Ladies and gentlemen.
Meeting in progress.
Good day and welcome.
This meeting is being recorded.
To the STL Q1 FY23 earnings conference call. I am Pankaj Dhawan, Head of Investor Relations at STL. To take us through the Q1 FY23 results and to answer your questions, we have Mr. Ankit Agarwal, Managing Director, STL, and Mr. Mihir Modi, 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 risks 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.
Thank you, Pankaj. Good day, everyone, and thank you for joining us for our Q1 FY23 earnings conference call. At a macro level, the overall digital infrastructure industry is growing at a rapid pace, and we see three clear themes playing out. One, network creators, including governments around the world, are investing heavily in creating digital infrastructure. Themes like 5G, Fiber to the X, and data center deployments continue to grow at a rapid pace. Overall, the demand for optical network is growing on the back of multiple growth drivers. We shall talk about each of these in the following slides. On the first theme, just to quote a few instances, in the U.S., AT&T has in fact increased its CapEx from about $16.5 billion to about $20 billion in 2022.
Overall, the U.S. is looking to pass 9 million households per year for the next three years to reach 87 million fiber-connected homes. Similarly, in Europe, multiple telecom operators, alternatives, are actively investing and growing their investments to increase their FTTH coverage. In India, Airtel plans to spend over $15 billion, which they have announced in CapEx through four subsidiaries over the four years. In the data center business, the overall CapEx has gone up by almost 25% to over $150 billion. On the government side as well, various incentives and programs have been announced. For example, the U.S. government is spending a massive $65 billion in broadband as part of its infrastructure bill. In the U.K., the government is investing GBP 5 billion to increase broadband connectivity by 2025.
In India, as we all would be familiar, under the BharatNet program, the government plans to connect all the villages through optical fiber networks in the next two to three years. Next, we see that the CapEx investments are powering deployment of 5G, FTTx, and data center deployments. Clearly, 5G is becoming the fastest growing technology in the world today. Operators are expected to invest more than $500 billion in 5G networks from 2022 to 2025, just next three to four years. The total number of subscribers is projected to go up from about 660 million to about 4.4 billion by 2027. Leading the deployments currently is China, which plans to triple its base stations from about 1.4 million to 3.7 million by 2025.
In India, 5G spectrum auctions are taking place shortly, and we all look forward eagerly to the network investments post the 5G. FTTx is becoming all pervasive. In the U.S., $125 billion has been earmarked for FTTH deployments in North America for the next five years. In the U.K., companies like British Telecom Openreach plan to spend about GBP 15 billion over the next five-six years for connecting about 26 million homes. Data center deployments are also increasing. The data center CapEx is set to grow at almost 10% CAGR over the next five years to $350 billion by 2026. Google has announced about close to $9.5 billion investment in building offices and data centers in the U.S. just in 2022.
Lastly, Open RAN is also moving from pilot to initial deployments in 2022, and large-scale deployments are likely to take on from next year onwards. This is an important slide, which looks at, you know, the optical fiber cable demand region-wise, in millions of fkm . This is quoted from CRU, which is one of the leading analysts for the optical industry. As you can see, all of these deployments that we spoke of and the technology shifts are leading to sustainable growth in optical fiber cable volumes. As per CRU, the global optical fiber cable demand is expected to reach 610 million by 2024, from about 500 million currently. In 2021.
The STL focus markets of North America and Europe clearly have high potential for growth and are fast growing, and they also have the highest realization globally. In addition to that, we also see that as the cable demand continues to strengthen, the cable prices are also on the rise. These are forecasts also by CRU, which say that the OFC price is expected to go up by 16%, 28%, and 13% respectively in North America, Western Europe, and APAC. Which is, APAC is non-China. As you can see from here that clearly the demand is also expected to improve over the next two-three years, and also the price is expected to stabilize and grow over the next two-three years. This is in line with our earlier views that the optical fiber demand, optical cable demand continues to grow.
Overall from about a 10.7 billion market globally, this is expected to grow at about 12.1 billion market. This is something very important to understand that the market in which STL plays just on the cable part is about INR 12.1 billion and probably a similar size on the optical interconnect part, which we will come to. One part that we do wanna deep dive on is in terms of China. We do get frequent questions in terms of what is the supply and demand scenario in China. We thought we'd spend a little bit of time on that this quarter.
It's very important to look at this because China continues to contribute out 50% of the world demand and is extremely important and plays a major factor in global pricing as well, particularly on the fiber and cable level. Here, it's clearly important to note that the China cable demand also is growing sustainably and is expected to continue to grow in the medium term. On the demand side, Chinese carriers combined issued about 235 million fkm of loose tube tender volumes in 2021, 2022, which was a 17% rise from the previous year. This demand is driven primarily by 5G and GSMA expects 5G demand in China to exceed about 900 million users by 2025. Currently, China has about 500 million-600 million users, so still fairly significant growth in terms of 5G demand.
Another operator called China Broadnet has now become China's fourth mobile operator to offer 5G services and has recently also started procuring fiber optic cables, although at smaller scales. On the FTTx side as well, we continue to see China needs to deploy significant amount of fiber, both to densify networks, but also for fiber to the home, particularly in rural parts of Western China. On the supply side, as for CRU, most major fiber cable and cable suppliers are running at high utilizations in terms of operational capacity. While the Chinese manufacturers are focused on China demand, the trade barriers, including anti-dumping duties, imposed both by EU and the U.S., continue to ensure that Chinese players don't get undue advantage in these markets.
Also, with the growth of protectionism in the world, local manufacturing, particularly on the cable side, is being preferred, particularly in government projects. As an example, the large government project in the U.S., which is on the infrastructure side, requires 55% of the material to be sourced locally. Based on all these three themes that we discussed earlier, we confidently reiterate that we are in a multi-year network build cycle across the globe. The three investment cycles, 5G, FTTx, and hyperscale build-out, have coincided, and they're expected to continue over the next seven to 10-year timeframe. With these favorable industry tailwinds, we have deployed focused growth levers to propel us forward. In the following section, we shall talk about this in detail. We have focused ourselves to build our business primarily on these two growth levers. Firstly, to grow the optical business.
Second, to globalize our service businesses. We are allocating capital to tap into these strategic growth opportunities offered by these growth levers, and we shall talk about our progress in each of these in detail in the subsequent slides. In terms of growing our optical business and increasing our global market share, if we look at the optical business, particularly optical fiber cable business, as you can see from the chart here, we have consistently gained market share across all our focus markets. At the end of FY 2022, we had reached 9% market share globally, if you exclude the China market, up from 5% in FY 2020. In Europe, very proud to share that we have now reached 21% market share from about 11% in FY 2022.
Particularly in North America, we have seen very rapid growth from about 6% market share in 2022, has gone up to about 14% market share in FY 2023. All of this from almost a negligible base in FY 2020 in North America. Our aim is clearly to become the top three players in the optical fiber market globally in the medium term and achieve leadership in this market over the longer term. Through our efforts of our incredible team and our focused strategy, we've established a foothold in the U.S. in the last three years. We entered the market in FY 2020 and started partnering with our customers and creating unique solutions for their requirements. Through FY 2021 and FY 2022, we added 45 customers and built strong relationships.
As we start FY 2023, we are very happy to announce that we've secured a multi-million-dollar, multi-year contract with a North American telecom operator. We shall continue our journey to support the North American customers.
Mihir? Would you like to take over in the meantime? Sir, you are on mute.
Sorry. Yeah. We've lost the presentation as well.
I will just put up the presentation. In the meantime, maybe for the sake of the participants, maybe you can continue.
Yes, I will do that.
All right.
Just give me a second, I'll put it up. Let's go to the chart 15. Okay, super. Apologies for this little hiccup, ladies and gentlemen. Continuing what Ankit was saying, and we'll wait for him to come in and take over. In the meanwhile, as he was saying, through the efforts of our incredible team, we have established a foothold in the U.S. in the last three years or so. When we entered the market in FY 2020, and since then have started partnering with our customers. Through FY 2021 and 2022, we added 45 new customers and built very strong relationships. Even at the start of FY 2023, we are very happy to announce that we have secured a multimillion-dollar multi-year contract with a North American telco.
We will continue our journey to support the North American customers with our world-class manufacturing for optical fiber cable, which is expected to go live in quarter three of the current fiscal. Can you move to the next one, please? Ankit, I request you to move to the next slide, please.
Apologies. Just give me a second.
While the chart comes up, I think we are continuing to grow our optical business. In the optical, and within that, the optical interconnect attach rate, which we've been talking about, has been on the rise. We've increased our interconnect attach rate from 3% in FY 2021 to now double digits, 11% in Q1 of this fiscal. Our approach of providing the end-to-end optical solution of the optical fiber cable plus interconnect has yielded us results, and we aim to reach an attach rate in the high teens by the end of this fiscal, by fourth quarter, FY 2023. The next chart, please. Coming to the second growth lever of globalizing the services business.
We acquired and successfully integrated Clearcomm, as you're all aware, a leader in optical network design, deployment, and integration in the U.K. We have also built a global robust resourcing model through our own STL Academy. We train engineers at STL Academy in the areas of product management, installation, testing, quality assurance, et cetera, and keep the talent pool for deployment ready for the U.K. We are ramping up our execution pace in the U.K., and we aim to increase the U.K. revenue contribution to 25% of global business services revenue by FY 2024. While we build our business in the U.K., we continue to focus on strategic and profitable projects in our core Indian market. As we are developing new solutions, we aim to expand our opportunity pipeline arising from the 5G deployment.
We expect new deployment vendors to come through post-5G auctions, which are likely to be in Q2 of FY 23. We are also expecting a large BharatNet tender to come through in the second half. Both of these opportunities have the potential to generate significant order book for the India services business.
Yeah.
Yeah. Ankit, do you wanna talk about this? Yeah.
No, I think not much to add on this particular side, but clearly still fiber is a challenge in India, so still working through it. In terms of providing, you know, end-to-end solutions, this is an example we shared through our media recently. I think this is a great example of, you know, the full value that STL has to offer, starting from our bend sensitive fiber, going towards really next generation cables, our optical interconnect we've been speaking about, and then our FTTH, you know, LEAD 360 solution. It's a good example of where we were able to showcase the value of this to the customer, ultimately leading to lower cost of deployment, faster speed, as well as less requirement of trained manpower.
All of this is something that has been quite positively demonstrated now in the U.K., and we'll also see how to scale that up. I think in terms of R&D, this continues to be a cornerstone for STL, where we consciously want to build the right product portfolio solutions for our key accounts globally. At the end of this quarter, we had about 740+ patents, and that really is something which we'll continue to focus on and invest in. We've invested close to about INR 50-odd crores in the quarter one, and we do expect to continue this R&D investment. We've also launched our own 5G R&D center in Gurgaon recently with state-of-the-art equipment linked to Open RAN as well as P-FTTx.
That's something that we continue to commit to, but very focused in terms of spending the R&D catered to our large key accounts. On the back of this consistent R&D investments in the access solutions business, we have successfully launched eight product SKUs. We have now general availability of our Garuda Small Cell, 5G Small Cell, P-FTTx and Wi-Fi 6. We are targeting general availability of a 5G radio unit and RIC, and therefore full portfolio in the current financial year. In terms of customer engagements, on the wireless side, we continue to engage with customers globally. We have secured five more engagements, which are anywhere between early-stage discussions to POCs or orders.
In line with the industry, we also aim to acquire customers and build order book for wireless business in FY 2023, which we expect to start yielding results and revenue in FY 2024. Over the last two to three years, we've done significant investments in this business and taken the product development to mature stage. In order to propel the business to next level, we are also actively exploring strategic partnerships for others to come and invest in this business. In terms of capital allocation, our clear priority is investments in the optical business. We are investing in OFC capacity expansion, particularly in the U.S., that we touched on earlier. In quarter 1 FY 2023, we also bought 25%, the balance 25% stake in our China JV to ensure fiber supply will increase to further serve our cable requirements as those volumes grow on a quarterly basis.
We shall continue to divest non-core assets in FY 2023. As you would recall, in FY 2022, we had sold our interest in Metis Heavy Ventures and MTCL. Post the current investment phase, we shall prioritize optimization of debt and our capital structure. We shall now discuss the financials for Q1 FY 2023. I would now like to hand over to Mihir to discuss the financials.
Thanks, Ankit, and a very good day once again to everybody. Let's start at the top of the financials funnel. Our order book at the end of Q1 FY 2023 stands at INR 11,200 crore. In Q1, we have secured overall a very strong new order book, particularly in the optical business, which is a reflection of strong demand in the industry and our dominant position and focus, particularly on the optical business. However, we've also short closed an order book of about INR 16,015 crore, majorly in the services business. This is in line with our focus on executing projects at the desired level of profitability in the services business and not executing for the sake of execution.
Just to INR 1,615 crores. Yeah.
1,615 crores. Our order book is well diversified across our customer segments and across all our businesses. We also have a significant O&M order book, which shall start to yield a significant revenue from this year onwards. Next one, please. Talking about the revenue. Our revenue mix is shifting to customer segments and geographies of our choice over the last few quarters. We are increasing our share in the telco and cloud segments. In terms of geography, we are increasing our share in North America and European markets. What is heartening to note here is that in line with our strategy, in the last three years, we've increased our revenue share in North American market, the most premium market in the world, from near negligible to almost 28%.
Again, as Ankit had referred earlier, this is a reflection of our product innovation and reward of investment in the R&D over the years. In terms of notable wins this quarter, apart from the multimillion-dollar contract for a North American telco, we have secured new orders for optical fiber cables from North America. In the European market, we have secured now orders for optical fiber cables and interconnect solutions from a telco customer. On the services side, we continue to partner with Netomnia to fiberize multiple cities with fast broadband in the U.K. We have also secured new orders for fiber rollout from leading Indian telco. As we pick up the orders, our execution, project execution is clearly on track. If you can go to slide 25, please.
Among Indian public projects, our BharatNet project in the state of Telangana is 54% complete, including all packages, and the network modernization project for an Indian PSU is 52% complete. In the Indian private side, fiber rollout for a large Indian telco is fully done, 100% complete for phase I, and 5% complete for phase II. We are yet to start phase III, which we shall do soon. Fiber rollout for a modern optical network for yet another Indian private customer is 5% complete. Coming to the U.K., fiber to the home rollout in U.K. for all projects is again picked up and is 5% complete.
All in all, our project execution is on track across various types of projects in line with our strategy. We talked about very sharp increases in our key raw material categories and freight costs due to global supply chain disruption last quarter. Crude oil prices, which can be looked at as a proxy for polymer prices, continue to inch up further in Q1 FY 2023. Gases, LNG, helium have also exhibited price increases. Helium gas prices particularly have increased sharply in recent quarters due to production problems at major U.S. and Russian suppliers. Logistics costs, though, have started easing, as shown by the Freightos Index for the route of China to North America. We shall also start to see reduction in logistics costs from Q2 FY 2023 onwards. That should ease the pressure on our margin a little bit.
In line with our estimates, quarterly revenue grew 20% YOY to INR 1,575 crore. Our operational EBITDA margin grew 160 basis points quarter-on-quarter to 7.6% in Q1 of FY 2023. Revenue growth drivers in the first quarter are OFC volume growth and increase in optical interconnect attach rate, at the same time increase in U.K. services revenue. Margin improvement drivers for Q1 in FY 2023 are increase in the optical revenue share, increase in North America revenue share, and increase in optical interconnect margins. We're working to reach sustainable EBITDA margins by second half of FY 2023, in line with our estimates. In terms of revenue split, optical business was at 72%, services at 27%, and digital and access combined at 3% of overall revenue.
In terms of capacity utilization, OFC was at 88% utilization based on production volume and capacity at approximately 37 million fkm . If someone can go to the next chart, please. We placed an abridged version of our quarterly reported numbers for your perusal here. I'll pause for 30 seconds so that you can have a look at it. We can move to the next one, please. So along with financial objective, 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. Like we've been sharing, we have diverted 175,000+ metric tons waste away from landfills from FY 2018 to 2022.
We've reduced emissions of 15,000 tons of CO2 equivalent through various initiatives in the plants from FY 2021 to this quarter. We have announced our commitment to become a carbon neutral company by 2030. Not to mention we've recycled 500,000 cubic meters of water from FY 2019 to Q1 FY 2023. Through our various initiatives in education, women empowerment, over 700,000 lives have been positively impacted from FY 2019 to the first quarter of FY 2023. We have also positively impacted 2 million+ lives through our various initiatives in healthcare from FY 2019 to the current quarter. For our work, we have won 71 ESG awards from FY 2020 to the current quarter. Overall, in summary, I would say that the multi-year network build cycle is in full swing.
If someone can move to the next chart, please. While the chart comes up, I will continue to summarize this. The multi-year network build cycle is in full swing. The global OFC volume and pricing expected to grow in 2022 is on track, and our capital allocation shall be focused on the optical business. We are aiming for global leadership in the optical business. We look to achieve strong market share gains in North America and Europe and increase the attach rate in the optical interconnect space. We are focusing on strategic segments in the services business. While we are ramping up execution in the U.K., we are also working to build profitable order book in strategic segments in India.
In terms of capital allocation, we are allocating most of the capital in the optical business and are simultaneously divesting non-core businesses. With this, we come to the end of our opening commentary, and we shall now move on to Q&A with Pankaj and Anuj and others.
Thank you. Participants, at this point, we'll start the Q&A session. If you have a question, please use the raise hand button at the bottom of your screen and I'll allow you access to ask questions. Alternatively, you can also type in your question in the chat box, and I will ask the question on your behalf to the management. Let's take the first question from Pranav Kshatriya. Pranav, if you can unmute yourself and go ahead, please.
Yeah. Hi. Thanks for the opportunity. I have three questions. Firstly, Mihir, can you please help us with the, you know, at least ballpark product and services business margin and how they have trended in last two, three quarters to get a sense of, you know, how, where we stand? Secondly, you know, again, related to margin, you know, there seems to be considerable cost pressures. There seems to be, you know, some green shoots. One is the logistics cost is sort of trending down, and you have talked about, you know, the prices for fiber optic cable moving up, which should drive up the realization. How we should be seeing the margin in Q2 and Q3?
That's my second question. Last question is, you know, attach rate, which we are growing very smartly in the first half or almost entirely in FY 2022, seems to have sort of plateaued. I mean, Q3 FY 2022 we had roughly 14%, Q1 we are at 11%. What is happening and how much time, you know, how the trajectory will be in that? Those are my three questions. Thank you.
Yeah. Thank you, Pranav. Thank you for the questions. So probably take it, you know, one by one. In terms of, you know, products and services, part of it, I think broadly what we have guided is that the, you know, products and services will continue to grow in terms of profitability. We had targeted EBITDA margins for products business, optical network business towards 20%-22%, you know, towards Q3 and Q4. Similarly, services we had said that we will target low teens during this period. Versus that, we've seen some good improvement on the optical part, which is now closer to about 14%-15% as a combination of couple of these activities.
Services is still probably in the mid-single digits, and hence we are, you know, combined at EBITDA of about 8% that we have. This is something that we are confident with these two, three levers that you spoke of as well. Firstly, some of the price increases that we've done, particularly in U.S., that should start reflecting towards the end of Q2 into Q3 and Q4. Second is we do expect some of the benefits of the container costs starting to come down or even stabilize, start reflecting in the profitability. As well as overall the product mix that we have seen both within ONB and the ratio of ONB to the services. All of these should enable better profitability in the quarter three and quarter four.
I think that's one part. In terms of the cost pressures that you spoke of, I think certainly from the peak of container costs that we had seen almost $22,000 per container, that has come down to probably around $16,000 or $15,000. It's largely kind of settled there. It might come down marginally more going forward, but we don't expect it to go all the way back to probably $7,000-$8,000 we had seen, you know, several quarters back. I think that's something that we'll continue to watch. What's happened is by nature of just sheer volume that we are now shipping both to U.S. and Europe, the absolute amount has gone up, which you would have seen in the other expenses.
I think that's one part that we continue to monitor. One benefit that we have seen is the lead times have come down in terms of shipping from India to U.S., probably earlier were around 70 days. That's coming down to probably 55-60 days. To that extent, our working capital should come down marginally as those delivery times start improving. In terms of the other costs linked to you know oil and gas to the oil essentially to polyethylene that we continue to stay at the higher levels, as well as helium in particular has contributed to fiber costs increasing versus what our expectations were. These are things that we are working on.
We're still working on certain price increases, particularly in European market with some large customers. As those play out, we will see that benefit into Q3 and Q4. On your last question in terms of attach rate, I think overall we continue to be very bullish in terms of our growth in terms of the attach rate. I think one thing to keep in mind is our cable volumes have started to increase significantly as we said on the back of U.S. and Europe. Actually on absolute numbers, our OI in crores is actually increasing quite well. What we continue to see is particularly with our large key accounts, we're very keen to have similar you know values ultimately of cable and interconnect going in.
We're very confident our products are getting approved by more and more customers. We're in that phase of between approval and starting to supply. We are confident that going into Q3, Q4, you will see both absolute number and percentage grow for the interconnect.
Sure. If I can just ask one small follow-up. You did mention that, you know, the working capital should come down and the logistics costs have come down. I think, you know, in Q2 it will be more of a transitory quarter because from Q3, we'll have the manufacturing facility available and hence, you know, those costs will be a lot lower. Should we see, you know, significant improvement in the margins from Q3 onwards?
I think one part is the U.S. facility will start operations in quarter three. Of course, that will itself take some time to scale up to its capacity of, you know, 5-6 million fkm. That's one part. Also, we are our supply to U.S. is still more than what just the U.S. facility can serve. To that extent, what else we are manufacturing in India or in our global operations for U.S. market, to that extent, that working capital will continue. What we are manufacturing locally then of course will be local supply. I think from working capital perspective, we do see some improvement from Q3, Q4.
Plus, as I said, the travel time from India to U.S. should come down probably by about 20 days from current peak of 70 days. That, all of this will help improve the working capital, supply into the U.S. I think on the margin perspective, one is, as I said, the overriding factor will be, in terms of the improvement in the, passing on the cost to the customers, improving the top line, which we expect in the 7%-10% range. Some of that has happened with U.S. customers, some were still ongoing. As I said, few key negotiations are ongoing with our European customers.
Sure. Thank you. That's it from myself.
Thank you.
Thank you, Pranav. Next question, I request Neerav Dalal to unmute himself and go ahead.
Yeah. Hi. Thank you for the opportunity. A couple of questions from me. First is on the other expenses. If you did mention that logistics cost is increasing in absolute terms, and hence we've seen the increase in other expenses. If one looks at the gross profit margin, the gross profit margin has improved for us. If we compare it with, say, second quarter of last year, or even if we compare it to FY 2021, the gross margins were at 37% and current quarter we are at 37.6%. Technically speaking, we've seen the business come back in terms of margins. However, the other expenses continue to increase.
Over the last couple of years we've seen the expenses actually double for us. When do we see, you know, these costs either stabilize or start to decline? That is question number one. The second question is, in our presentation, we've given the OFC cables volume at somewhere 30, 36, 37 million, but we were of the understanding that currently we are at 33 million optical fiber cable capacity. Just wanted to clarify on this number as well.
There are a couple of things. One, I think overall, on the other expenses, if you look at it, we have increased from about INR 429 crores to about INR 478 crores. And as I said, some portion at least has come in terms of, you know, increasing in terms of, from just sheer volume that we spoke of has increased into Europe and U.S. and some of those costs. We've also had some costs, particularly in this quarter related to legal and consulting fees, et cetera, which we believe is one time. I do believe, looking at this, we need to break it out. Our sales will continue to grow, as I said, even in terms of our export market segment. To that extent, that's something we're mindful of.
Some of the other costs will start tapering down towards, you know, Q2 and Q3. I think it'll be a combination of, you know, both factors. In terms of the capacity, what we have shared also earlier is that the major investment is in the U.S., so that capacity will come in into Q3 in terms of about 5.5 million capacity. We've done marginal capacity increase, in India, in terms of, cable improvement and also again, very small capacity in Italy. Combination of all this has got us to add about 3-4 million, currently. Then this balance, 36-37 to about 42, which we had stated, will come from the U.S. addition.
Got that. Just staying on the other expenses, if you could give us a breakdown. Or just one is what were these legal expenses and what is the quantum of that? And second is what would be, you know, logistics cost as a percentage of revenues for us, and if we could get a Q-over-Q, Y-over-Y number.
Sure. No, let us come back to you, Neerav. We'll get Pankaj to share the breakup.
Sure. Just lastly, in terms of the China subsidiary, I think we are buying out, buying it out. Does that mean that we would not be doing any business in China? What about the capacity there? If you could just clarify on that.
No, actually it's quite a positive development for us, where we got the opportunity to acquire the balance 25% stake from our JV partner. With this then it'll become a wholly owned Indian company. Absolutely, no issues that we foresee in terms of, you know, running the operations. It's all aligned with our strategy, Neerav, about what we said about leading with cable. As we move towards now 42 million of cable very soon, it's very important to be fully secured in our own manufacturing of fiber. Now with this, complete ownership, we will be scaling up our China operations. Full capacity is close to about 12 million, 12-14 million fkm .
We'll scale up our fiber operations and make sure that we have sufficient fiber for our global cable requirements.
Right. All of that technically will be moved, will be used for the international markets rather than China. Is that correct?
Yeah. I mean.
-assumption?
The underlying is to serve our cable, our captive cable requirements.
Okay
wherever they're located, India
Okay
U.S., Italy, wherever.
Okay. Thank you. Thank you.
Thank you.
Thank you. Now for the next question, I request, Sunny Gosar to unmute himself and ask the question.
Yeah, thanks for the opportunity. My question is that while the U.S. and Europe business have shown good growth, India business has declined in Q1. Any particular reason for that? My second question is, this, the presentation at one place mentions that we short closed approximately INR 1,600 crores of open order book in Q1, FY 2023. Does this mean that the order was partly canceled? Or what does that exactly refer to?
Sure. Absolutely. I think, you know, Indian market, I would say largely what we have spoken of earlier also, that we are very conscious of only focusing on taking business, especially on the services part, at the right margins, and we're not chasing top line. That's also a little bit linked to the second part, and I'll come back to that. Overall, we actually do believe what I shared earlier also, we are at this kind of tipping point for Indian market to grow. Whether you look at Indian operators, you look at BharatNet or defense, all of the areas we do expect pretty robust spending on the infrastructure, digital infrastructure, probably for the next four-five years.
We are quite well-placed with our you know with our current market share, with our brand, with our capability and our teams. Of course, relationships are very strong across our customer base. As the demand starts picking up, which we do believe should happen in the next six-nine months, we are quite well-placed to get the right businesses, the right projects at the right margins that I was talking about earlier. We had a very conscious view of what business we want to pick up in India. That will continue to be the case. That's where we saw some reduction in our revenue on the India market part. In terms of the short closure of order book.
At a macro level, this was one of our strongest ever quarters in terms of order book. Very proud of our global team and our solutions, where we clocked, I think, north of INR 2,700 crores overall, for the quarter. We short closed about INR 1,600 crores. This was largely about INR 1,200 crores in the services business and about INR 400 crores in our optical business. Largely, these were linked with the same theme where very, in most of the cases in our conversations with the customers, we have had a mutual discussion where we short closed some of the lower margin orders or pro-orders that were just not progressing in terms of time and speed from the customer side.
We are looking at very often with the same customers renegotiating new orders or new customers as well. This is something that we wanted to make sure that we have the right visibility of the order book and that is up to date. What we have looked at is about INR 2,700 crore that we have booked overall, and then we have reduced about INR 1,600 in terms of the short closure.
Sure. That is actually very good because it doesn't reflect in your net order inflow because of the short closure. Do you believe that this kind of order momentum will sustain, or there were some one-off large orders which came through in Q1?
As we did talk about one specific large order out of the U.S. Even apart from that, just looking at the momentum we see, as I said, both in U.S. and Europe, we are confident of, maybe not at this scale, 2,700, but somewhere in this range kind of order book. Again, as I said, we'll look at very closely with 5G in India and BharatNet, over next six-nine months that will play out. We'll see out of this what orders do we capture. Again, want to reiterate, we are very mindful, especially in Indian market, to take projects at the right margins.
While we are confident we can book a lot of orders, we are very mindful now of both looking at right margins and also, I would say, mindful of the cash and the collection cycle.
Sure. In your outstanding order book of INR 11,000 crore, do you foresee any similar order closures which are lower margin or not so focused segments? Or now the order book is more or less cleaned up in that sense?
I would say we continue to evaluate. I mean, it's literally a month-on-month process. We're very clear in terms of our focus markets, at what margins we want to take them on, as well as how do we perceive risks at the collection. With all of these cases, want to reiterate these are mutual discussions with the customers and done on a friendly basis. This is something that we keep evaluating month-on-month. At any point we feel, for a particular quarter, we feel that the orders we do not want to pursue, then we take those calls in terms of short closing them. I won't be able to comment, but at least for now, we have obviously taken a good amount in terms of INR 1,600 crore. We feel it was a prudent thing to do for the business.
Sure. One last question. What is the expected CapEx outflow for FY 2023 and FY 2024?
Yeah.
You had also a plan for a facility in U.K. Is that plan currently on or has that been like deferred or canceled?
Yeah, good question. Overall, as we had guided earlier also it continues in terms of overall, CapEx about INR 500 crores. Currently in Q1 we had a CapEx about INR 160 crores out of that. As we said, most of this is, you know, linked to our U.S. facility as well as probably some CapEx payments from past investments, et cetera. I think that is something that is, you know, we are confident of. Optical interconnect requires some marginal CapEx for that growth. Overarchingly, you know, linked to our point on capital allocation, majority of our investment, almost all of it will be focused in terms of our optical business.
Next year, currently we foresee in the range about INR 350 crore in terms of CapEx. This is broadly for current year, next year. To your question on the U.K. part, I think overarchingly our plan was to look at 42 million, which we believe we can ensure through combination of U.S., India and Italy that I spoke of in terms of cable. We continue to evaluate the market and the requirement for a local facility, and that's something we will probably update you as we make any progress. As of now, we are focused on the other regions, particularly on the U.S. part in terms of the new facility out there.
Sure, sure. Thanks for the detailed answers and looking forward to a strong margin recovery in the quarters to come.
Absolutely. Thank you, Sunny.
Thank you. For the next question, I request Saket Kapoor to unmute himself and ask the question. Saket, if you could unmute yourself and ask your question. Saket?
Hello.
Yeah, go ahead.
Yeah. Hello.
Yes, Saket.
Sir, you can hear me?
Yes.
Hello.
Saket, we can hear you. Please go ahead.
Hello, am I audible, sir?
Yes.
Hello.
Please, Saket, I'll request you to come back in queue.
Yeah, yes, I'm in the queue, sir. Can I continue, sir?
Yeah, you can. We can hear you. Can you go ahead?
Yeah. Thank you, sir. Thank you for this opportunity. Taking into account the way the fiber prices have moved, and the cable prices have not compensated to that. What is your current take? I mean, how much have been the external sales of fiber out of the total production?
I think you're right, Saket. There has been a time lag, and I think we've shared this last quarter as well, between fiber prices improving vis-à-vis seeing the corresponding improvement in cable. Having said that, you know, we have been consciously talking to our key accounts, especially our large customers in U.S. and Europe, for improving the prices and passing on some of the costs. That improvement and benefit we should certainly see into Q3 and Q4, that we've shared. In terms of fiber prices and cable prices ballpark, you know, we would say fiber prices are probably in the $6 range, in terms of standard fiber. Of course there are many varieties.
In terms of, say, cable prices, especially in the markets we operate in, would probably be in the $15-$16 range. That's the ballpark. We are not seeing any major, you know, upward or downward movement in the prices since we last spoke. Again, these are all standard prices. Each contract, each customer is different. For us also, more and more of our sales is moved much more now on cable and interconnect. I think we would almost have marginal, if any, fiber being sold in the open market. Most of our fiber is consumed for our cable requirements.
Sir, on the finance cost part, if you could give, I missed the net debt level, and the finance cost as an absolute number remains at INR 69-70 crore per quarter. What should be the annualized number we should look? Sir, taking into account what the quarter one performance have been, it was informed to us earlier that also that it would be muted till the H1 And H2 would be the one where we would see some light at the end of the tunnel. Sorry for the phrase, but do we stand there that worst is behind for the sector, because the numbers are certainly reflecting on other optics ops players also. Do you think the worst is there or still we have more pain left and maybe this Q2 would also reflect the same?
I think finance cost, as you said, we are in the same about INR 69-INR 70 crore. We're very mindful that of course, you know, there is discussions globally in terms of interest rates rising, et cetera. We're watching that, you know, very carefully. Our net debt has increased by about INR 380 crore to about INR 3,200 crore. We are very mindful that we have to create that balance between investment into the business and the CapEx that we spoke of. At the same time get very strong operations cash from the operations to reduce the net debt.
Currently, while we create this balance, our target still at the company level is probably to settle back to the INR 2,800 crore levels we were at previously, while still ensuring we invest for these growth areas, particularly in the cable expansion that we've spoken of. I think that's the focus. Do we see light at the end of the tunnel? We are in the light business. Optical business is the light business. As I said, we continue to see the tailwinds quite strong. We continue to see market demand for next few, at least four to five years, quite strong.
It'll now be a function both of how do we ensure some of these external costs get normalized, as well as from our own operational efficiencies and our customers, we start getting some of our prices and costs passed on to them. As we continue to guide, we do believe quarter three and quarter four will be better. We'll certainly into Q4, we have confidence that we'll be moving towards the better margin profile, particularly of the optical business.
Right, sir. I'll come in the queue for my follow-up. I have two of them.
Sure. Thank you.
Saket, please just continue. One more last question, please.
Yes, sir. The small point, what we can make sense, is that from quarter four onward will be the normalized quarter, sir. How have been the collections, sir, from for the ones we have made some provisions, I think so, two quarters earlier.
Right. That's it.
What is an update on the same, sir? How is the collection currently?
Overall, we had made a provision close to about INR 200 crores on the balance sheet. I think that's something at that time also we had shared, we wanted to make sure that we did based on prudent accounting, we took those as provisions. They were not write-offs. There have been some very small collection on the back of those provisions, but still work cut out in terms of you know the entire INR 200 crores. That's something still work in progress for our teams. During the quarter, we had probably working capital increase also north of about INR 200 crores. This is a good portion of this is linked to the increased sales into the North America market, which then der
All of this then contributed to the net debt going up, which we spoke of. I think we are very conscious of these elements. We're also, as I said, conscious of exposure, particularly to government projects. We're very mindful of even any collections that are due. We have very strong focus on it from a cash perspective.
Sir, year-end target for net debt number should be what, in what vicinity are you working?
That's what I spoke of. We want to bring it back to normalized levels of about INR 2,800 crores.
2,800.
INR 2,800 crores.
What are the numbers, sir, for this, as of June, sir?
About 3,200, ballpark.
3,200. This increase in inventory also somewhat is baked into this increase in debt.
That's right. It's we spoke of the working capital. We've also spoken of CapEx of INR 160 crores, as well as what we call contract assets. Some of that has increased as well in our service business. Combination of this has increased the net debt by about INR 380 crores.
Sir, just to summarize it, is it the inflationary part only that is creating the trouble for an optical company or OFC manufacture company like us? Or what are the other issues that wherein the PBT numbers are and the numbers are looking when lower or in fact, sir, if you look at the PBT numbers, negative PBT numbers for us. Where are the gaps that this was not the trend what the company used to post earlier, sir.
I'd break into two parts. One is, structurally, you know, we've seen some pretty large, you know, non-normal increases in our costs, right? Specifically for us, we've seen container prices go up three-fold, four-fold, as I said, from about $7,000 to almost $22,000. That happened at a time where very large portion of our sales shifted from India and Europe to Europe and U.S. That is one big factor contributing to cost increases. Second is all the raw materials linked to oil has also seen a pretty large. Hello?
Yeah, go ahead, Ankit.
Also, all the raw materials linked to oil have also seen a pretty large increase in cost. I would say it's a couple of these factors. In addition to that, we continue to have invested close to INR 40-50 crore per quarter on development of our new businesses like the wireless and software. It's a combination of these three, four things. As I said, we do believe that some of the improvement, and we have been able to pass on some of these costs to our customers on the optical side. Improvement in our value from that you should start seeing in quarter three and quarter four.
Thank you, Ankit. Let me take one last question, due to time constraints, from the chat from Agnel Peter. He's asking why does North America business is better for margins?
Sure. Good question. One, I think just to reiterate, there's two, three things happening in U.S. in particular. One is the growth itself is for a pretty large market. I think it's 80-85 million fkm . That itself is going rapidly towards 100 million fkm . Market itself is growing quite strongly. Second is government has announced this massive fiber project, which is, you know, about $65 billion. That is giving a lot of comfort that this will, you know, grow for next four to five years. We believe that there is a very strong opportunity for STL because we have the right product portfolio. Our products are certified by Telcordia. We have a very strong sales and technical team, and we have now the local presence.
Just to be clear, some of the tier one operators, they also get tax benefits for buying from locally manufactured companies. All of this plays quite well for us. In addition to this, at a macro level, U.S. really values quality, they value technology, they value innovation. A lot of our high-end products, so to speak, in terms of cable and soon probably interconnect, will be getting the right premium pricing in the North America market. This is equally true for a few customers in Europe as well, where with our key accounts, we do really engage with them in a solution basis, and then we get a premium for it.
Thank you. Unfortunately due to time constraints, that was the last question that we could take. Thank you everybody for participating on behalf of Sterlite Technologies Limited. Thank you for participating in today's earnings call. Management, if you have any closing comments, please.
I want to just appreciate and thank everyone for attending this call and showing interest in our company. I hope we are able to address and clarify all your queries and comments. For any further questions and discussions, feel free to contact the investor relations team, which includes myself and Mihir, and we really look forward to continuing the conversation with you in the future. Thank you.
Thank you, everyone.