Sterlite Technologies Ltd

NSE:STLTECH

Earnings Call Transcript 2024-Q1

[Pankaj Dhawan, executive]

Ladies and gentlemen, good day, and welcome to the STL's Quarter 1 FY '24 Earnings Conference Call. I am Pankaj Dhawan, Head of Investor Relations at STL.

To take us through the results and answer your questions, we have Ankit Agarwal, Managing Director, STL; and Tushar Shroff, Group CFO, STL.

Please note that all participant lines are in the listen-only mode as of now. There will be an opportunity for you to ask questions after the presentation concludes.

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

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

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

[Ankit Agarwal, executive]

Thank you, Pankaj. Good day, everyone. Thank you for joining our call for our Q1 FY '24 Earnings Call today. .

So just to reiterate, our strategic priorities for SGL remain the same and are as follows:

Firstly, we will continue to grow the optical business by increasing OFC market share and the connectivity attach rate that we've been speaking about. We've also started project to optimize our raw material and fixed costs, in the business to become more competitive. Secondly, we shall continue to consolidate global services in the segments of our choice. We are building new capabilities for value-added services.

We are also working to improve the U.K. operations profitability that we have touched on earlier. Last but not the least, we shall build the digital business through focused investments in new technologies and capabilities.

Let's first touch on the optical business. The 5G deployments continue to remain strong globally. As of June 2023 A total of 532 operators in 160 countries have invested in 5G networks with over 254 operators having launched commercial 5G services. At least 41 carriers in 20 countries have launched stand-alone 5G networks. There are already 1.1 billion 5G subscribers in the world, which is expected to reach 1.5 billion by the end of this year.

Leading the 5G deployments in China, which plans to increase its 5G base stations from 2.3 million to 2.9 million by the end of 2023. Also, fiber-to-the-home deployments continue to remain strong. In the U.S., the number of homes passed in 2023 is likely to remain at similar levels as 2022. As examples, Frontier Communications passed 339,000 homes in quarter 2023, up by 60% over quarter 1 2022, while AT&T added 600,000 locations in Quarter 1, 2023.

In the U.K., 4.7 million home passes are expected in this year, Similarly, in Germany, Deutsche Telekom plans to pass another 3 million homes in 2023. Lastly, China continues to deploy fibers, now more and more for fiber to the room applications. to prepare for AI and Internet of Things. The Biden administration has recently announced the distribution of funding of over $4.2 billion the BEAT program, the funding will be used to primarily deploy last mile fiber networks.

The funds are expected to flow to states early next year and shall start to fund projects by the middle of 2024. In total, government clients to spend close to 100 billion in building broadband connectivity by 2030.

We expect the excess inventory to correct and growth to come back by the end of the year. Therefore, we remain committed to the U.S. market and continue to broaden our customer base. In this regard, we have recently announced our partnership with Windstream, a privately held communications and software company.

Our collaboration started in February 2021. We will provide them with advanced optical designs like high fiber count intelligently bonded ribbon and flat ribbon in addition to loose tube cables. These products are designed to ensure faster rollout and superior network longevity which aligns perfectly with the Windstream requirements.

I'm also happy to share that China Mobile has announced the results for 2023, '24 tender. The tender volume is at 108 million per kilometer. While it is lower than last year, the previous tender was actually extended beyond 12 months. The final settled average weighted price remains unchanged from last year and local RMB terms.

The big 5 players in China got a majority of the tender volumes, which is very positive, which will lead to consolidation in the China market. The tender award shall mitigate any price risk that we see out of China in the near term. In addition to the China Mobile, China Telecom has also announced a tender of 50 million kilometers which I'm happy to share that it is higher than last year.

Now coming to the demand outlook. As per CRU, the medium-term demand in optical fiber cable volumes expected to go up to 638 million fibre kilometers by 2027, up from 535 million in 2022. In the short term, however, as expected, global OFC demand is contracted by 3.4% in H1 2023, particularly in North America, demand contracted by 11%. However, the demand grew in Europe, Asia, excluding China, as well as rest of the world.

Our market share remained stable at 11% in H1 of calendar year 2023 versus H1 of calendar year 2022. Our connectivity business also remained stable at 10%. We expect OFC market share to grow from H2 '24 onwards. We also strongly feel that new products in the connectivity business should see a jump in attach rate from H2 FY '24 onwards.

Coming to the financials for the optical business. In Q1 FY '21, revenue stands at INR 1,112 crores, which is lower by 2% on a year-on-year basis. OFC volume is lower on a Q-on-Q basis, and OFC realization is also lower on Q-on-Q basis due to change in geographical mix away from North America. Even though revenue has gone down, EBITDA has gone up by 53% year-on-year basis to INR 246 crores. EBITDA margins for Q1 FY '20 stands at 22.1%.

We have reduced our operating costs on Q-on-Q basis to mitigate the realization impact. Going ahead in Q2, we are taking the following actions to grow and maintain our operational profitability. Number one, we are taking action to increase our share in EMEA, India and APAC markets to fill some of the volume gap from the U.S. market. We continue to drive new product development, approval and commercialization in the optical connectivity business. And we have engaged a Tier 1 management consulting firm to further optimize our operating costs. We expect these actions to start showing results from second half of this financial year.

Now let's discuss the progress in the Global Services business. In quarter 1 of FY '24, in line with our strategy to win profitable projects with optimal fund involvement we have won 2 key orders. The first one, we are a system integrator to provide ICT infrastructure for data centers and promote sites, along with the responsibility of operations and maintenance. In the second order, we shall supply optical fiber cables and shall do the fiber rollout for 5G deployment and multiple circles for one of the largest Indian private telecom operators.

We expect BharatNet Phase 3 tenders to be released in second half of this financial year. As a result, we also expect our order inflow to increase as we go through the rest of this year. In the Global Services, Q1 FY '24 now revenue stands at INR 353 crores. EBITDA has gone up by 27% on a year-on-year basis to INR 28 crores due to a favorable project mix. The EBITDA margin at Q1 FY '24 stands at 7.9%, in line with our expectations.

Our project execution in the services business is on track. Among Indian public projects, our BharatNet projects, state of [ Telangana ] is 65% complete, including all packages. The network modernization project is 68% complete, the fiber rollout project is 3% complete, the new managed services project is 12% complete. And additionally, we've just started the data center project that I spoke about.

In the Indian private side, fiber rollout projects for a large Tier 1 telecom operators 20% complete for Phase 3. Fiber rollout for another large telecom operator, Phase 2 is 28% complete. And finally, the fiber rollout for a modern optical network for another Indian private customers, 58% complete. Coming to the U.K., fiber-to-the-home rollout in the U.K. for projects combined is at 31% complete.

We shall now talk about the updates for STL Digital business. In STL Digital, we are continuing to grow with momentum. We acquired new customers in the U.S. and Indian across technology and service industry verticals. We have more than 20 plus active customers at the end of Q1 FY '24. We also had a very strong deal inflow in the Quarter 1 of FY '24. We are happy to announce that we have signed strategic partnership with SAP and Google to offer the solutions jointly to our customers. We have also expanded our delivery team to 950-plus consultants and our open order book is also very healthy, at INR 900-plus crores.

In line with our expectations and despite a tough industry environment, we have grown our revenues on Q-on-Q basis to INR 62 crores. Our EBITDA loss for Q1 was at INR 37 crores. We expect to maintain this growth momentum. But at the same time, we also expect the losses to go down as the revenue ramp-up increases.

I now hand over to Tushar to talk about the financials.

[Tushar Shroff, executive]

Thanks, Ankit. Good day, ladies and gentlemen. Q1 revenue, up by 2% on a year-on-year basis to INR 1,522 crores. EBITDA grew by 42% on year-on-year basis to INR 235 crores. EBITDA margin increased correspondingly to 15.4%. Net profit after minority interest and share of joint venture increased by 156% on a year-on-year basis to INR 46 crores. .

In terms of new orders, in optical business, we continue to win multimillion-dollar orders for optical fiber cable in Europe and Americas. We have already talked about new orders in service business in previous slides. In terms of revenue mix, it has shifted to EMEA and India in Q1 FY '24 in line with our guidance in previous quarter. Our open order book at the end of Q1 FY '24 is INR 10,938 crores. Our order book is well diversified across our customer segment and also across all our businesses.

We have placed an [ a brief ] version of our reported numbers for your reference. Our net debt is stable on a quarter-on-quarter basis. Also, we have filed a demerger of service business with stock exchange. We expect to complete the demerger by fourth quarter of next year -- next financial year. Based on current U.S. [ Webs ] industry situation, we are revising our revenue guidance to 7% to 9% growth for full year. However, we are still targeting net debt-to-EBITDA to be at 2.5x.

On this particular slide, one major update is our ESG rating by MSCI has gone up from triple B to A, which is positive. In summary, I would like to say that we shall target to gain the market share across our focused market, particularly in EMEA, India, APAC markets to fill the volume gap from U.S. market. We shall also optimize our operating cost to maintain the operating profitability.

In Global Services, we continue to move towards the value-added services with improved margins and fund involvement. In digital business, we shall consciously invest to grow the revenue and reduce the EBITDA losses on a quarter-on-quarter basis. Last, but not the least, we are targeting to grow 7% to 9% in FY '24 with reduced net debt-to-EBITDA at 2.5x by the end of financial year.

With this, we come to the end of our commentary, and we shall now open for Q&A.

[Pankaj Dhawan, executive]

[Operator Instructions]

We'll take the first question from the line of Mr. Mohit. Mohit, you can ask your question now.

[Mohit Motwani, analyst]

So my first question is on the North America business, right? I mean there's to be some slowdown there, which we have also indicated. So can you give us some color what is driving this slowdown? Is there's a slowdown in 5G is the adoption is slower if the CapEx investments have gone out by the telecom players. So what is driving the slowdown in North America because of the inventory has also built?

[Ankit Agarwal, executive]

Yes, absolutely. Thank you, Mohit. So I think as we shared even at the end of our previous quarter results, and we've reiterated now, we do see some slowdown in terms of our sales, specifically in North America. I think there are 2 or 3 elements that are playing out. I think number one is, as we had shared last time when we reiterate, broadly, there is still inventory with the Tier 1, Tier 2 players in the market. So as they start depleting that inventory, we do expect the demand to come back up.

Currently, we do see that probably the depletion of that inventory will still take a quarter or two. So our own view is that we should start seeing good demand coming back in North America probably in Q3 and Q4 onwards. The second point is from the operator perspective, it's probably still taken time to scale up the deployment speed. That is still taking some time in terms of availability of scale manpower and execution capability that's probably been slower than what the customers expected.

And then, of course, lastly, because of the higher interest rates and inflation. I would say there's some level of caution from the operators in terms of really ensuring they're doing the right projects. But at a macro level, I want to reassure that overall in our conversation with customers and what they have put out publicly, they continue to be committed towards long-term deployment of fiber networks for all 3 elements, whether it is linked to 5G, whether it is linked fiber to the home or it is for data centers.

All of the requirements continue to be there, continue to be strong. One other part that we just shared was in terms of the [ bed ] that has been announced in terms of $42 billion. There has been discussions about allocation to the various states for the connectivity, our view is the demand linked to the [ beat ] will come in at some point in half of FY -- calendar year '24, is when we should start seeing some positive demand linked to that.

[Mohit Motwani, analyst]

Sure. That's very helpful, okay. And my one other question is, there's a massive improvement in the gross margin. So is it that also a function of change in geography mix because your raw material consumption will be lesser or is it like the raw materials have pulled off as a whole. So I just wanted to -- and once the demand comes back, will this again go back to previous levels once the demand in North America comes back. .

[Unknown Executive]

So Mohit, I would like to address this particular question. If you see that the material cost percentage has gone down mainly because of the prices of some of the material has gone down as well as we have been working on optimizing the consumption of the -- some of our key raw materials, correct, which is also helping us in driving the overall material cost. So there are two parts to it. Structurally, we see that there is a price impact as well as the consumption impact in overall material costs.

[Mohit Motwani, analyst]

Sure. And last one, if I may. So there's an open order book of INR 900 crores for ST Digital. So can you give us an average tenure of this order book?

[Unknown Executive]

So the average is about 3 to 5 years because it's over a period of 5 years. So we signed the long-term contracts with the customer, and we continue to provide the services over a period of 3 to 5 years.

[Pankaj Dhawan, executive]

We'll take the next question from the line of Mr. [ Baumann ]. You can ask your question now.

[Unknown Analyst]

Sir, all of your competitor mentioned optical fiber optical fiber prices have been declined by 10% to 15%. And other expenses also has been decreased by 10% to 15%. That's why the margin improvement will be there in this quarter. Whether this will be sustainable in the upcoming quarters? And optical networking side also, we have witnessed a 22.1% margins, which is higher compared to past 4 to 5 quarters. So like how do we see the margin side in upcoming quarters? Also, please provide the realizations in the market for OFC side?

[Ankit Agarwal, executive]

Thank you, so firstly, I would say that we are -- we continue to be focused, as we said, we do expect a healthy mix between the various geographies. Given some of the lower sales that we have seen in Q1, and we will also see in Q2, we are actively focused on also improving our sales in other markets.

As we have shared through our presentations and previous discussions, we do experience higher realizations in U.S. market. So to that extent, our share and volumes increase in other markets, the average realization for STL would come down. So that is our current expectation probably for Q2. And we would need to see how our volumes come back in U.S., as I mentioned, probably in Q3 or Q4. So I think it will be a function of these things.

In our current quarter, our realizations, specifically for cable, like I mentioned, continue to be steady. It has come down marginally. As I said, because of the mix slightly away from U.S. But I still believe that looking at our focus, our priorities on improving our volumes, which will be a focus for us going forward. We do see a good balance of other geographies as well.

[Unknown Executive]

And Bala, just to address your very specific questions on our gross margin, as I said, we continue to work to optimize our material cost by looking at the consumption of key raw materials. We have engaged the leading management consulting firm to help us out in terms of optimizing the productivity in terms of ensuring the better yields as well, as we are also looking at the right prices for some of the key raw materials that we procure. .

[Unknown Analyst]

Got it, sir. Sir, on that, apart from North America, any other countries, we are facing slowdown on the export side? So if you could throw some light under that that really helpful.

[Ankit Agarwal, executive]

No. So I think we continue to see good demand in Middle East and India and parts of APAC. We have seen slight slowdown in Europe market. But that, we think, should come back faster. Specifically, I think, again, there, it has linked to high inflation and high interest rates, which have taken some period of pause. Also, typically, we're also seeing in Q2, for example, August month and part of September, also slower months in Europe generally in terms of execution of projects. .

So we're looking at these elements. But overall, I would say that we're still bullish on Europe market. We do expect that to bounce back. It is also a market where we have good amount of sales of our optical interconnect. So that's also something that we are bullish that will grow from H2 onwards.

[Unknown Analyst]

Sir, on that digital and technology side. So we made this quarter INR 62 crores. So we may see the same kind of run rate for next 3 quarters?

[Ankit Agarwal, executive]

So I think what we can share about digital, definitely, as you can see, we are really getting good order book, good commitment from high-quality customers, particularly in U.S. and other markets. So I think that gives us confidence on the underlying business and the value we are creating for the customers.

What I would say is, as we had shared last time also, our focus is to make the business breakeven by Quarter 4, that's the current priority and that will happen by further scaling up the revenue and covering the fixed costs and other costs. So that's something that the leadership here, [ Aman ] is focused on, and we are confident the way the orders are progressing and the customer conversations that we should break even by Q4.

[Pankaj Dhawan, executive]

Thanks, Bala. We'll take the next question from the line of Pratik Singhania.

[Unknown Analyst]

My question is with respect to optical fiber connect business, interconnect business. So as compared to what we had planned at the start of the year, and the actuals, which are being reported, there's quite a bit of divergence into our expectation at the start of the year. So what steps are we doing to rectify that? How can we grow this business further as compared to its full potential?

[Ankit Agarwal, executive]

Yes. Good question, Pratik. I think you're absolutely right. In the past, we had looked at how do we scale up this business probably even faster. I think some of our learnings that we did share last quarter as well is that the whole cycle that it takes from understanding the customers' problems, creating some unique innovation creating the IP, getting that approved through the technical cycle of the customers and then getting large scale, then trial rollout and larger scale rollout.

I think that whole time period has probably been longer than we initially expected, we are much more mindful of the entire cycle now. Having said that, we are definitely in trials with various customers globally. And so it's one of those things where as more and more of our customers get comfortable and we successfully passed through this trial phase, we do expect good volumes to come up for the products.

Another thing that we have done really proactively invest both in the product development as well as the team development for this business. So very happy to share that we have got on board some very strong talent globally, to help scale up this business. And on the customer end, we are also adding resources who are very comfortable with this product portfolio and really looking at that package solution of cable as well as the interconnect together for our customers. So I'm confident that probably by Q3, Q4, we should see some improvement in sales. And certainly, going into next year, we are even more confident that the sales will come up.

So I agree with you in summary. I think versus what we had thought of how this would scale up. There's been a lag. I think we've taken some of the learnings, and I'm confident of our actions that this will start stepping up and as it's particularly going to H2 of this year.

[Unknown Analyst]

So based on the revised plan in terms of the scale and the execution, what kind of an exit quarterly run rate you see by, say, FY '24 end by FY '25 end?.

[Ankit Agarwal, executive]

We are not sharing that kind of forecast currently. What we had shared was about our vision of getting to a high attach rate, if you remember in the past, versus that, as you can understand, today, we are at a 10% attach rate.

What I can share is clearly our intention would be to scale that up. We both see it as an important lever with our customers. And as we have shared, the margins on our interconnect are closer to 30%. So there's clearly an intent to scale it up also from a bottom line perspective.

[Unknown Analyst]

Right. My question would be with respect to the consultant that we have hired. So what kind of conservative cost cutting initiatives that you have taken would result into and by when we can see the results percolating in our financials?

[Ankit Agarwal, executive]

So we won't be able to share too many details. But what I can share is, as I said, it's a Tier 1 consultant who has experienced specifically working with us on optimization of all our costs. Also looking at our consumption. We had shared in the past where we had certain raw materials and gases which had a high cost for us.

So we have been actively working with the consultant for a few months now. We do expect some of these benefits will start flowing in, in H2 of this year, and some of it will come in quarter 2 as well. As we progress, we will share our overall cost improvements. We won't be able to share things directly linked to any specific consultant.

[Unknown Analyst]

So if you can quantify how many bps of EBITDA margin you are envisaging because of this entire exercise of cost initiatives? .

[Unknown Executive]

So I think overall, the entire management team is presently working on it. So the savings that we have been looking at is, some of the savings are under the evaluation stage. So at this point in time, we will not be able to actually quantify in terms of that, whatever is the total savings that we'll be able to generate because these are technical matters which requires a thoughtful evaluation before implementing any changes. So that's why, at this point in time, it is too early for us to quantify any kind of savings that we are planning to accrue for this particular financial year. But definitely, the team is working on it.

There are different projects, different teams which are working on was aspect, material costs, material consumptions, indirect spend. So a lot of other areas that we have been working on to optimize the overall cost structure for our ONB business.

[Unknown Analyst]

Okay. And my final question, if I may push one more. So in terms of the business environment in U.S., as compared to last con call when we had discussed the environment to be weaker for a couple of quarters. As compared to last quarter, the scenario remains exactly same worsen or better? Like what is the feel over there?

[Ankit Agarwal, executive]

Good question. I would say -- so I think on the positive side, I think there is more clarity now with the announcement of [ beat ], right? So I think that's clearly massive quantum $42.5 billion. There's more clarity now around how much -- which states we get, what kind of allocation, how will the flow happen and a lot of that will now start getting worked out. And clearly, we think at least 20% of that quantum, there will be procurement and so deployment starting to link to that starting in kind of mid of next year.

So I think that's positive from a market perspective. And clearly, as we said in the past, a large portion of that will be directly optical fiber as the medium for connectivity. Again, most of the telecom operators have reiterated their focus on optical fiber and fiber deployment. So we continue to track that very closely. I think what we had shared is that probably for 2 quarters at that point, we had shared that we see it taking time to go through the inventory.

I would only add that, that continues to be the case, whether it's 2 quarters or 3 quarters is the only X factor in our view. So we are watching that closely. We'll certainly update you probably in the next -- during the next set of results. But certainly, nothing more has significantly changed. Our own interaction with customers remain very strong, as you would have seen with, for example, with our Windstream press release. Customers are really appreciating our product portfolio, our innovation, the fact that we are now manufacturing locally in the U.S. and supporting made in America. So I think these things are going quite well for us.

[Pankaj Dhawan, executive]

We'll take the next question from the line of Mr. [ Kash ].

[Unknown Analyst]

Yes. My question is with regard to the debt-to-EBITDA ratio of 3.5% that you have projected to be at 3.5 at the end of this year?

[Unknown Executive]

I think it is 2.5%. That is what we are looking at.

[Unknown Analyst]

So will you be able to attend this with the current state of operation or you have factored in a rights issue or something of that sort? .

[Unknown Executive]

Yes. So I think it's a mix of two things. One is with respect to our current operations, it is mainly from our current operations at this point in time because we are also working on cost optimization project. and how effectively we are able to serve our customer in terms of the cost. So that's something that we have been working on. I think that also should start accruing over a period of time, and that should drive us in terms of generating better cash and to be able to reduce our debt. .

Similarly, we are -- on our GSV side, we have clear focus on execution, if we have been able to complete some of the projects in terms of a better execution, there will be -- we'll be achieving some of the milestone, critical milestone. That also will be able to help us in terms of releasing some cash which is blocked in some of these projects. So there's the two levers that that should help us out in terms of releasing the cash and reducing the debt to EBITDA.

[Ankit Agarwal, executive]

And also as some of the losses in IT services in our digital business comes down. To that extent, that would improve our EBITDA. .

[Unknown Analyst]

So you don't have any rights issue in the immediate future, right?

[Unknown Executive]

As of now, we continue to pursue, but we are not factored in this particular working at this point in time.

[Unknown Analyst]

Okay. And the U.S. business, I mean, U.S. is talking about making U.S. products and all those things. So does that help you with your operation in U.S., do you stand a better chance in the bids that are to be bid out in next year or something?

[Ankit Agarwal, executive]

Yes. So I would say broadly, that's been the whole strategic intent of why we set up the cable factory there. We set up -- it's really a world-class facility. We've set up the we're very proud of it. And the whole intent there was to provide world-class service locally to Tier 1, Tier 2 operators, hyperscalers, et cetera. That certainly, I would say, helped us in terms of our branding and positioning and really providing that quick turnaround, quick turnaround, quick service to the customers. And again, to reiterate customers like Windstream coming on board, and being proud of the partnership.

So that's the whole intent. Again, with projects, either with our current customers or large projects would be the whole intent is to support those projects through our local manufacturing.

[Unknown Analyst]

And on the CapEx front, is the peak of CapEx behind us? And from next year onwards, there will be hardly any CapEx is that the way to read?

[Ankit Agarwal, executive]

So I would say, see, currently, we are in that range. If you see last year, we were in the range of about 400. Even this year, we talked about 350 400. But I think also linked to what Tushar just mentioned, looking very closely at our net debt to EBITDA, et cetera. We are reevaluating all the CapEx even for this year and going forward. We really want to make sure that we generate cash as a business and then can reduce our debt. So I think those are elements that we are just balancing.

But overall, the first priority is whatever capacity we have set up to make sure that we utilize those fully. As given the current lower volumes of Q1, et cetera, the first focus is to ensure we get the right customers, right orders and we fill up our factories.

[Pankaj Dhawan, executive]

We'll take the next question from the line of Mr. Sunny Gosar.

[Sunny Gosar, analyst]

I had a couple of questions. So first is on the U.S. market. So we were doing about INR 750 crore plus kind of quarterly revenue run rate in U.S., which has dropped below INR 450 crores in this quarter. So although I understand that the demand is soft, but how should we look at in terms of numbers? So when this bounces back, say, like in Q3 or Q4, do we expect to go back to that INR 50 crore plus unit?

And second is, is this the bottom in terms of a quarterly run rate? It may not grow, but do you see that this is the bottom in terms of the quarterly performance in the U.S. specifically?

[Unknown Executive]

Yes. Good question, Sunnt. So I would say it's -- we're still watching the U.S. market closely. I don't think we can say a definitive when the demand will fully come back because I told you it's a function of these 3, 4 factors, how quickly do they deplete the high inventory that they have. Second is how can they scale up the execution, which is a constraint. And then obviously, their internal metrics around looking at the higher interest rate, et cetera, how quickly they want to deploy their capital.

In principle, in our conversations with customers, the intent to roll out continues to be strong. So it's more a function of going through the inventory and the other elements. That's why what we have been saying is that it will be 2 quarters what I just shared, [ Fin a ] few minutes back is that it could be up to one more quarter where it takes that kind of time.

Also, when we look at some of our peers in the industry, that's also similarly what we understand not only for STL, but also for our peers that it could be even up to end of this calendar year that it takes to complete -- to run through the inventory and the fresh ordering comes through. So what I shared is that to your specific question, this is the time period it will take for us to get back our volumes. Principally, our customers remain committed with us. We are their preferred partners in many of of the large customers.

Plus, as we have been able to start supplying from a U.S. facility to them, that will also increase. We do share a good relationship with the customers. What we are doing in the meantime is to ensure that to saturate our facilities, we're looking at ensuring that we increase our volumes in other markets like APAC, India and the Middle East.

[Sunny Gosar, analyst]

So just to harp on this a little bit more, basically, do you expect that whenever this bounces back, I'm not saying Q3, Q4, this bounce back will be to the older levels? Or you feel that, that may take a much longer time? Like when you did more than INR 750 crores in a quarter, from 450 to 750, will this bounce back be as sharp whenever that is to happen or that...

[Ankit Agarwal, executive]

No, I think -- I would say, see, it's a function of both things, volume and realization, right? So I think both things we are looking at closely. There could be, again, it's a function of timing of the orders, other things. So we could have some reduction in realization. But I think structurally, from a volume perspective, we continue to see that to be strong. Again, it's a function of how quickly the depletion happens, particularly with our large customers, both in Tier 1 operators as well as some of our distribution partners, we do see that volume coming back. .

[Sunny Gosar, analyst]

Second question is on the optical margin. So it's commendable that in spite of the operating deleverage, you guys have delivered like a 22% margin on the optical side. So if you can help me understand like what has changed because we were seeing improvement in quarters before that, from the freight cost and some other cost elements reducing. But how have -- what has aided this improvement in spite of an operating deleverage? And once, say, your revenue goes back to your peak quarterly level, do we now look at a much higher base in terms of optical EBITDA margins going forward versus your earlier range of, say, 20%, 22% that you had been guiding do we now at a higher revenue base, look at much higher margin?

[Ankit Agarwal, executive]

I'll make one comment, and I'll pass to Tushar. I think it's two things we'll have to keep in mind, Sunny, one is how will our realizations, particularly in the U.S. market move going forward, and that's what I was adhering to earlier. I think that's something -- today, we can't fully commit the same realization. There could be some reduction in realizations going forward. So that's something we just have to watch on where that could take us.

I think the second part, overall on margins, to your point, is also a function of how we see the interconnect scale up may not be very substantial in second half and then it could further increase in the next year, for example. So I just keep these 2x factors in mind of what could also drive the margins going forward.

[Tushar Shroff, executive]

So to your specific questions, I think this quarter also in spite of the fact that we have lower volumes. And in spite of the fact we have been able to improve on the overall margin. So all our efforts are -- we are putting our all the efforts to ensure that we are at this kind of a margin in spite the fact that we have the challenges maybe in terms of making the volumes. But as an organization, we are committed to maintain that kind of a cost basis, whether it is a direct spend or indirect spend to ensure that we are able to maintain the right profitability for that particular business.

So our approach is more disciplined as compared to in the past. So it is more -- it is going to balance in terms of whatever we may have the impact in terms of realization, if realizations are at the current level, I'm sure that we'll be able to improve on the overall margins. That is what is my outlook.

[Sunny Gosar, analyst]

And if I may, I have one more question. So on the global service business, we have again shown like very good margin performance. So again, some outlook on how should we look at margins going forward? Is this the base going forward, can we see some improvement? Or this is the level that we should work with going forward?

[Ankit Agarwal, executive]

Yes. So I think there's two parts to it. As we said, we are definitely focused on any projects we take on, whether private sector or in the public, we're very conscious of the margins and the cash flow. I think there's definitely a very strong discipline with the CEO, [ Pravin ] and his team for this business. So I think that's something we continue to watch closely. And I think we continue to see how we can keep these margins and see to improve them as well.

The X factor certainly for our services business will be the Bharatnet project. which we should have better visibility in the coming months. But clearly, that will be a large 3-, 4-, 5-year execution that will happen and then maintenance of that going forward. So I think that's one next factor to keep in mind. I would keep one caveat. We still have challenges with our U.K. business. We had talked about breakeven. It's been in that range of breakeven or marginal losses. So that's something we're watching closely on how we can turn that around so that overall, the profitability of services can also improve. So I hope that answers the question.

[Pankaj Dhawan, executive]

So we'll take a few questions from the chat in the meanwhile, which has come. So one is on the digital business. So when can digital business be EBITDA positive? And second is that can we give some more color on the strategic partnership that we have signed with SAP and Google? And how are we looking at in the long run?

[Ankit Agarwal, executive]

Yes. So I think on the first part, as I said, we are looking at breakeven in quarter 4 and probably get to positive EBITDA in Q1. I think as we stated, we have a strong team in place. We have 950 consultants. We have over INR 900 crores order book. So I think all the investments that STL has done into this business, this is the right time where the business scales up and starts performing.

So I think we're at that phase. I think specifically to your question, in terms of the details of the business, I can just give you some more details. So essentially, we have tied up a partnership with SAP, which is a market leader in ERP. Essentially, the objective is to help our clients to upgrade to a resilient future proof and scale-ready operations. And we are essentially enabling them to be cloud-enabled for their business modernization. And some of the key features of SAP, you might be aware with is, for example, the rise with SAP that they have.

So essentially, the partnership pairs our digital services with C-suite advisory and strategic implementation, along with SAP's market-leading expertise in enterprise software and cloud solutions.

[Pankaj Dhawan, executive]

We'll take one more question from the chart. Can you talk about the working capital movement in the first quarter?

[Tushar Shroff, executive]

So as you know that we have 3 businesses in terms of optical network service business and a digital business. Optical network in the service business is working capital light, while the major working capital requirement is generally for the service businesses as we continue to execute and progress on some of the contracts that we have been awarded with. The initial till the time, we don't achieve those milestones, we continue to invest in the working capital that all will get released once we start to achieve the milestone, which is required as per the tender condition.

So for this particular quarter, yes, we have made some investment in working capital for our GSP business.

[Pankaj Dhawan, executive]

Got it. Thanks, Tushar. One more question we had is that for the U.S.A., how much time would it take to clear the inventory? Any data points if you can give, that would be helpful.

[Ankit Agarwal, executive]

I think we touched on it so broadly. As we said earlier, in the last performance, call it, will take 2 quarters. Our current view is it's somewhere between 2 to 3 quarters is what we see. We're tracking announcements by our customers in our conversation as well, we're seeing how we can support them. And at the same time, we ourselves are looking at other markets to increase the volumes. .

[Pankaj Dhawan, executive]

Probably one last question from the line of Mr. [ Koushik drain ].

[Unknown Analyst]

Can you give us the rationale for this separation of the service business? And will the service business include your digital also?

[Ankit Agarwal, executive]

No. So [ Kaushik ], this is a standalone, what we call our Global Services business, where we do large-scale deployment of networks and we do system integration. So it's purely that vertical. So we had shared the rationale last time. I'll reiterate and Tushar can add. But essentially, when we look at the businesses, we are in -- from our perspective, our customers -- and then we look at various stakeholders looking at investors and we look at what is the underlying capital model of the businesses. We clearly saw that particularly when we look at the optical business vis-a-vis the services business, these are fundamentally very different models, where clearly, a lot of working capital is required for the services business vis-a-vis optical is essentially more CapEx heavy, needs more investment in the manufacturing.

One business is fairly global Tier 1 telecom operators, where we provide our cables and connectivity and other is more system integration and more EPC kind of business. And also then looking at feedback from various stakeholders, we also realize that the investor base very often is quite different for these, an investor profile is quite different for these businesses. So clearly, the intent is to scale up both the businesses, the optical business as well as services. And then looking at feedback or looking at inputs and advice, we felt it's best to look at a demerger.

So both the businesses would be listed separately as a 1:1 ratio. And we do believe this will enable the right kind of investment into the two businesses separately, and will help to scale up both the businesses. So that's at a high level, the thought process. We are confident, as we said that probably by Q1 of next year, we should complete this process and it will enable the growth of both the businesses.

[Unknown Analyst]

And digital is not part of this service business, right?

[Anand Gopaldas Agarwal, executive]

No, that will stay with the current STL.

[Unknown Executive]

The detailed scheme of demerger is already uploaded on the website and it's also available with the stock exchanges now.

[Pankaj Dhawan, executive]

Ladies and gentlemen, with this, we come to the end of a question-and-answer session, and I now hand it over back to Ankit Agarwal for closing remarks.

[Ankit Agarwal, executive]

To thank everyone for attending this call, showing interest in our company, and we hope to be able to address and clarify all your queries and comments.

I'm personally very, very excited with how we see STL going forward. We really are taking an Indian brand globally and setting global benchmarks for manufacturing. We are really living through our purpose of connecting the unconnected and transforming millions of lives. I'm also very happy with our impact to how we're enabling our country to move forward on 5G, how we're supporting our defense networks, and we're connecting the remotest people of India on high-quality optical fiber.

So very, very bullish on playing our own role to make India to take India forward. For any further comments, questions and discussions, please feel free to contact our relaations team which includes myself and Tushar.

We really look forward to continuing the conversation with you in the near future. Thank you.