Welcome to STL's Q2 FY 2024 earnings conference call. I'm Lakshmi Iyer, Head, Investor Relations at Sterlite Technologies. To take us through the results and to answer any questions, we have Ankit Agarwal, MD, STL, and Tushar Shroff, Group CFO, STL. Please note that all participant lines are in listen-only mode as of now. There will be an opportunity to ask questions after the presentation concludes. Please note that the 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.
Thank you, Lakshmi. Good day, everyone. Thank you for joining us for our Q2 FY 2024 earnings conference call. Just to reiterate, our strategic priorities remain the same and are as follows: firstly, we continue to grow the optical business by increasing the optical fiber cable market share and connectivity attach rate. Initiatives to optimize raw materials and fixed costs in the business to become more competitive are ongoing. Secondly, we shall continue to consolidate our global services business in select segments. We're building new capabilities for value-added services and looking at improving the profitability. Lastly, but not the least, we shall build the digital business through focused investments in building technology and domain capability, and looking at getting to EBITDA breakeven in the near term. We shall now cover the outlook and performance of our optical business.
Coming to the demand outlook, as per CRU, the medium-term demand for optical fiber cable volumes are expected to go up to 623 million fiber kilometers by 2027, up from 535 million fiber kilometers in 2022. The short-term headwinds are mainly in the markets of North America, and expected to continue, with contraction in the US, in North America by 7.7% and in China by 1.9% respectively in 2023. CRU has made a downward revision of the earlier forecast of North America for 2023 by 7%. The near-term downturn in North America is on account of an inventory correction, which is expected to correct in Q1 or Q2 of 2024 calendar year.
Service providers are already in the process of participating in various government-funded opportunities, including the $42.5 billion BEAD program. STL's focus markets of North America, Europe, and India are high potential and is estimated to grow at a CAGR between 2023 and 2028 of 10.1%, 4.7%, and 9.5% respectively. This is something we wanted to share with all of you in terms of how the networks are evolving and the new way of operators looking at carpet coverage of fiber. Telcos on a global scale are primed for substantial expansion of their 5G subscriber base. Moreover, we now see 6G technology starting to create more and more noise in the market, and it will be forefront by 2028.
From being linear with limited applications, as you can see on the left-hand side, fiber has now become denser and all-pervasive. With the growing utilization of fiber in various applications like fiber to the home, AI data... AI-based data centers, edge data centers, smart cities, small cells, and the integration of 5G to smart enterprises, demand is expected to increase multifold. Presently, our 5G penetration is 36% as per Omdia, and the 5G subscription is forecasted to grow at 184% in North America, from 173 million-601 million subscribers. In the case of fiber to the home, currently, 67 million unique homes have been passed out of the 129 million homes.
As per CRU, FTTH homes passed will increase in line with BEAD from 8.7 million per year to 12.25 million in 2025, with a CAGR of almost 18%. Also, the current data center expansion on CapEx between $50 billion-$60 billion and is forecasted to grow to $90 billion by 2027. Coming specifically to the BEAD program, as on date, the broadband mapping has been completed and state-wise allocations for BEAD funding has been announced. The initial grant will release 20% of the funding, with funds expected to flow into the respective states by early 2024 and should kickstart the demand recovery in the market. The final grant will release the balance funding by early 2025 and will drive a continued demand phase beyond that.
Since the deployment need to be completed within four years of the award, there'll be an adequate runway of growth beyond 2025 as well. Our U.S. factory in North America is fully compliant with Build America, Buy America regulations. STL is well positioned to capture the growth impetus from this BEAD program. Coming to India, the 5G subscriptions are expected to grow at a CAGR of 48%, from 100 million subscribers currently to 700 million subscribers by 2028. The telcos are expected to spend between $1.5 billion-$2.5 billion for 5G fiberization, as per research reports. Similarly, the data center CapEx is also expected to grow significantly. Between 2023, where about $4 billion will be invested, it will grow to as high as between $16 billion-$20 billion by FY 2025.
And just one example is Amazon Web Services is expected to invest $12.7 billion in data centers in India between now and 2030. As you may be aware, the India fiber per capita stands is only 0.25 kilometers, compared to China at 2.5 kilometers and US at 1.8 kilometers, indicating a massive potential ahead. The government has recently approved the INR 139,000 crore for BharatNet, for phase three of BharatNet, which is envisaged to upgradation of the fiber network that lay across the 250,000 gram panchayats of India. Our market share remains stable at 11% in H1 of calendar year 2023, versus H1 of calendar year CY 2022. We remain. We expect the OFC market share to grow from second half of FY 2024 onwards.
Our connectivity business attach rate has increased to 13% from 10% on a Q-o-Q basis. Commercialization of the new optical connectivity products will further increase the attach rate from H2 FY 2024 onwards. Coming to the financials for the optical business, the H1 FY 2024 revenue stands at INR 2,196 crores, which is lower by 10% on year-on-year basis, on the back of lower OFC volumes, but partially offset by improved realization. Although revenue has declined in H1, H1 FY 2024 EBITDA has gone up by 8% on year-on-year basis to INR 457 crores. EBITDA margins for H1 FY 2024 stands at 20.8%. Reduction in operating costs have ensured increase in margins. Moving on to the performance of our global services business. Our project execution on the services business is on track.
Among Indian public projects, our BharatNet project in the state of Telangana is 66% complete, including all packages. The network modernization project is 71% complete. The managed services project is 31% complete, and additionally, we have just started the data center project. On the India private sector, the fiber rollout project for large Indian telecom operator is 30% complete for phase 3. Fiber rollout for another large telecom operator for phase 2 is 42% complete, and fiber rollout for a modern optical network for another private customer is 70% complete. In the U.K., fiber to the home rollout in the U.K. for all projects combined is 31% complete. In the global services business, H1 FY 2024 revenue stands at INR 728 crores. We have been selective in order intake and execution. HY twen...
H1 FY 2024, EBITDA has gone up by 81% year-on-year basis to INR 49 crores due to favorable project mix. EBITDA margin for H1 FY 2024 stands at 6.7%. We shall now talk about the performance of STL Digital. In STL Digital, we are continuing on the growth momentum. We acquired new customers in the US and India across technology and services industry verticals. We have more than 20+ active customers at the end of Q2 FY 2024. We also had a strong order deal inflow in Q2 FY 2024. Currently, we have 43+ active technology partners and signed strategic partnership with SAP and Google to offer the solution jointly to our customers. Growth will be driven by a robust order book, over INR 780 crores, and the right team of leadership and consultants.
In line with the expectations, and despite a tough industry environment, we have grown revenues to INR 62 crores in H1 FY 2024, a 25% growth Q1-Q basis. The EBITDA loss for H1 2024 is at INR 54 crores. EBITDA losses are trending downwards on Q1-Q basis and expected to further reduce with increase in revenue run rate. I now hand over to Tushar for further talking about the financials.
Thank you, Ankit. Good day, ladies and gentlemen. Now we talk about STL Q2 FY 2024 financial highlights. Q2 FY 2024 revenue stands at INR 1,494 crores. The 11% drop in revenue is on account of the reduction in our OFC volume, which was down on year-on-year basis, but partially offset by improved realization. Q2 FY 2024 EBITDA margin is, however, up at 14.4%. Margin increased by 50 basis points on year-on-year basis due to improvement in operating efficiency. Q2 FY 2024 PAT is at INR 28 crores, on account of higher depreciation of U.S. factory and increase in interest cost, led by higher interest rates. Now we talk about STL H1 FY 2024 financial highlights. STL recorded H1 FY 2024 revenue at INR 3,016 crores.
H1 FY 2024 EBITDA at INR 451 crores, which has increased 31% on year-on-year basis, along with margin expansion of 230 basis points. H1 FY 2024 PAT stands at INR 74 crores. Now we talk about the revenue mix, which is now moving from U.S. to other geographies. In terms of new orders, in optical business, we continue to win multimillion-dollar orders for optical fiber cable in Europe and Americas. In service business, we continue to win system integrator contracts in a data center space and fiber rollout for 5G deployment in India. In light of lower demand from North America, revenue mix has shifted more towards EMEA and India in Q2 FY 2024 versus FY 2023, with these regions accounting for 72% of the revenue. Open order book highlights.
Our open order book at the end of Q2 FY 2024 is INR 10,516 crores. Our order book is well diversified across our customer segments and across all our businesses. The financials abridged version is placed before you. The main highlight of the financial is with respect to the net debt of FY 2024 for six-month period, has reduced by INR 111 crores from FY 2023. We expect to complete the demerger of global service business by Q1 FY 2025. The current demerger status: We have recently received the NOC from both the stock exchanges for the demerger of the scheme, and we will be filing the application with NCLT shortly.
In summary, I would like to state that in optical network business, we shall target to gain market share across our focus market, particularly in EMEA, India, APAC markets, to fill the volume gap from U.S. markets. Ramp-up of U.S. plant to capitalize on demand surge in North America going forward, that is in 2024, 2025 onwards. Increase in optical connectivity to drive the growth and the attach rate. In global service business, we continue to focus on select projects to improve the profitability and optimize the net fund involvement. In digital business, we continue to grow revenue and achieve EBITDA breakeven by Q4 2024. With operationalization of U.S. plant, a CapEx cycle has completed. Our capital allocation priority will be towards the debt reduction.
In terms of guidance, given additional quarters of inventory correction in North America to play out fully, we expect the revenue to decline in FY 24. For FY 24, significant focus will be towards reduction in the debt, net debt. Now we talk about the, our initiatives on ESG. Our ESG rating from Morgan Stanley Capital International has improved from BBB to A. Major updates for the quarter, STL has become the world's first optical fiber manufacturer to launch independently verified eco label methodology. STL has collaborated with Hygenco . for supply of green hydrogen for use in its manufacturing. Now I hand over to Lakshmi for closing remarks.
Thank you, Tushar. Ladies and gentlemen, with this, we come to the end of our presentation and shall now move on to the Q&A. Please note that if you want to ask a question, you can click on the Raise Hand, and we shall take your questions one by one. Yeah. Yeah. Sorry, Gosar, please go ahead with your question.
Yeah, thanks for taking my question. First of all, if you can help us understand how the demand situation is evolving in North America? And basically, when you say that inventory correction will continue for a few more months, how should we read that in terms of the base revenue that you have done in, say, Q1 and Q two from North America? Whether the worst is over and things start improving from here on, or do you expect things can even worsen from here on?
Yeah. Thank you, Sunny. So I, I'd put it in two, three areas. One, definitely, probably since what we spoke last and guided last, we still see more time required in North America market to really get through that inventory and for the demand and the right kind of demand coming back with full steam. So earlier, if you remember, we had probably guided that somewhere around Q3 or Q4, we should start seeing that demand come back. We now see that it'll probably be closer to, you know, Q1 of next year, financial year, where we start seeing some of the, the regular or the good, good volume of demand coming back from North America.
So that's one shift that we're seeing from the market perspective when we speak to our customers and also look at our peers in the industry. From the operations perspective, that also means what we have shared is we've also looked at other markets, including EMEA, as well as India, for growing that and making sure some of the volume drop gets covered in those markets. Of course, our realizations are, as we've shared in the past, higher, typically in North America and then in Europe as well. So to that extent, we do expect a decline from a revenue perspective.
So that's what we have just shared in our last slide, that overall that will impact the revenue of the optical business and then overall for the STL for the rest of the year.
And, by recovery, do you mean that, basically you will go back to what you were doing before, say like in Q3 or Q4 of FY 2023, in terms of the run rate from North America? That is what you mean by recovery, or you mean that things improve from the current base? Because what is not clear from any of the commentary or the presentation is, where is the new base, looking like?
Yeah. So I think that's fair. I think... Look, I would say that, Sunny, there's still uncertainty, certainly over the next six months, of how the demand pans out. So I would say we are still looking and continuing to converse with our customers on, on how their demand comes through. So we'll probably be able to update you as, as we see that. What I'm structurally saying is that we do see fundamentally, as inventory comes down, the projects like BEAD and other demand for that starts coming in, as well as the other projects start kicking in, we do fundamentally believe that the North America market will continue to start growing back in that timeframe, as I shared, from Q1, next fiscal year onwards. So that's when we see that the demand should be strong.
On the back of that, and especially now with our U.S. factory fully ready and fully compliant, we are very well positioned to capture that growth, as it comes back. But we don't see it as kind of a hockey stick. There will be quarter to quarter on quarter improvement.
Sure. Sure. And, basically, if you can give some color on interconnect, because there is no outlook or any description on the interconnect-
Yeah
... business in the current presentation. So basically, how is that progressing and what is the attach rate we are operating at currently? And how do we see the outlook of that business in the near future and the medium term?
Yeah. So, as we shared, Sunny, this continues to be a top priority for growth for the optical business. The key areas for us have been very, very focused in terms of improving the attach rate compared to the cable that we do. What we had shared earlier also is that we have seen some success, particularly in Europe, so we want to continue to scale up in that market, but also exploring how we can scale up in other markets, including North America. The reason we cannot give very specific forecasts is because of the fairly long cycles that it takes to get the approvals and to get in with some of these leading telco operators. What I can share is that this is certainly a top priority for us.
We currently have improved from 10% to 13%, which is in Q2. As we've shared earlier as well, the intent is to continue to improve that going forward. Certainly we'll continue to give, you know, give more visibility, particularly as we start improving our positioning in Europe and U.S.
Sure. Sure.
Sunny, Sunny, you can refer the slide 12, where we have given a little color on, OI attach rate in terms of how we are seeing, you know, in the quarter, it has gone up to 13%. So I think, you know, we have provided some information about OI, on slide number 12.
Sure. Thank you. And if I may, I have one last question. Basically, on the global service business, what is the status of your T-Fiber project? Because the completion rates look to remain stagnant there. So-
Yeah
... is that project moving very slowly? How should we look at the completion of that? Because I believe that the large amount of capital employed stuck in the service business through some of these government projects. So what is the outlook there? Any color will be helpful.
Sure. Sure. No, absolutely, Sunny. So I... So you're right, that, that is an important project for us. So just to be clear, we continue to make progress in that project. There would have probably been slower execution on the account of, you know, factors like monsoon and other things. But what's important to also remember is that the way these projects are structured, especially from a cash-out perspective, are on achieving certain milestones. And so it's, it's one of those elements where even if smaller amounts are from a kilometer perspective are achieved, but as you keep completing those links and milestones, then the cash payouts happen. So fundamentally, we believe that that's the focus for us.
We want to continue to move, and you will see progress in this project broadly over the next six months. And there we see as we start hitting the milestone, there will be disproportionate cash out from these projects. But structurally, there's a good understanding between us, T-Fiber, and as we complete these milestones, we have good confidence on the cash getting released.
Oh, okay. Thanks. Thanks for the detailed answers.
Thank you, Sunny.
Thank you, Sunny. We'll now move on to Bala. Bala, just for the benefit of the others, can you also state your organization name and take your questions?
Thank you so much, sir. I'm Bala from Arihant Capital. Sir, I have one question regarding the realization side. You have mentioned the improvement on the realizations. One of your competitor talked about, like a decrease in that OF and OFC side. On the OFC side, they have mentioned INR 1,300-INR 1,200 per fiber kilometer price corrections. On that OF side, 380 rupees to 350-345, that range, per fiber kilometer price corrections. But we have mentioned about improvement on the realizations. How do we understand in this quarter?
Yeah. Thank you, [Ayan]. So, firstly, I mean, we don't normally comment on our competitors. What we can share, at least, is that, we've strategically always looked at our focus markets being Europe, North America, and India, which largely contribute to over 90% of our sales. These are markets where we've been very focused on selling our innovations, selling our products, and as you can also some element of the interconnect that comes through. Specifically on fiber and cable, I won't be able to comment on specific realizations, but, we have been able to push some of the price increases to our customers successfully, and that is what has come through in our realizations improving from last quarter to this quarter.
Okay, sir. Sir, on the debt side, like, how much we are focusing, focused to reduce in this financial year?
Bala, our internal target is to see that anything in terms of INR 200 crore-INR 250 crore in terms of a debt reduction that we are internally targeting.
Okay, sir. Sir, like, on that volume side, like you have mentioned some volume drop, is there like... This volume drop is specifically, like is in the domestic market or in the international markets?
This is largely... Yeah, this is largely international market. In fact, since we saw some of the slowdown in North America, we've in fact increased our sales successfully in the Indian market as well.
Okay, sir. Okay, got that. Okay. Thank you, sir. I'll come back in.
Thank you.
We have Nikhil Choudhary. Please go ahead.
Hey. Hi, Ankit. Hi, Tushar. Thanks for the opportunity. First question is regarding the revenue growth guidance. So, Ankit, on one hand, CRU is guiding less than 1% decline in overall volume ex-China in 2023. Our own guidance states that our revenue growth will be negative, let's say, right? Is it fair to assume that we might be losing market share in some geography, given our overall revenue growth is negative, while, you know, overall market is more or less flattish?
Yeah, so I would say—I would put two, three parts to it. One, categorically, we want to share that we are not losing market share. In fact, a big focus for us is how do we in fact increase our market share in this market scenario? As I also shared, we are very, very well positioned now in North America with absolute, you know, tier one customers, tier two customers we have on board with the facility that we have now set up, as well as now getting BABA BEAD compliant. We are in fact very strategically well positioned to capture good market share as the market comes back.
So that's one on the U.S. and Europe also, with our facility of
Metalogica and our Optotech acquisitions, we are in a good position, strong market position, to capture the Europe market. And India as well, as I just shared, we are in fact increasing our share in the Indian market, with customers like Airtel and some others. So overall, we are quite well positioned. I wouldn't comment on the numbers between how we are growing versus CRU, because CRU is also an external, you know, market forecast. What we are very clear is that these are the three current markets that we are operating in. Within this period, we are seeing how to maximize our market share on one side with our customers. We're looking to increase our interconnect business that we spoke of.
What Tushar just touched on is from our operational perspective, really looking at cost efficiency to ultimately improve our profitability.
... Sure, Ankit. Second is again on operating efficiency only, what you mentioned. Clearly we have seen quite a bit of improvement despite of challenging quarter and margin facing challenge due to lower Americas revenue. But just want to understand where we are in the journey, how much we have already traveled. And also regarding, you know, we hired external consultancy to guide us in terms of cutting our overall costs. So any maybe directional guidance you can give where we are, how far we have reached, and any color on that will be appreciated.
Yeah. So I think, timing-wise, we're probably, you know, halfway or three-fourth into that journey, so we still have a few months where some of the impacts of these initiatives should continue to come through. I think what's important to understand is the way we've gone about it is that to make sure that structurally we're in a better cost efficiency base, so that whenever... as the market, improves and other operations improve, we're able to hold on and, and, you know, get the benefit of these costs in the years to come. So that's how we've gone about it. These are structural, focus that we've had, structural initiatives we've had, looking at every element of our cost, you know, and, and making sure that we see the benefit of that. So, so that's, that's broadly where we are.
We continue to believe that there are opportunities for further cost improvements, and we're focused on that.
Sure, Ankit. That's it from my side. Thank you. Good luck for coming period.
Thank you. Thank you, Ankit.
Thank you, Nikhil. We'll now move on to Sohan Joshi. Sohan, please state your organization name as well. Sohan?
Hi, Ankit. Am I audible? I am from-
Yes
... ASC Consultants. I want to ask one question. What is the timeframe now within which we can achieve the Net Debt to EBITDA to 2.5 or below 2.5? I mean, want to understand-
Yeah
... up to what timeframe we'll achieve that. Are we now factoring the right issues as well in achieving these 2.5 to 2.5 or below 2.5 net debt to EBITDA levels?
Sure. So, I think as Tushar just mentioned, I think, definitely one data point is we have reduced our net debt by about 110 odd crores in the first half. And overall, we're looking at somewhere between INR 200-INR 250 crores net debt reduction for the year. So that's a clear priority in line with what we have guided in the past of generating cash on the business and reducing the net debt. We have also looked at our CapEx for the full year, and broadly looking to reduce our CapEx from around INR 350-INR 400 crores, probably closer to INR 250 crores for the year. So these are two, three areas where we're looking at it very closely from a cash.
And second part also from a fund involvement, looking at how we can reduce that further, particularly in the services business. So these are some of the areas that we're very focused on. The last part is also on our digital business, where this year we would have spent about overall, we'll be spending close to INR 120 crores as an investment into this business. As that also gets into EBITDA breakeven by Q4, then that co-cost and cash also comes away. So these are the areas that we're focused. I won't be able to comment specifically on the net debt EBITDA at this moment, particularly given how we are looking at the next six months.
We are just watching this very, very closely in terms of the market dynamics, and as we get better visibility, we'll be able to share with you.
Okay. Thanks a lot. My second question is that given the bleak outlook on the demand side, will we push back our rights issue proposal? Any guidelines on that?
So we've got the approval in terms of the rights issue and overall fundraise, we have got approval up to INR 1,000 crore. So depending on our strategic requirements as well as market conditions, et cetera, we'll continue to evaluate. I won't be able to comment on it specifically at this time.
Okay, one last question: What is the current order book status on the BharatNet project? I mean, what is the value addition we are now gaining from the BharatNet project?
So just to be clear, the new Phase 3 BharatNet is the almost INR 140,000 crore project. That is a clear priority of the government to take that forward, and the conversations and the discussions are progressing, even since we last spoke. So there's a real intent to go get the project executed. I think the way the CapEx is structured is broadly 50%, the investment structure is broadly 50% CapEx and 50% OpEx, where the execution would happen over 2.5-3 years, and maintenance would be for 7 years.
So this presents a very exciting opportunity for STL across, you know, from supply of fiber, supply of cable, supply of interconnect, as well as, of course, our services and maintenance business. So this is something that we're very much actively participating. As we shared earlier, we are very mindful of looking at this and the government business, so very mindful of the cash and the exposure as well.
Yeah, just one thing. Are the bids submitted for the BharatNet project and allocation is pending or?
No
... even the allocation part is done? What is, what-
No, no
... what is the status on that?
No, we are not at the bid stage yet. We're before that.
Okay. Okay, okay.
Yeah.
Thanks a lot. Thanks a lot. But that's it from my end. Wish you good luck for the, for the upcoming months.
Thank you. Thank you.
Thank you, Sohan. We'll now ask Ravikant to ask the questions. Ravikant, please state your organization name.
Thank you for the opportunity. I'm an individual investor. My question is, sir, a couple of quarters back, we heard from you, like, the Chinese and the Chinese China Mobile tender order has been released, right? So did we get any business from that particular country, sir? I mean, we acquired even a joint venture. We had 25% stake, right, from the joint venture. And did we get any business from that?
... Yeah. Thank you, Ravi. So, we are, we did acquire the balance 25% stake, so it's a 100% entity, STL-owned entity now in, in, in China. But strategically, just to be clear, we've always set up and built that facility to not just meet China requirements, but our global, requirements, both whether it is for our own cable requirements or any other external cablers. So to that extent, that's, that's how the factory, is, is operating. And, we continue to serve our, our global requirements for fiber from that facility. Regarding specifically to China Mobile, of course, that tender has come through. The volumes continue to be in the market. We do not currently serve... We do not supply from that fa- facility into the China market.
We do see more strategic reasons to supply to our global cable operations or to external markets, other cablers globally.
Okay. Thank you. Just one more question, sir. From past six months, we have been hearing from North America, like, there's a lot of inventory pending, right? I mean, even today, we are also saying that it will take about six months. So in the past six months, isn't really any business, isn't really any commissioning going on there? I mean, despite such slow progress, can you provide some insight on that?
Yeah, sure. So just to be clear, there's still deployment going on. And so it's just a function of how quickly does the execution happen across, you know, the broader customer base to ensure that the inventory comes off. Essentially, as I've shared earlier, the inventory is in three places: it's inventory with us as a supplier, it's inventory with the distributors, and it's also inventory with the end customers. So it's a function of all that inventory cumulatively coming off, and that's what we've been sharing will take some period of time, versus what we had expected in last quarter as well. It has still taken more time.
Part of that also is because the execution speed on the ground is actually not picking up with as much as we would have liked or hoped for in terms of physical deployment on the ground. So hopefully, as that also picks up over the next 6 months and 12 months, we get more manpower into the ground to execute as a market. Hopefully, that also leads to more execution. In terms of actual funding commitments, interest from private equity or from telecom operators to deploy, that we fundamentally see to continue. And also from a mid- to long-term perspective, we continue to be very bullish on the North America market.
Okay, sir, just one, one last question. The U.K. service business, sir, I think even there also, we didn't really see much movement. I mean, can you throw some light on that also?
Yeah. So, absolutely. So, as we shared last time, that, currently, in part of Q1 and then into Q2, the UK services was still looking to scale up but was operating at losses. So to that extent, as we've shared, we have evaluated the business closely, and, we're closely evaluating strategic options to take the business forward. There, we clearly see there is an operating model and a cost base that we're looking to reduce towards to make the business, you know, breakeven and profitable. And parallelly, we're also evaluating other strategic options. So we will come back to you on that shortly.
Thank you, sir.
Thank you, Ravi. We'll now move on to Aditya Jhaveri.
Yeah. Thanks for the opportunity. My question is regarding the North America market. So everyone is expecting that next year there will be growth, right? So firstly, I wanted to ask regarding what is our capacity utilization? And the second part is, if everyone is waiting to dump next year, then the pricing also pressure can come here, right? So can you throw some light here on the pricing front and the capacity utilization?
Yeah. So, at least, on the North America part, just to be clear, I think, it's not that the market we expect will dump and prices to go down. We've in fact seen, even in this market, prices to actually be quite healthy, and that's just nature of that market specifically, where you typically have good tier one suppliers with you, you know, through market conditions, who continue to supply. What we have seen is lead times have come down, from at its peak, was probably north of 50+ weeks, have probably come down to somewhere around 8-10 weeks, currently. And to that extent, wherever we need to supply, from our North America market, we have started supplies from those operations. That factory is still scaling up.
And overall, at STL level, we are operating at close to 60% utilization for first half of this fiscal year.
Next year, any additional capacity is commissioning or it is already commissioned with us?
So we are, as we shared in the past, our main investment is to, to look at our US facility. So there'll probably be some in the second half of this fiscal year, there'll be some more capacity getting added as per our current plan for North America. But beyond that, we have no other capacity addition plans. And that's also where we have talked about our CapEx plans for the year coming down, from INR 350 crores-INR 250 crores. So we are pretty much done with our CapEx investment, apart from maybe some maintenance CapEx, et cetera. And, the prime focus will be to look at various markets for our sales and to ensure we improve our factory utilizations.
Okay. The next question is regarding the demerger. I had one question, right? How will be the debt restructure there? Can you throw some light here?
So, I think, from a debt restructuring for our GSB business, I think it's a, it's a function when we are going to get the necessary approval from NCLT. On the date when we get the approval from NCLT, whatever is very specific debt attributable to the GSB business, which will get transferred-
... and we looked at current debt, which is attributable to the STL service business, is about INR 550 crores-INR 600 crores.
Okay. But I think the working capital is, high there only, right? So, it-
Yeah
... comes by 50 only to the services business, rest all debt is on the optical business.
That's correct. But, the way it is required, from the income tax perspective, the debt has to be very specifically attached to that particular business. When you borrow the funds, for the purpose for which you borrow the funds is important. So the lines that we have very specifically for USD business, which has been utilized, is about INR 550-600 crores as on date.
Okay. On the, this product business, how much working capital or debt would be required?
So the working capital cycle for ONB business is in the range of 60-75 days. So the balance debt will be with ONB business. Correct. That would also... At STL level, which will be attributable to ONB business as well as to the digital business.
Right. Okay. Okay, my last question is on the digital. I see there is quite a jump up in our revenue, right? And I know that you are taking a consultancy model here, you are hiring the consultants here. But, if you think of a long, long-term strategy, if you want to scale this business big, do you think this is the right strategy to go forward? And can you talk about the projects here? What kind of projects we are doing, such that-
Uh
... we are getting the revenue like INR 140 crore within a span of one year?
Yeah. So, I, I think, I would say at a high level, it's still very early stages in this business. What we've, what we've focused on, what we shared earlier as well, is we want to focus on few segments, make sure that we have strong customer relationships in those segments, and we create value for those customers. That's, that's really been the focus. And really from a financial perspective, I think we've got fairly healthy order book, close to INR 750 crores. We have very, very strong team in place and leadership in place. And the very specific near-term target for the business is to look at EBITDA break even by Q4.
We continue to evaluate how we want to take this business forward, how we want to scale it up, what are the areas we want to focus on, what are the capabilities we want to build. But really from a management focus, that is the immediate priority in terms of break even. And from there, then we will provide more updates as we get clarity on the plan ahead.
But, uh-
Just to clarify-
Yeah
... the consultant means these are our own employees, having the capabilities of-
Yes
... delivering the requirement of the customers. So they are not third-party consultants, they are our own people.
Okay. So how many people are there here?
So, if you go to the slide number 18 of the presentation, we have 900+ consultants. So-
Why are we calling as consultants? I don't get that.
It's our internal terminology, so that's why we-
Okay
... call them the consultant. But these are our own employees, because they, they provide a consulting to the, to the customer. That's why, you know, we call them internally as a consultant.
But what kind of work, Ankit? Can you throw some light? Like, it is a typical IT services work, or it is code to some-
Yes, yes, yes. It, it is, it is IT services business. Just to be, to be very clear, it's, it's very focused. We have some Tier One customers on board. And as we continue to scale up with these customers, that's where we see, particularly by Q4, we have... You know, we see a path where we can get this to break even.
Basically, this is like banking, retail, like this, only the work-
So-
... we are doing here.
Yeah. So you go on slide number 18, the service offering we have, the second bullet is on service offering-
Oh
... where we have very clearly mentioned that we provide on enterprise SaaS services-
Yeah
... product engineering, cloud and cybersecurity services, data analytics, and AI services. So these are the specific services that we provide to some of our customers.
Okay. Thank you, Ankit.
Thank you, Aditya. We'll now move on to Saket Kapoor. Saket, please state your organization name as well.
Yeah. [Foreign language], Ankitji, and [Foreign language], Tusharji.
[Foreign language]
I'm Saket. Yeah, Saket Kapoor from Kapoor Company. Sir, you did mention that we are lowering our CapEx target to, I think, INR 250 crore from INR 350-400 crore. So, if you could elaborate more, where is this reduction going to happen, and what was the earlier thought-out plan, and why is this reduction now? And the capital work in progress is, I think, at INR 180 crore, so that has increased year-on-year. So, if you could explain these two numbers.
So, I take your first question is with respect to our CapEx program. So usually, when we started, you know, the financial year, we looked at what was the overall CapEx program, which was required. It had, you know, the U.S.-specific phase two CapEx plan. Correct? Now, looking at the current, you know, the demand in U.S., we will have to defer some of those things till the time the demand picks up, and we see that sustainable demand. And then we'll try to revive the second phase of any kind of a CapEx program that we may have for U.S. plan. So that's, I mean, that's your first question. You know,
Sir, sir, just one second. Is it a capacity building or operational efficiency building at the for the U.S. part, which you are-
The-
... we are differing right now?
The U.S. part is a capacity building, the phase two of the capacity building, based on the demand.
Okay.
Correct. So at this point in time, since, you know, the demand has still to pick up. I think we have curtailed this particular CapEx in order to manage the cash efficiently.
Right, sir. And point two, sir, the current capital work in progress, I think so it's around INR 180 crore. So, when is we are going to capitalize this, and where is this money deployed?
So these are the CapEx related to, large part of the CapEx is related to U.S., which will be capitalized, you know, once we are able to commission some of these particular lines. Correct? So, as we commission some of these lines, you know, the capitalization will happen.
Right, sir. Sir, when we look at your employee cost as a percentage of sales, that has remained elevated at the consolidated level. So, what's your comment on the same? Is it because of the ramp-up exercise for the US facility, or how should we take this number of this run rate of INR 250 crores on a quarterly basis correctly there? And also, sir, Ankitji, when you mentioned that we are looking at muted numbers going ahead, so on an H1 basis, do we look at the exit of H1 as what we can look for H2 as of now, or H2 will be comparatively lower than what we have done for H1?
So, with respect to your employee cost, I think we need to understand that, you know, we are into three businesses, three separate businesses. The two businesses are, you know, the highly, you know, the employee-intensive or, you know, you know-
People
... people-intensive. I would say that, you know, service business as well as our digital business, which requires, you know, a kind of, you know, headcount that is required to serve the customer. With respect to... That's the reason that we are into a high employee cost, as an organization, because we are into three different businesses. The second is, your second question is with respect to... I missed that particular question.
The revenue, the revenue trajectory for H2,
H 2, is it?
Yes, H2 versus H1. What we exited H1 at 2,200, especially for the. I think so the muted pessimism is towards the optical network business, our core. It is not, I think so, regarding the global services, neither for the digital part.
That's it.
There, I think so. Better times you take, right? But for our core business, the things look on the lower side. So what should we be pessimistic in going ahead for H2, for the two segment?
So I think, you know, for this, both the segments will continue to grow, the you know continues to serve the customers based on the auto execution plan that we have. So it will on a sustainable basis, they will grow on, these two businesses will grow on a quarter-on-quarter basis, except for ONB business.
So how should we look at the ONB business, sir? My question is ONB is-
ONB
...on a declining trend. So this is done with, or more decline is expected for H2 going ahead. What should we be pessimistic in?
I mean, see, we have given this guidance is with respect to the overall-
Yeah.
We see that this year we will be, we may see the decline with respect to the previous, previous year. And the large part of the revenue comes from the ONB business.
Okay. So no, no, no percentage you can give, guide us where we can land?
No, as I said, I think we are watching the market closely-
Mm
... and particularly impact of North America. So as we get better visibility, I think it'll be fair for us to comment at that time.
Okay. So two very small points. For the delivered parts, sir, from T-Fiber project, how much is the delivered pending, and what kind of milestones are we going to complete so that these deliverables get liquidated?
So our working capital employed in this T-Fiber business is about INR 700 crores. The T-Fiber, as Ankit mentioned, is very complex project because it requires the entire state level, the network, to be built up. So each [Foreign language], then the district, then the village, then the city, and then the entire state needs to be built up to ensure that, you know, we have built up the entire network at the state level. So which is a little bit of complex project, because each and every, the every, the segment of the network should work efficiently to get the necessary approvals from the, from the, from the customer, which we call it as ATC, the Acceptance Test Certificate.
I think that's the way we have been working on, you know, to ensure that we complete progressively on, on each and every segment, so that we move ahead on this particular project faster.
Thank you, Saket. Yeah. With this, we come to the end of the question and answer session, and now I hand it over back to Ankit for closing remarks.
I'd like to thank everyone for attending this call and showing interest in our company. Despite the challenging market environment, we've managed to maintain EBITDA margins at consistent levels. At H1 FY 2024, we have reduced our debt levels by INR 111 crore, and the CapEx cycle has been completed with operationalization of the U.S. facility. We're thus well positioned to execute on our growth strategy of being world top three, be able to deliver more robust results when the demand, particularly in North America market, recovers. I hope we were able to address and clarify all your queries and comments. For further questions and discussions, feel free to contact our investor relations team, which includes myself and Tushar. We really look forward to continuing the conversation with you in the near future. Thank you.