Sterlite Technologies Ltd

NSE:STLTECH

Earnings Call Transcript 2023-Q1

[Pankaj Dhawan, executive]

Ladies and gentlemen, good day, and welcome to the STL Q1 FY '23 Earnings Conference Call. I am Pankaj Dhawan, Head, Investor Relations at STL. To take us through the Q1 FY '23 results and to answer your questions, we have Mr. Ankit Agarwal, Managing Director, STL; and Mr. Mihir Modi, CFO, STL.

[Operator Instructions] Please note that this call is being recorded. You can also download a copy of the presentation from our website at www.stl.tech.

Before we proceed with this call, I would like to add that some elements of today's presentation may be forward-looking in nature and must be viewed in relation to the risks pertaining to the business. The safe harbor clause indicated in the presentation also applies to this conference call.

For opening remarks, I now hand over the call to Ankit Agarwal. Over to you, Ankit.

[Ankit Agarwal, executive]

Thank you, Pankaj. Good day, everyone, and thank you for joining us for our Q1 FY '23 earnings conference call.

At a macro level, the overall digital infrastructure industry is growing at a rapid pace, and we see 3 clear themes playing out. One, network creators, including governments around the world are investing heavily in creating digital infrastructure. Themes like 5G, fiber to the X and data center deployments continue to grow at a rapid pace. And overall, the demand to optical network is growing on the back of multiple growth drivers. We shall talk about each of these in the following slides.

So on the first theme, just to quote a few instances. In the U.S., AT&T has, in fact, increased its CapEx from about $16.5 billion toward $20 billion in 2022. Overall, the U.S. is looking to pass 9 million households per year for the next 3 years to reach 87 million fiber connected homes.

Similarly, in Europe, multiple telecom operators, alt-nets are actively investing and growing their investments to increase the FTTH coverage. In India, Airtel plans to spend over $15 billion, which they have announced, in CapEx through 4 subsidiaries over the 4 years. In the data center business, the overall CapEx has gone up by almost 25% to over $150 billion.

On the government side as well, various incentives and programs have been announced. For example, the U.S. government is spending a massive $65 billion in broadband as part of its infrastructure build. In the U.K., the government is investing GBP 5 billion to increase broadband connectivity by 2025. And in India, as we all will be familiar, under the BharatNet program, the government plans to connect all the villages to optical fiber networks in the next 2 to 3 years.

Next, we see that the CapEx investments are powering deployment of 5G, FTTx and data center deployments. Clearly, 5G is becoming the fastest growing technology in the world today. Operators are expected to invest more than $500 billion in 5G networks from 2022 to 2025, just next 3 to 4 years. The total number of subscribers are projected to go up from about 660 million to about 4.4 billion by 2027. And leading the deployments currently is China, which plans to triple its base stations from about 1.4 million to 3.7 million by 2025. In India, 5G spectrum auctions are taking place shortly, and we all look forward eagerly to the network investments post the 5G.

FTTx is becoming all pervasive. In the U.S., $125 billion has been earmarked for FTTH deployments in North America for the next 5 years. In the U.K., companies like British Telecom, Openreach plan to spend about GBP 15 billion over the next 5 to 6 years for connecting about 26 million homes.

Data center deployments are also increasing. The data center CapEx is set to grow at almost 10% CAGR over the next 5 years to $350 billion by 2026. Google has announced about close to $9.5 billion investment in building offices and data centers in the U.S. just in 2022. And lastly, Open RAN is also moving from pilot to initial deployments in 2022, and large-scale deployments are likely to take on from next year onwards.

This is an important slide which looks at the optical fiber cable demand region-wise in millions of fiber kilometers. This is quoted from CRU, which is one of the leading analysts for the optical industry. As you can see, all of the deployments that we spoke of and the technology shifts are leading sustainable growth in optical fiber cable volumes. As per CRU, the global optical fiber cable demand is expected to reach 610 million by 2024 from about 500-odd million currently -- in 2021.

The STL focus markets of North America and Europe clearly have high potential for growth and are fast growing, and they also have the highest realizations globally. In addition to that, we also see that as the cable demand continues to strengthen, the cable prices are also on the rise. These are forecasts also by CRU which say that the OFC price is expected to go up by 16%, 28% and 13%, respectively, in North America, Western Europe and APAC, which is -- APAC is non-China. So as you can see from here, that clearly the demand is also expected to improve over the next 2 to 3 years and also the prices are expected to stabilize and grow over the next 2 to 3 years.

This is in line with our earlier views that the optical fiber demand -- optical cable demand continues to grow. And overall, from about a $10.7 billion market globally, this is expected to grow to about $12.1 billion market. So this is something very important to understand, that the market in which STL plays, just on the cable part is about $12.1 billion and probably a similar size on the optical interconnect part, which we will come to.

One part that we do want to deep dive on is on terms of China. We do get frequent questions in terms of what is the supply and demand scenario in China. So we thought we'll spend a little bit of time on that this quarter. It's very important to look at this because China continues to contribute about 50% of the world demand and is extremely important and plays a major factor in global pricing as well, particularly on the fiber and cable level.

Here, it's clearly important to note that the China cable demand also is growing sustainably, and we expect it to continue to grow in the medium term. On the demand side, Chinese carriers combined issued about 235 million fiber kilometers of loose tube tender volumes in '21, '22, which was a 17% rise from the previous year. This demand is driven primarily by 5G, and China expects -- and GSMA expects 5G demand in China to exceed about 900 million users by 2025. Currently, China has about 500 to 600 million users, so still fairly significant growth in terms of 5G demand.

Another operator called China Broadnet has now become China's fourth mobile operator to offer 5G services and has recently also started procuring fiber optic cables, although at smaller scales. On the FTTH side as well, we continue to see China needs to deploy significant amount of fiber, both to densify networks but also for fiber to the home, particularly in rural parts of Western China.

On the supply side, as for CRU, most major fiber cable and cable supplies are running at high utilizations in terms of operational capacity. And while the Chinese manufacturers are focused on China demand, the trade barriers, including antidumping duties posed both by EU and the U.S., continue to ensure that Chinese players don't get undue advantage in these markets. Also, with the growth of protectionism in the world, local manufacturing, particularly on the cable side, is being preferred, particularly in government projects. As an example, the large government project in the U.S., which is on the infrastructure side, requires 55% of the material to be sourced locally.

Based on all these 3 themes that we discussed earlier, we confidently reiterate that we are in a multiyear network build cycle across the globe. The 3 investment cycles, 5G, FTTx and hyperscale build-out, have coincided, and they are expected to continue over the next 7- to 10-year time frame. With these favorable industry tailwinds, we have deployed focused growth levers to propel us forward. In the following section, we shall talk about this in detail.

We have focused ourselves to build our business primarily on these 2 growth levers: firstly, to grow the optical business; second, to globalize our service businesses. We are allocating capital to tap into these strategic growth opportunities offered by these growth levers, and we shall talk about our progress in each of these in detail in the subsequent slides.

In terms of growing our optical business and increasing our global market share, if we look at all -- if we look at the optical business, particularly optical fiber cable business, as you can see from the chart here, we have consistently gained market share across all our focus markets. At the end of FY '22, we have reached 9% market share globally if you exclude the China market, up from 5% in FY '20. In Europe, very proud to share that we have now reached 21% market share from about 11% in FY '22. And particularly in North America, we have seen very rapid growth, from about 6% market share in '22 has gone up to about 14% market share in FY '23, all of this from almost a negligible base in FY '20 in North America. Our aim is clearly to become the top 3 player in the optical fiber market globally in the medium term and achieve leadership in this market over the longer term.

Through our efforts of our incredible team and our focused strategy, we have established a foothold in the U.S. in the last 3 years. We entered the market in FY '20 and started partnering with our customers and creating unique solutions for their requirements. Through FY '21 and FY '22, we added 45 customers and built strong relationships. As we start FY '23, I'm very happy to announce that we've secured a multimillion-dollar multiyear contract with a North American telecom operator.

We shall continue our journey to support the north American customer...

[Technical Difficulty]

[Pankaj Dhawan, executive]

Mihir, would you like to take over in the meantime? Sorry, you're on mute.

[Anuj Sonpal]

Sorry, yes, we've lost the presentation as well.

[Pankaj Dhawan, executive]

I will just put up the presentation. In the meantime, maybe for the sake of the participants, maybe you can continue.

[Mihir Modi, executive]

Yes, I will do that.

[Pankaj Dhawan, executive]

Just give me a second, I'll pull it up.

[Mihir Modi, executive]

Yes. Let's go to the Chart 15. Yes. Okay. Super. So apologies for this little hiccup, ladies and gentlemen. So continuing what Ankit was saying, and we'll wait for him to come in and take over.

But in meanwhile, as he was saying, through the efforts of our incredible team, we have established a foothold in the U.S. in the last 3 years or so. We entered the market in FY '20 and since then have started partnering with our customers. Through FY '21 and '22, we added 45 new customers and built very, very strong relationships. Even at the start of FY '23, we are very happy to announce that we have secured a multimillion-dollar multiyear contract with a North American telco.

So we will continue our -- in our journey to support the North American customers with our world-class manufacturing for optical fiber cable, which is expected to go live in quarter 3 of the current fiscal. Can we move to the next one, please? Anuj, can I request you to move to the next chart, please?

[Anuj Sonpal]

Apologies. Just give me a second.

[Mihir Modi, executive]

So while the chart comes up, I think we are continuing to grow our optical business. And the optical -- and within that, the optical interconnect attach rate, which we've been talking about, has been on the rise. We've increased our interconnect attach rate from 3% in FY '21 to now double digits, 11%, in quarter 1 of this fiscal. Our approach of providing the end-to-end optical solution of the optical fiber cable plus interconnect has yielded us as a result and we aim to reach an attach rate in high -- of high teens by the end of this fiscal, by fourth quarter FY '23.

The next chart, please. Coming to the second growth lever of globalizing the services business. We acquired and successfully integrated Clearcomm, as you're all aware, a leader in optical network design, deployment and migration in the U.K. We have also built a global robust resourcing model through our own STL Academy. We train engineers at STL Academy in the areas of project management, installation, testing, quality assurance, et cetera, and keep the talent pool for deployment ready for the U.K. We are ramping up our execution pace in the U.K., and we aim to increase the U.K. revenue contribution to 25% of global business services revenue by FY '24.

While we build our business in the U.K., we continue to focus on strategic and profitable projects in our core Indian market. As we are developing new solutions, we aim to expand our opportunity pipeline arising from the 5G deployment. We expect new deployment tenders to come through post 5G auctions, which are likely to be in Q2 FY '23. We are also expecting a large hardener tender to come through in the second half. Both of these opportunities have the potential to generate significant order book for the India services business.

Ankit, do you want to talk about this?

[Ankit Agarwal, executive]

No, I think not much to add on this particular side. But clearly, still fiber is a challenge in India, so we're still working through it.

In terms of providing end-to-end solutions, this is an example we shared through our media recently. I think this is a great example of the full value that STL has to offer, starting from our bend-sensitive fiber going towards really next-generation cables, our optical interconnect, we've been speaking about, and then our FTTH Lead 360 solution. So it's a good example of where we really showcase the value of this to the customer, ultimately leading to lower cost of deployment, faster speed as well as less requirement of trained manpower. All of this is something that has been quite positively demonstrated now in the U.K., and we also see how to scale that up.

I think in terms of R&D, this continues to be a cornerstone for STL, where we consciously want to build the right product portfolio and solutions for our key accounts globally. At the end of this quarter, we had about 740-plus patents. And that really is something which we'll continue to focus on and invest in. We've invested close to about INR 50-odd crores in the quarter 1, and we do expect to continue this R&D investment.

We've also launched our own 5G R&D center in Gurgaon recently with state-of-the-art equipment linked to Open RAN as well as pFTTx. So that's something that we continue to commit to, but very focused in terms of spending the R&D catered to our large key accounts.

On the back of these consistent R&D investments in the Access Solutions business, we have successfully launched 8 product SKUs. We have announced general availability of our Garuda small cell -- 5G small cell, pFTTx and WiFi 6. We are targeting general availability of a 5G radio unit and rig and therefore, full portfolio in the current financial year.

In terms of customer engagements, on the wireless side, we continue to engage with customers globally. We have secured 5 more engagements which are anywhere between early-stage discussions to POCs or orders. In line with the industry, we also aim to acquire customers and build order book for wireless business in FY '23, which we expect to start yielding results and revenue in FY '24. Over the last 2 to 3 years, we've done significant investments in this business and taking the product development to a mature stage. In order to propel the business to next level, we are also actively exploring strategic partnerships for others to come and invest in this business.

In terms of capital allocation, our clear priority is investments in the optical business. We're investing in OFC capacity expansion, particularly in the U.S. that we touched on earlier. In quarter 1 FY '23, we also bought 25% -- the balance 25% stake in our China JV to ensure fiber supply will increase to further serve our cable requirements as those volumes grow on a quarterly basis. We shall continue to divest noncore assets in FY '23. As you would recall, in FY '22, we had sold our interest in Metis Eduventures and MTCIL. Post the current investment phase, we shall prioritize optimization of debt and our capital structure.

We shall now discuss the financials for Q1 FY '23. I would now like to hand over to Mihir to discuss the financials.

[Mihir Modi, executive]

Thanks, Ankit, and a very good day once again to everybody. Let's start at the top of the financials panel.

Our order book at the end of Q1 FY '23 stands at [ INR 11,200 ] crores. In Q1, we have secured overall a very strong new order book, particularly in the optical business, which is a reflection of strong demand in the industry and our dominant position and focus particularly on the optical business. However, we've also short-closed an order book of about INR 16,015 crores, majorly in the services business. This is in line with our focus on executing projects at a desired level of profitability in the services business and not executing for the sake of execution.

[Ankit Agarwal, executive]

Just 16 -- INR 1,615 crores.

[Mihir Modi, executive]

I'm sorry, yes. Okay. INR 1,615 crores, yes. Our order book is well diversified across our customer segments and across all our businesses. We also have a significant O&M order book which shall start to yield a significant revenue from this year onwards.

Next one, please. Talking about the revenue. Our revenue mix is shifting to customer segments and geographies of our choice over the last few quarters. We are increasing our share in the telco and cloud segments. In terms of geography, we are increasing our share in North America and European markets.

What is heartening to note here is that in line with our strategy, in the last 3 years, we've increased our revenue share in North American market, the most premium market in the world, from near negligible to almost 28%. Again, as Ankit had referred earlier, this is a reflection of our product innovation and reward of investment in the R&D over the years.

In terms of notable wins this quarter, apart from the multimillion-dollar contract for a North American telco, we have secured new orders for optical fiber cables from North America. In the European market, we have secured now orders for optical fiber cables and interconnect solutions from a telco customer. On the services side, we continue to partner with Netomnia to fiberize multiple cities with ultrafast broadband in the U.K. We have also secured new orders for fiber rollout from a leading Indian telco.

As we pick up the orders, our execution -- project execution is clearly on track. If you can go to Slide 25, please. Among India public projects, our BharatNet project in the State of Telangana is 54% complete, including all packages; and the network modernization project for an Indian PSU is 52% complete. In the Indian private side, fiber rollout for a large Indian telco is fully done, 100% complete in phase -- for Phase 1 and 5% complete for Phase 2. And we are yet to start Phase 3, which we shall do soon. Fiber rollout for a modern optical network for yet another Indian private customer is 5% complete.

Coming to the U.K. Fiber-to-the-home rollout in U.K. for all projects has again picked up and is 5% complete. So all in all, our project execution is on track across various types of projects, in line with our strategy.

We talked about very sharp increases in our key raw material categories and freight cost due to global supply chain disruption last quarter. Crude oil prices, which can be looked at as a proxy for polymer prices, continue to inch up further in Q1 FY '23. Gasses, LNG, helium have also exhibited price increases. Helium gas prices particularly have increased sharply in recent quarters due to production problems at major U.S. and Russian suppliers.

Logistics costs though have started easing, as shown by the Freightos index for the route of China to North America. We shall also start to see the reduction in logistics cost from Q2 FY '23 onwards. That should ease the pressure on our margin a little bit.

In line with our estimates, quarterly revenue grew 20% Y-o-Y to INR 1,575 crores. Our operational EBITDA margin grew 160 basis points quarter-on-quarter to 7.6% in quarter 1 of FY '23. Revenue growth drivers in the first quarter are OFC volume growth and increase in optical interconnector attach rate, at the same time, increasing U.K. services revenue. Margin improvement drivers for Q1 in FY '23 are increase in the optical revenue share, increase in North America revenue share and increase in optical interconnect margins. We are working to reach sustainable EBITDA margins by second half of FY '23, in line with our estimates.

In terms of revenue split, optical business was at 72%, services at 27% and digital and access combined at 3% of overall revenue. In terms of capacity utilization, OFC was at 88% utilization based on production volume and capacity at approximately 37 million fiber kilometers.

We placed an abridged version -- can we move to next chart, please? We place abridged version of our quarterly reported numbers for your perusal here, and pause for 30 seconds to -- so that you can have a look at it.

We can move to the next one, please. So along with financial objective, STL endeavor is to be a responsible leader in ensuring a connected and inclusive world. This focus reflects in the way we have designed and implemented our ESG agenda. Like we've been sharing, we have diverted 175,000 plus metric tons waste away from landfills from FY '18 to '22. We've reduced emissions of 15,000 tonnes of CO2 equivalent through various initiatives in the plants from FY '21 to this quarter. We have announced our commitment to become a carbon-neutral company by 2030. Not to mention, we've recycled 500,000 metric cubes of water from '19 to -- Q1 FY '19 to Q1 FY '23.

Through our various initiatives in education, women empowerment, over 700,000 lives have been positively impacted from FY '19 to the first quarter of FY '23. We have also positively impacted 2 million-plus lives through our various initiatives in health care from FY '19 to the current quarter. For our work, we have won 71 ESG awards from FY '20 to the current quarter.

So overall, in summary, I would say that the multiyear network bid cycle is in full swing. If someone can move to the next chart, please. While the chart comes up, I will continue to summarize this. So the multiyear network build cycle is in full swing. The global OFC volume and pricing expected to grow in 2022 is on track. And our capital allocation shall be focused on the optical business.

We are aiming for global leadership in the optical business. We look to achieve strong market share gains in North America and Europe and increase the attach rate in the optical interconnect space. We are focusing on strategic segments in the services business. While we are ramping up execution in the U.K., we are also working to build profitable order book in strategic segments in India. And in terms of capital allocation, we are allocating most of the capital in the optical business and are simultaneously divesting noncore businesses.

So with this, we come to the end of our opening commentary, and we shall now move on to Q&A with Pankaj, Anuj and others.

[Anuj Sonpal]

[Operator Instructions] Let's take the first question from Pranav Kshatriya.

[Pranav Kshatriya, analyst]

I have 3 questions. Firstly, Mihir, can you please help us with the -- at least ballpark product and services business margin and how they have trended in the last 2, 3 quarters to get a sense of where we stand?

Secondly, again, related to margin. There seems to be considerable cost pressures. And -- but there seems to be some green shoots. One is the logistics cost is sort of trending down and, you have talked about the prices for fiber optic cable moving up, which should drive up the realization. So how we should be seeing the margin in Q2 and Q3? So that's my second question.

And last question is attach rate, which we're growing very smartly in the first half or almost entirely in FY '22, seems to have sort of plateaued. I mean Q3 FY '22, we had roughly 14%. Q1, we are at 11%. So what is happening and how much time -- how the trajectory will be in there? So those are my 3 questions.

[Ankit Agarwal, executive]

Yes. Thank you, Pranav. Thank you for the questions. So probably take it one by one. In terms of products and services, part of it, I think broadly, what we have guided is that the products and services will continue to grow. In terms of profitability, we had targeted EBITDA margins for products business, optical network business towards 20% to 22% towards Q3 and Q4. And similarly, services, we had said that we will target low teens during this period.

Versus that, we've seen some good improvement on the optical part, which is now closer to about 14%, 15%, as a combination of a couple of these activities. Services is still probably in the mid-single digits. And hence, we are combined EBITDA of about 8% that we have. So this is something that we are confident with these 2, 3 levers that you spoke of as well.

Firstly, some of the price increases that we have done, particularly in U.S., that should start reflecting towards the end of Q2 into Q3 and Q4. Second is we do expect some of the benefits of the container costs starting to come down or even stabilize start reflecting in the profitability. As well as overall, the product mix that we have seen both within ONB and the ratio of ONB to the services, all of these should enable better profitability in the quarter 3 and quarter 4. So I think that's one part.

In terms of the cost pressures that you spoke of, I think, certainly, from the peak of container costs that we had seen, almost $22,000 per container, that has come down to probably around $16,000 or $15,000. And it's largely kind of settled there. It might come down marginally more going forward, but we don't expect it to go all the way back to probably $7,000, $8,000 we had seen several quarters back. So I think that's something that we'll continue to watch.

What's happened is by nature of just sheer volume that we are now shipping more to U.S. and Europe, the absolute amount has gone up, which you would have seen in the other expenses. So I think that's one part that we continue to monitor.

One benefit that we have seen is the lead times have come down in terms of shipping from India to U.S. Probably, earlier were around 70 days. That's coming down to probably 55 to 60 days. So to that extent, our working capital should come down marginally as those delivery times start improving.

In terms of the other costs linked to oil and gas, to the oil, essentially to polyethylene, that we continue to see on -- continue to stay at the higher levels. As well as helium in particular has contributed to fiber costs increasing versus what our expectations were. So these are things that we are working on. We're still working on certain price increases particularly in Europe market with some large customers, and as those play out, we will see that benefit into Q3 and Q4.

On your last question in terms of attach rate, I think overall, we continue to be very bullish in terms of our growth in terms of the attach rate. I think one thing to keep in mind is our cable volumes have started to increase significantly, as we said, on the back of U.S. and Europe. So actually, on absolute numbers, our OI in crores is actually increasing quite well.

What we continue to see is particularly with our large key accounts, we are very keen to have similar values ultimately of cable and interconnect going in. So we're very confident. Our products are getting approved by more and more customers. And we're in that phase of -- between approval and starting to supply. So we are confident that going into Q3, Q4, you will see both absolute number and percentage growth for the interconnect.

[Pranav Kshatriya, analyst]

Sure. If I can just ask one small follow-up. You did mention that the working capital should come down and the logistics costs have come down. But I think in Q2, it will be more of a transitory quarter because from Q3, we'll have the facility -- manufacturing facility available, and hence, those costs will be a lot lower. So should we see a significant improvement in the margins from Q3 onwards?

[Ankit Agarwal, executive]

So what -- see, I think one part is the U.S. facility will start operations in quarter 3. And of course, that will itself take some time to scale up to its capacity of 5 million to 6 million fkm. So that's one part. But also, we are -- our supply to U.S. is still more than what just the U.S. facility can serve. So to that extent -- what else we are manufacturing in India or in our global operations for U.S. market, to that extent, that working capital will continue. And what we are manufacturing locally, then, of course, will be local supply.

So I think from a working capital perspective, we do see some improvement from Q3, Q4. Plus, as I said, the travel time from India to U.S. should come down probably by about 20 days from current peak of 70 days. So that -- all of this will help improve the working capital supply into the U.S.

I think on the margin perspective, one is -- as I said, the overriding factor will be in terms of the improvement in the -- passing on the cost to the customers, improving the top line, which we expect in the 7% to 10% range. Some of that has happened with U.S. customers, some we have still ongoing. And as I said, a few key negotiations are ongoing with our European customers.

[Anuj Sonpal]

Next question, I'd request Neerav Dalal.

[Neerav Dalal, analyst]

A couple of questions from me. First is on the other expenses. So if -- you did mention that logistics costs is increasing in absolute terms. And hence, we've seen the increase in other expenses. But if one looks at the gross profit margin, the gross profit margin has improved for us. So if we compare it with, say, second quarter of last year -- or even if we compare it to FY '21. FY '21, the gross margins were at 37%, and current quarter, we are at 37.6%.

So technically speaking, we've seen the business come back in terms of margins. However, the other expenses continue to increase. So over the last couple of years, we've seen the expenses actually double for us. So when do we see these costs either stabilize or start to decline? That is question number one.

And the second question is, in our presentation, we've given the OFC cable volume at somewhere 36 million, 37 million. But we were -- we were of the understanding that, currently, we are at 33 million optical fiber cable capacity. So we just wanted to clarify on this number as well.

[Ankit Agarwal, executive]

So there are a couple of things. One, I think, overall, on the other expenses, if you look at it, we have increased from about INR 429 crores to about INR 478 crores. And as I said, some portion at least has come in, in terms of increasing in terms of freight, sheer volume that we spoke of has increased into Europe and U.S. and some of those costs. We've also had some costs particularly in this quarter related to legal and consulting fees, et cetera, which we believe is onetime.

So I do believe -- looking at this, we need to break it out. Our sales will continue to grow, as I said, even in terms of our export market segment. So to that extent, that's something we are mindful of. But some of the other costs will start tapering down towards Q2 and Q3. So I think it will be a combination of both factors.

In terms of the capacity, what we have shared also earlier is that the major investment is in the U.S. So that capacity will come in into Q3 in terms of about 5 million, 5.5 million capacity. And we have done marginal capacity increase in India in terms of cable improvement and also, again, very small capacity in Italy. So a combination of all this has got us to add about 3 million to 4 million currently. And then this balance, 36 million, 37 million to about 42 million, which we have slated, will come from the U.S. addition.

[Neerav Dalal, analyst]

Got that. So just staying on the other expenses. If you could give us a breakup in terms -- or just one is what were these legal expenses? And what is the quantum of that? And second is what would be logistics cost as a percentage of revenues for us? And if we could get a Q-o-Q, Y-o-Y number.

[Ankit Agarwal, executive]

Sure. So I'll -- let us come back to you, Neerav. We'll get Pankaj to share the breakup with you.

[Neerav Dalal, analyst]

And just lastly, in terms of the China subsidiary, I think we are buying out -- buying it out. So does that mean that we would not be doing any business in China? And what about the capacity there? If you could just clarify on that?

[Ankit Agarwal, executive]

No, actually, it's quite a positive development for us where we got the opportunity to acquire the balance 25% stake from our JV partner. So with this, then it will become a wholly owned Indian company. And absolutely no issues that we foresee in terms of running the operations.

And it's all aligned with our strategy, Neerav, about what we said about leading with cable. So as we move towards now 42 million of cable very soon, it's very important to be fully secure in our own manufacturing of fiber. So now with this complete ownership, we will be scaling up our China operations. So full capacity is close to about 12 million -- 12 million to 14 million fiber kilometers. So we'll scale up our fiber operations and make sure that we have sufficient fiber for our global cable requirements.

[Neerav Dalal, analyst]

Right. So all of that technically will be moved -- will be used for the international markets rather than China? Is that the correct assumption?

[Ankit Agarwal, executive]

Yes. I mean the underlying is to serve our cable -- our captive cable requirements wherever they're located, India, U.S., Italy, wherever.

[Anuj Sonpal]

For the next question, I'd request [ Sunny Gosar ].

[Unknown Analyst]

My question is that while the U.S. and Europe business have shown good growth, India business has been -- has declined in Q1. Any particular reason for that? And my second question is this -- the presentation at one place mentioned that we short-closed approximately INR 1,600 crores of open order book in Q1 FY '23. So does this mean that the order was partly canceled? Or what does that exactly refer to?

[Ankit Agarwal, executive]

Sure. Absolutely. So I think India market, I would say largely what we have spoken of earlier also, that we are very conscious of only focusing on taking business especially on the services part at the right margins and we're not chasing top line. That's also a little bit linked to the second part, and I'll come back to that.

Overall, we actually do believe what I shared earlier also. We are at this kind of tipping point for India market to grow. And whether you look at Indian operators, you look at BharatNet or [ Defense ], all of the areas we do expect pretty robust spending on the infrastructure -- digital infrastructure probably for the next 4 to 5 years.

So we are quite well pleased with our current market share, with our brand, with our capability and our teams, of course. Relationships are very strong across with our customer base. And as the demand starts picking up, which we do believe should happen in the next 6 to 9 months, we are quite well placed to get the right businesses, the right projects at the right margins that I was talking about earlier.

So we did -- we had a very conscious view of what business we want to pick up in India. That will continue to be the case. And that's where we saw some reduction in our revenue on the India market part.

In terms of the short closure of order book, so at a macro level, this was one of our strongest ever quarters in terms of order book. Very proud of our global team and our solutions where we clocked, I think, north of INR 2,700 crores overall for the quarter. And then we short-closed about INR 1,600 crores. This was largely about INR 1,200 crores in the services business and about INR 400 crores in our optical business.

And largely, these were linked with the same theme where very -- in most of the cases, in our conversations with our customers, we have had a mutual discussion where we short-closed some of the lower-margin orders or orders that were just not progressing in terms of time and speed from the customer side. And we are looking at -- very often with the same customers, renegotiating new orders or new customers as well.

So this is something that we have -- we wanted to make sure that we are -- we have the right visibility of the order book, and that is up to date. And so what we have looked at is about the INR 2,700 crores that we have booked overall, and then we have reduced about INR 1,600 crores in terms of the short closure.

[Unknown Analyst]

So that is actually very good because it doesn't reflect in your net order inflow because of the short closure. So do you believe that this kind of order momentum will sustain or there were some one-off large orders which came through in Q1?

[Ankit Agarwal, executive]

So we -- as we did talk about, one specific large order out of the U.S. But even apart from that, just looking at the momentum, we see, as I said, both in U.S. and Europe, we are confident of maybe not at this scale, INR 2,700 crores, but somewhere in this range kind of order book. And again, as I said, we'll look at very closely with 5G in India. And BharatNet over next 6 to 9 months, that will play out. So we will see out of this what orders do we capture.

And again, I want to reiterate, we are very mindful especially in India market to take projects at the right margins. So while we are confident we can book a lot of orders, we are very mindful now of both looking at right margins and also, I would say, mindful of the cash and the collection cycle.

[Unknown Analyst]

Sure. And in your outstanding order book of INR 11,000 crores, do you foresee any similar order closures with a lower margin or not so focused segments? Or now the order book is more or less cleaned up in that sense?

[Ankit Agarwal, executive]

Well, I would say we continue to evaluate. I mean it's literally a month-on-month process. We're very clear in terms of our focus markets and what margins we want to take them on as well as how do we perceive risks at the collection. With all of these cases, I want to reiterate, these are mutual discussions with the customers and done on a friendly basis.

So this is something that we keep evaluating month-on-month. At any point we feel -- for a particular quarter, we feel that the orders we do not want to pursue, then we take those calls in terms of short-closing them. So I won't be able to comment. But at least for now, we have obviously taken a good amount in terms of INR 1,600 crores, and we feel it was a prudent thing to do for the business.

[Unknown Analyst]

And one last question. What is the expected CapEx outflow for FY '23 and FY '24? And you had also planned for a facility in U.K. So is that plan currently on? Or has that been like deferred or canceled?

[Ankit Agarwal, executive]

Yes. Good question. So overall, as we had guided earlier also, it continues in terms of overall CapEx, about INR 500 crores. Currently, in Q1, we had a CapEx of about INR 160 crores out of that. And as we said, most of this is linked to our U.S. facility as well as probably some CapEx payments from past investments, et cetera. So I think that is something that is -- we are confident of.

And optical interconnect requires some marginal CapEx for that growth. So overarchingly, linked to our point on capital allocation, majority of our investment, almost all of it, will be focused in terms of our optical business. In terms of the -- and next year, currently, we foresee in the range of about INR 350 crores in terms of CapEx. So this is broadly for current year, next year.

And to your question on the U.K. part, I think overarchingly, our plan was to look at 42 million, which we believe we can ensure through combination of U.S., India and Italy that I spoke of in terms of cable. So we continue to evaluate the market and the requirement for a local facility. And that's something we will probably update you as we make any progress. As of now, we are focused on the other regions, particularly on the U.S. part in terms of the new facility over there.

[Anuj Sonpal]

For the next question, I request [ Saket Kapur ].

[Unknown Analyst]

So you can hear me?

[Ankit Agarwal, executive]

Yes.

[Anuj Sonpal]

[ Saket ], we can hear you. Please go ahead.

[Unknown Analyst]

Am I audible, sir?

[Ankit Agarwal, executive]

Yes.

[Unknown Analyst]

Can I continue, sir?

[Anuj Sonpal]

Yes, you can -- we can hear you. Can you go ahead?

[Unknown Analyst]

Yes. And sir, taking into account the way the fiber prices have moved up, there is -- the cable prices have not commensurated to that. So what is your current statement? How much have been the external sale of fiber out of the total production?

[Ankit Agarwal, executive]

So I think -- one, I think you're right, [ Saket ]. There has been a time lag, and I think we've shared this last quarter as well, between fiber prices improving vis-à-vis seeing the corresponding improvement in cable. Having said that, we have been consciously talking to our key accounts, especially our large customers in U.S. and Europe, for improving the prices and passing on some of the costs. That improvement and benefit, we should certainly see into Q3 and Q4 that we've said.

In terms of fiber prices and cable prices ballpark, we would say fiber prices are probably in the $6 range in terms of standard fiber. Of course, there are many varieties. And then in terms of, say, cable prices, especially in the markets we operate in, would probably be in the $15 to $16 range. So that's the ballpark.

We are not seeing any major upward or downward movement in the prices since we last booked. But again, these are all standard prices. Each contract, each customer is different. And for us, also more and more of our sales has moved much more now on cable and interconnect. I think we would almost have marginal, if any, fiber being sold in the open market. Most of our fiber is consumed for our cable requirements.

[Unknown Analyst]

Sir, on the finance cost part, if you could give -- I missed the net debt level, and the finance cost as an absolute number remains at INR 69, INR 70 crores per quarter. So what should be the annualized number we should look? And sir, taking into account what the quarter 1 performance has been, it was informed to us earlier that also that it would be muted until the first half and H2 will be the one where we'll see some light at the end of the tunnel, sorry for the phrase.

But do we stand there, that worst is behind of the sector? Because the numbers are certainly reflective of other optic, obviously, players also. So do you think the worst is there or still we have more pain left and maybe this Q2 would also reflect the same?

[Ankit Agarwal, executive]

So I think one -- so finance cost, as you said, we are in the same, about INR 69 crores, INR 70 crores. And we're very mindful that, of course, there is discussions globally in terms of interest rates rising, et cetera. So we're watching that very carefully. Our net debt has increased by about INR 380 crores to about INR 3,200. So we are very mindful that we have to create that balance between investment into the business and the CapEx that we spoke of, but at the same time, get very strong operations -- cash from the operations to reduce the net debt. So currently, while we create this balance, our target still at the company level is probably to settle back to the INR 2,800 crores levels we were at previously while still ensuring we invest for these growth areas, particularly in the cable expansion that we've spoken of. So I think that's the focus.

Do we see light end of the tunnel? We are in the light business, the optical business is the light business. We are -- as I said, we continue to see the tailwinds quite strong. We continue to see market demand for next few -- at least 4 to 5 years, quite strong. And it will now be a function both of how do we ensure some of these external costs get normalized as well as from our own operational efficiencies and our customers, we start getting some of our prices and costs passed on to them.

So as we continue to guide, we do believe quarter 3 and quarter 4 will be better. And we'll -- certainly into Q4, we have confidence that we'll be moving towards the better margin profile, particularly of the optical business.

[Unknown Analyst]

Right. Sir, I'll come in the queue for my follow-up. I have 2 of them.

[Anuj Sonpal]

[ Saket ], please just continue. One more last question, please.

[Unknown Analyst]

Yes, sir. So the small point -- what we can make sense is that from quarter 4 onwards will be the normalized quarter, sir. And how have been the collections, sir, for the ones -- we have made some provisions, I think, so 2 quarters earlier. What is an update on the same? How is the collection currently?

[Ankit Agarwal, executive]

Overall, we had made a provision close to about INR 200 crores on the balance sheet. And I think that's something -- at that time also we had shared, we wanted to make sure that we did -- based on prudent accounting, we took those as provisions. They were not write-offs. There have been some very small collection on the back of those provisions, but still work cut out in terms of the entire INR 200 crores. So that's something -- still work in progress for our teams.

And during the quarter, we had probably working capital increase also north of about INR 200 crores. This is -- a good portion of this is linked to the increased sales into the North America market, which then -- all of this then contributed to the net debt going up, which we spoke of. So I think we are very conscious of these elements. We are also, as I said, conscious of exposure, particularly to government projects. And we are very mindful of even any collections that are due. We have very strong focus on it from a cash perspective.

[Unknown Analyst]

So year-end target for net debt numbers would be? In what vicinity are we working?

[Ankit Agarwal, executive]

That's what I spoke -- so we want to bring it back to normalized levels of about INR 2,800 crores.

[Unknown Analyst]

INR 2,800?

[Ankit Agarwal, executive]

INR 2,800.

[Unknown Analyst]

And what are the numbers, sir, for this as of June, sir?

[Ankit Agarwal, executive]

About INR 3,200 crores, ballpark.

[Unknown Analyst]

INR 3,200 crores. And this increase in inventory you also somewhat spoke is baked into this increase in debt?

[Ankit Agarwal, executive]

That's right. So it's -- we spoke of the working capital. We have also spoken of CapEx, the INR 160 crores. As well as what we call contract assets, some of that has increased as well in our services business. So a combination of this has increased the net debt by about INR 380 crores.

[Unknown Analyst]

So just to summarize. Is it the inflationary part only that is creating the trouble for an optical company -- OFC manufacturer company like us? Or what are the other issues that were in the PBT numbers? The numbers are looking -- were lower or in fact, sir, if you look at the PBT number, negative PBT numbers for us. Where are the gaps that -- this was not the trend what the company used to post earlier, sir.

[Ankit Agarwal, executive]

Sure. So I'd break it into 2 parts. One is structurally, we've seen some pretty large non-normal increases in our costs, right? Specifically for us, we've seen container prices go up the threefold, fourfold, as I said, from about $7,000 to almost $22,000. That happened at a time where a very large portion of our sales shifted from India and Europe to Europe and U.S. So that is one big factor contributing to cost increases.

Second is all the raw materials linked to oil has also seen a pretty large -- hello?

[Anuj Sonpal]

Yes. Go ahead, Ankit.

[Ankit Agarwal, executive]

Yes. Also, all the raw materials linked to oil have also seen a pretty large increase in cost. So I would say it's a couple of these factors.

In addition to that, we continue to have invested close to INR 40 crores to INR 50 crores per quarter on development of our new businesses like the wireless and software. So it's a combination of these 3, 4 things. As I said, we do believe that some of the improvement -- and we have been able to pass on some of these costs to our customers on the optical side. And so improvement or value from that, you should start seeing in quarter 3 and quarter 4.

[Anuj Sonpal]

Let me take one last question, due to time constraints, from the chat from [ Agnel Peter ]. He's asking why does North America business have better -- is better for margins.

[Ankit Agarwal, executive]

So good question. So one, I think just to reiterate, there's 2, 3 things happening in U.S. in particular. One is the growth itself is for a pretty large market. I think it's 80 million, 85 million fiber kilometers. That itself is going rapidly towards 100 million fiber kilometers. So market itself is growing quite strongly. Second is government has announced this massive fiber project which is about $65 billion. So that is giving a lot of comfort that this will grow for next 4 to 5 years.

But we believe that there is a very strong opportunity for STL because we have the right product portfolio. Our products are certified by Telcordia. We have very strong sales and technical team, and we have now the local presence. And just to be clear, some of the Tier 1 operators, they also get tax benefit for buying from local manufacturer companies. So all of this plays quite well for us.

In addition to this, at a macro level, U.S. really values quality, they value technology, they value innovation. So a lot of our high-end products, so to speak, in terms of cable and soon probably interconnect will be getting the right premium pricing in the North America market. And this is equally true for a few customers in Europe as well where with our key accounts, we do really engage with them on a solution basis and then we get a premium for it.

[Anuj Sonpal]

Thank you. Unfortunately, due to time constraints, that was the last question that we could take. Thank you, everybody, for participating. On behalf of Sterlite Technologies Limited, thank you for participating in today's earnings call. Management, if you have any closing comments, please.

[Ankit Agarwal, executive]

I want to just appreciate and thank everyone for attending this call and showing interest in our company. I hope we are able to address and clarify all your queries and comments. For any further questions and discussions, feel free to contact the Investor Relations team, which includes myself and Mihir, and we really look forward to continuing the conversation with you in the future. Thank you.

[Anuj Sonpal]

Thank you, everyone.