HFCL Ltd

NSE:HFCL

Earnings Call Analysis

Telecom Firm's PAT Dip Amid Expansion Drive

In quarter 2 of FY24, the telecom company posted a Profit After Tax (PAT) of INR 70.17 crores, down from INR 75.56 crores in the previous quarter and INR 84.31 crores year-over-year. Despite this, half-year revenue was slightly lower at INR 2,106 crores compared to INR 2,224 crores in the same period last year, while half-year EBITDA margin improved to 14.69% from 13.68%. The firm remains optimistic, driven by growth in global telecom markets, robust R&D, and upcoming opportunities in India. They're gearing up to showcase key product features at the India Mobile Congress that will significantly contribute to the 5G movement in the country.

Financial Performance and Margins Analysis

The financial assessment starts with a review of revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA), leading health indicators for a company's performance. In the most recent quarter, Q2 of FY '24, revenue was reported at INR 1,111.49 crores, which marks a decrease from the corresponding quarter of the previous fiscal year where it stood at INR 1,173.47 crores, but it increased compared to the previous quarter's INR 995.19 crores. The EBITDA presented a similar trend at INR 149.77 crores for the current quarter down from INR 174 crores in the same quarter last year. Notably, the EBITDA margin contracted to 13.47% in Q2 of FY '24 from 14.88% in Q2 of FY '23, indicating pressure on profitability.

Net Income and Profitability

Alongside the EBITDA assessment, net income, or profit after tax (PAT), and corresponding margins flesh out the profitability picture. The company's PAT for Q2 of FY '24 was INR 70.17 crores, which has declined from INR 84.31 crores in Q2 FY '23, and the PAT margin now stands at 6.31%. This drop in PAT reflects the combination of decreased revenue and margin contraction mentioned above.

Future Revenue Growth Prospects from New Products

Despite current challenges, the company's forward-looking statements provide optimism with the launch of new products. Management estimates an incremental revenue of INR 800 crores to INR 1,000 crores from these upcoming products, although they express cautious optimism by labeling this as a pessimistic estimate. The potential in the market for these products appears substantial, fostering an expectation of robust revenue growth in the near future.

Market Opportunity in the Defense Sector

Delving into market segmentation, about 60% of the company's product demand caters to the U.S. cable markets, a substantial portion given the market size. There is also significant activity in the defense sector, with ongoing tenders and expectations to participate in opportunities valued between INR 7,000 crores to INR 10,000 crores during the current fiscal year.

Adjustment in Defense Revenue Projections

The defense segment brings a note of conservatism in the face of reality. Originally forecasting revenues between INR 300 crores to INR 400 crores from certain defense products, the company has tempered its expectations to INR 250 crores to INR 300 crores for this fiscal year. However, buoyed by a more optimistic view of the next year, they anticipate revenue could reach INR 800 crores to INR 1,000 crores, reflecting confidence in their product demand and pipeline.

Expansion Strategy Implementation

A critical aspect of the company's strategy is the expansion of its manufacturing capabilities. The fiber manufacturing expansion is slated for completion in two phases: by July '24 and January '25. The cable manufacturing expansion will take place over the course of FY '24-'25. These expansions are expected to increase revenue by approximately INR 800 crores to INR 1,000 crores compared to the present revenue. Such expansion is fundamental for supporting increased demand and the launch of new products, opening additional avenues for growth and necessitating a robust supply chain.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Results Conference Call of HFCL hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.

From the management team, we have with us Mr. Mahendra Nahata, Promoter and Managing Director; Mr. V R Jain, CFO; Mr. Manoj Baid, Company Secretary; Mr. Amit Agarwal, Head IR.

I now hand the conference over to Mr. Mahendra Nahata. Thank you, and over to you, sir.

[Mahendra Nahata, executive]

Thanks a lot. Good afternoon, ladies and gentlemen. I welcome all of you to HFCL's Earnings Call for the Second Quarter and Half Year of the Financial Year 2024. I would like to express my sincere appreciation and gratitude to all of you for joining the call today. I'm sure that you've got a chance to go through our financial results, press release and investor presentation, which are available on the website of the company and also on the website of stock exchanges.

Friends, the outlook for the global economy still remains somewhat uncertain, marked by various macroeconomic conditions, across different regions and uncertainty, which has integrated off by the recent global conflicts. Despite that, International Monetary Fund has -- India's economic growth forecast to 6.3% for the current fiscal FY '24 primarily due to Indian economy's robust growth prospects.

India's digital transformation is making a significant difference in creating a new model of economy. India is offered is to indigenously deliver 5G technology to other countries and has also offered digital public infrastructure to the world. The country is now well positioned to take on bigger challenges with the Bharat stack that holds immense promise given India's technological expertise in the fleet.

India's technological progress in the telecom sector has positioned it as an attractive global investment and manufacturing destination. In just 1 year after the 5G rollout started, India has emerged as one of the top 3 5G ecosystems in the world. The growing demand for high-speed 5G connectivity fueled by government initiatives like BharatNet, implementation of Fiber to the Home, different PLI schemes and antidumping duty optical fiber cables to not only say manufacturing, but also open up promising avenues for growth.

In addition, the telecom industry is also taking significant steps to create road map for 6G. This was evident with recent signings of MOU within Bharat 6G Alliance and Next G Alliance at G20 Summit. The collaboration is poised to focus innovation in the dynamic telecom landscape and deepen public-private cooperation.

Against the backdrop of digital transformation and building a robust 5G network infrastructure, we are expecting strong demand in near future for fiberization, both in India and globally. This expected strong demand is fueled by increased government thrust on fiberization, Fiber to the Home, price in data centers, adoption of cloud computing, IoT, investing in 5G CapEx and telecom infrastructure across the global markets, including India, U.S.A., U.K., France, Germany, Middle East and other countries.

In India, products in the PLI scheme and fiberization under BharatNet and FTTP and [indiscernible] private operators result in good opportunities for players like us. The government in United States convey the great vision, which is broad equity, access and deployment program of $43 billion, which is intended to extend last mile across the U.S. Under this and such other programs and subsidiaries equivalent to $61 billion is expected to be disbursed for fiberization across the United States.

On the other hand, new countries, including Germany, Italy, France, Australia are also seeing massive CapEx besides funds allocated by U.K. government recently to accelerate 5G innovation and to put all U.K. households in reach of fiber to the premises by 2033 as part of its project [indiscernible].

HFCL has carved out a distinct space in telecom industry. By continuing on its strategic priorities of expanding optical fiber and optical fiber cable capacities along with key initiatives to design 5G networking solution and various other broadband wireless products. This product includes a revolutionary 864 fiber count intermittent bonded given 5G fixed wireless access customer premises equipment, cloud-based network management system, 5G radio access network, 5G transport products, along with high capacity unlicensed radio and Wi-Fi 7 access.

We plan to launch some of these key products during the current financial year, and we are confident that the launch of these products will further contribute to higher revenue and profitability in the coming years.

During the quarter under review, we launched our revolutionary 864 fiber count intermittently bonded even cable in the U.K. IVR cables enable easy installation of high fiber count in smaller diameter especially useful in congested areas with a very limited space. We also unveiled our new high fiber density flat driven cable as Fiber Connect Event 2023 held in United States. A strong market reception highlights the significance of our innovative cables. We are following HFCL as a leading provider of pioneering solutions and that consistently addresses evolving use to our valued customers.

Further, fiber reinforced plastic rod and intermittent glass fiber reinforcement manufacturer in HFCL's wholesale plant has been accredited with the evaluation authorization and restriction of chemicals compliant reach, which we call [indiscernible], which permits the sale of these cable enforcement products in countries across the European Union.

HFCL is actively pursuing business opportunities by leveraging its domain expertise, technological strength and established market business to enhance the nation's different capabilities. I'm proud to inform you that our aerospace and defense division in HTL Limited, a subsidiary of ours, secured a prestigious out of a prominent defense of mid sector under for a supply of [ 18 ] different type of assemblies that provide interface and interconnection between subsystem of identification of friend or -- [ 4 ] large systems.

We have also successfully cleared the user trial readiness review by the Indian Army for the BMP2 armament upgradation project, under [indiscernible] program of the Indian Army, underscoring our commitment to meeting the different sector's departments and contributing to the national self-reliance.

In Q2 of financial year '24, optical fiber manufacturing plant at Hyderabad achieved a run rate of 12 million fiber kilometer per month through sustainable improvement in efficiency, per quality and capacity building. [indiscernible] established the best overall equipment effectiveness performance and also resulted in increased 10% throughput.

I also wish to update the expansion of optical fiber manufacturing capacities from 10 million fiber kilometer to 33.9 million fiber kilometers is progressing well and shall be operational as planned. [Planned] Optical Fiber Cable production capacity from 25 million to 35 million fiber kilometers. This expansion will also lead to significant increase to revenue and profitability. That is added in a safe manner with a completion targeted in the financial year '24,'25.

During this quarter, we also witnessed softening in demand of optical fiber cable and telecom networking products from Telco, resulting into decline in product revenue, both on quarter-to-quarter and year-to-year basis. But this temporary decline can be attributed to an inventory builder with major operators, resulting an overall reduction revenue in absolute terms as well as lower sales utilization per kilometer of fiber.

Aside, the overall demand across U.S. has slowed down as the BEAD program, which I talked about a little earlier, that funding got delayed, which took a hit on the CapEx by the telcos. But now it is expected July-August next year. In China, less orders were released by China Mobile. In India also, the situation was not much different. The BharatNet program of Government of India got delayed. And insistent rains across the country during the monsoon season also impacted the overall demand by the Indian telcos. This has resulted in decline of demand of optical fiber cable worldwide for some time.

During the quarter under review, however, we were able to bring some significant orders from our customers. As a result, we closed Q2 of the financial year 2024 is an order book exceeding INR 7,000 crores. HFCL also successfully raised INR 352 crores through QIP during this quarter. The QIP received an overwhelming response from investors. I extend my heartfelt gratitude to all the investors for their unwavering support and trust in HFCL's long-term growth strategy.

The proceeds from QIP are primarily being used to fund capital expenditures for the expansion of our optical fiber and optical fiber cable capacity, support expenditures related to R&D initiatives, including the acquisition of technology facilitates the repayment of short-term borrowings and fulfill working capital requirements.

Friends, let me now brief you on the key performance metrics of quarter 2 of financial year '24 and then H1 of financial year '24. Revenue of Q2 of FY '24 stood at INR 1,111.49 crores as compared to INR 995.19 crores in Q1 and INR 1,173.47 crores in quarter 2 of financial year '23. EBITDA for the quarter stood at INR 149.77 crores as compared to INR 159.62 crores in Q1 of financial year '24 and INR 174 crores in Q2 of financial year '23.

EBITDA margin stands at 13.47% for Q2 of '24 compared to 16.04% of Q1 of '24, which stood at 14.88% in Q2 of financial year '23. Profit after tax in quarter 2 of FY '24 stands at INR 70.17 crores as compared to INR 75.56 crores in quarter 1 of '24 and INR 84.31 crores in quarter 2 FY '23.

PAT margin stands at 6.31% in quarter 2 of FY '24 as compared to 7.59% in quarter 1 of FY '24 and 7.18% in quarter 2 of FY '23. Segment revenue for telecom products during the quarter stood at INR 473.81 crores, that is 43% of quarter 2 of financial year '23 as compared to INR [ 62.43 ] crores, a 67% of quarter 1 of '24 revenue and INR 671 crores, [ 57% ] of revenue in quarter 2 FY '23.

Revenue half year of financial year '24 stood at INR 2,106 crores as compared to INR 2,224 crores in H1 of financial year '23. I again repeat, INR 2,106 crores in first half of financial year '24 as against INR 2,224 crore H1 of financial year '23. EBITDA for H1 of financial year '24 stood at INR 309.39 crores as compared to INR 304 crores in H1 of FY '23. EBITDA margin stands at 14.69% for H1 of financial year '24 as compared to 13.68% for H1 of financial year '23.

Profit after tax for H1 stands at INR 145.73 crores as compared to INR 137.40 crores in H1 of FY '23. PAT margin stands at 6.92% in H1 FY '24 as against 6.18% of H1 financial year '23. Segment revenue for telecom products during H1 of '24 stood at INR 1,136.24 crores, that is 54% of the revenue of H1 of FY '24 as compared to INR 1,291.14 crores, which is 58% of revenue of H1 of financial year '23. The growth in each global telecom markets and upcoming opportunities, in India fail our optimism.

To conclude, I would like to repeat that with our strategic focus on capacity expansion, geographical expansion, shifting revenue mix from projected products, backward and horizontal integration, strong R&D commitment and developing margin accretive new products begin to give results, and we are confident that our strategy will continue to enhance revenues and profitability in the coming years.

With an unheading focus on delivering value, our team is determined to pursue our goals relentlessly. We are excited about our participation in upcoming India Mobile Congress from 27th to 29th October 2023. We look forward to unveiling various key features to products that are set to play a crucial role in the telecom industry revolutionized the 5G expansion moment in India.

Friends, thank you very much once again for your participation. With this, I conclude my opening remarks and open the floor for a question-and-answer session. Thank you very much.

[Operator]

[Operator Instructions] The first question is from the line of Balasubramanian from Arihant Capital.

[Balasubramanian A, analyst]

My first question, on the financial side. Intractable assets under development has increased from INR 98 crores to INR 299 crores from FY '23 to H1 FY '24. Could you please clarify on the same, like what kind of development we have...

[Mahendra Nahata, executive]

Look, all these expenses what you see, the increase in the R&D expenses, the license fee paid, R&D expenditure incurred. And that would amortize once the products are launched, there will be -- amortize over a period of time because R&D is an expensive effort. And we are incurring these expenses as different products are being undertaken for R&D, which I have been mentioned all the time. This totally related to R&D expenditure and also the equipment which we buy for the software licenses and all that we get for developing various equipment.

[Balasubramanian A, analyst]

Got it. And sir, my second question on that segmental mix, in Q2 FY '22, how do we understand on segmental revenue mix again going forward?

[Mahendra Nahata, executive]

Please repeat your question, Mr. Balasubramanian, your voice was cracking in between.

[Balasubramanian A, analyst]

Yes, sir. Segmental revenue mix reflects to FY '24. So like how do we understand on segmental revenue mix and margins going forward?

[Mahendra Nahata, executive]

You cannot, as you would have noticed in the current quarter, the product revenue has gone down a bit. And that has happened because we have decreased demand of fiber optic cable which I explained with detail in my opening remarks. It went down quite suddenly, quite unexpectedly. And for various reasons, in India, because of monsoon reasons, and operators not expecting that -- network that fast in [indiscernible]. In different other countries, the U.S. for delay in the subsidiary programs and accumulation of inventory with the operators. So people only have thought that supply will be quite delayed while accumulating inventory. All that led a decrease in the revenue of fiber optic cable in the last quarters.

And I'm expecting this to continue a little bit in the current quarter also and then expect it to improve again with all these programs coming back. Overall, fiber optic cable demand is going to be remaining good, exceeding well because of FTTH, 5G, BharatNet in India and various other subsidiary programs being launched by various corners worldwide, including the developed countries, to make fiber reach to every home. Overall, demand is going to remain very good. But this has been a temporary. So going forward, if you ask me, segment in segmented revenue is going to become better and better. And our objective is to reach to a kind of an ultimate 70-30 kind of a product and project revenue, whereas 30% of the project revenue would be from the good cash flow kind of projects. And products revenue out of the 70% maximum would be out of the products to be pulled by us or are being developed by us.

Some of them which we have developed are already launched in the market and are getting good traction like Wi-Fi access point, like unlicensed radios. There are a very good traction in the market. So going forward, I would say, the objective of the company is to reach to a 70%, 30% kind of a revenue mix. However, for current quarter, which I am presenting to you in the current quarter. The mix might be a little different because of the current situation of fiber optic cable I explained to you. However, in the Q1, it is again expected to improve -- sorry, Q4, Q1 of Calender year I was talking about. Because the increase in the demand of pursuing increased demand of cable and some of the new which we are planning to launch.

If we launch in the first quarter, on the fourth quarter of the financial year, that revenue will also kick in. But definitely, if you go to Q1 of the next financial year, this would have a dramatic change. So all the products would have been launched, cable demand would have been improved. So that will put less stress on the cash flow and also increase our revenue and profitability. Moreover, by that time, a lot of revenue, which is unrealized from one of the major which is network for spectrum Indian Army project. A large part of that revenue would have also been realized. So that will further improve the cash flow of the company to a very good extent.

[Balasubramanian A, analyst]

Okay. Got it, sir. Sir, my next final question. On that export market side, like we have some inventory built up with major telcos in U.S. market. How do we anticipate demand and supply environment, not only U.S., the overall global market because our revenue export share in 17% in FY '23. Right now, we have seen little bit it improve 14.4%. So like how do you understand on the global markets because of inventory buildup. It is probably to U.S. market only or -- how do we understand on the overall markets?

[Mahendra Nahata, executive]

Look, basically -- higher the problem is in U.S. I tell you. Before few months, before -- not few months, I would say, 2 or 3 quarters back. U.S. was in a situation where the deliveries were 4 to 6 months. Unfortunately, at that time, our focus for under approval. We have not started exposing mix. Smartly we were preparing ourselves. Now what has happened because the increase in capacity in U.S. and also late start of those programs which I mentioned about, operators had already built up inventory feeling that deliveries will be continuing 4 to 6 months there accumulated stock by taking increased deliveries on supply.

So when these programs got delayed, naturally, the output, the installation of fiber optic cable did not take up that kind of a speed which it was expected as a result of which there was a buildup of inventory with the operators. Simultaneous supply which had increased, hinting you that the demand would increase and the supply have increased. So this has resulted in twofold impact. But yes, inventory buildup is there very quick, which is expected to ease out, as I said, next 4 to 6 months or even maybe less than that, we see affected results.

Good thing which has also happened. Of the total requirement in U.S. market, more than 60% products we have already got approved by the teleco via another approving agencies, which itself is a victory because the U.S. market cable requirement is completely different in terms of construction and material used than Indian and European market. So those approvals have been taken. Once the demand picks up, we expect a reasonable amount of opportunities for us. We have already started appointing distributors agents. We have already got our own employees also in U.S. market. We are totally ready to take advantage of this market once the demand picks up. But anyway, we already started selling. We have done some selling in U.S. market. I don't have the exact number in my hand. But yes, I think something like $8 million or $10 million -- $7 million or $8 million of sales has already happened in the U.S. market.

[Operator]

The next question is from the line of Sahil Sanghvi from Monarch Networth Capital.

[Sahil Sanghvi, analyst]

Just two questions, sir. One, so now thinking about the second half, sir, can we still expect a low single-digit growth this year? Or should we expect a flattish number on the revenue side for this.

[Mahendra Nahata, executive]

Listen, Sahil, I would not like to give any future guidance or projections. But I am sure with the demand picking up in the next few quarters, there would be reasonable -- there should be reasonable growth in our revenue, which we had anticipated. This particular quarter, the revenue growth was there because of the reduced sales on the products, margins took a hit from if we compare on the quarter 1. On the product sale improve, the margin are going to improve. So though -- the revenue has grown. But if you compare it to the last year, it's not really -- revenue has gone down, but more or less profitability has gone down. So I expect that next 2 quarters, we should expect the demand should pickup. And if the demand picks up our revenue and profitability both.

[Sahil Sanghvi, analyst]

Right, sir. Right, sir. And my second question is already products that we are launching, would you be able to give a number as to what kind of incremental revenue can we expect maybe by next year?

[Mahendra Nahata, executive]

Look, new products which we are launching, which a number of times I mentioned, I am expecting that there should be at least an increased revenue of about INR 800 crores to INR 1,000 crores coming up from this source on a very pessimistic basis. It's could be more. Because some of the products we are launching, the demand is huge, huge demand opportunity is there. But at least INR 800 crores to INR 1,000 crores, minimum I expect that kind of revenue to come up from these products.

[Sahil Sanghvi, analyst]

This should be in FY '25 or it would be over 2 years -- 2, 3 year?

[Mahendra Nahata, executive]

No, I'm talking about FY '25. I'm quite confident of that. Because all these products I'm talking about would be launched before the expiry of this financial year. And maybe a little bit earlier than that, and one by one. And by the next financial year, we would be totally in the market, including the export market to sell this product. So once that happens, demand of this sort of billions of dollars. So there is absolutely no lack of confidence in us to get this kind of a revenue.

[Operator]

The next question is from the line of Saral from Indsec.

[Saral Seth, analyst]

Sir, what would be our blending capacity utilization, if you could give a sense?

[Mahendra Nahata, executive]

Would you repeat your question once again?

[Saral Seth, analyst]

Sir, my question pertain to our capacity utilizations for the first half.

[Mahendra Nahata, executive]

Yes. Look, the capacity utilization in the fiber optic is low. As I've said, the cost of this market has slowed down. So it has gone down by revenue by 1/3 or so. As you've seen, the product sale has gone down by 1/3. So capacity utilization has almost gone -- maybe a little bit more than that because inventory which was there, has been also been part of the sales number. But around that, it has gone down capacity utilization. But once the demand improves, it will go up again. Very easy to increase that. This is very modular.

[Saral Seth, analyst]

Sir, you highlighted that our margins have fallen because of the weak product mix, the product revenue has fallen. Any other reason apart from this? Or this is the only reason?

[Mahendra Nahata, executive]

Major reason this only. But there has been a decrease in the price also because once you have a decrease in demand, considering there will be some decrease in the price also. So the realization of fiber optic cable per fiber kilometer has gone down by about INR 100 per fiber kilometer. So that is the [indiscernible] some decrease in demand. But let me tell you, these are very temporary phenomena in the market. And market cannot always remain sky high and every time the demand is very, very high.

These are temporary things which come in the market, which is -- this is one of them. And I am quite confident this would come back at a smaller level very, very soon. And this will also improve once the demand improved. And also at the same point of time, capacity utilization will also improve. And all that would be reflected in the P&L of the company.

[Saral Seth, analyst]

So sir, what should be the margin trajectory because it has been volatile over the last 4 -- 3, 4 quarters. So just wanted to get a sense where can we lined up in FY '24, if you could give a directional guidance.

[Mahendra Nahata, executive]

Well, look, it's not proper for me to give guidance. But yes, I can say with the increase in the product allied revenue, margin trajectory would also become better and average out. We average out for last 2 quarters, it would be around that.

[Saral Seth, analyst]

Understood. That was helpful. Sir, what do we -- can you share some outlook for exports? How is it shaping up? We've seen very good traction over the last 3, 4 years. But going ahead, how do we see that going?

[Mahendra Nahata, executive]

Look, I'm very bullish about that. I'm very, very bullish about that. We have taken various steps to increase exports for fiber optic cable as well as equipment. I think we would have contacted in last 2 months, more than 200 to 250 different customers across the world about our fiber optic cable. And now starting to build them from L0 level to L1, L2, L3 level when L4 will improve at the final sale. So these are kind of customers we are now contacting apart from the customers we are selling. They are the new customers we are contacting by a dedicated team. And we received reply from many and when we start this taking the next steps and all that. And we have got approvals from, as I said, in Telcordia for the U.S. market, which is in the approval [indiscernible] technically. We've got approval from various other well renowned operators for our fiber optic cable.

So I have a very promising outlook for fiber optic cable sales in the export market. And of course, I expect it to pick up in the next couple of months. As far as the equipment are concerned, I'm very bullish because the market of equipment is far, far larger than the fiber optical cable market. Of course, equipment are also quite a lot. But the equipment which we are manufacturing, we are designing and due to manufacturing. They're also demanding billions of dollars. But I am talking about INR 800 crores to INR 1,000 crores. So we have already started making in that direction effort in that direction also to start writing to the operators. So these are the products which are going to come out of our manufacturing in the next few months, did this, this and these are the specifications. And we are already looking at that react, we are getting good response from operators. And once the products come out and we give it for testing, I'm sure that this INR 800 crores or INR 1,000 crores of revenue would be absolutely peanuts, nothing.

In fact, we have already sent one of our product samples for testing to a very large U.S. operator. And they've already gone through the first level of testing and they've expressed a complete satisfaction with our product. I don't say that has resulted in any demand immediately, but getting a satisfactory report from such a large operator itself is a good thing. One of our 5G products -- and this one is a 5G product.

Another 5G product is getting tested in another operator's lab in India, where also we have a satisfactory report. So for the revenues from exports and also cable revenue from exports, I am very bullish about because of the efforts we have taken, because the customer base we are creating and in terms of products, good efficient products at a price which is very competitive we have developed. I'm sure this will all result in good export revenue in the next year and years beyond that.

[Saral Seth, analyst]

Sure, sir, that was delightful to hear. Sir, you spoke in detail about that inventory buildup by one of the key clients.

[Operator]

Hello, Mr. Saral, sorry to interrupt. The next question is from the line of Darshit from Robo Capital.

[Unknown Analyst]

So although you have partly answered my question, but I just request that if you can just not about proper guidance, but just give a view of the medium term, say, 2 to 3 years down the line about margins, revenue or any kind of key drivers you think?

[Mahendra Nahata, executive]

Look, Darshit, thanks for your question. I will not give a guidance, but what I can say the strategy which we have got in the company, two-, three-fold. One, increasing our revenue from products and that is happening with increasing the capacity of fiber optic cable manufacturing capacity, fiber manufacturing capacity. Backward integration which results in reduction; two, cable designed by ourselves, which is resulting in a number of products, which can be sold in export markets and also reducing our revenues from project increasing from products.

All if look at combined way, you would find that revenue are expected to go up as well as profitability is also expected to go up in next 2, 3 years, merger talking about, reason is simple. One, for us have a better profitability, lower cash require, releases the interest burden. And also at the same time, increased capacity would mean as you would be able to export to more customer in more countries. Again which we are ending up on heavily because if the export is built, then that is where the 90% of the demand lies. So with the more number of customers, we expect increasing the revenue. So that is where we are being up a lot of effort, apart from our customers in India.

Of course, because India is our home market, where customers like Jio and Airtel are -- we hope that Vodafone also revised, we hope. BSNL is coming up with a lot of incentives from the government. Programs like BharatNet are coming up because -- and that has a budgeted outflow of INR 1,40,000 crores for next 10 years, including maintenance -- already INR 40,000 crores is CapEx in next 3 years, and we expect to get -- reasonably booked orders out of that because we should be one of the more qualified parties. So in 2, 3 years time frame, I expect feature should be good.

[Unknown Analyst]

Okay. Okay. Great to hear that. And I just missed one thing you said about products already approved in the U.S. market. What was the number?

[Mahendra Nahata, executive]

That I talked about the fiber optic cable. And that was -- roughly, we estimate that constitutes about 60% of the demand on the cable markets of the U.S.

[Operator]

[Operator Instructions] The next question is from the line of Aman Vij from Astute Investment Management.

[Aman Vij, analyst]

My first question is on the defense side and then on the product side.

[Mahendra Nahata, executive]

Aman, your questions are always on defense side.

[Aman Vij, analyst]

Yes. I have a question on product side also, sir. So on the defense side, sir, if you can give an update, last call, you talked about some potential tenders in BMP upgrade and fuses as well. And on the SDR and Nitrogen, if you can update on all these 3, 4 products.

[Mahendra Nahata, executive]

Look, on the BMP upgrade, UTRR for our upgrade has already happened. UTRR is with various time, and I'm very happy to inform that we have already gone through that UTRR. Some of them are failed and I don't want to name who are failed because it's not my job to name the competitors who have failed. And now I think the last phase of trial is going for -- going on for the remaining companies. And I think they are finishing the trial within this month. And whoever passes through, they will get RFT and the tender to participate. And we have already passed through that trial, and that is happy to inform you.

In terms of SDR, which is under development, it is still not fully developed. We have done more or less 50%, 60% of the development. There were some issues where we got stuck in terms of technical part of it, which is technically the radio frequency part, which we have now got a solution and resolved. So resolved in a sense that theoretically resolved, but practically when we put it through as a equipment, we would know and now we know the solution. So then the SDR would be developed sometime mid of next year and will be submitted to Army, but it's a long-term project. Demand of SDR will continue for decades to come, more than a decade to come.

So there is no problem for us, [indiscernible] got delayed by 6 months or so. And in R&D, nothing new. Very, very complicated product. So there is a delay of 6 months or so and fine. It's a product which would be in demand for a couple of decades, so we have no issue with that. Huge new tender is yet to come. We are hearing that new tender would come. Whenever it comes, we'll participate, but we have already approached Indian Army, whose trial even without a tender because there is a procedure while they try by themselves, if you submit without a tender and they certify it for a military use.

Once they certify it for military use, then whenever a tender comes, you don't even have to go through this test and trial again, in many cases. Many cases, you may have to, many case you may not. In terms of defense, we have participated in another tender, which is yet to be opened, which is for tactical fiber optic cable, which is, I think, about 7,000 kilometers about few days back, about 10 days back, and that it to be opened. So once it is not a result, there are only -- I think there should be only 3 or 4 participants as much as I know. So it has not been declared, but as industry information is there, there should be about 3 or 4 participants. And we are very hopeful that we should be one of the parties who would be asked to go for the reverse bidding. It's a 2-stage bidding. One is what we submit and then the reverse bidding happens. So we are quite hopeful of that. That's one which you've already participated.

So UTRR, we are approved and waiting for RFP. Technical cable, we have already participated in a tender. We are quite hopeful of that. SDR development is big delays, but which will come up the mid next year. Huge, we're submitting for approval to the Indian Army, already listen to them. Now waiting for the ammunition to be made available and the final range to be made available for artillery guns firing range for limited. So final range availability we are waiting for. Electrooptics, we have one tender coming up where we'll participate in. One tender already came where there has been some problems with a number of private companies in a particular class of firing, which was -- all have represented it was -- is a problem with the technical problem has given, not really problem with the Electrooptic devices of the company. So that is in the reconsideration at this point of time.

[Aman Vij, analyst]

Sure, sir. That was helpful. The second question is on the product side. So earlier, we had a target of around maybe INR 300 crores to INR 400 crores sales for this year and INR 800 crores to INR 1,000 crores for next year. I believe we are still on track for next year target, but what would be the revised target for the product side for this year?

[Mahendra Nahata, executive]

So this year, we are -- instead of INR 300 crores to INR 400 crores, we are expecting INR 250 crores to INR 300 crores, about INR 250 crores to INR 300 crores, because some of our products which we are already in the market, for example, unless -- there has got room that is under supply. We've got an order of 10,000 links, which we under-supply them. Another order of 5,000 is expected very soon which we will supply. So you should exhibit our INR 250 crores to INR 300 crores instead of INR 300 crores to INR 400 crores. But next year, INR 800 crore to INR 1,000 crores, I believe, shouldn't be any problem in achieving that.

[Operator]

The next question is from the line of Saket Kapoor from Kapoor Co.

[Saket Kapoor, analyst]

[Foreign Language] Firstly, sir, for this EPC segment part, I think Madhya Pradesh, we bagged an order for INR 1,015 crores. So if you could give us some more details. And also whether it is one of the project or a package in the project, if you could throw some more light.

[Mahendra Nahata, executive]

No, it is one of the projects, not really a package in the project. And it is expected to be completed in 2 years' time frame. And forever then all that would start in the months from now, after Diwali, let me say. So as I said, our effort is to somehow come up with the technology where we can put fiber optic cable with that. In U.K., we are already working on that, the technological part, how to do that and how to make it robust and not something which can be damaged with the water pipeline and then various methodology, whether it can be inside the pipe, outside the pipe, we are working on that. But then hurry to come up with a solution we did. For working with a solution it works and it could be different in different parts of the network. So we are working on that. The topology of the Madhya Pradesh different, but we will still work on that kind of a solution. So it's a 2-year thing, which is to be completed and work would start in a month's time.

[Saket Kapoor, analyst]

So sir, as you have earlier mentioned that we will be more inclined towards the product segment and more R&D being done there only. So how would the revenue profile look forward? I think so now with this participation in the Jal Nigam Projects. I think it further are there in the annual, what should be the likelihood and the percentage in the revenue mix?

[Mahendra Nahata, executive]

Look, as I said currently -- as I said, our overall strategy is that product revenue should increase. And then spend [indiscernible] of the company in R&D in cable as well as your product which is telecom products and defense products. Of course, when I say 70%, 30% is our ultimate objective, 30% being from the projects where good cash flow projection, like what we do for Jio. Very good cash flow. Now at the same point of time, there are things. Like, for example, current quarter, the revenue price is low. And for the regions which I've already explained, I need not go in detail again. So current year, as this quarter 3, also, I expect it to remain almost like that. Quarter 4, it would improve. That's my expectation. And Q1 onwards from the net -- different synergy altogether. There's so many products coming to the market, the scenario will be completely different. So this year, it's about 50%, 50% or maybe little better than that. Next year, I think I should be able to go into a 60%, 40% situation than we did 70%, 30% situation.

[Saket Kapoor, analyst]

Correct, sir. And one more question, sir, you mentioned about some CapEx in...

[Operator]

Could you please rejoin the queue? There are other participants are also waiting for the turn. The next question is from the line of Parth Mehta from MCAP.

[Unknown Analyst]

Sir, I had a couple of questions. The first one is when you are going to launch these new products, be it on the defense side or the 5G side, will we need any kind of CapEx or investment to convert those launched products to revenues, which we are probably looking at INR 800 crores to INR 1,000 crores of revenues in the next financial year?

[Mahendra Nahata, executive]

No. There will be some CapEx required is INR 50 crores to INR 60 crores, around -- you can say less than INR 75 crores.

[Unknown Analyst]

INR 75 crores of CapEx would give us a revenue of INR 800 crores to INR 1,000 crores?

[Mahendra Nahata, executive]

Absolutely. Absolutely. Because a lot of money spent on R&D. There is also CapEx. It's not only machinery we said. How you design the product, that is also very, very important. And I could have done without the INR 75 crores also going for controller contract manufacturing, but since I have to take advantage with DLI incentive, which has been sanctioned with the company of almost INR 600 crores. That's why we have to establish the manufacturing facility so that we can take advantage of that INR 600 crores of [indiscernible] to us.

[Unknown Analyst]

Yes. Okay. Sir, my second question and the final one is what -- after the new capacity for OFC and OF comes on stream next year, how much revenues are we looking at, at these prices where they have corrected in the last quarter?

[Mahendra Nahata, executive]

I'm looking something around INR 2,800 crores to INR 3,000 crores, which includes the fiber optic cable fiber and also accessories, which are sold together with fiber optic cable. So this is what I am looking for around INR 2,800 crores to INR 3,000 crores.

[Unknown Analyst]

At the expanded capacity?

[Mahendra Nahata, executive]

At the expanded capacity.

[Unknown Analyst]

Okay. Sir, how much price...

[Mahendra Nahata, executive]

That could increase further. Next year, it could increase further.

[Unknown Analyst]

Sir, next year only, I'm asking that how much -- how much do you think after the...

[Mahendra Nahata, executive]

I'm talking about next year only. But then year next to that it will not increase.

[Unknown Analyst]

So year next to that, how much will that increase from INR 3,000 crore?

[Mahendra Nahata, executive]

Pardon me?

[Unknown Analyst]

In FY '26, how much are you expecting from these...

[Mahendra Nahata, executive]

I would say another couple of hundred -- INR 200 crores to INR 300 crores.

[Operator]

The next question is from the line of Mr. Pramod, who is an individual investor. The next question is coming from the line of Jeel Thakkar from Nirzar Securities.

[Unknown Analyst]

Sir, I just wanted to know what is the optic fiber price and volume compared to the previous year? And also, I would like to know, are we building for Kavach?

[Mahendra Nahata, executive]

For what?

[Unknown Analyst]

Kavach, Kavach.

[Mahendra Nahata, executive]

Okay. Okay. Railways, that is the signaling equipment. Not the telecom...

[Unknown Analyst]

Yes, yes.

[Mahendra Nahata, executive]

No. So for -- if Kavach was telecom part, we will be definitely bidding for that. When it comes to the realization of fiber, in terms of pricing, as I said in my opening remarks, it has gone down by roughly by -- not opening, in my answering one of the questions. I Think that pricing has gone down by roughly about INR 100 per fiber kilometer in terms of realization. So what was cable, I'm talking about cable, what was the realization about INR 1,300 per fiber kilometers cable has gone down to INR 1,200. In terms of -- but depending upon what count of fiber and all that, which is the average. In terms of price -- fiber per kilometer, it has gone down from Q1 to Q2. Earlier it was about INR 380 per kilometer. Now it has become around INR [ 555 ] per kilometer, that is the fiber price I'm talking about.

[Unknown Analyst]

All right. So right now, you can say it was about INR 1,300?

[Mahendra Nahata, executive]

Right now, the price of fiber cable, I'm not talking of cable, fiber.

[Unknown Analyst]

Yes.

[Mahendra Nahata, executive]

Price of cable per fiber kilometer, it is about INR 1,200, INR 1,213, on average. But it is, again, as I said, it is average for us. Somebody else will have a different average because somebody might have sold fiber of lower count where price will be different. Higher count, price will be different. Company to company and construction to construction. For us, it has gone down by INR 100.

[Unknown Analyst]

How much was this last year?

[Mahendra Nahata, executive]

INR 1,300 -- INR 1,315.

[Operator]

The next question is from the line of Pranay Gandhi from Green Portfolio.

[Pranay Gandhi, analyst]

Sir, my first question is in regards to the Defense segment. As you just discussed that the company is actively bidding for tenders and going for product trials as well. But I want to understand what kind of numbers are we looking at? I understand it's difficult to comment on it before we get the tenders. But I just want to understand the scale of tenders that the company participates in. Could you please give an insight on that.

[Mahendra Nahata, executive]

Tenders you asked me was what we have participated and what we expect to participate in, let us say, next -- this current financial year, will be roughly about INR 7,000 crores to INR 10,000 crores, participating and expected to participate, both I'm putting together, about INR 7,000 to INR 10,000 crores. Now how much orders we'll get? It is anybody we will get.

[Pranay Gandhi, analyst]

And sir, even if we participate at that number, and I know in a real case scenario in real world, it's not -- I hope it happens, but the company will not be able to secure all the offers. But even if it does, is it in a position where it can deliver that number?

[Mahendra Nahata, executive]

Look, let us not even expect to get all those numbers. That is not even expected. So I would not say that in a position or not. I have been very happy even if I get 15% or 20% of that. Very, very happy with that. And that certainly would be in a position to deliver.

[Pranay Gandhi, analyst]

Okay. And in the next few years, do we see that number increasing in terms of our scale...

[Mahendra Nahata, executive]

Sure, sure, sure. Because we will be increasing our range. One more decision we have taken, in defense, we are not only going to depend upon where we see design, we are going to do the transfer of technologies also, taking technology from outside for our manufacturing. And then the [BNP] which I talked about. Nothing is manufacturing by us. It is all partnerships. But yes, system integration would be done by us. So we will take more such opportunities. For defense products are very complex products and goes through testing cycle, which is got forbid -- was so strict. And sometimes unrealistic also, let me be very frank, very unrealistic also which is not even required. But they're progressing. So to design the themes and go through those sites all the time for every product, it's not possible. Better take technology transfer also with proven products and increase the revenue through them also. So it's a two-pronged approach. One is our own products. Second is TOT. So like the GLP-2 where is the transfer of technology, the system integration by us. We expect to be more such projects for ourselves coming up in the future.

[Pranay Gandhi, analyst]

And my next question would be in regards to telecom equipment.

[Operator]

Sorry to interrupt, Mr. Pranay. Could you rejoin the queue for any further question?

[Pranay Gandhi, analyst]

Ma'am, This is only one question.

[Mahendra Nahata, executive]

Okay, I will take. This is one question. Let him, let him. No problem.

[Pranay Gandhi, analyst]

Thank you. Sir, in regards to telecom equipment, I understand as you previously mentioned that market is huge. It's bigger than the optical cable with sales. So what are the products that we see our flagship products or feed products on which we will have competitive advantage? And the scope beyond FY '25, beyond INR 1,000 crore revenue mark. Could you please comment on that?

[Mahendra Nahata, executive]

Look, on a flagship product, like, for example, the products which are currently -- launched UBR, unlike radio. For the first, it is being -- not only the time, it's been commercially used for backhauling the 4G and 5G traffic. And even the Qualcomm, which is in chip supply, they were also amazed -- I had earlier meeting with the Qualcomm people last week only, they are very senior people, #2 is the #3 people had come from U.S. We were amazed the kind of a here for the unlicensed they have not done anywhere else in the world, which we are able to do in India. And the product is used for backhauling the 4G and 5G traffic, which has not happened anywhere else in the world. We have been able to build radio, which is giving multiple GDPs of backhaul traffic by calling the traffic of 4G, 5G. So that is going to have a good demand in India and many other countries.

Wi-Fi, Wi-Fi 7, which we had developed last year, but now we are making a cost-reduced version of that because at that time, what chipset were available in the market, price was so high, it was not effective for one switch. But now the new chipset has come, we are going to rationalize that, and that is going to be a flagship -- and much more importantly, the wireless -- 5G wireless customer premises equipment, which are -- that are not under development, some of the development is already done, which is under trial. And a couple of other versions of that would be coming into -- for free trial in the next 1 month, I expect very, very good demand coming out of that. Though I'm not willing to give any numbers but it can be much more than the overall turnover I've assumed from the -- our product next year.

One product itself can be more than that. Such high is the demand for those products. So 5G-related products, unlicensed and radio Wi-Fi routers. Routers are a shoot part of BharatNet. So BharatNet whenever comes up, indigenously designed products and I think we and only one more company has indigenously designed products for Bharat for routers. So whenever the BharatNet comes, demand is going to be more than lac of routers. So I believe there would be good demand of opportunity from -- for routers also. So these are -- which I can say that very good demand and opportunity is there. Now how are we able to take up, how much we will be able to sell, is stilk premature to say. But yes, INR 800 crores to INR 1,000 crores is nowhere. It's very, very pessimistic. We can do much more than that. If myself, are not able to do that also, I develop the effect. And I don't think they are bad guide. They should be able to do more than that.

[Pranay Gandhi, analyst]

And good luck for that. Sir, I just have one request. We were trying to schedule a plant visit or meeting with the management...

[Mahendra Nahata, executive]

Any time. Any time, Just let us know, our...

[Pranay Gandhi, analyst]

Not being able to secure one. Is there a concern person I can get in touch with?

[Mahendra Nahata, executive]

Yes, yes. You can get in touch with Amit Agarwal, our Head of Investor Relation, and he would be too happy to organize your visit, if you want to visit fiber and cable both, it would be at Hyderabad. Hyderabad, very good. Where are you based?

[Pranay Gandhi, analyst]

We are based out of Gurgaon.

[Mahendra Nahata, executive]

Gurgaon, then visit Hyderabad or Chennai, whatever you want.

[Operator]

The last question is from the line of Mr. Prayansh is an individual investor.

[Unknown Attendee]

My first question is regarding this expansion of optical fiber and fiber cable. So in which month are we going to complete it, number one? And number two, what kind of additional turnover that we will be generating from this?

[Mahendra Nahata, executive]

So fiber manufacturing, the completion is expected in by stages. But partly, it should be completed in late say, July '24. And partly, it will be completed in January '25, which is two stages. We are doing the expansion. And [indiscernible] changes because of during machine deliveries. So that is going to happen, but it is going to be in two stages.

In the cable manufacturing, it would be completed in the stages in the financial year '24-'25. In stages, I said because of different kind of cables which we are going to be manufacturing. So deliveries are different for machines. So it is -- stages we are doing '24-'25, it will be completed. If you compare the present revenue and the expanded revenue, difference could be roughly about INR 800 crores to INR 1,000 crores.

[Unknown Attendee]

So you are saying that like additional incremental revenue will be INR 800 crores to INR 1,000 crores from the cable?

[Mahendra Nahata, executive]

Yes, yes. In accessories, cable plus direct.

[Unknown Attendee]

Yes, yes. In a full financial year?

[Mahendra Nahata, executive]

Yes.

[Unknown Attendee]

Yes. And my second question regarding this 5G equipments, which we are manufacturing. So just on a rough understanding, how many numbers or how many types of equipment are we developing now? And whether all the equipment will be launched within this financial year or something will be next financial year also, this is number one. And number two, whether there is any impediment or hurdle which we can delay this thing?

[Mahendra Nahata, executive]

Look, the number of increment, if you take, there are categories and there are subcategories. But if I include subcategories, if it is just the categories, the categories would be Wi-Fi, UBR 5G customers equipment, Wi-Fi, customer HMR, there will be six or seven categories of communication equipment. But if I include subcategories, which is that category equipment is more than 25. So it's something like that.

Now in terms of impediment, it's a research and development. R&D is always something which you cannot always succeed in the first time. Sometimes you may, sometimes you may not. There are 50% of the cases you succeed first time. 50% cases, you make modification and then you succeed. So there is no impediment asset that there is something which you will not succeed at all. You will sometimes it gets delayed. And that is true with all R&D. Chandrayaan [Foreign Language].

[Unknown Attendee]

No, sir, my only point was since we are now approaching very like -- very soon to the end of this financial year. So -- and like this last -- like there is not so close, you mentioned the same thing regarding this new product and everything. So now like now this idea that might be right because now 4, 5 months left. So maybe the surety of launching all products like should be much more as compared to 3 month before...

[Mahendra Nahata, executive]

We are quite sure that all these products will be launched in the current financial year. There may be 1 or 2 products may be another 1 or 2 months delay, but I don't expect more than that.

[Unknown Attendee]

And sir, like one thing you mentioned, which I missed that you said that you are also developing some products which -- revenue which can be very huge. So if you just kind of recap this one?

[Mahendra Nahata, executive]

Yes, this is like, for example, 5G customer equipment, which I talked about. Demand opportunity is very, very high. So the one quarter itself can be more revenue than what I'm expecting from all the products in telecommunication sector. But I'm not saying that it has the potential. Potential is there. But how much finally revenue comes, that depends upon the order and customers and all that. But potentially, just one product is there to give more than that revenue.

[Operator]

For the remaining questions, the participants can get in touch with Mr. Amit Agarwal individually. And now I would like to hand over the conference to Mr. Nahata for closing comments.

[Mahendra Nahata, executive]

Thank you very much. And thanks a lot, ladies and gentlemen, for attending this earning call for FY -- Q2 of FY '24. And ladies and gentlemen, this quarter in terms of product demand [indiscernible] because of lower demand of fiber optic cable because of various reasons, which we expect to improve next couple of months. In U.S., Europe and India also, I think there were will be significant improvement. Company has taken enough steps to increase the production capacity to supply the increased demand from its customers.

Moreover, with the products which we have undertaken the design R&D for the telecom products, those are also now in a very advanced stage. And one by one they will be launched in the current financial year itself. So I expect very good revenue to come from in the next financial year. Not only from Indian market, from export market also. And there is a very, very high potential from those products for revenue to come. Moreover, programs like BharatNet, which has got an outflow of -- total outflow INR 140,000 crores. A CapEx of INR 40,000 crores. Again, there is good demand opportunity for the company there. Apart from the Fiber to Home being launched worldwide, 5G happening. So there is even bigger opportunity.

And product had revenue which is the strategy of the company, we expect it to reel in result, not only in the Indian market, but as we improve the revenue and improve profitability and improved cash flow. Moreover, one of the [indiscernible] is the network for Spectrum, which had what consumed a lot of our existing cash flow because of delay in payments, well, this is not attributable to us. We expect that also to start figure getting handed over to army one by one. And even yesterday, there was a discussion, and one of the command -- army command, we are expected to hand over to the army from the -- within -- before Diwali. Another one before next month. So that revenue, the cash flow would also start kicking in. And we are expecting that within this financial year, all of the total INR 900 crores which is due from that project, at least, we should be able to receive very significant portion of that money in the current financial year, which would also improve the cash flow situation of the company.

So I look forward very optimistically for the time to come because of the reasons of product development, because of expected demand coming from fiber optic cables and increased revenue from products, not only in telecom, but defense sector also in coming years.

Thank you very much, and thanks a lot again for participating in the call and wish all of you a very, very happy Navaratri, and very, very happy Diwali. Thank you very much.

[Operator]

Thank you, sir. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.