable data transfer technology. This is recognized and echoed by various industry experts and CEOs.
Here, we've shared examples of comments by the Airtel CEO, by Ericsson CEO, and also Elon Musk, talking about SpaceX and the comparison with terrestrial cellular networks. With the growing use of fiber in various applications, such as fiber to the home, AI in data centers, edge data centers, smart cities, small cells, and the smart enterprises, fiber demand is bound to increase manifold going forward. Coming to North America, there are certain strong drivers which we believe will lead to sustained growth for the market. In North America, as per Omdia, the 5G subscriptions are forecasted to grow significantly from 173 million currently to almost 600 million. 5G is expected to become the most dominant mobile access technology by 2028, and as we all know, fiberization will be at the core of this 5G deployment.
In the case of fiber to the home as well, the U.S. has close to 100 million homes which are remaining to be passed. AT&T alone is eyeing 10 milion-15 million additional locations to be passed in the coming years. As for CRU, FTTH homes passed are expected to rise with build projects from 8.7 million per year in 2023 to almost 12.2 million per year by 2025, at a CAGR of almost 18%.... Data center for CapEx is also forecasted to grow to $139 billion by 2028. Lastly, the BEAD program allocation is progressing steadily, and recently, Louisiana became the first state to move from planning phase towards execution phase. Coming to India, we also see similar strong drivers for sustained growth in the market.
In India, 5G subscriptions are expected to grow at a CAGR of 33%, for a total of close to 500 million subscribers by 2028. The tower fiberization currently stands at close to 38% and expected to grow towards 70% by 2025 onwards. Telcos are expected to spend close to $1.5 billion-$2.5 billion for tower fiberization in the coming years. In case of fiber to the home, India is expected to be the second largest fiber broadband market by 2030, and India's FTTX installations are expected to grow fastest globally at a CAGR of 26% between 2023 and 2028. India has 15% of the global internet users, whereas limited data center capacities exist in the country.
CRISIL estimates to the tune of INR 45,000 crore will be invested in data centers between now and FY 2026. BSNL also has recently released a draft of BharatNet Phase III RFP for industry consultation. This program intends to connect the 250,000 gram panchayats with fiber connectivity, and should provide a major boost to India demand, particularly in rural India. Coming to the Chinese players that we have currently in the market. The government in the European Union, UK, as well as in India, have imposed significant anti-dumping duties on the Chinese optical fiber and cable manufacturers, which has resulted in significant decline in the optical fiber and optical fiber cable exports from China to Europe, as well as to India. These measures from the government are expected to support the overall demand and realizations for non-Chinese suppliers like ourselves.
So even though we observe a minor decline in our market share, we also see a good improvement or minor improvement in our attach rate. Our market share slightly declined to 9% in the first half, versus 10% in the first half of previous year. We expect OFC market share to grow from FY 2025 onwards. Optical connectivity attach rate has improved marginally to 14% in the recent quarter, and as we continue to commercialize new optical products, and we believe that there should be a further increase in attach rates in the coming quarters. Coming to the financials for the optical business, as guided, quarter three FY 2024 has declined on account of lower volumes, and stands at INR 857 crore, which is lower by 42% year-on-year basis.
The nine-month FY 2024 revenue stands at INR 3,053 crore, which is lower by 22% on year-on-year basis. In line with the reduction in revenues, the Q3 FY 2024 EBITDA stands at INR 104 crore, which is 66% lower on year-on-year basis. For nine-month FY 2024, absolute EBITDA has declined to INR 561 crore, which is 23% lower on year-on-year basis. Due to the lower EBITDA and EBITDA margins, due to lower EBITDA, the EBITDA margin for Q3 FY 2024 has declined to 12.1%, although the nine-month FY 2024 EBITDA margin has been stable at 18.4% on year-on-year basis. We are well positioned to grow our optical business.
With our strategically located manufacturing facilities, our optimized cost structure, and our continued product innovation and customer approvals for our products from tier-one telecom operators and customers across the globe, we believe that we are well positioned to capture significant market share as the demands come back up. Let us now go through the performance of our global services business. In the global services business, the Q3 FY 2024 revenues have increased by 6% year-on-year to INR 405 crores. For nine months, FY 2024 revenue stands at INR 1,133 crores, and we have been selective in our order intake and execution, which has helped us improve our Q3 FY 2024 EBITDA to INR 22 crores, and EBITDA margin to 5.4%.
Favored project mix and effective execution has resulted in improved nine-month FY 2024 EBITDA to INR 71 crore and EBITDA margin to 6.3%. Our project execution on the services business is on track. Among the Indian public projects, our BharatNet project in the state of Telangana is now 67% complete. The network modernization project is 71% complete. Fiber rollout for public sector unit is 17% complete, and we have progressed well on a large data center project in last quarter, and the project is now 70% complete. On the Indian private side, fiber rollout for large Indian telco is 35% complete in phase three. Fiber rollout for another large Indian telco is 51% complete. Fiber rollout for modern optical network for Indian private customers, 78% complete.
I would also like to share with a lot of pride, that your company was actively involved in the network build-out in Ayodhya, and our team worked diligently day and night for seven days, to build a world-class fiber infrastructure in Ayodhya, so we could have all the amazing videos and pictures over the last several days. I shall now talk about the performance of STL Digital. In STL Digital, we are continuing the growth momentum. We continue to add new customers in the U.S. and India across technology and service verticals, and observe a strong order flow during FY 2024. We have more than 25+ active customers at the end of quarter three, FY 2024. We have 46+ active technology partners, and have signed up strategic partnerships with SAP and Google to offer the solutions jointly to our customer.
Expect the growth to be driven by a robust order book of more than INR 780 crore, and the right team of leadership as well as consult. In line with our expectations, and despite a tough industry environment, we have achieved a Q3 FY 2024 revenue at INR 80 crore and a nine-month FY 2024 revenue of INR 220 crore. The EBITDA loss for Q3 FY 2024 stands at INR 12 crore, and nine-month FY 2024 EBITDA loss is at INR 66 crore. As a result of our efforts, EBITDA losses are now trending downwards on Q-on-Q basis and expected to further reduce going ahead. I shall now hand over to Tushar to take talk through the financials.
Thank you, Ankit. Good day, ladies and gentlemen. In line with our lower guidance, the consolidated quarter three FY 2024 revenue stands at INR 1,322 crore, while nine months FY 2024 revenue stands at INR 4,338 crore. The drop in revenue is attributable to lower OFC volumes. The Q3 FY 2024 EBITDA stands at INR 109 crore. The nine months FY 2024 EBITDA has dropped to INR 559 crore on account of lower revenue. Q3 FY 2024 EBITDA margins are at 8.2% vis-à-vis FY-- nine months FY 2024 EBITDA margins are at 12.9%, which is stable as compared to previous year. On account of lower EBITDA and higher interest and depreciation cost, Q3 FY 2024 profit after tax stands at INR 49 crore in terms of the losses.
Due to Q3 FY 2024 PAT loss, the nine months FY 2024 PAT is reduced to INR 24 crore. In terms of new orders, the optical business, we continue to win multimillion dollar orders for optical fiber cable in our focused markets. In the service business, we secured large fiber rollout orders from a private customer for 5G deployment in India. In light of lower demand from North America, revenue mix has shifted to India in Q3 FY 2024 versus FY 2023, and India region started to account for 40% of revenue during Q3 FY 2024. Our order book at the end of Q3 FY 2024 is at INR 9,849 crore. Our order book is well diversified across all our customer segments and our businesses. We have placed the average version of the reported numbers for your perusal.
Our net debt for the nine months FY 2024 has reduced by INR 174 crore from FY 2023. On global services, the business demerger status, we have filed the application with NCLT and awaiting the first hearing from NCLT, which is expected to get scheduled somewhere in the month of February. In summary, I would like to say that in optical network business, we shall target to drive the cost leadership and pursue our ambition to be global top three. Increase the sales in EMEA, India, and APAC market to fill short-term volume gaps. Increase optical connectivity, growth, and attach rate. In global services, we continue to focus on select projects to improve profitability and optimize net fund involvement. In digital business, we continue to grow our revenue and achieve the EBITDA breakeven in subsequent quarters.
Our guidance on overall business, given the softness and demand in North America and Europe, we expect the volumes and revenue to be lower in FY 2024 vis-à-vis FY 2023. We continue to continue our significant focus in terms of a debt reduction going forward. Now, I hand over to Chetan for Q&A.
Thank you, Tushar. Ladies and gentlemen, with this, we come to the end of our presentation, and we shall now move to the Q&A session. Please note that if you want to ask a question, you can click on the Raise Hand button, and we shall take your questions one by one. So we'll take the first question from Harshal Shah. Harshal, you can go on.
... Harshal, unmute yourself and then talk.
Please repeat your question, Harshal. We'll take next question from Aditya Jhaveri. Aditya?
Yeah. Thanks for the opportunity. Yeah, I have a couple of questions. Firstly, disappointing set of numbers from this quarter three, but I want to specifically understand on the optical business, what are the gross margin in this optical business? Because I see you mentioned the volume decreased, but I see there is a lot of pricing pressure and the pricing trending toward downwards. Can you throw some light here? That's my first question. And the second question is, I want to really understand on the long-term nature of our optical business. So we are in this industry for quite some time, and how can we increase value per cable? Like, suppose it is in the range of 1,000-1,200, how can we maximize that?
And, and there is optical interconnect, because I see you, you said that optical interconnect should be a bigger pie, bigger value addition. But, what levers take us through that, and can you explain, throw some light on these three parts?
Take the first one.
Yeah. So, let me take the first one with respect to the margin. Our optical business has a material contribution margin to the extent of almost 54%. So, 54% is material contribution margin that we have in the business. This quarter, we specifically, the margins are lower, mainly on account of, you know, lower revenue, which has resulted into the contribution loss for this particular quarter, has resulted in the lower margin profile.
What are the gross margin in this quarter? Gross margin.
I'm talking about material contribution margin is about 54%.
What is the difference between material and gross?
So material contribution margin and gross margin includes the plant-related specific cost. Gross margin, when we talk about gross margin, it includes the plant specific cost. Okay, I'm talking about material margin, because in this particular quarter, since the plant was not completely utilized, so margin comparable is it is not right to compare margin on quarter-on-quarter margins, gross margin.
Okay. Generally, in this business, we are having for 54%-55% gross margin, you're saying?
Material contribution margin, that is what I'm saying. That is the revenue minus material cost.
Okay.
I think your question on, on cable, so one, I think just want to highlight that we continue to see at an average, the realization still hold up, positively for STL. So I think I want to, definitely highlight that, we have not seen any material reduction in realizations. This has both been a combination of multiple elements: one is we continue to have, strong relationships with our customers, globally. Even in some pockets, while volumes have come down, we do have, multi-year contracts with several of our customers, and hence our realizations have been steady. Second part is we continue to focus on more value-added fibers and cables. That's been part of our focus, which has continued and helps us keep the realizations up.
Third is part of our focus strategy, where we see minimal competition, which includes, US and Europe, where we see minimal competition from Chinese. That is also something that has helped us in terms of the realizations. So I think these are, this is how we see the markets from the cable, as well as, from the interconnect. The intent very much is to continue to drive customization, to create, value-added solutions of cable and interconnect together. We would like to have seen probably faster growth in our interconnect, but the approval cycle has been longer than we expected. We are continuing to get approvals from our customers as we speak, and into this quarter as well.
So certainly going into next year, we do expect the Attach Rate to start improving from next year onwards.
So what are your debt targets for this year? I see that's a good improvement for nine months, INR 180 crores. What are the debt targets?
This quarter also we are targeting your debt to reduce by INR 50-75 crore. That's, that's the target that we have internally. We are working towards it.
Okay, okay. Sir, if I take some medium-term guidance from the optical business, what sort of revenue and the margin for next two three years you see in this business?
We won't be giving any specific guidance at the moment. What we can definitely share is our capacity utilizations have been some 50% on a nine-month basis. So certainly the focus is on in the short term to make sure that we cover that to other geographies, and then certainly as especially the U.S. demand comes back, the intent is certainly to improve our capacity utilizations from here. We've shared in the past, our capacity is almost 50 million on fiber level and 42 million plus on cable level, so there's sufficient capacities that we've now invested. And as those utilizations improve, you will see a meaningful improvement in top line, but more so on the bottom line basis.
Okay. Okay.
... Thank you.
Thank you, Aditya. We take question from our next caller. Nikhil, you may go ahead with your question, please. Nikhil Choudhary.
Hey. Hi, Ankit. Hi, Tushar. Thanks for the opportunity.
Hi. Hi, Nikhil. Can't hear you properly.
Is it better now?
Yeah, better.
Yeah.
Yeah. So Ankit, Tushar, what I want to understand is particularly problem in North America, why we are seeing some volume in inventory build-up, which is impacting our growth. But, industry decline is 10%, but for us the decline is more than 15%, right? For nine months comparing to FY 2023. That clearly shows that there is a significant market share loss as well, rather than just industry decline, right? So just want to understand what's happening there, what is our expectation going ahead?
No, Nikhil, good question. I think, I'll, I'll put it in two, three pockets. One is, our own view is that, the decline in North America was, more aggressive than what, CRU has shown. CRU is an external third party house. Our own view is that, certainly in the last, you know, six months, we have seen and experienced the market being a steeper decline than that. As we've been sharing consistently, in our conversations, and analyst calls, that, there has been inventory at three levels, in the... at the customer, with the distributors, as well as, with the manufacturers like ourselves. So we've been tracking those inventory levels.
We definitely are confident in saying those inventory levels have been coming down meaningfully, but probably not as fast as we would have liked. So that's where we believe that probably it will take another four to six months for those that inventory to come back to normalized levels. But we do believe in that the Q3 was probably the bottom from our experience of sales into the market, in particularly North America, and volumes should improve in Q4 and going forward. We are watching every quarter obviously very closely, but given current visibility and also our understanding from our own conversation with customers, that probably it will take four to six months for all of that inventory to normalize and the volumes coming back in a good way.
Sure, just a couple of follow-ups. First, it's, you know, even if there was material decline, 50% is, I guess, in my estimate, that should be higher than the industry, right? So anything other than just industry to highlight or it was just-
Nikhil, Nikhil, we are not able to hear you properly, Nikhil.
Sorry. Better now?
There's a lot of echo behind. Yeah. Yeah.
Yeah. So, again, just couple of follow-up. First is, you know, even though there was a material industry decline, 50% I think is still significant. So anything one-off here, or it was all due to industry decline?
So I think the main factor is definitely the inventory with the customers. We've also shared... You know, we have also seen that the interest rates have continued to be on the higher side. That's also something that we foresee as that stabilizes and starts to come down, that should also lead to, you know, some of the projects which are on the edge, some of those should start coming through in terms of fiber deployment. From our own perspective, you know, we do both have the facility in U.S., which is now ready and functioning. We also have our operations in India. So we are very well set up in terms of our capacity product portfolio for the North America market.
We continue to engage with our customers, some of whom we've announced. We'll be making some more announcements. On top of this, we are also looking to grow our interconnect business in North America, so that will also be something that we focus, especially as we get into next year.
Sure, Ankit. Just last one, given you highlighted that we have reached bottom in terms of overall pain in optical fiber, is it fair to assume on absolute level we have reached bottom in terms of the revenue, and from here on, on Q- and- Q basis, we should see some improvement from quarter perspective?
Yeah. So, I think that's what I shared a little bit earlier. We do believe that certainly from a volume perspective that it should improve quarter-on-quarter. I don't think it will be a significant improvement. I think, as I said, it will take time for the inventories in North America to reduce and our sales to improve. But certainly directionally, I would agree with what you've said.
Sure, Ankit. Good luck with-
So, Nikhil, one good thing is that what-
Sure, sure, Tushar.
Yeah. So Nikhil, one good thing that we have seen is that, you know, now customer have started engaging in terms of their requirement. They've started floating the RFP. We started participating in some of the RFPs, and that is a positive sign. I think that is what we believe that is a positive-
For North America.
Especially in North America. So, probably in next couple of quarters, probably this, all this RFP will get converted into the orders. That is what we believe.
Got it. Got it. Thanks, Ankit. Thank you, Tushar.
Thank you.
Bye-bye.
Thanks, Nikhil. We take question from Sohan Joshi, our next participant. Sohan, please go ahead.
Am I audible, Ankit?
Yeah, perfect.
Ankit, in that India Mobile Congress, you said that there is a lot of opportunities in enterprise 5G.
Yeah.
So are we in talks with any of the corporates for the 5G deployment, data centers or, say, driver fiberization? I mean, we would like to increase a more focus on India, since the North America business is not picking up. Is there any such plans?
... Yeah, so good question. I think, there's two, three parts to it. We do have a very strong fiber as well as copper connectivity portfolio. So to that extent, we have our own brand called Estelan, which we have launched, and looking to sell that to enterprises both in India as well as Middle East. So some of that business is starting to come in. We're also seeing other opportunities in sectors like oil and gas, et cetera, which are low volume but high value opportunities. In India as well, as you mentioned, especially on the data center side, there is interesting opportunities where there's significant amount of fiber optics required within data center as well as interconnect between data centers. So those are some of the conversations ongoing in terms of these.
Again, these are typically lower volumes, but higher value and good margin opportunities. So those are things that we're evaluating in India. As well as, on, for example, on the fixed wireless side, where some of the operators are deploying, even there, there'll be some amount of cabling required, and we are in some conversations with telecom operators, for some solutions, linked to fixed wireless.
Okay. But then, we are not planning to enter into the Open RAN segment, right? We are strictly adhering to optical fibers only.
No, no, absolutely. Just to reiterate, we have, we are. We were in that, we had explored that business. We had invested in it. We have clearly exited that. We are very, very focused, our core being on the optical cable connectivity. We have a services business which does the deployment system integration, and we have a digital business. These are our three very focused businesses.
Okay, and just, two more questions, if we, if may I?
Yes.
There were some collection issues from one of the receivables in Maharashtra. I think it was put up on the announcements. So is there any provision made, or will it be made in the upcoming quarters, or it's not required?
So I think, you know, with respect to... See, there's, you know, this particular Maharashtra project, especially with one of our customers, it's a matter that is presently sub judice, so I will not be able to comment very specifically on the provision related to this particular project. But the company has a robust provisioning policy with respect to unbilled revenue as well as on outstanding debts that we have. That is, you know, the normal, you know, the expected credit loss kind of a provision policy that we have at the company level.
Okay, but, the talks are going on for the collections, right? I mean, still there are no signs that we may require a provision on it, right?
So we have a very strong case. That's why we have gone ahead with the litigation in this particular matter.
Arbitration.
In arbitration.
Okay. Any impact on our container cost due to ongoing Red Sea issues, or we are, we are not impacted at all?
Nothing. We've not seen anything significant currently. We have seen slight delays in our shipments to Europe, and slight price increases, but I think it's still from a value perspective, it's not been significant. As we've done in the past, if this does sustain, then we would have conversations with our customers, as well to see what portion of the cost we could share with them. It's not meaningful at this stage.
Okay. And when can we expect the rights issue? I mean, will it be after demerger, or we may further delayed when the demand starts picking up?
I think, we are exploring the various fundraise option at this point in time. You know, at appropriate time, when we see a larger engagement of investors, I think that is a point in time we'll get into the market, and launch the fundraise.
Okay. Okay. Thanks a lot, and all the best for the upcoming quarters.
Thank you.
Thank you. Thank you.
Thanks, Sohan. We'll take next question from Saket. Saket, please go on with your question.
Yeah Namaskat. Ji. You can hear me?
Yes.
Yes.
Yes.
So just coming to the point which Tushar sir just mentioned, that on better engagement with investors and at an appropriate time. So, sir, when we are seeing that at one side our core business is not performing because of the reasons as mentioned, and on the other side, we are trying to develop a business in the digital part. So would it not be a prudent exercise on the part of the promoters to infuse fund at this level, to put the confidence on track from the promoter itself, rather than waiting for an opportune time and then engaging your investors? What's the take on...
Of the promoter currently, and since Ankit Ji, you are here, in terms of infusing capital at this appropriate time, since the valuations are also low, if I may call so, but what's your understanding currently, sir?
See, Saket Ji, I won't be able to comment specifically on rights issue, but as Tushar mentioned, we're definitely exploring all the options. We have taken the enabling resolution up to INR 1,000 crore from our board, and we are evaluating the options. We're definitely very clear on growing the business, taking the business forward. I think also, you commented on STL Digital. As we've been discussing, we've been looking at reducing the losses in that business quarter and quarter, which we have demonstrated. So I think that position, that business unit will also be well-placed for growth going into next year. I think on overall fundraise, I would still say that we are exploring all the options.
Certainly, you know, as the time goes, we will share the update. And our intent definitely is to scale up the business, and we continue to be very bullish on the business.
Sir, on the U.S. part particularly, I think so you mentioned that our utilization levels have been on an overall basis at 50% on a total basis. So, I think so we have done a new capacity addition for the U.S. factory. What are the current utilizations? And sir, what is the order booking specifically for the new facility which we have created?
Saket, for competitive reasons, I won't be able to give utilization at a factory level. What I can share is that it's truly a world-class factory that's come up. We've had several government officials, several customers visit the facility, and its feedback has been very, very positive. And it is also really helping us grow the brand and positioning of STL. We are also mindful that there are large government projects like BEAD, which are coming up, and that is placing the company very well to be qualified to supply for such large projects. So I think we are now well placed to scale up this factory within the next few months.
And certainly as these large projects come up, we are very well placed to set up. We're well set up to supply from the factory locally in North America, with very quick lead times and turnaround times.
This is $100 million investment we have done?
US factory.
It is about $40 million-$50 million in terms of overall investment in U.S. factory.
Okay. I said net debt number, Tushar Ji. You told that the debt has been reduced for nine months. Can you give me the net debt numbers and the split up between long-term and short-term debt?
Yeah. Long-term debt is about INR 1,300 crore.
Okay.
The Net Debt is INR 2,947 crore.
Okay, and we are about to close at INR 2,900 and lower than that for the current fiscal. This is what our target is, INR 50 crore reduction.
Yeah, INR 50- INR 75 crores that we are targeting for this current quarter.
One more small point, sir. When you mentioned about interconnect growth going ahead, what factors are you taking into account that will play out in the larger percentage of interconnect? Because if this interconnect story was, we are harping on it for now more than one year.
Yes.
What is the reason why anticipated growth?
Sure. Thank you, Saket. Now, I'm guilty of harping on it for a year. The reason is that, essentially, we have already great relationships with Tier 1 telecom operators around the world. And the whole intent was, along with selling cables, the same customers buy large volumes of these interconnect. Especially as you go more closer fiber to the home connectivity, then you need more of these, interconnect solutions. So we were very clear that we had the relationships, the customers were spending. Probably what we didn't factor was the very long, approval cycle that happens. These are very, very technical, very, very customized solutions, where multiple stakeholders and the customers and installers have to approve the product. So, yeah, time laga to get the approval process.
We are still in multiple approval processes with various customers, and then as those RFQ cycles come up for the interconnect, that's where we believe that we'll be much better placed now. A lot of product development has happened, a lot of good team has come in place. We recently also announced David has joined us as a leader for this business, who comes from CommScope. So good team is there, good product is there. That gives me the confidence that going forward, we'll be able to improve this business.
Right. But any number which you want when interconnect contribution to the total optical business, as for the nine months, and what are you projecting going ahead? And for Tushar, sir, we had a foreign arbitration case also wherein we lost. So what's the status on the same? I missed the amount. It was a substantial one. We lost at Singapore forum. So these two points, if you could answer.
So, yeah. So I think it was about minimum. So this is the, this is one of the supplier to us, and in past we had some kind of a volume commitment from that particular supplier. Due to certain reasons, we have not been, we didn't pick up that kind of a material, and that was the reason that entire matter was in arbitration. These are not the current contracts, these are the past contracts, and for those past contract, you know, recently, you know, the arbitration award was against us, that we have to fulfill the minimum commitment requirement.
This was mainly during the COVID time, that entire arrangement was, and because of the COVID time, we couldn't pick up the material and, that was one of the reason that we got into this particular liability. And we challenged this particular order on certain grounds, in the Supreme Court also, and, you know, sorry, at the High Court, but unfortunately, the decision has not come in our favor. We had adequately provided for this entire loss in our financials and impact of this in our financials. There will be a cash flow impact, because there will be, some kind of a payment structure that we have agreed with, with this particular vendor.
And, you know, gradually the payment will have to be made to this particular vendor based on the arbitration award that we have.
Right. Value of interconnect number you can give, sir, for nine months? How much has been the-
Uh-
- revenue contribution?
Absolute value?
Yeah.
No, so look, I think, directionally, what we can share is that the intent has always been to grow this interconnect rate while we're at 14% attach rate currently. Clearly, the intent is, when we look at our global peers and the customer demand as well, the intent is definitely to scale this up. We won't be able to give a forecast at this point, but certainly as we get into our business planning for next year and we look at next two to three years out, the intent is definitely to scale this up.
... percentage, can you give, sir, for nine months? What percentage of the total revenue would be from interconnect, a ballpark number?
That is the attach rate, so we are saying 14%.
Right.
of interconnect to our cable sales.
Right, sir. And that, lastly, sir, on the Jio, this AirFiber issue, sir, where now broadband being available also, on this, on the Wi-Fi front. So what kind of threat do you think to the structure for OFC can we experience going ahead? I think so one more competitor, Tejas, has developed, I think so one of the AI software wherein we can use, we can view, we can view videos in mobile without the internet. There was some sort of story on that front also. So what kind of threat for OFC as a product do you find going ahead with Wi-Fi and with these technologies coming into play with more and more focus?
And also that you have been mentioning that $1.5 billion to be spent by the telcos on fiberization. So if you could give this number for the nine months, and what is the expected spend by them, and also the percentage of fiberization?
It's a lot of questions, so, I'll take, I'll take some of them. One is, I think, as we said, at a market level, we are probably around 37%-40% tower fiberization today. That has to go to 70%-80%, at least, for good 5G network coverage pan-India. So I think that's the work over the next few years, which the operators are working on. I think your point on fixed wireless, which particularly, some, you know, one large operator in India is, is looking at. I don't see that as a threat. I think we look at this technology, we've been studying it. In principle, this is really where you're not able to get right of way and other challenges on the last, you know, 100 meters or so.
This is also getting deployed more in kind of tier 3, tier 4, where you see the demand pick up. Most of the telecom operators see that you can get much better ARPU with fiber to the home, services as well as bundling that. So the intent continues to be for operators to balance as much as possible, take the fiber to the home and provide direct fiber service, and then the backup alternate is through fixed wireless. There are multiple bandwidth issues, latency issues, uplink, downlink issues, with fixed wireless, and we don't see that as a threat. Anyways, up to the last 100 meters, you'd need a very, very large and intensive fiber backbone. So from our business perspective, we don't see it as a threat to fiber demand.
In fact, overall connectorization is a positive for us because it will mean more dense networks, both on long distance and ultimately, within the metros. So we don't, we see this as a, as a positive development. And overall, in terms of, connectivity, as we shared in one of our slides as well, fiber continues to be the best medium by far, compared to copper, compared to satellite, compared to fixed wireless. And that gives us a lot of positivity and bullishness in terms of demand for fiber going forward.
Sir, on the CapEx part, you want to elaborate on $1.5 billion figure being mentioned in your?
We don't have, that is a number we have quoted from the research reports, but certainly we have seen that, there continues to be investments in fiber networks by the telecom operators in India. On top of that, we will have BharatNet networks getting deployed at large scale. So we continue to be quite bullish on fiber demand in India going forward.
Yeah, sir. Thank you for answering, sir. And for the employee cost also, please, please, please, show some rationale why we have these, I mean, why the employee cost as a percentage of sales is higher, mainly due to the utilization levels being lower, and this will get offset once the utilization picks up, sir? And I think so-
Yeah.
We also heard about a lot of layoffs also, sir, in our organization. So if you could-
Saket, uh.
Deal with that.
Saket, in interest of time, I think we'll just look at addressing one question-
Yeah.
that you asked about
Sure.
-employee cost, and then we'll move to the next participant.
Yes, yes, please.
Yeah, Saket, you are right. I think, I think there's a one-off cost. We have paid some ex gratia payment, which is to the tune of INR 12- INR13 crore, which is counted in this particular financial period. So there's a one-off cost, which is an ex gratia payment of INR 12- INR13 crore.
Okay, thank you, sir.
We'll take question from next participant. Sunny Gosar, you may please go ahead with your question.
Thanks for taking my question. So, just continuing on the, basically last question of the previous participant. So you mentioned that there's an ex gratia cost of about INR 12- INR13 crores, which has been paid out. So, except that our employee cost comes to around about INR 240 odd crores, for the quarter. So, I assume that there are some, basically rationalization in our employee strength, which has been undertaken. So, what should be a revised base, basically post this entire exercise in terms of, the quarterly employee cost? And is there any other cost item that, we are basically rationalizing? So overall, on a quarterly basis, what is the cost savings that we can expect, over the coming quarters?
... So, Sunny, thanks for this question. I think, as I said, that, you know, there's a, there is a one-off cost which is in, which is, which is provided for in this particular quarter, which is related to the ex gratia payment. I think, structurally, what we are looking at is that, you know, since the capacity utilizations are at lower level, we are also looking at each and every cost, whether it's a fixed cost, whether it's employee cost or any kind of an admin expenses, correct, which is controllable in the nature. We are trying to see that all of those costs are rightfully being rationalized, correct?
We are also looking at all the discretionary spend in terms of, you know, marketing, business development, wherever it is required to be rationalized, and that's the way we have been looking at. So, I think if you see the structurally also if you take out this one-off cost, you will see that, you know, the other expenses and the employee cost on a quarter-on-quarter basis has reduced to the meaningful level. I think, and we continue to pursue that kind of a path in terms of managing the cost efficiently so that we remain profitable going forward.
Sure. That's helpful, sir. Basically, just to get some quantitative understanding or basically some reference points, so excluding our cost of goods sold, our overall quarterly cost between employees and other expenses comes to about INR 580-INR 590 crores for this quarter. So any percentage or any reference point in terms of how much can this come down in terms of overall fixed cost level that will be very helpful to get some context.
Yeah. So I think, as a journey, I think, you know, because, you know, the manpower cost and other expenses, is also a function, lot of expenses, which is a function of the revenue, correct? So as the, the revenue goes up, there are certain expenses like freight and other things also, which is linked to the other expenses also starts to go up. So from that perspective, I mean, you know, it has both the component. There's a component of fixed cost also, and it has a component of variable cost also. But structurally, we are targeting that you know, to INR 100 crore-INR 150 crore of a cost rationalization over a period of time in the next three to four quarters.
That is what we are targeting for. Correct?
Got it.
So, Sunny, from our perspective, I think if you see that the employee cost has gone up, mainly from the fact that there is a substantial, you know, we've—I mean, the way we have been growing this digital business, the lot of ramp-up has happened in the digital business, which is contributing to the increase in the employee cost. Otherwise, if you see that, you know, the ONB business or a GSB business, both are at a sustainable level in terms of employee expenses. Rather, it has reduced, not increased, for sure.
Sure. Sure, that, that's quite helpful. In terms of... So basically, the digital business, so we are currently at about, like, last quarter, we were at INR 78 crore of quarterly revenue. This quarter has been about INR 80 crore of quarterly revenue. So, like, going forward, like, how should we look at this business in terms of growth? We have a INR 750 crore order book, but that obviously is over a time period. So, like, basically, if I have to project, say, next two years or three years, and I'm not looking for any immediate guidance as such, but, like short-term guidance, but how should we look at this business in terms of the quantum of revenue? Like, can this be like a $100 million revenue over the next two to three years?
At some stable state, what is the kind of margins that this business can generate?
Yeah. So I think, specifically on this particular quarter and, you know, you know, with respect to the revenue, this particular quarter being a year-end for most of the U.S. customers, and, you know, you know, there is always, this particular quarter remains dull, not only for STL, but, you know, probably for the industry as well. So from, from that perspective, probably we have not seen a very significant, order book building up for the digital business in this particular quarter. However, we remain bullish in terms of building up the customer base, especially in the U.S. market, the way we have been, trying to grow and the way the team is being built up. We see that you are absolutely right.
We, we are targeting that in next two to three years, we should be able to make this particular business to the extent of $100 million, with a reasonable EBITDA margin of 10%-15%, because the initial, the first, 300 crore to 350 crore to 400 crore would be about our breakeven level, and that's the incremental revenue which should start to reflect into EBITDA margin.
Got it. Got it. That's-
Sunny, I'll move to another participant so that we can cover maximum questions. Thank you for your questions. I'll move to Vaibhav Jain. Vaibhav, your line is open, you can ask your question. Vaibhav? Okay, we move to the next participant. Ravi. Ravi B.
Thank you for the opportunity. Can you hear me? Yes. Can you speak a bit louder, please, Ravi? Yeah. How about now?
... Yeah, better.
Okay. Sir, I have two, few questions. First, can you give me some update on the-
Ravi, we cannot hear you.
Is it audible now?
Yeah.
Yes.
Yeah. Can you please provide me an update on the T-Fiber and the UK service? There's really no movement there in the progress. The other thing is like, based on all these conversations, what I understand is like even in 2024, in this calendar year also, we don't see really any growth in our revenues based on all the discussions right now. So I think solely the two important things which could improve are the BEAD, BEAD project and the BharatNet project, which anyway would take its own time. Is my understanding correct? Please correct me, is my understanding? Because BEAD project will take about a year to rectify, and even BharatNet project, even that too, rectify it, will probably be at the end of the year, if not at earliest. Is my understanding right, sir?
So Ravi, good, good questions. I think I'll take a couple of them. One is, you know, what... On the positive side, one, BEAD is fully approved bipartisan. There has been allocation to the, to the states, and there is phase one of immediately 20% of overall $42 billion getting allocated. So our own view is from a calendar year, you know, 2024 basis, probably around quarter three of calendar year is where we expect people to start getting some of the projects, the states, and then on to some of our potential customers. BharatNet, as we said, the phase three RFP is now out, where it is up for industry consultation.
So, I think it will take probably a quarter or two for you know, final release of an award. But this is broadly the timeframe of these two very, very important projects. But at least from STL perspective, we are not dependent on these projects. These would be further volume upsides for the company. We are already seeing you know, as we mentioned, inventory reductions from our customers, and as those come down, volumes come back and probably positive triggers on interest rates, et cetera, coming down, we do expect the volumes to come back for STL. Coming to T-Fiber and the U.K. services. On U.K. we had talked about getting to profitability in our last call.
Happy to share that we have taken good actions in terms of cost reductions, admin and other travel and all of those costs. So we do believe we are on path to exit the current quarter with, at least getting to breakeven. It has taken us more time than we would like, but we do believe that we have taken some of the actions, and, those costs should, help us, come to EBITDA breakeven towards the end of the quarter. On T-Fiber, we are actively both looking at improving our execution. There have been some delays owing to forest clearances in particular, which is responsibility of the, of the state government.
But we are in conversations to both look at how do we get our cash release, as well as for whatever we have executed to remove to complete the milestones and improve our execution percentage.
Okay. So just one more question.
Thanks, Ravi. Sorry to interrupt, and we are mindful of the scheduled time. So, we'll now come to the end of the question and answer session with this. I now hand it over back to Ankit for giving the closing remarks. Ankit.
Thank you. Thank you, Charan. I'd like to thank everyone for attending this call, showing your interest in the company. Despite the challenging market environment that we spoke about, we have managed to reduce our debt by INR 174 crore, and we are focused on reducing it further. We continue to aggressively drive business fundamentals of deep customer engagement, product innovation, and sustainability. We're using this period to drive all factors in our control, becoming lean, agile, and thus, and as we discussed, establish industry-leading cost model. While this downturn is temporary, our customer centricity and the capabilities we have built around product design, quality, and manufacturing presence globally will reap us benefits well into the future. We are well positioned to execute and deliver robust results as we see the demand normalize. I hope we were able to address and clarify all your queries and comments.
For any further questions and discussions, feel free to reach out to the investor relations team, which includes myself and Tushar. We look forward to continuing our conversations with you in the future, and again, wish you a very, very happy Republic Day. Thank you.
With this, we come to the end of the call. Thank you, everyone.