Ladies and gentlemen, good day and welcome to the STL Q3 FY 23 earnings conference call. I'm Pankaj Dhawan, Head of Investor Relations at STL. To take us through the quarter three results and to answer your questions, we have Ankit Agarwal, Managing Director, STL, and Tushar Shroff, Group CFO, STL. Please note that all participant lines are in the 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 at www.stl.tech. Before we proceed with this call, I would like to add that some 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 clause indicated in the presentation also applies to this conference call. For opening remarks, I now hand over the call to Ankit Agarwal. Over to you, Ankit.
Thanks, Pankaj. Good day to everyone. Thank you for joining us for our quarter three FY23, and also wishing all of you a very happy Republic Day. I look forward to our conversation and discussions and your questions as well at the end. In line with our expectations, strong investment momentum is continuing in 5G, Fiber to the Home, Fiber to the X, data center, and citizen network deployments. 5G is becoming the fastest-growing technology in the world today. Operators are expected to invest more than $500 billion in 5G from 2022 to 2025. As even recently, Mr. Sunil Mittal, chairman of Bharti Enterprises, also indicated that the industry will also be spending this quantum of money.
As for Ericsson, 228 service providers have now launched 5G commercial services globally, the number of subscribers of 5G is projected to go up from 870 - 5 billion by 2028. Leading the 5G deployments is China, which plans to increase its base stations from 2.2 - 3.7 million by 2025. FTTx is also becoming all-pervasive. In the US, for example, Frontier has reached halfway to reach its target of 10 million homes, home pass locations. Similarly, Windstream is targeting 3 million homes by 2030. In the UK, BT Openreach plans to reach 25 million fiber to the home locations by 2026. Deutsche Telekom is building FTTP networks to pass 2.5 -3 million premises in 2023.
Similarly, Open Fiber in Italy is targeting to reach 24 million homes by 2031. Data center deployments are also increasing. Data center CapEx is set to actually increase from $263 billion globally to $377 billion by 2026. Particularly in India, the data center investments are expected to surpass over $20 billion by 2025. As an example, NTT India has earmarked $2 billion for next three to five years for IT and communication infrastructure in India. Lastly, on the citizen network side, we're seeing significant investments by the governments globally. For example, the U.S. is investing $97 billion in broadband through multiple programs like RDOF, BEAD, Middle Mile programs, et cetera.
Similarly, U.K., Germany, France, Austria are countries where cumulatively, about $8 billion, $14 billion, $24 billion, and $2 billion respectively under various programs are being utilized to build digital programs to connect the unconnected. The Indian government similarly is looking to move forward on Phase three of BharatNet to connect all the villages. Over $10 billion is expected to be invested. We listen to the leadership of the leading global telecom companies. They are unequivocal on the importance of fiber investments in the overall network build-out. In this regard, as an example, AT&T has recently signed definitive agreement to form a joint venture with BlackRock that will operate commercial fiber platform. The JV plans to deploy a multi-gig fiber network to 1.5 million customer locations across the nation.
It's important to note that these customer locations will be outside of AT&T's traditional 21 state service footprint. In addition to the 25-30 million home passes that already AT&T has targeted by 2025. All of these deployments is leading to a sustainable growth of OSC volumes and Optical Interconnect. As for CRU, the leading research house in this space, the global OSC demand is expected to reach 624 million fiber kilometers by 2025, from 534 million fiber kilometers in 2022, last year. The Optical Interconnect demand in the global market ex China is also expected to grow from $7.5 billion in 2021 to close to $10 billion by 2025. STL has a strong presence in its key focus markets, which are North America, Europe, and in India.
Coming specifically to India, 5G deployments are clearly picking up pace. The top two telecom operators are rolling out approximately 3,500 sites per week cumulatively. Bharti Airtel, for example, launched 5G services in more than 30 cities, and Jio has launched 5G services in more than 130 cities. Both the operators have aggressive plans to cover India broadly between now and March 2024. Telecom operators are expected to invest between $18 -$22 billion in non-spectrum CapEx between now and 2025. Out of this, we expect operators to spend between $1.5 -$2 billion for fiber rollout, specifically in the next two to three years in preparation of the 5G.
As we said before, we broadly believe the tower connectivity has to grow from about 30% to close to 70%. This is where significant fiber will also be required. In terms of cable kilometers, we expect telcos to deploy more than 2 lakh cable kilometers in the next 18-24 months. With favorable industry tailwinds, we have deployed a focused strategy to propel us forward. In the following section, we will talk about our strategy in detail. Essentially, our strategy is straightforward and includes two levers. Firstly, we focus on growing the optical business. Secondly, we look to consolidate our services business. We are allocating capital to tap into strategic growth opportunities offered by these levers, and we shall talk about our progress in each of these in detail in the subsequent slides.
If you look at the optical business, particularly optical fiber cable business, as you can see from the chart, we are consistently gaining market share. In nine months FY 2023, we had reached an estimated 12% market share globally. If we subtract the China share, which is up from just 5% in FY 2020. We are also very pleased to announce that we have received additional orders in the multi-year, multi-million dollar contract with a leading North American broadband connectivity company. Our intent is to increase the long-term contracts and order books, and we're moving forward in that direction. In line with the expectation, commercial production has started in our optical fiber facility in China in Q3 FY 2023. In the U.S., commercial production shall start in the current quarter, Q4 FY 2023.
We are working hard to reach to full utilization by first half of FY 2024. We have increased our optical interconnect attach rate from 3% in FY 2021 - 10% in the nine months of FY 2023. The first step we have taken to grow this business is to offer optical interconnect solutions to our existing accounts, particularly in the European market. A next step, we are also going through a product approval cycle in new markets such as the Middle East and APAC. We expect to continue to increase our rate of optical interconnect products, and plan to reach the attach rate to 40% by Q4 of FY 2025. Coming to the services business, We're focused on building a profitable order book by picking up projects in our India private segment.
If you look at the services revenue split, revenue from India private has gone up from 31% in FY 2022 to 42% in 9 months FY 2023. We are looking to build sustainable revenue streams including O&M as well. Moving forward in the services business, our focus is on cash and profitability rather than chasing revenue growth. As you can see, our project execution is on track. Among India public projects, our BharatNet projects in the state of Telangana is 61% complete, including all packages, and the network modernization project for Indian PSU is 63% complete. For the Indian private sector, private side, fiber rollout for a large Indian tech operator is 100% complete for phase one and 99% complete for phase two. Phase three is yet to start.
Fiber rollout for a modern optical network for yet another private operator is 29% complete. Specifically in the U.K., Fiber to the Home rollout for all our U.K. projects combined is 6% complete. As you would recall, we had entered the network software business in FY16 through acquisition of Elitecore. We continue to remain a niche player in this business. Moving forward, we are working to pivot from this telecom software business to a digital business. The strategy is still in work, we shall come back to you in quarter four with some more detailed plans. In line with what we shared last quarter, we have ramped down the wireless business with no further investments in capital and manpower from quarter four of FY23.
In the last quarter, we enabled specialized engineering talent of the wireless business to move on to other relevant organizations. We expect HCL EBITDA to go up on account of ramp down of the wireless business from quarter four FY 2023 onwards. In terms of capital allocation, our clear priority is investments in the optical business. We are investing in the optical fiber cable capacity expansion, optical interconnect expansion, and new product development. We have improved margins and working capital cycle in the optical business. We are working to improve margins and working capital cycle also in the services business. We have ramped down the wireless business, as I mentioned, and we shall help in improving the cash flow from operations. We shall also continue to divest subscale assets. We have divested IDS in the current year, as you would recall.
In FY 22, we sold our interest in Metis Eduventures and MTCIL. Through all of these actions, as we start to generate higher cash from operations, our priority will be to reduce net debt and to bring along with adequate investments in the optical business. STL's endeavor is to be a responsible leader in ensuring a connected and inclusive world. This focus reflects in the way we have designed and implemented our ESG agenda. We have diverted over two lakh plus metric tons waste away from landfills from FY 19 to November 22. We have reduced emissions of 21,000 tons of carbon dioxide emissions through various initiatives in the plants from FY 21 to Q3 FY 23. We have also announced a commitment to become a carbon neutral company by 2030. We have recycled six lakh metric cube of water from FY 19 to November 22nd.
We are also very happy to announce that we have become the world's first optical fiber manufacturer to be Zero Liquid Discharge certified. Through our various initiatives in education and women empowerment, more than 790,000 lives have been positively impacted from FY 2019 to Q3 FY 2023. We have also positively impacted 2.15 million lives through our various initiatives in healthcare from FY 2019 to Q3 FY 2023. In our work, we have won 84 ESG awards. I'm very proud of the team for their achievements from FY 2020 to quarter FY 2023. At this juncture, I'm delighted to introduce Tushar, who's joined us as Group CFO. Just to give you some brief on Tushar.
He's a qualified chartered accountant and a cost accountant with an experience of close to three decades in the fundraising, capital structure, mergers and acquisitions, treasury management, taxation, financial accounting and planning, investor relations, and business partnering. All the facets of a finance function. As a CFO STL, he will work closely with me and the leadership team to bolster the company strategy to deliver consistent shareholder value and profitable growth. I now hand over to Tushar to discuss the company financials with you.
Thanks, Ankit, for your kind introduction. Good day, ladies and gentlemen. Our financials continue to improve. We shall now discuss this in detail. Before discussing on these financials, I would like to state that in accordance with Indian accounting standards, Ind AS 105, non-current assets held for sale and discontinued operation, which is related to IDS, wireless business, and telecom software business, are reported as discontinued operations. Accordingly, for like-to-like comparators, respective period financials are restated. For further details, you can also refer note four to the financial results. Our open order book, that is order backlog, at the end of Q3 FY 2023 has gone up to INR 12,054 crores. This is a reflection of strong demand in the industry and our dominant position and focus particularly on optical fiber business.
Our order book is well diversified across customer segments, also across our business areas. We also have a significant O&M order book, which is already yielding revenue from this year. Our revenue mix is shifting to customer segment and geographies of our choice. We are increasing our share in telco segments. In terms of geographies, we are increasing our shares in America and European markets. In line with our strategy, as compared to last year, we have increased the revenue share in American market from 11% to 37%. Again, this is a reflection of our product innovation and reward of investment in R&D over the years.
In terms of notable order wins in this quarter, apart from the additional order in the multimillion-dollar contracts for cables in North America, we have secured a multimillion-dollar order for optical fiber cable and optical interconnect solution from European customers. On the service side, we have secured new orders for pan-India fiber rollout from leading Indian telecos. In line with our expectation, quarterly revenue grew 12% quarter-on-quarter to INR 1,882 crores. EBITDA from continued operation went up by 8% on quarter-on-quarter basis to INR 252 crores. Net profit grew by 17% on quarter-on-quarter basis to INR 77 crores for Q3 FY 2023. Revenue growth was driven strong growth in optical business. Margin improvement mostly on the back of improvement in margin in optical business.
For nine months FY23, revenue grew by 28% on a year-on-year basis to INR 5,050 crores. EBITDA from continued operations went up by 17% on a year-on-year basis to INR 651 crores. Net profit from continued operation is at INR 162 crores for nine months period FY23. In order to increase the transparency, we've started reporting segmental financials from last quarter. Starting with optical business, we delivered revenue from the continued operations of INR 1,486 crores, which is 13% higher on a quarter-on-quarter basis. This is due to increase in our volume and better price realization and the favorable product mix. We delivered EBITDA from the continued operations of INR 302 crores, which is 15% higher on a quarter-on-quarter basis.
Key drivers for margin improvements were a product mix shift to higher margin products and reduction in logistics costs. While increased raw materials, particularly helium, has dragged the margin relatively. In global service business, we delivered revenue from continued operations of INR 380 crores, which is 8% lower on a quarter-on-quarter basis. We have said initially that we are focused on cash and profitability over a revenue growth. We are being selective in new projects intake. Despite lower revenue, EBITDA is relatively flat due to better project management and focused execution. We said earlier that we are working to ramp up U.K. revenue to be profitable by H1 FY 2024. Coming to digital technology solution, revenue from continued operations grew 380%. Sorry, INR 24 crores in Q3 FY 2023.
As we have spoken earlier, that we are building a new business in this segment, and we shall come back to you in Q4 to explain the business in detail. We have placed a brief version of quarterly reported numbers for your perusal. In summary, I would like to say that our profitable growth journey in optical business continues. We continue to gain the market share across the focused markets, increase the optical interconnect attach rate, and improve the margins. We are consolidating towards the strategic segments in service business. We are working to build profitable order book from Indian private telcos and aim to reduce the capital deployed in this segment. In line with the stated strategy, we have discontinued the wireless business and exited from IDS and other subscale businesses. We aim to reduce our debt as we move forward.
The debt has peaked and going forward it shall be we see the progressive reduction in our debt over a period of time. Now, if there are any specific questions, we would be happy to take your questions.
Thanks, Tushar. Ladies and gentlemen, please note that if you want to ask a question, you can either send us in chat or you can click on Raise Hand, and we shall take your questions one by one. We'll take the first question from the line of Mukul Garg. Mukul, you can ask your question.
Yeah. Thank you. I hope, I'm audible. Hey, Ankit. Two questions from my side. First, on the Americas business, the pace of growth in that market is extremely sharp. I think, you know, it has become your largest region this quarter. How should we think about Americas going forward? You know, will it be more of a case that Americas will take, you know, the sales away from your other segments? You know, how are you kind of looking at trade-offs between different regions? Second, on the profitability side, you know, your margins, at least you know, the optical margins are flattish compared to last quarter, whereas the raw material prices, including helium, have corrected very meaningfully.
How should we think about, given that the volumes also were higher this quarter and operating leverage benefit, you know, have started flowing off?
Thanks, thank you. I think broadly on the U.S. market, I think we're generally quite bullish on market demand. We continue to see pretty strong investments both by large operators, tier two players, as well as very large investments from the government. As I called out, there's going to be just one project, which is the $40 billion program of BEAD, is expected to come in by mid of this calendar year, as an example. We fundamentally see a very strong demand over the next three to five years.
I think our own position in that market has been strengthened, in terms of our team, product portfolio, and now with the facility coming up, our overall brand and positioning in the market has improved quite positively. We are under stage of commissioning the factory, setting up our processes systems, and getting certain technical approvals, which will enable us to serve that market better. I think macro level, the way to think about it is that, you know, yes, it will continue to be either our number one or number two market going forward. We also see that this is a future growth area for our interconnect solutions as well, over the next two to three years.
I think the way we are looking at it is that we would serve that market both from the operations that we would have locally as well as from our operations in India. That's how we look to serve the market. In terms of the profitability of the optical business, I think we have guided that we will be north of 20%, that's something that we continue to be committed towards. We will see broadly over the next, you know, between now and H1 of next year, you know, improvements coming into the numbers because of the volume.
We're talking about going from 33 - 42 million. That will come in with China fber factory as we started, and as we scale that up, those benefits of volume will come in. We largely believe the realizations have peaked or largely will peak between now and Q4. The upsides will now come from the volume on the cable part as well as growth of our Optical Interconnect. We've talked about going from 10% attach rate to 40% attach rate by Q4 FY 2025. That's really a priority and focus for us. Just one comment or one different view on Mukul, on the raw materials.
While I think we've seen some kind of now flatlining of benefit of polyethylene and container, the helium prices are still very high, I would say exceptionally high. Both availability and pricing has been a challenge. And at least our current visibility is that it'll continue for probably next six months.
Sure. Just one follow-up on the U.S. market. Will that business, you know, kind of operate at a different profitability level versus, India and Europe? Net, net, you know, higher prices will be compensated by higher operating cost, you know, due to transportation and, other expenses?
Yeah. I don't want to comment on the realization in that market for competitive reasons, but I think broadly it's as I said, it's a very important market for us. It's a fast-growing market. We have invested a lot in R&D, innovation and intellectual property to serve that market, and we continue to do that. For us, it's definitely an important market. Going forward, we will address that market both through our operations there as well as a good portion of sale will come from our Indian operations into that market.
Sure. Thank you so much for answering my questions. I'll get back into the queue.
Thank you.
Thanks, Mukul. We'll take the next question from the line of Mr. Mohit Motwani. Mohit, you can ask your question now.
Hi. Thanks for the opportunity. I wanted to understand the jump in the other expenses quarter-on-quarter. I think this is reflection of the fact that you stated container costs continue to remain high. Is this completely driven by that or there is something else also to it?
I respond to this particular question. If you see Q3 FY22, other expenses were about 32.55% of the overall revenue. Q2, I think it went down to 23.8%, and currently this quarter we are at 24.9%, which is in line with increase in the revenue that we have seen for this particular quarter, largely on account of the variable cost in terms of the transport costs, transportation and logistics costs that we have.
The second part is there are a couple of expenses, like one-time expenses on professional and legal services that we have taken as well as, you know, the plant operation in U.S. which is related to OpEx, which is a time cost which is impacting other expenses for this particular quarter. However, our guidance is, you know, in terms of these OpEx or other expenses should be in the range of 23%-25% on going forward.
Thank you for that. One other question would be around the wireless business ramp down. Is the effect benefit of that completely done in Q3, or that we could expect some incremental benefit in Q4 as well?
No. In fact, we had the costs for that business in Q3. The benefit will actually come in Q4. There's two parts to it. Largely, you know, the people costs that we had, we really put a lot of effort to ensure that they were placed with partner companies, and we're so very happy with that outcome. We don't expect those costs to be there in Q4 onwards. That benefit will start coming in Q4. There are certain assets that are there with STL in terms of R&D equipment, et cetera. Those we will run probably a sale process or something to ensure that we maximize the value from that.
Understood. actually I just meant that above EBITDA, there's no wireless business cost. Everything is flowing through the profits from distributed operations, right?
That's correct. That's correct.
Got it. Thank you so much.
Okay, thanks, Mohit. We'll take the next question from the line of Mr. Bhupendra Tiwari. Bhupendra, you can ask your question now.
Yeah. Hi, Ankit. congratulations on good set of numbers. I hope I'm audible.
Yes. Yes.
Yeah. My question is, more on the, you know, read this part about raising fund in form of rights issue. Of course, the timing on this is not out, but just wanted to understand the purpose behind this issue. I mean, is it a growth driven kind of a fundraise for, or in terms of the capacities that maybe you would like to add in the product thing? Is it basically for deleveraging? Just wanted your thoughts around that first.
Yeah. I think, you know, because it's really in line with our conversations we've had and we've been sharing the market fundamentally. You know, on the one hand, we're clearly positive about the growth of the business, but I think more important for us to really make sure our capital structure is in the right place. That's really the core.
Fund raise.
Of the fund raise through the rights issue. The total capital amount will be up to INR 500 crores. Further details will be decided with the committee. I think that's the intent is really to use the capital to, you know, get the capital structure in a better place. Then, you know, and really in line with our previous discussion on capital allocation, make sure that the balance sheet improves essentially.
Thank you. That was very, very useful. The second question was largely on the services thing, and I think, you alluded to that saying that you're focusing more on the private side of the services and that was seen also in the nine months revenues that we have.
That's right.
When we say private side of the business and the opportunity that we talked about was two lakh fiber kilometers of, you know, fiber that will come around in India because of the 5G. How much is your sense of, you know, Or rather, what has been your historical kind of a market share of, fiber layout in India? And Just wanted, you know, you to throw some light.
Yeah. you know, maybe some context here. Historically, the fiber rollout was done by, you know, a lot of local companies. It was a very local way of running the business. And our whole premise for HTL was that, A, we can consolidate and be a large tier one professional company in this space. We can bring in innovation and technology. We can use apps, tools, and other means to improve both the service quality as well as operational maintenance. So that's that's been the efforts. We've worked with the two large operators in the country. I won't be able to share market share, but I can share that certainly with both operators, we're probably one of the largest partners in the country. And there's a real interest to...
from both sides, to see how we can further support them both for their 5G as well as for their Fiber to the Home rollout. As I said, what's important for us at the same time, is not to grow the revenue for sake of it. We are really focusing on getting any of these opportunities, whether government or private, at the right margins and in the right fund involvement structure. That's really the focus for this business.
Thank you. That's, that's all, sir.
Thank you.
Yeah. Thanks, Bhupendra. We'll take the next question from the line of Mr. Krish Mehta. Krish, you can ask your question now.
Yeah. Hi. Thanks for taking my question. I just wanted to ask on what the loss for this quarter was for OSS and BSS, as well as for Q2 FY 2023.
The loss for the OSS and BSS business. That will be gross.
Just give us a minute. Sure.
Nine months period, it was about INR 53 crores.
What was it for this quarter specifically and last quarter?
I'm talking about the EBITDA impact of, you know, OSS and BSS business to the extent of INR 53 crores. This quarter was about INR 15 crores. The previous quarter was about INR 26 crores.
Okay. Thank you so much.
Thanks, Krish. We'll take the next question from the line of Mr. Manoj. Manoj, you can ask your question now. Okay. We'll take the next question from the line of Mr. Saket Kapoor. Saket, you can ask your question now.
Yeah. Namaskar, sir.
Hi. Namaskar.
Sir, firstly, as you mentioned that the Chinese entity would be now contributing since now the utilization levels have gone up. If you could give us the trajectory, what kind of contribution will be there from the Chinese for the remaining half and for the full year as a whole going ahead?
Actually, Saket, we are not disclosing volumes by facility for competitive reasons. What I can share is that as you would have seen in the pictures and some of the data, we do have the team there. The operations have started. It's actually a world-class asset, so we do believe the fiber manufactured from there will both be competitive as well as able to serve our global requirements. At a macro level, what's important to understand is that a large portion of our fiber will now be utilized for our own cable operations, especially as we are expanding from 33 -42 million. Similarly, a good portion of the fiber made from our China factory will be utilized for our global cable operations.
By and large, we believe that, quarter on quarter we will see volumes, scale up. We do believe that, these will be made competitively. Whatever investment we require, we've made to acquire the balance 25%, that will be a positive investment. As well as, one of the areas that's also positive is now we're targeting to... Because it's a R&D facility, we'll be targeting to run this at 15% tax rate, which will also be beneficial for the company.
How much more we need to spend to ramp up the production there? I was just trying to understand that last year, I think so we've, there was a negative impact of around INR 80-90 crores from the Chinese subsidiary.
Yes.
Going ahead, what would be the run rate? How will that go down? Yes. That's the understanding. What was the price we paid for the balance acquisition, sir? How much have we spent? INR 14, INR 14. INR 2.50.
Sir, I think the ballpark in the range of INR 50-60 crores. We can come back with the, a specific number. I think the main message was that essentially, while during COVID we were negotiating with our JV partner on the terms, and the operations weren't running at that time. Since then, we have acquired the 25% successfully. The transaction is closed. We've also successfully got the business license to operate. We are quite well set up now. Quarter-on-quarter we'll see the improvement in the production. And we can probably update you more into next quarter on how that's scaling up.
Sir, when you mention it is as an R&D, it is an operating asset. I mean, I did not.
Yeah, yeah. What I meant was that it's from the government perspective, if you are doing technology manufacturing, you are given a special tax rate of 15%. I didn't mean R&D in that sense.
Right, sir. more update we'll get in the fourth quarter. Sir, in terms of the net debt level, and I think so the roadmap ahead for reduction. Right, rights issue has been as you earlier commented. What's the road ahead in terms of how the net debt is going to look like? Whether we are peaked out and just more thoughts on the same, sir.
The right issue proceeds that we are expecting maybe in the FY 2024 because of the, you know, the documentations and everything, the procedural part that we'll have to complete. The rights issue proceeds will come in next year. However, for this particular year-end, what we are targeting is that we will be at a net debt of about INR 3,200 crore based on the earlier guidance Ankit had given. All our efforts are, you know, moving towards INR 3,200 crore at year-end debt levels.
INR 3,200 will be the closing for March 2022?
That's the target, yes.
Okay. I'll come in with you, sir.
That will be great.
Yeah, yeah. Thank you, Ankit. Yeah.
Thank you so much. Thank you. We'll take the next question from Mr. Tejas Sheth. Tejas, you can ask your question now.
Yeah, yeah. Hi, Ankit.
Yeah. Hi, Tejas.
On the Optotec side, when you said the attach rate of 10%, is it on the cable and fiber combined revenue, or it is only on the, on the cable side?
On the cable. This is, yeah, this is the attach rate of interconnect. That's what I was sharing last time also. For a $1 of cable sold, today we sell $0.10 of interconnect at a company level.
Okay.
Just to be clear, it is combination of the Optotec that we have. We have a setup in Dadra as well. It's a combination of everything in the interconnect business that we have.
Got it. Got it. On the, is there any element of INA depreciation towards the increase in the order book level?
FX impact, if you see this quarter, like to like basis is about 2% - 3% in dollar terms, right. However, the very specific number in terms of whatever is an adjustment due to the FX rate, which is minus from quarter, the Q2 to Q3, we shall provide you separately. Ankit Agarwal will provide you separately.
Okay.
I don't see it being meaningful. I mean, that's what we've been sharing some of the details. These are some of the contracts in U.S., there's some contracts in India, et cetera. It's a mix from a geography perspective.
Okay. When I see your optical order book, in a way, obviously it is being executed well on the quarterly basis, but at the quarter end basis, it's more or less quite flat over last four, five quarters.
Yeah. Yeah. No, that's right. I mean, directionally, we've been in this range overall of open order book in this range of, say, INR 11,000-INR 11,500 or so. I think what's also important is that to measure that versus our revenue run rate, right? We've been at say INR 1,500, INR 1,600, and now it's going up. At the same time, we are booking over INR 2,700 crores per quarter. That's an important measure for us in terms of what is our order booking vis-a-vis our quarterly revenue, which will then help us and place us well for next year growth onwards.
Got it. Just last question. On the digital side, where we are burning capital-.
Yeah.
How do you see that trajectory changing, as well as on the global services side, where the margins are very, very low?
Yeah.
much lower single digit. How you see the margin trajectory there also? Not from quarter basis, but more so from, let's say, FY24 and FY25 basis.
Yeah, I think good question. See, the U.K. services is on the back of the acquisition we've done for Clearcomm.
Yeah.
You know, I think the intent there clearly when we look at the model, we need to scale up that business and execute on quarter on quarter basis. We believe that probably by end of H1 of next year, we should at least get to a break-even level versus the losses right now. Then we see how to improve the EBITDA probably to that 10% range. That's really the focus for the services business and the UK team out there. On the digital business, one part of it we have called out that these are assets held for sale.
We have Raman who's come in, and he's really relooking at our business, our portfolio, and seeing how do we scale it up in right profitable segments. There, I would say give us about, you know, three to six months, we will come back with more details of how we want to drive the business. It looks exciting. We're definitely seeing positive trends in that.
Okay. Just one last book dropping question. Are we, capitalizing any of the finance costs, considering that the interest cost is quite steady despite our debt increasing as well as the interest rate, increasing at the global level as well as in, at India?
Yeah. For a U.S. plant, which is under constructions and which is under WIP, which is, whatever the borrowing cost that we have to the extent of the capital employed for that particular plant, we are capitalizing, which is required as per the accounting standard.
Sure. Sure. Yeah. I guess. Yeah. Thank you very much, Awesome.
Yeah.
Thanks, Tejas. We'll take the next question from the line of Sunny Gosar. Sunny, you can ask your query now.
Yes. Thanks for taking my question and congratulations on an improvement in your financial performance. My first question is if you can highlight what are the net debt levels of the company currently, and in terms of the guidance, what's the net debt that either net debt to EBITDA or some ratio or some guidance you can give of debt, net debt in the next 18-24 months.
Currently we are at about INR 3,400 crores in terms of the net debt at the close of the quarter three. We are expected that we should be able to close this particular financial year with INR 3,200 crores. This quarter we should be able to generate sources of cash. As, you know, we discussed in Ankit's presentation that, you know, the way we are looking at this particular business, we want to run this particular business in a disciplinary manner. That's why we are looking at targeting debt to EBITDA level of 2-2.5 to EBITDA. That's the journey that we'll be embarking on over a period of next 6-12 months.
Got it. In terms of the CapEx, any guidance on CapEx for next two years? This year I believe it's INR 500 crores overall.
Yeah.
What will be the CapEx per annum for next year?
Broadly, we're looking at around INR 350 crores for next year. We're still kind of in the finalization of our business plan, but it will be largely focused on the cable and to some extent the interconnect.
Got it. Got it. My next question is on the system integration business. We are doing about like about 1% margin on the system integration business currently. How should we look at the business going forward? You mentioned about the focus on the private side and focusing on orders which are profitable and have working capital which is under control. Whether the current revenue base on a quarterly basis is the base or this can go down further? And how should we look at margins for this business, at least for the next few quarters and then maybe in the medium term?
Yeah. That's a good question, Sunny. I think at a macro level, you know, one is just at a fundamental level, we believe, one of the drags on the profitability is the UK business, what we just spoke about. I think that's quite critical for us to turn that around, get it to at least break even and then grow that. And that's something we're, you know, looking to execute. The orders are there. The market is positive. I think it's for us to execute and build that right model, to get it to break even and profitable. I would say that's one directionally that we're looking to do. In India, as I said, directionally, we are not chasing revenues per se.
We are focused on whatever orders we pick up going forward, both from private and government, to both look at very closely the right profitability margins as well as the right fund involvement. I think the third part clearly is on projects where we're either executing or have executed like Maharashtra, Telangana and other projects, is to make sure that we complete the execution, complete the milestones, and then collect the cash. That's really the priority of the system integration business. We do expect the profitability to improve, but it will take time to, you know, get the new projects on one side in India with the right margins. Second is, you know, this six -to- nine- month period will take to get these UK services into the right profitability level.
If I can conclude, is the current quarter profitability in that sense the base and things improve from here on, or there could be a couple of quarters where you have remain at breakeven or even have some kind of losses, small losses in this segment?
Yeah. again, it's going to be, you know, touch and go. It's really a function of, you know, how do we make the shift happen, as I said, in both the UK and in India. I wouldn't comment. I think directionally, as I said, we are, you know, as you can already see quarter and quarter, probably some of the revenues have started coming down for services. We are, we're really not even setting, you know, very specific targets on revenue going forward. It's just whatever we have on our plate, execute in the best way possible, and anything new we pick up, we do it at better margins.
I think it will just take some time, but it will probably, you know, it will take us that period of six to nine months to improve the business performance.
Sure. If I may, I have one last question. On the new digital business that you're focusing on, say in this quarter, you had EBITDA losses of, say, about INR 30-35 crores. Going forward till the business stabilizes.
Yeah.
breakeven, is this the peak level of loss on a quarterly basis, or there could be again a period where, on a for a few quarters this losses go up?
I think directionally, at least, as I said, we'll give more details of the business, what we're looking to do, customers, et cetera, probably in a quarter's time. Directionally, we are excited about the business. We have a global leader, Raman Venkataraman, who's coming from TCS, who leads this business. I think we are really working with him to see how do we scale this business up, how do we do it profitably, et cetera, and with the right customers. I would just leave it at that to say that give us another quarter to share more details.
Broadly, we are investing in this, but we are also conscious of making sure that, you know, at the right point of time, this business also starts generating profit and cash for the company.
Got it. Thanks and all the best for the future.
Thank you. Thank you.
Thanks, Sunny. Due to the paucity of time, we'll take maybe last few questions. The next question we, you know, we'll take from the line of Mr. Pritesh Chheda. Pritesh, you can ask your question now.
Hello, am I audible?
Yes.
Yeah, sorry. Just few questions. When you said that from here it is largely volume, I want to know what is the headroom in volume that you have from the current level? Is it 20%, 30%? If you could share that.
Yeah.
My second question is, we have an interconnect rate today of 10%, right?
Yeah.
That we aspire to reach to about 50% in some years' time.
40%.
40. What is the value addition on account of the interconnect rates on your overall business run rate that you have today when you reach that 40%? What are the margins in that incremental business? These are my two broader questions.
First question.
First question was what is the headroom and.
I think broadly what we said is that the cable capacity is what will come on stream, right. Broadly from 33-42, about a 9 million, you know, addition of volume will come through, broadly in the next six to nine months. I think that's the major volume trigger. As a sub-part of that.
What is it, what is it in a percentage terms of the current, that 9 million? Like 30% extra?
Yeah. Broadly nine over thirty-three, nine over thirty-three. About 30 odd %.
Okay.
Yeah.
Okay. Okay.
That's on the, on the cable, essentially. On the interconnect, basically what we see, just to give you a perspective, globally, the cable market is about $8 -$9 billion, and the interconnect is similar, $8 -$9 billion, right? The global benchmark for us when we see at a macro level is one to one , which means 100% attach rate. That's where we are already in conversations with customers. There's a typical longer time cycle to build the products, get intellectual property approved, get the customer approval, and also to supply. This is where there is some period of time, probably even more than what it takes for cable supply to really scale this up. Once you're in there, typically customers really like to, you know, depend on you for long term.
Directionally, because this is much more solution-oriented than even cable, the typical EBITDA margins on interconnect are 30%, compared to cable being at 20%. That's really what we are driving in terms of growth. And also, this is typically less CapEx investment or CapEx intensive than what's required for cable. That's really where the focus is. We do have global teams. We do have global customer connects. The focus is now to build a product portfolio and get and get this moving over the next two years.
How much business do you add from moving 10% - 40% on your current, quarterly revenues that we see?
At least directionally, I won't be able to share exact number, but directionally, at least INR 1,000-1,500 crores can be an addition over the next two to three years.
Okay. Okay. Thank you.
Thanks, Pritesh. We'll take one more question from the line of Mr. Subrata Sarkar. Subrata, you can ask your query now.
Yeah. Three question on the first, on the India side of the business. Like, apparently it's appearing like, we are more stronger on the external market than India. Can I try to understand the reason behind that? Is Indian market is too competitive? Like, what's the exact reason? Is it because of margin? Is it because of, like, operational difficulty in implementation, or is it because of like, you know, working capital issue? This is first question of mine.
Yeah. Yeah. I think, Subrata, I think, one, just at a macro level, I don't think we have a negative view on India.
Relatively we are muted. That's what I mean.
Yeah, yeah. I'll come to that. you know, I think fundamentally, I think, you know, India will have a 10-year, you know, digital network build-out, right? Whether it's from government side, from defense side, data center side, et cetera. I think it's a great opportunity and STL has built strong capability over last seven, 10 years, we are quite well placed to take it on. I think what we're simply saying is that, you know, this is where we look at the business today, we are largely doing a lot of services today, both to private sector and government sector. Based on our experiences, particularly on some of our execution challenges for government projects or cash collection, which would have a fund involvement which has been longer on government side.
Based on some of those experiences, we are saying we want to pivot more to private sector in India. We're still committed to the India market, and we want to make sure that we support the growth, especially at this time of 5G deployment in India. The other part we are looking at very closely is that there's probably a $10 billion investment funded by the government on fiber rollout to the villages as part of phase three of BharatNet. That's obviously a very, very exciting and national project which would be great for STL to be part of. Having said that, we have to ensure that if and when we look at any of these projects, it has to be at the right terms, the right norms, so that there's complete visibility on both profitability as well as the fund involvement.
These are the parts that we are just taking lessons from our past experiences, and I would say being more mindful of which projects we are part of, which projects do we say yes to, and sometimes we have to say no to.
Perfect. My second question is on the capital structure side. Like, as you announced, like this year, we will have a INR 500 crore CapEx. Next year we will have INR 350 crore of CapEx. Our operation is also growing, which will require higher working capital. Given all this context, whatever debt reduction or rationalization that we are planning for, is it mainly from the external source, like, funding through right issue or like whatever source or like we are, I think internally, from operational cash flow also we are planning to reduce the debt or to that extent. What's the strategy?
Yeah, very good question. I think if you would have looked at the service business, which is, you know, which is working capital heavy. As we continue to execute the some of the some of the projects, we tend to release lot of retention money which gets involved in this kind of a tender business. As we execute better and better, the opportunity of releasing cash is much, much more. We are more focused in terms of ensuring that, you know, we are able to generate more on operational side of cash flow as well.
Sir, last a small question. Like, in the optical fiber side, more or less at, we are high, above 20% margin, which is more or less the peak margin. In this context, like, major margin expansion. Vis-à-vis our, you know, overall, company level margin, we are operating at 13% only. My point is like at service level, like, that's also a strategic decision, like how much we want to penetrate on the gate of, at the service level, because service is a much lower kind of a business. You are guiding for 10% margins.
like, what will be from a strategic point of view, what kind of overall company level margin we are targeting given the mix of like, optical fiber interconnect as well as services?
Good question. I think the way I would put it is, see, optical today is at 20%. We are confident of that. I think it's important as we talked about, there will be improvement coming from the volume increase. There is also both a focus on volume as well as profitability improvement coming from the interconnect, right? As I said, the margins in interconnect are closer to 30% typically. It's important for us to keep pushing that forward, getting all the technology, getting the innovation and pushing that to the customers. I think that's something that we are positive about and, you know, that's work cut out for us.
In terms of the services part, as we stated in our last results as well, directionally we want to improve the profitability, EBITDA level of the services business, take it at least to 10% levels from very low levels currently. One big part of that is to sort out the UK services margins so that overall services improves as well as in India, focus more on the private sector going forward so that we have both good margins as well as better fund involvement. That combination of these two we believe should help us improve the EBITDA margin. As I said, this is probably a six to nine month process.
Okay. are we targeting any optimal level of mix, like the way our intention is to reach 40% in interconnect? service to optical fiber interconnect mix, are we targeting anything? Do we have any optical, optimal, mix in our mind?
Nothing specific. I mean, already as you can see directionally, you know, we are broadly at, say 70% of optical business, you know, 25%-27% of services, and then balance is the digital business. As I said, we're not consciously driving any top-line growth in services. We're much more focused on taking select projects at the right profit and cash level. I'm comfortable at the split. More than the split for me is making sure whatever business we are in is coming at the right terms. I think it's, you know, we are positive when we look at the market trends of optical, so we are fully committed on that. Services requires some sort of, you know, change and improvement from where it is. That's the second part.
Then digital, as I said, we'll share more details by next quarter. Clearly a lot of opportunity here for us to improve from here.
Thanks. Thanks a lot.
Okay. Thanks, Subrata. With this, we come to the end of Q&A session, and I now hand over back to Ankit Agarwal for closing remarks.
I'd like to thank everyone for attending this call and showing your interest in our company. I hope we were able to address and clarify all your queries and comments. For any further questions and discussions, please feel free to contact the investor relations team, which includes myself and Tushar. We really look forward to continuing the conversation with you in the future. Thank you. Jai Hind.