HFCL Ltd

NSE:HFCL

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the HFCL Q3 FY '23 Earnings Conference Call, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mahendra Nahata, MD, HFCL.

Thank you, and over to you, sir.

[Mahendra Nahata, executive]

Thanks a lot, and good afternoon, ladies and gentlemen, and greetings for the New Year, 2023. A warm welcome to HFCL's earning call for quarter 3 of financial year 2023. I truly appreciate and I express my gratitude for making it to HFCL's earning call for the third quarter of the financial year '23.

I'm sure that you've got a chance to go through our financial results, press release and investor's presentation, which are available on the website of the company and also on the website of stock exchanges.

Friends, our country has recovered to a large extent from the aftermath of macroeconomic challenges post due to pandemic and geopolitical situation. We all applaud our government, the Reserve Bank of India and our policymakers for handling the situation so well and setting India on a path of economic growth.

As a result, World Bank has upgraded India's economic forecast for financial year 2023, citing the country is showing high resilience to global shocks and robust domestic demand. The telecommunications sector has been at the forefront of India's technological growth, ushering into new advancements and enabling innovation. The impact of supply chain disruption due to ongoing Russian-Ukraine conflict also seems to have eased a bit further during this quarter.

For us, quarter 3 of financial year '23, earmarked with some significant developments including the launch of our 5G products and services during India Mobile Congress of 2022, coupled with prestigious partnership with Qualcomm for the development of innovative and futuristic 5G products. Further, we received approval to avail incentive up to INR 652.79 crores under the PLI scheme from Government of India, which will give us a boost to the production of indigenous telecom equipment from India. With the favorable industry tailwinds, we bagged key orders from permanent domestic and global players. The demand for our new range of optical fiber cables in key markets remains high, leading to a stellar performance on export front, which grew by 140.38% on a year-to-year basis.

We have been able to close quarter 3 with an outstanding order book of more than INR 7,000 crores. As India undertakes one of the fastest and largest 5G infrastructure rollout, there has been significant progress on homegrown 4G and 5G stack. The next couple of years will be exciting for the telecom equipment industry as the leading telcos are planning massive orders for 5G rollout.

During the fiscal period of 2023 to 2028, the addressable market size of various 5G products and services globally which includes, of course, 5G transport products, 5G RAN product and system integration services is estimated around USD 400 billion. To meet this impending demand emerging from the 5G network rollout in India and also the global market. We launched some key innovative products at the India Mobile Congress 2022, which is Asia's largest telecom, media and technology forum held during October 2022.

We launched -- we are first to open source WiFi 7 access points, 5G 8T8R Macro Radio Unit, which combines power of vRAN and open standards to accelerate 5G deployment. We also launched 5G Lab-as-a-Service facility to accelerate rollout of 5G solutions services to sustain innovation and technological breakthroughs we collaborated with industry leaders at Qualcomm Technologies for designing and developing various 5G products.

The telecom industry has continued to witness a strong investment momentum on the back of advent of 5G, dipping of FTTH penetration in the country, ongoing BharatNet projects, proposal for modernization of railway and defense telecom networks and NHI telecom initiative launched by the Government of India. Also with hyperscaling of data centers and 5G networks, we are seeing a manyfold rise in the demand of fiberization and telecom networking products in India.

In order to create a strong 5G network infrastructure in India, the telecom industry will witness an investment of at least INR 3.5 lakh crores to INR 4 lakh crore in the next 5 years to facilitate 5G rollout in India. The domestic optical fiber cable market environment continues to be strong with the current market demand for optical fiber cable products at 25 million to 30 million fiber kilometer per annum is expected to grow significantly over the next few years on account of creation of 5G network across the country, expansion of existing 4G networks, deployment of fiber-to-home network, implementation of BharatNet project and creation of multiple data centers across the length and breadth of the country.

In India, BharatNet alone will lead to an opportunity of laying 16 lakh kilometers of optical fiber cable, translating into almost 50 million fiber kilometers of fiber. Until June 2022, the level of fiberization in India was at 35% against the ideal requirement of 75% for the launch of 5G services. Indian telcos are estimated to expand USD 1.5 billion to 2.5 billion on optical fiber cable in the next 3 to 4 years. The current global demand for optical fiber cable is around 650 million fiber kilometer equivalent cable which is expected to grow significantly on account of 5G rollout, FTTH expansion, creation of multiple hyperscale data centers. As the largest supplier of optical fiber cable in India, HFCL has been focused on developing the new edge low diameter cables like microduct cable, FTTH cable range, micro module cables, aerial cables and underground cables for meeting the growing global demand.

As already informed, significant development during this quarter was our export growth of 140.38% on a year-to-year basis, and we are optimistic to continue with the same trend in coming quarters by accessing more geographies. Our powerful and robust innovations have helped us in establishing a global footprint of 30-plus countries and serving up to 80-plus clients on the global front, with employees -- with our own employees in places like Dubai, France, Germany, England, Netherlands, Kenya and the U.S. We are further deepening our customer relations and widening our global presence.

Leading global economies, including the U.S., U.K. and Europe are some of our key focused markets. During the quarter, one of the key milestones was to receive approval under the production-linked incentive scheme from Government of India, converting incentive up to INR 652.79 crores over period of 5 years during the financial year '22-'23 to financial year '26-'27.

As part of the development, the earmarked, an investment of INR 425 crores over a period of next 4 years starting from the financial year '22-'23 for manufacturing of various telecom products, including 5G instrument. In order to avail the benefits under the PLI scheme, Board in its meeting of 23rd January 2023, has given its approval for setting of a manufacturing facility for telecom and networking products in Gurugram in the state of Haryana. The participation in the PLI scheme will enable us to support our government's initiative of Make In India and make us more competitive in global markets.

The Board in the same meeting also decided to further the existing optical fiber manufacturing facility by 15 million fiber kilometer per annum in Hyderabad, where company's optical fiber manufacturing facility is already operational, instead of our earlier plan setting up through wholly owned subsidiary, HFCL Technologies Private Limited. Estimated CapEx for this proposed capacity expansion would be INR 357 crores and the total consolidated capacity of optical fiber manufacturing, post-expansion will reach to 25 million fiber kilometer per annum from the existing capacity of 10 million fiber kilometer per annum.

Further, HTL Limited, our material subsidiary was recognized as an emerging company of the year, during the 8th International Aerospace and Defense Awards conducted in the recent Defense EXPO 2022 in Gandhinagar, Gujarat, making it stepping stone to our expanding, our presence in the defense side. During the quarter under review, the company has bagged prestigious orders from various Indian and global customers amounting to approximately INR 3,000 crores. We have a stable order book of more than INR 7,000 crores as of 31 December 2022. Let me friends now brief you on key performance metrics of quarter 3 of financial year '23. Revenue for quarter 3 stood at INR 1,086 crores as compared to INR 1,173 crores in quarter 2 of FY '23 and INR 1,215 crores in the quarter 3 of FY '22.

However, EBITDA for the quarter stood at INR 193 crores as compared to INR 175 crores in quarter 2 of FY '23 and INR 174 crores in quarter 3 of FY '22. EBITDA margin stood at 17.8% for quarter 3 of FY '23 as compared to 14.88% in quarter 2 of FY '23 and 14.36% in quarter 3 of FY '22. For quarter 3 of FY '23, profit after tax stood at INR 102 crores as compared to INR 84 crores of quarter 2 of FY '23 and INR 81 crores for quarter 3 of FY '22.

Now PAT margin stood at 9.36% in quarter under consideration as compared to 7.18% in Q2 of FY '23 and 6.67% in quarter 3 of FY '22. Segment revenue for telecom products during the quarter stood at INR 693 crores as compared to INR 671 crores in quarter 2 of FY '23. From our financial metrics, you would kindly appreciate that on the backdrop in supply chain disruptions and reduced special input costs, we have been able to demonstrate healthy growth in our order book, profitability and margins over last quarter. We're optimistic about tapping into future opportunities and believe that our order book, revenue and margins will continue to grow with the initiatives taken in the last few quarters.

With 5G driving telecom operators and their innovation to a new high, HFCL is also witnessing a transformation homogenous high-tech global enterprise and integrated next-gen network solution provider. Having established a strong footing in the industry, I mean leader in the optical fiber cable manufacturing in the country will continue to offer more robust and high-tech solutions with open source technology. In financial year '23, '24, will further continue to invest in R&D and focus on our strategy of tapping new customers, new geographies with new products. We aim to grow with strong contribution coming from exports, product segments and private customers.

We're also looking at strengthening our order book further, which is over INR 7,000 crores in the quarter 3 of financial year '23. To conclude, I would like to say that given the opportunity landscape in India, going through the 5G rollout, deepening FTTH penetration, ongoing BharatNet, railway, defense and NHI decompose and hyperscaling of data centers, we will continue to leverage our capabilities and make the best out of available opportunities to innovate further.

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

[Operator]

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

[Aman Vij, analyst]

First of all, congratulations on a very good performance on the optical fiber segment. Sir, I wanted an update on the other segment as well, which is the defense segments. So if you can talk about what is the update on the electronic fuse tender as well as electro optic tenders?

[Mahendra Nahata, executive]

Aman, the performance is overall being wrong, not only on optical fiber cable business but other areas also, including the project and the services. As far as projects for fuel, this concern, that is yet to be decided. There are a lot of issues going on and which are under discussion. Since it's a defense-related projects, I would not like to go in more details at this point of time, but it is yet not decided. And I believe that the tender is under consideration and let us see what decision finally the military authorities take giving the best interest of the country in view in the next few weeks' time.

But no decision has yet been made. In electrooptics, a tender, we have participated, which is under evaluation. Technical testing is going on. We have submitted samples for totally indigenously designed electrooptic products. Now, not only indigenously designed product, but the core, which is the heart of the system, has also been designed by us. I think we are one of the -- probably the only Indian company, which has designed a 12-micro core by ourselves. Only the sensor has been purchased from outside but that design is done by ourselves. We are probably the only Indian company, which has designed that 12-micro core by itself, so which increases our competitiveness and quality performance also.

So it is under evaluation -- technical evaluation at this point of time. And but other couple of areas also, we are making good progress in defense. Though, as you know, defense revenue takes time, and I've been saying repeatedly on every call, but we don't expect any revenue in the current financial year from defense because our evaluation and performance checks and all this are going on. But you should start picking on from the next financial year and then increase further in the coming financial years.

We are already working on a couple of more projects for defense, including as I had informed earlier also modernization of BMT armored personnel carrier that is going on, events already happened. We are now keeping the BMT with our optoelectronic products and control systems. That evaluation will take place in the month of March.

And similarly, we are working on software-defined radios, high-capacity radio relay. These are the 4, 5 different projects we are working, but revenue would start coming from the next financial year, but the major growth would be from here next to that.

[Aman Vij, analyst]

Sure, sir. Just a clarification on this, and then I'll move to my next question. So the -- on the few sites, we'd already explained back, the tender, last time, there were some issues and the government had -- the army has given the tender to the public sector companies rather than the private.

[Mahendra Nahata, executive]

There was no tender has been awarded to anybody, no such tender award has happened.

[Aman Vij, analyst]

Okay. Okay. So they were supposed to come with new tenders?

[Mahendra Nahata, executive]

It allows to participate. Award winning not happened.

[Aman Vij, analyst]

Okay. Okay. But what I understood from the last call, you had mentioned that only the public sector company's product was allowed to go through the second level of trial. The private company products were not allowed to go, and that is why private sector had complained to the Ministry of Defense. So I just wanted that.

[Mahendra Nahata, executive]

That still remains the same. So after all this recommendation by all private sector companies, no decision has yet been made to award tender to anybody. And let us see what decision government finally takes in terms of giving a chance to private sector companies again to try products because private sector companies to the best of my knowledge, out of the fleet -- have -- indigenous technologies own IPR, at least HFCL has got old technology with IPR and which serves the real purpose of the self-reliance, atmanirbhar particularly different sector and which is under consideration of defense authorities, that is much I can say.

[Aman Vij, analyst]

Sir, the trials are stopped for everybody or only the private players now?

[Mahendra Nahata, executive]

Pardon me?

[Aman Vij, analyst]

Their trials which were going on, has it stopped for everybody or only the private players and public sector trials have been raised?

[Mahendra Nahata, executive]

It's not stopped in a sense that decision has yet to be taken that whether as the second chance has been allowed to public sector companies, our representation is that once you have given a second chance to those companies, you have to give the same money to the private companies also.

[Aman Vij, analyst]

Sure. Sure, sir. That helps. On the electrooptic side, you said we are the -- sorry, what is the tender that we have already built for?

[Mahendra Nahata, executive]

This is the tender for, I think, light machine guns. Or assault rifles one of them because the equipment is same. About 5,000 sites for this night vision devices, and that is under evaluation.

[Aman Vij, analyst]

I'm sorry, what is the rough order side...

[Mahendra Nahata, executive]

I cannot say that. I said not been opened up. Aman, so I cannot say the price, the size, but it's 5,000 units and more tenders are coming.

[Aman Vij, analyst]

Sure, sir. And you said we are the among the only players who have the indigenized product in this...

[Mahendra Nahata, executive]

indigenized product -- other people have also indigenized. But within that, within the whole product the major cost is the core. The core we have indigenized. So it's not only the indigenous product, the core has also been indigenized. It's something like equipment, where chipset, for example, you indigenized. So here, the core is the basic heart of the system -- heart and mind of the system. We have indigenized that.

[Aman Vij, analyst]

And sorry, how many players were there in private sector who have bid for this?

[Mahendra Nahata, executive]

I think there must be 6, 7 players. I don't remember exactly, but there must be 6, 7 players.

[Aman Vij, analyst]

Sure, sir. Last question on the defense side. You had mentioned that FY '23, there won't be any revenue. FY '24, maybe some. And FY '25, the scaling will happen. So according to your rough estimate, what can be the numbers in FY '24 and '25 in defense for us and from which we have 4, 5 products, so which do you think will commercialize first?

[Mahendra Nahata, executive]

Right now, I can't project a number because it's too early to say that. But yes, next year, I expect some couple of hundred crores of revenue come from this. But to project the year next to that, that would be too much of a forward-looking statement. I would not like to make at this point of time. But yes, there will be significant growth, that's much I can say.

[Aman Vij, analyst]

And out of these 4, 5 categories in defense, which do you think we will be able to commercialize first?

[Mahendra Nahata, executive]

I think electrooptics should be the first one to be commercialized.

[Aman Vij, analyst]

Okay. And followed by sir?

[Mahendra Nahata, executive]

Followed by, it may be the upgradation of BMP. It may be the fusion also. Yes.

[Aman Vij, analyst]

Sure, sir. And this time, you have updated the presentation and you have talked a lot about the addressable market. And in the defense itself you have talked about domestic market...

[Mahendra Nahata, executive]

Aman, can you come back with the question, there are too many questions and other people are also there.

[Operator]

[Operator Instructions] We'll take the next question from the line of Balasubramanian A from Arihant Capital.

[Balasubramanian A, analyst]

Congratulations for good set of numbers. Recently, we have secured one of the EPC contracts in UP like which is laying fiber optic cables to implement rural water supply network. And we don't have expertise in rural water supply network, like how we are going to manage this project and like what kind of profitability we can expect in this project, what kind of margins we can expect because right now, we are facing pressure on EPC contracts on margin levels. And what are the minimum criteria we are looking to select the projects?

[Mahendra Nahata, executive]

Good question, Mr. Balasubramanian. First of all, let me tell you. The way -- I first coming to expertise and then I will come to the rationale. As per our expertise of laying water pipeline is concerned, it is the same HDPE duct, which we lay for telecom network. There's absolutely no difference, except the diameter.

Only difference is that we have to keep the gradient in view which you don't keep in view while laying telecom cable because water has to flow, in telecom, no liquid has to flow so gradient, you don't keep in view. Here only the gradient you keep in view, otherwise, the methodology of laying duct, material duct used of the material, which is HDPE duct in telecom, the same HDPE duct is used here. Absolutely, there's no difference in laying. It is a combination like what we do in a backhaul network for fiber optic cable and fiber-to-home network, there's absolutely no difference than that.

So technology is same. Way you do it is same. Only the gradient is the thing which you have to keep in mind, which is not a difficult thing to do at all, number one. Now our rationale uptaking, worldwide many places I've seen that when you -- and even in India, Telangana it has been done by the government, Bhagiratha project. That you lay down fiber optic cable while laying down water pipelines because the cost of laying fiber optic cable, if you look at more cost is in digging than the fiber itself. Here you're digging anyway for laying the water pipeline.

So you might as well put the fiber also. So what I said, let HFCL do this experimentation in Uttar Pradesh and many other parts of the country, if this is successful, that we lay fiber optic cable together with this because here this project is making pipeline reach to every home. So we will make -- keep fiber optic cable reach to every home, which is anyway the objective of government of India under BharatNet program. And also at the same point of time, operators are also looking at taking fiber to home at a lower cost because ARPUs in the village may be lower.

Lower cost can only happen if the CapEx is low. So here since that cost of digging is not there, cost of ROW is not there. The cost is expected to be much lower than what you would have incurred if you had laid down fiber optic cable alone for the telecom. So since the cost will be lower, expectation of ARPU would also be lower from the rural subscribers. So it is expected to be beneficial to operator also, to government also and we get additional revenue.

So this is a new experiment we are doing in the country. So as that if this is successful, we would like to do this in the more number of areas. So this is the first project where anyway, only water pipeline, we have different profit. But we are doing survey for the telecom purpose also, and we are going to lay fiber optic cable also in selected areas. Coming to profit, we are targeting at least about 10% profit before tax margin, 10% PBT in the project, which we have no reason to believe that why it would not be there, certainly, it would be there. 10% PBT is expected out of this.

[Balasubramanian A, analyst]

Okay, sir, got it. Sir, my second question, our telecom product share increased to 64% versus 42%. And like our margins also substantially improved, EBIT margin improved to 19%. Like if we -- if the telecom product shares crosses above 70%, we may -- what kind of EBIT margins we may expect and what kind of working capital cycle improvement be expected sir in over medium term?

[Mahendra Nahata, executive]

Look, this is one of the strong performance area of the company, which you have really pointed very well Mr. Balasubramanian. If you look at in the current quarter, our product revenue is 64% as against it was 57% in the last quarter and 42% in the same quarter of the year -- financial year 2021.

So 42% in one year has been up 64%. If you really take it 9 months of the year, then this year, we have reaching to the 64% in the current quarter, but 60% in the 9 months. And compared to the same 9 months in the last year, it was 41%. In the -- if you compare one year back, go back by one year, financial year '21, it was only 27%. Financial year '22, it became 43%. This year, this quarter, it is 64%. So we have been rapidly growing our revenue from products, which has been my key initiatives as I've been talking in every earnings call that we have been rapidly growing our revenue from products rather than projects.

Project was 73% in March '21, it has gone down to 36% in the current quarter under review. So we expect to continue this. Our strategy is to not to stop taking project. We will keep on taking projects, but which are not draining our cash flow, number one, and at the same point of time, which are profitable. So if you look at, we have not taken any major telecom turnkey projects in the current quarter. We have taken this water supply together with telecom, where the payment conditions are good and the profitability is there, but we have not undertaken any large telecom turnkey projects, they were many under offer. We could have taken a couple of thousand crores, I can tell you, a couple of thousand crores, but we did not take it because payment conditions are not good.

So we just left that as that. So strategy is to take more revenue from products, but not to forget the projects, if it is cash flow, negativeness is not there and profitability is -- for example we are doing this Reliance's telecom turnkey projects. We're implementing their fiber optic cable network in North India, any FTTH network in North India, but payment condition is good. So we have no problem in keeping on implementing their project because they know negative cash flow. The know cash flow problem in that project. So we'll continue to do that. But yes, now we will not take a highly negative cash flow projects, which creates cash flow problems for us.

[Balasubramanian A, analyst]

Sir, what is the average working capital cycle for telecom products and EPC contracts, like if you could...

[Mahendra Nahata, executive]

On overall basis, I would tell you, it is about 125 days working capital cycle, for products and this mixed up. Mixed up, if you do is on an average. But if you say only products, products would be less than 90 days and that could be roughly 150 days or so 170 days or so.

[Balasubramanian A, analyst]

Okay. Sir, under optical fiber CapEx around INR 370 crores. What is the CapEx for optical fiber cable?

[Mahendra Nahata, executive]

No, this is INR 356 crores only for optical fiber. Optical capacity enhancement of 15 million fiber kilometers.

[Operator]

Mr. Balasubramanian, maybe request you to please return to the queue. There are several participants waiting for their turn. We'll take next question from the line of Abhishek from Arihant Capital.

[Unknown Analyst]

Congratulations on good set of margins. Sir, on the business, we are hearing largely...

[Operator]

Sorry to interrupt, Abhishek, I think you're on a hands-free mode. Can you switch to handset mode and speak. We can't hear you clearly.

[Unknown Analyst]

Now it's audible, ma'am?

[Operator]

Yes.

[Unknown Analyst]

Okay. Sir, congratulations on good set of numbers. Sir, I want to understand on the railway communication side, we have an order book of INR 309 crores. Now Railway is talking about the increment in CapEx, the higher trajectory allocation by at least by 25% going forward. Sir, what kind of work we are doing? And can you throw some light on how you see the railway business going forward?

[Mahendra Nahata, executive]

Abhishek, again, a very good question. I must appreciate. We have done a good -- have a good expertise in railway telecommunication. If you had seen yesterday's Times of India, there was a full page ad by Larsen and Toubro, that they have set down the metro rail network of Mauritius. There was a full page advertisement. You must have seen that. Point I'm trying to make here is the telecom network of that was done by HFCL. Mauritius Metro, which was started -- overall construction was by L&T and which was flagged off 2 days back, and there was a full page ad by L&T yesterday on that.

Telecom net worth of debt project was by HFCL. Few days back, I think a couple of weeks back, if you would have seen another news item where Dhaka Metro Phase 1 was also switched on -- flagged off by Shaikh Haseena, the Prime Minister of Bangladesh. There also, the telecom network was done by HFCL. Similarly, number of projects in dedicated freight corridor here has been done by HFCL for telecom. Kanpur and Agra Metro are also being -- telecom network is being done by HFCL. We have participated in a couple of more projects at Ahmedabad and Surat. The tenders are yet to be opened.

There also we expect regional size of order to come to us. So point I'm trying to say not only in India but abroad also, we are doing a lot of telecom projects like Mauritius, Dhaka, I just mentioned. In India also, some of the projects are subcontracted to us by the large contractors -- turnkey contractors, some like Kanpur, Agra, we are doing directly. We have participated directly in Surat and Ahmedabad. So we have developed a good amount of expertise.

Now there are more than 50 new metro cities are being planned on metro network. So we will be participating in all these projects also. So I see reasonable growth in revenue coming up on these areas. But yes, between order and execution orders, it takes a lot of time because order comes when they start building the infrastructure, the pillars, the lines and all that. The completion of that takes a long time. But I think our revenue from railway next year onwards something like INR 500 crores per annum should be able to reach, growing steadily by some percentages every year.

[Unknown Analyst]

Sir, what will be the margin on those projects? And just a follow-up...

[Mahendra Nahata, executive]

The margin, Abhishek, it depends different in different projects. But generally, you can see something like 10%, 12% margin can be there, generally. But around 10%, you can say. But it differs for different projects to project.

[Unknown Analyst]

Sir, my second question will be what is the follow-up -- so how the PLI benefit will be coming in the picture right now. So how -- what level they will be getting the PLI benefit? Is there any timeline or anything is there right now?

[Mahendra Nahata, executive]

No, PLI benefit, it's the next 5 financial years and starting from the current financial year. So what we produce after a new investment, which would be done by us INR 425 crores in the next 4 years, and there is a percentage they have provided, this year how much percentage, next year how much percent.

And since we have got approval within the PLI DRI scheme, designing incentive scheme. So R&D expenditure is also taken as a part of CapEx for the purpose of calculation of this total investment of INR 425 crores. So total investment, INR 425 crores and the PLI incentive given to us is INR 653 crores. This will be available to us in the next 5 financial years, including the current year.

Current year is not expected to be much because we are yet to start making investment which would be start doing now except R&D, infrastructure investment, we are still not done. We are going to start it now in Gurugram near Delhi. But from next year onwards, when we start producing this equipment, 4 years' time frame, we expect to receive about INR 600-plus crores as incentive out of the production telecom equipment we will do in India.

[Operator]

We will take our next question from the line of Sanjay Shah from KSA Securities private limited.

[Sanjay Shah, analyst]

Sir, commendable and congrats on the front of shifting of private customer business, which is a very huge achievement company has done. And also on the product side, shift is really a remarkable achievement company has done. Sir, my question was regarding our Slide 18, I suppose. In Slide 18, we mentioned about key partnership. There are 12 partners with us. And so will it be possible to highlight briefly on the opportunities with these partners and what business they throw to us as an asset to our company?

[Mahendra Nahata, executive]

Yes, yes, yes. I will definitely do that. But before I do that, one of the point I would like to highlight. You rightly said that there is a good performance in the area of products and all that. There have been 3 key areas I would like to highlight. The company has done a robust growth in terms of robust strategic decisions we took, where we have been very successful in implementing those decisions, and there have been a long-term benefit to the company, there would be long-term benefit the company.

But if you look at our revenue from products and projects, which I mentioned a little while back, that it has grown to 64% in this quarter, but it was 27% in the financial year '21, 20% to 64%. And naturally, this turnkey has gone down from 73% to 36%. Last few earning calls I have been repeating this, that this is our policing, this is our strategy to reduce our revenue from projects and increase from products. And gentlemen, this has been pretty successful, 27% of products revenue going to 64%, it's a good performance, number one.

So one first strategic decision and the performance is the revenue mix. Second, increase in exports. There is another area I've been talking that we want to increase our exports, not marginally, but geometrically, we want to increase our exports. Now if you look at in the current financial year, till now, our exports have already crossed more than INR 600 crores up to December. Now my target for export in the current financial year was INR 750 crores, which is more than double of INR 360 crores of last year to INR 180 crores a year before that. So INR 180 crores become INR 360 crores, then the target of the current year was INR 750 crores.

But let me tell you, this year, we will be crossing INR 850 crores. So INR 180 crores become INR 360 crores and INR 360 crores would be coming INR 850 crores in the current financial year. And I can tell you, we will maintain the same kind of growth trajectory. As a company, we have taken the target of reaching to our export revenue of INR 1,500 crores in the next financial year. So INR 180 crores, INR 360 crores, INR 850 crores and the target of INR 1,500 crores.

This is the kind of another success has been in the company, increasing export revenue, which is the strategy we have taken up as a second cornerstone apart from revenue increase of products and which automatically leads to revenue increase from exports. Now, what is the second thing which is happening in export, which is also very critical. Though we have taken only a pilot project at this amount of time, but the kind of inquiries we are receiving, we are not sure that whether we can take that quantum of orders, which is implementation of projects in Europe.

Now European project payments are very good. You get paid every 15 days, every 15 days on the basic work completed. We are getting inquiries, not only inquiries, firm inquiries where they actually come into. After looking at the work we have done in Germany, the kind of pilot work what we have done.

We are getting inquiries for hundreds of crores for implementation of projects in Europe. Only point is that I am not able to ramp up my implementation team to such a quick extent to get to undertake those number of projects. So we are really looking at how much order we should be taking wherein we don't dissatisfy the customer. We'll do less, but we keep customers satisfied.

So in the export front, when I say INR 1,500 crores, that does not include revenue we would be getting from project side, whenever we start taking this project, which we believe that we should start taking in the next 1 or 2 months' time frame after ramping up our team which we have decided to recruit some people and do that, but that would be an addition.

So second initiative of growth of export has also been very successful. Third initiative we have taken, increase of revenue from private sector, it decrease revenue from government. When I say this, our policy is to take only those government projects, which are not negative in cash flow. Cash flow is better, payments are better. Only those government projects, or even the private. But the policy of decreasing revenue from government has also been very successful.

In the quarter under review, government revenue has only been 20% and private has been 80%. Now if you go back financial year March '21, government revenue was 49% and private was 51%, it was more than 50-50. 50-50 has now become 20-80 in terms of private sector. So there is 3 key initiatives, Mr. Sanjay Shah, one, increase in product revenue, increase in exports and then increase in revenue from nongovernment. This -- you have been in the calls earlier also, I remember.

So last 4, 5, 6 calls, I've been repeating this. And you have -- now we have demonstrated that how successful we have been implementing each of the strategy. Now let me again come back that we will continue on the strategies to keep on increasing our exports. Our strategy of new products by our R&D efforts is on. New customers, new geographies is on, and we will constantly improve our exports and revenue on the basis of strong demand, not only India but abroad also.

Let me put it like this. If the world market is 100, Indian market is 6% to 7%. 90% to 93% market, sits outside India. Now second Chinese, where we can't go. Let's just take out Chinese which might 25% to 30%, but still 65% of the market is beyond any of which is accessible to us. So while we concentrate on our 6% to 7% of the market, we should go out and grab some share of the 65% market also, which we have successfully demonstrated in optical fiber cable. We are now getting good success in implementation of projects also, but we will get good success in the product segment also, which I've been saying we would start working on this from the next financial year. Working mean, working has already started, but we will start getting a full revenue from the next financial year on the product side also.

So that is as far as -- you talked about projects and turnkey and so I thought not only that, but there are 3 very strong strategic points, which company has undertaken and has been very successful, I thought I should mention to the benefit of all participants on the call. Now coming to the key partnerships, which we have said. One, we discussed about Qualcomm. Qualcomm is a world leader in wireless technologies. So we had a partnership with Qualcomm for development of WiFi backhaul radios, and now 5G products. 5G products is very critical, very critical. I might have visited the top leadership of Qualcomm a month back. And it's a very successful partnership going on in terms of helping understanding development products, their technical know-how systems and all that. And we believe that will start coming out from the -- for the 5G products with Qualcomm technology in the -- starting from the free trial, I would say, from the first quarter of the next financial year.

The non-5G products, which is WiFi and backhaul radio are already there. They are growing production. New versions of that, including WiFi 7, first WiFi 7 based on open minded standard, we've already demonstrated. So they are already in the production, WiFi 5, 6 are already under production. They are being sold. So it's a very profitable partnership. WiFi and radio are already there, but this 5G radio networking products, which includes macro cells, small cells, indoor, outdoor and fixed wireless sets, which is going to be a very, very successful product are going to come up gradually starting in field trials on the first quarter of the next financial year.

Now, so this is one partnership. Now coming to 2 particular partnerships here, [indiscernible] Systems. Here, we have invested money in their company. Because they stated about 50% of the equity and as against that investment, they're designing, software defined radio force for RV application. Similarly, I think that is expected to a huge market opportunity to INR 40,000 crores, INR 50,000 crores in the next 6, 7 years. Event Systems, again, we have invested in their company 15%. They are design of switches, is being taken by us and switch again as a huge market, $10 billion to $12 billion worldwide, [indiscernible] and these switches are being manufactured and sold by, yes, as has been designed by limited systems.

Now other opportunities like Wipro, CommAgility, VVDN these are the companies where we have done partnership for designing of products for us because when you design so many products, you can't ramp up your own R&D by yourself into such a manner. So we have given them contract for designing products for us. Contracts, they are doing work for us for designing our products, the IPR belongs to us. For example, Wipro is designing a router for us, but design parameters testing architecture is being done by us, development is being done by Wipro. So Wipro is probably doing 3 kind of routers, 120 Gbps 300 GBPs, and 700 GBPs. After that, we'll go above 1 terabit also. So Wipro is designing routers for us. This VVD is also helping us in designing of some of the wireless products. Similarly, Common agility is also helping us in designing of the 2 x 2 small cell for indoor application. So when we have more above 250 R&D engineers within our company, but we need many more.

So these are the R&D contracts, all the partners where we have invested money, they are helping us in designing this different technology even their IPR belongs to us. So I would say, not less than 400 to 500 people put together, must be working in these companies for designing products for us. So that's an R&D spend, which belongs to us because they are working on it for us.

So other companies like IP Infusion. They are softly expect partnerships. Unique software stacks for different products, which they are supplying software stacks to us. So there are different kind of partnerships starting from contract R&D to technology partnerships like Qualcomm or partnerships like equity partnerships we have done even the system got. But all lead to new products for us. All lead to new products for us. Their IPR belongs to us. That is the advantage we have got. So this is -- all this partnerships strengthening our R&D, strengthening our R&D by getting more and more manpower, better manpower, design products for us. And once this product come here in the company, they will be manufacturer and sold, which will increase our revenue and profitability.

[Operator]

We'll take a next question from the line of Hardik Vyas from Economic Times.

[Unknown Analyst]

Sir, I just had one question. You have enlightened us enough on all my questions. Just one question that we have been taking all these initiatives, but where do we see our next phase of growth for the next 4 quarters coming in from as in -- I'm not asking you the numbers, but the way you have said that you probably would exceed INR 1,500 crores on the product export revenue side. So will that be the same contribution, as in roughly 15% to 20% of the overall revenue? Or could you please guide us on that?

[Mahendra Nahata, executive]

Hardhik, growth would continue. Growth would continue on the back of strong demand in India and globally because now -- we are not only talking to Indian market but global market, because that's one area where we are now concentrating and the performance has shown that.

Until now, we have been working on exporting fiber optic cable. Now as I started working on export of projects also. Third, we would now be working very seriously on export of products also. So overall growth is coming on indigenous demand, local demand on the back of 5G, NHI, and [indiscernible] and all that and BharatNet and all that and a strong global market. Now growth will come from which areas. And let me tell you that. One, fiber optic cable. Fiber optic cable revenue has been increasing consistently. This year, it would be around INR 2,300 crores to INR 2,400 crores in the current year, which you are talking about.

Last year, it was about INR 1,700 crores. Year before that, it was INR 1,200 crores. Year before it was INR 700 crores, INR 700 crores, INR 1,200 crores, INR 1,700, INR 2,600, INR 2,400 crores. This has been the kind of growth. So we will maintain this kind of a growth trajectory in the next financial year also. This growth trajectory will be maintained and major growth would be coming from export market.

As I mentioned, INR 750 crores, INR 850 crores this year, but we expect to reach to INR 1,500 crores. This is in fiber optic cable alone, but there would be projects on the top of that. There would be products on the top of that. This INR 1,500 crores, again, I tell you for only for fiber optic cable. But projects and products would be on the top of that. So how much that would be, it's too early for me to start talking about because we have to still jump into the water and swim there. That is one.

Second growth opportunity or rather the growth, of course, would happen in the product business. As I said, products are going to be launched, all 5G-related products, routers and all that are going to be launched, starting from the first quarter of the next year. It's R&D, R&D checks at many times. It always happens. So first quarter, we are starting free trials of the equipment, and it will continue free trials and launching of products throughout the year.

So second growth is going to come from your -- this product revenue, wherein we believe that next year, a reasonably good number of products will be launched and revenue would come from nationally and internationally, both. Third growth would come from those projects which are financially profitable and also cash flow positive. That is the another area where we look forward, the growth would come, not that we are stopping this business, no, where the profitability is there and the cash flow is not so much negative, we would keep on getting projects.

So that is another area of growth, which is going to come. So all this put together, growth would be there locally, internationally, cable, projects and products all 3 areas.

[Operator]

[Operator Instructions] Our next question is from the line of Abhishek from Arihant Capital.

[Unknown Analyst]

Sir, my question is largely on the export side, you have given the numbers right now. So what will be the mix of the export side, if you can throw some light, which are the segment depends and how you see defense as an opportunity for an export?

[Mahendra Nahata, executive]

Look, we have not at all looked at defense, what should export till now. Because once we start supplying in India, then only we will be starting looking at opportunity of export in defense. See for example, we are registered in NATO as a possible supplier, NATO, some case number, which is allotted to us. but we are not working on any of such opportunity at this point of time because let us first establish ourselves in a good way in India, then we look forward for export in defense equipment.

So that revenue is not in my projection at this point, not that we would not do that. But I don't visualize doing that in next 1 or 2 years. That's the number one. Now coming to exports right now, the entire exports mostly has been fiber optic cable till now. As I've been saying that until now we have been considering fiber optic cable project, very small work we have started as a pilot. But next year, we will be doing more of that product, yes. that's one area that there would be another growth opportunity apart from fiber optic cable. When I say INR 1,500 crores, as I said, there is fiber optic cable, product and projects will be added on the top of that. So these are the export opportunities we are working on.

[Operator]

Our next question is from the line of Hitesh K. Patel from KK Patel & Company.

[Unknown Analyst]

Congratulations for the good quarterly numbers. I would like to clarify one thing, sir, in the month of October, around INR 600 crores expansion plan of optical fiber cable was announced. So right now, sir, what is the onstream of further expansion. Are we 100% spending on the capacity announced in the October month?

[Mahendra Nahata, executive]

No, Mr. Hitesh. Fiber optic, as I mentioned, INR 356 crores expansion has already started. Construction has already started in Hyderabad. That work is going on. Fiber optic cable, we are yet to start construction, but machine orders and are almost placed. Construction activities yet to start because of land acquisition work and that is going on, which is expected to be completed in next one month's time frame, then immediately that per call. So would start. A lot of land has been acquired. Payment has been made, but construction is yet to start. Once the land acquisition is completed, we will start construction of that. But fiber work has already started.

[Unknown Analyst]

And one more question, sir, how would you see the future margins of the company on the product side? Because I have 6 month background because of the COVID, the margins was shrunk by lead margin. In this quarter, we have seen some spike in the operating margin. How would you see the future?

[Mahendra Nahata, executive]

Look, as you would have seen, the profit margins have grown in the current quarter. There has been a reasonably good growth in the profit margins. And I believe that going forward, margins will keep on becoming a bit better, reason being as you bring in more telecom products in our product portfolio, I believe that margins will keep on going further because once we have products with our own IP, or our own control on the technologies, the margins are expected to grow. So the margins have grown into the -- in current financial year, current quarter. And we expecting that the margin will grow further.

But to put up a number would be very difficult right now that how much growth would be there. But yes, I expect the margins to grow.

[Operator]

We will take our next question from the line of Dipesh from Manya Finance.

[Dipesh Sancheti, analyst]

Am I audible?

[Mahendra Nahata, executive]

Yes, yes, yes.

[Dipesh Sancheti, analyst]

Sir, you mentioned about setting up the new manufacturing project [indiscernible] from the PLI scheme. Now the project cost, you said that it will be funded by a fresh fundraise. Will the fresh fundraise will come through as a preferential allotment as you had planned before? And will it come in this quarter or maybe in the next quarter?

[Mahendra Nahata, executive]

I didn't say that we did by fresh funds. I never said that. I said...

[Dipesh Sancheti, analyst]

In the press release sir, in the press release it has been mentioned that the project cost will be funded by term loans, internal approvals, preferential issue of warrants which has already been given and the fresh fundraise.

[Mahendra Nahata, executive]

Yes, yes, yes. So that's what we are referring to. I thought you are referring to what I said just now, no. So fresh fundraise, though there has been a resolution passed by enabling resolution as it passed by shareholders and the Board also. But the warrant have been already been issued, as you know, but we have not really decided when are we going to do the fundraising and all that. So we are waiting because this investment is to be made in next few years, not immediately. So we are waiting for the right movement and when the funds to be raised.

So no such decision has yet been taken to raise the funds at this point of time. Whenever we think we will definitely come back. Only enabling resolution, which has been passed.

[Dipesh Sancheti, analyst]

Okay. And just one more question, sir. I mean what is the reason of sales declining? And going ahead, do we see -- I mean, how strong really do you see -- do we see 20%, 25% growth in volumes?

[Mahendra Nahata, executive]

I would like to say one thing, yes. Decline in sales is not important. Improvement in profitability and overall profit is more important. If you get the same profit or more profit on a less sales, I think, it's a good performance parameter or any company. In the current quarter, if you see the sale as a small decline, and I will explain the reason also, but profitability has increased. So that is a key parameter one should look at.

And that's what we are looking at the company that profitability should increase. Revenue should also increase. No doubt, it has to be increased. But more effort should be done to increase of profitability. Now a small decline in the sales in the current quarter has been because that some incomplete work in the projects could not be built because the customer testing has not happened, particularly in the army related project.

The customer testing could not happen because of various issues related to the customers. That is why this billing of that particular -- what could not be made. Otherwise, you would have surpassed what the last quarter revenue was, but it was the -- reason was that we could not build that, so it could not be part of our revenue.

[Operator]

Ladies and gentlemen, we take that as a last question. I would now like to hand the floor back to Mr. Nahata for closing comments. Over to you, sir.

[Mahendra Nahata, executive]

Thank you. Thanks to all of you, gentlemen, for being part of this call. I'm sure you would have got a good view of what kind of a strong performance company has given. What kind of a strong strategical path we have created for our company for future growth and our strategy of new products, new customers, new geographies on track, by increasing our product range, by innovation, which is improving our profitability, increase our exports, we have to increase our revenue from private sector, we have increase our revenue from products. And we are sure to continue on that course and continue to improve the revenue and profitability of the company.

Thank you very much, gentlemen. And again, wish you a very, very happy and prosperous new year. Thank you very much.

[Operator]

Thank you very much, sir. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.