Sterlite Technologies Ltd

NSE:STLTECH

Earnings Call Transcript 2023-Q2

[Pankaj Dhawan, executive]

Ladies and gentlemen, good day, and welcome to the STL Quarter 2 FY '23 Earnings Conference Call. I am Pankaj Dhawan, Head of Investor Relations at STL. To take us through the quarter 2 results and to answer your questions, we have Ankit Agarwal, [indiscernible] Head M&A and Corporate Development at 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.com.

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 hence must be viewed in relation to the risks pertaining to the business. The safe harbor loss indicated in the presentation also applies to this conference call.

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

[Ankit Agarwal, executive]

Thank you, Pankaj. Good day to everyone. Thank you for joining us for our quarter 2 FY '20 earnings conference call. So the telco CapEx was estimated at close to $330 billion for the period of 12 months ending June 2022. I think this is a very interesting chart, which really demonstrates the growing CapEx intensity of the telecom operators. And I think, as you can see on the chart, almost at about 17.8%, close to 18%, it's actually the highest in the last 10 years. And really, I think a lot of the demand that was sent up because of lack of deployment during COVID, obviously, 5G picking up team around the world and then also fiber-to-the-home, combination of multiple factors, I think, is where we see the CapEx growing. Also, in our conversations with some of our key customers globally, we continue to see a strong demand scenario from them, and we believe quite comfortably that it will continue despite some of the current economic elements.

In line with our expectations, strong investment momentum is continuing across these 4 levers, 5G, fiber to the home, really fiber to the x, data centers as well as citizen networks. 5G is becoming clearly the fastest-growing technology in the world today. Operators are expected to invest more than $500 billion in 5G between '22 and 2025. One interesting data point is Ericsson, more than 210 service providers around the world have launched 5G services moving. And the number of subscribers, 5G subscribers are expected to go from about $700 million currently to almost INR 4.5 billion by 2027. So massive jump clearly in number of subscribers. And really leading the charge in terms of 5G development is China, which also plans to invest significantly in 5G and fiber and increases our 5G base stations from about 2 million today to almost doubling it to about 3.7 million by 2025.

In addition to that, FTTx really is becoming all [indiscernible]. And by that, if you look at fiber to the home, fiber to enterprise, fiber to small cells, fiber for smart city applications. Just one example, about $125 billion has been earmarked for fiber to the home, just in North America over the next 5 years. I mean, if you look at large telecom operators in the U.S. like AT&T, for example, their plan is to almost double its fiber coverage to about 20 million locations by 2025. Another example, like [indiscernible] is targeting about 10 million homes and so many other cases like that, this Telecom Orange, also operators in India as well as when you look at Australia. Similarly, data center deployment is also increasing.

The data center CapEx is expected to grow by almost 10% CAGR over the next 5 years to a massive $350 billion by 2026. Again, as an example, Google has announced about $9.5 billion in building office and data centers just in the U.S. in 2022. Equally, in India as well, we're starting to see pretty strong push towards data center build-out, not only by some of the global players, but also by Indian players like Yotai. Lastly, on the citizen network side, U.S. is implementing close to $65 billion project to connect particularly rural parts of America, connecting the unconnected essentially. Similarly, the United Kingdom has a program to connect nationwide by 2030. And of course, we're all familiar with Resmed in India, which is to connect to 6-lakh villages in India over the next 3 years.

So this is some interesting data points from CRU. As you can see, it's forecasted as the CRU between 2021 to 2024, both in terms of the optical fiber cable demand globally, we also shared what is the CAGR expected across the regions. And also, very importantly, looking at ex China, the optical interconnect demand, which is a very important area for our growth and development. As you can see in the CRU, the optical cable demand is expected to close to about 66 million fiber kilometers by 2024, which is quite a significant increase from about 500 million in 2021. And equally, I think very importantly, the optical interconnect market is expected to grow from about $7.5 billion to about $9.8 billion.

And as we've been sharing as well, cumulatively, this creates addressable market for us across cable and interconnect of close to over $20 billion. So of course, we are all very proud and very excited with the launch of 5G in India by the honorable Prime Minister at the India Mobile Congress. It was truly an incredible moment, I think, in the history of our country and will create a tremendous impact, not just with the telco with the retail user, but I think even more so probably with the enterprises, as we start providing these services to large corporations to airports and also, of course, the public sector units. In terms of the operators, we did hear a very, very, I would say, strong and aggressive announcements, particularly by Bhatia and GO, as you would know. Bhatia plans to launch across 8 cities immediately and also GO in 4 cities. And of course, they have all laid out their plans broadly. GO looks to cover India by about December 23 and Bhatia plans to cover India by about March 24.

So those are, I would say, very aggressive plans by global standards. But clearly, a massive network buildout would need to happen to enable that kind of IT services and coverage. Our own expectations are that between $1.5 billion to $2.5 billion will get invested on fiber build-out. This will be a positive driver both for our cable and interconnect but equally for our services business. And in terms of cable kilometers, probably around 200,000 cable kilometers are expected to be deployed over this period as well.

So with favorable industry tailwinds, we have deployed a very focused strategy to profile as power. In the following section, we'll talk about in detail around what are really our core areas of focus, what is our right to win, and also how we're looking to exit some of our non-core areas. So essentially, our strategy is fairly simple and is focused on 2 levers. Firstly, we want to grow the optical business. Secondly, we're looking to consolidate our services business. And essentially, we're allocating capital to tap into the strategic growth opportunities offered by these 2 levers, and we shall talk about our progress in each of these in detail in the subsequent slides.

If we look at the optical business, particularly optical fiber cable business, you can see from the chart that we're consistently gaining market share. In H1 of FY '23, we're very proud that now as an Indian multinational, we've gained 11% share globally if you exclude the China market, which was just 5% in FY '20. Equally, something that we are proud of is that in Americas, we have now reached 14% market share for H1 FY '23. And it will really see even just a couple of years ago, that was -- we were almost nonexistent. So it's been a very, very impressive growth, I think, in that market. And all of this really caters towards our ambition to becoming a world top player in the optical domain. And we're very proud of the team that we've now built to enable this growth.

Also free to announce that we've secured a multimillion-dollar contract with a leading North American broadband connectivity company. Our intent is to increase our long-term contracts and order book as we move forward in this direction. So in line with what we've been sharing in our previous calls as well. Again, very proud of this facility, especially the one in the U.S. that has come up now, which will really be a world-class optical fiber cable facility. And similarly, in China, we are actually restarting the operations, and we plan to scale these up within this quarter. And we do believe that they will reach full capacity utilization by quarter 1 of FY '24.

Something that's clearly very important and strategic to us is to increase the optical interconnect attach rate. Just for people for whom this might be new, but the attach rate is essentially for every dollar of cable that we sell, how many cents or dollars do we sell of the optical interconnect? As we've seen currently, at FY '22, we have about 11%. In H1, even with a growing base on the cable, we are currently at about 9%. And this is on the back of a couple of customers that pushed out some of the orders and the revenues to H2 FY '23. So we are confident of these orders coming through, and this attach share growing in the near and medium term.

We are very pleased to announce that we've also done a breakthrough innovation in the optical fiber by developing India's first multicore fiber and cable, develop that STL center of excellence in India, we launched this product at India Mobile Congress in 2022. Essentially, a simple way to think about this is that the multicore fiber has 4x the transmission capacity of a normal fiber with essentially the same diameter and other parameters. This is the greenest ever optical fiber, which reduces cable surface area by 75% in plastics and the plastic in the ground by around 10%.

Apart from this, we will earn some very interesting solutions, such as the 5G Cosmos as well as the Gram Galaxy solutions, at the India Mobile Congress. The 5G Cosmos is a tower fiberization, and small cell solution for 5G networks, and Graham Galaxy is in India is focusing on solutions for rural fiberization. We continue to invest in R&D as of quarter 2 FY '20, the number of patents, including granted and applied stands at 742. Coming to the services business. We are building profitable order book by picking up projects in our focus segments. In India, our India business margin is entering up to the targeted range of profitability.

Our revenue is also much more sustainable with increasing share from O&M contracts. As the industry really kicks off its 5G rollout, we expect the revenue to ramp up in the near future. As stated earlier, that we have secured a good order book in the U.K. and increasing the execution phase in the U.K. We plan to be profitable in the U.K. services by H1 of FY '24. Overall, our project execution is on track. Among the India public projects, our BharatNet project in the state of Telangana is 57% complete, including all packages -- and the net of modernization project for the Indian PSU is 57% complete. On the India Private side, fiber rollout for large Indian telco is 100% completed for the first phase and 62% completed for the second phase. The third phase is yet to start.

In addition, the fiber rollout for a modern optical network is yet another -- or yet another private customer in India, it's 15% complete. And coming to the U.K., [indiscernible] of the whole rollout in the U.K. for all our projects combined is 4% complete. In line with our strategy to focus on selective segments. We have now divested the IDS business in quarter 2 FY '23 and sold our stake to the Exito Group. IDS operates in a new segment of inside data center connectivity and containment solutions. The initial consideration for 80% stake is about GBP 9 million.

The earn-out consideration is based on actual EBITDA achieved for the year ending December 2022. We have recognized a gain of INR 25 crores over INR 117 crore of book value. As you would recall, we had entered network software business in FY '16 through acquisition of Alico. We continue to remain a niche player in the business. Moving forward, we are working to pay it from our network software business to a digital business. The strategy is in work, and we shall come back to you in quarter 3 with our detailed plans. 

We also want to share with you that we have ramped down the wireless business with no additional investments in capital and mine power from quarter 4 of FY '22. This is in line with what we have been sharing over the last couple of quarters. We envisioned a disruption in the RAN market to open this aggregator and programmable solutions. And in that regard where developed products and validated it through POC trials. With both of the sets, we expect STL operating profit to go up by 40 to 50 per quarter from quarter 4 of FY '23 onwards. In terms of capital allocation, our clear priority is investments in the optical business.

We are investing in oversea capacity expansion, optical interconnect expansion, and new product development. We will improve margins and working capital cycle in the optical business; we have ramp-down investments in the wireless business and which are helped in improving the cash flow from the operations. We have also continued to divest noncore assets. We have just invested IDS in the current year. As you would recall, in FY '22, we also sold our interest in metadata as well as MPCI. Our financials continue to improve. We shall discuss this in detail in the current section. 

Our open order book at the end of quarter 2 FY '23 has gone up to INR 11,697 crores. In quarter 2, we secured a new order book of close to INR 3,200 crores, the highest order intake in the large [ Penafiel ]. This is a reflection of strong demand in the industry and a dominant position and focus, particularly in the optical business. We have also short-closed an order book of INR 941 crores, majority in services and bytes business. This is completely in line with our focus of executing projects at desired level of profitability.

The orders were closed after discussion agreement with the respective customers. Our order book is well diversified across customer segments and also across our businesses. We also have a significant O&M order book, which is already yielding revenue from this year. Our revenue mix is shifting to customer segments and geographies of choice. We're increasing our sales in telco and cloud segment in particular. In terms of geography, it's very visible that we are now increasing our share in North America and European markets.

What is happening to note is that in line with our statin the last 3 years, we have increased our revenue share of SCL in the North America market, the most premium market in the world from almost being negligible to almost 33% currently. Again, this is a reflection of our product innovation and a reward for the significant R&D over the years. In terms of notable wins in the quarter, apart from the multimillion-dollar contract of cables in North America and for optical interconnect in Europe, we have also secured multiple other new orders. In the European market, we secured new orders for optical interconnect solutions from an alternate player. 

We are very pleased to announce that we're collaborating with Votes Group in Australia to provide optical fiber cables. On the services side, we continue to win orders from long-distance rollouts from a leading telecom operator in India. We've also secured new orders for fiber rollout from another leading Indian telecom operator. In line with our estimates, quarterly revenue grew 12% quarter-on-quarter to INR 1,768 crores. EBITDA went up by 70% quarter-on-quarter to INR 202 crores. I'd like to note that this includes a INR 25 crore gain in the -- which is the IDS stake. Revenue growth was driven by strong growth in the optical business. We also grew in the services business in our focus segments. Margin improvement is mostly on the back of improvement in margins in the Optical business.

In terms of net profit, we delivered INR 44 crores for quarter 2 FY '23. In order to increase transparency and really by popular demand, we have started to report segmental financials. Starting with our optical business. We have delivered revenue of INR 1,313 crores, which is 15% higher quarter-on-quarter. This is due to an increase both in volume as well as realization. The OFC realization has gone up due to the price increase and better product mix in favor of the North American market. We delivered EBITDA of 20% for quarter 2 FY '23, 1 quarter before that was promised.

Key drivers for margin improvement of product mix shift to higher-margin products, price increase flowing through, and some reduction in logistics costs. In terms of capacity utilization, OFC are stable, was at 88% utilization based on production volume and capacity of about 37 million cable kilometers In Global Services, we delivered revenue of INR 463 crores, which is 11% higher quarter on fat. This is due to increase in execution of our projects in India. The India business is entering towards desired profitability. Losses in the U.K. have lowered the overall segment profitability. 

As we have said earlier, that we are working to ramp up U.K. revenue to be profitable by first half of FY '24. We also expect the India business to increase revenue quarter-on-quarter due to 5G rollout in the upcoming quarters. Coming to the Digital and Technology Solutions. Revenue was flat around INR 40 crores. The combined operating loss for this segment was INR 102 crores for quarter 2 FY '23. The losses have gone up in quarter-on-quarter due to higher initial manpower cost in the digital business. We expect operating profit to improve by INR 40 crores to INR 50 crores in quarter 4 of FY '23 in this segment. We have already spoken about ramp down of all investments in capital manpower in the wireless business from quarter 4 onwards.

Also, as the pivot from network software to digital business, we aim to be profitable in FY '21. In terms of cash -- in terms of cash flow, as you can see, our net debt has gone up by about INR 457 crores, mostly due to increase in contract assets of all projects in the services business. The stat generated from operations and net investment in loans held in payment of CapEx and dividends. Optical business has funded its growth itself by improving margins and working capital use.

As we move forward, we shall work to release cash from working capital, particularly from services, with the completion of large existing public projects like T-Fiber and collection of completed projects coming through, this can be achieved. Our target to reduce net debt EBITDA by quarter 4 of FY '23. Also, as we ramp up in the U.S. and China production, we don't see any significant debt increase from these levels. In terms of credit rating, we have a stable set rating at [indiscernible].

Replaced in a great version of our quarterly reported numbers for [indiscernible] to be a responsible leader in ensuring a connected, inclusive world. This focus reflects in the way we have designed and implemented our ESG agenda. We have diverted more than 175,000 metric ton waste away from landfills in FY '19 to FY '22. I'm also proud that we have reduced emissions of 15,000 tons of carbon used in providing to various initiatives in the plan for FY '21 to quarter 2 FY '23. We have also announced a commitment to become carbon mutual company by 2020. I think we'll be one of the first in the industry to achieve this. We have recycled 500,000 metric cube of water from FY '19 quarter to FY '20.

We're also very happy to announce that we've become the world's first optical fiber manufacturer to be 0 liquid discharge for the 5. Two are various initiatives in education women empowerment. Over 765,000 lines have been positively impacted from FY '19 to quarter 2 FY '20. We have also positively impacted 2.1 million lives through our various initiatives on health care from FY '19 to quarter 2 FY '23. For our work, we have won 80 ASG awards from FY '20 to quarter 2 FY '22. So in summary, I would like to say that we have a -- we see a multiyear network build cycle, which is in full swing, especially in our focus markets in North America, Europe, and India. Our global OFC volume is also expected to grow sustainably. We are aiming for global leadership in the optical business.

We continue to gain strong market share in North America and Europe, increase our attach rate in optical interconnect and develop industry-leading new products and situations. We are focusing on strategic segments in the service business. We are working to build profitable order book in India and ramping up execution in the U.K. In terms of capital allocation, we are allocating capital to the optical business and auctioning to release capital from the services business. Simultaneously, as we shared, we are divesting from non-core businesses.

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

[Pankaj Dhawan, executive]

Thanks, Ankit. [Operator Instructions] We'll take the first question from the line of Mr. Pranav Shahriar. Pranav, you can go ahead and ask your question, please.

[Pranav Kshatriya, analyst]

I have 2 questions. My first question is regarding the cost. I mean, the ethical fiber business has been sort of hit by cost inflation, especially the helium gas prices and the oil-related prices. So can you please give some color on how those costs are trending? I understand that logistics costs have sort of come down, but what about the other raw material prices? That's my first question. Secondly, on a macroeconomic environment, if you look at, we are seeing the interest rate rising.

Typically, fiberoptics is a product which has very long period users and to that extent, it is reasonably sensitive to the interest rate. So how do you see this panning out? Because even some of the customers which you mentioned, for example, Google is also sort of looking to cut costs. And so are a lot of other tech cans. So how do you see this in the medium to long term impacting the optical fiber business? And my last question is on the ramp-down of the wireless business. So it is not that it will save around INR 40 crores to INR 50 crores cost. But if you can just elaborate what exactly is the reason behind taking because I remember you being fairly optimistic on expanding that disabled market and now basically addressing the wider need of the telco.

[Ankit Agarwal, executive]

Good questions, Pranav. Thank you. So I think first question on the cost inflation. I think you're right. We continue to still see cost pressures, particularly with some gases like helium. There are still challenges with supply chain on that globally. We work a lot on creating alternate suppliers, et cetera. That's still a cost increase for us and a supply chain risk for us. The other one is still polythene and et cetera, which are linked to the oil prices. That's still something that continues to stay high and impacts our costs. Logistics have come down probably in the range of 15% to 20% over some period of time now.

That's something that has benefited us and will continue to benefit us as we continue to shift from, say, India to Europe and U.S. and other parts. I think the part that's been positive for us is that we've been able to pass on some of the cost increases to customers in quarter 2, and we'll continue to see some of that further come through in quarter 3 and quarter 4. That you would have seen also then linked to our EBITDA for this optical business now where we've been able to showcase 20%. I was quite happy with that, that we may pull that off probably about a quarter earlier than what we had earlier communicated. In terms of the macroeconomic, I think I touched a little bit on that in my presentation. I think what's been interesting in our conversations with our customers is that, we really see fiber as a very central and core to their strategy. 

If you look at some of the comments of operators like AT&T, Verizon, operators in Europe, China, across the board, and even really in India, you really see that the CapEx investment simply has to continue or even grow to have a meaningful 5G experience for the customers. On top of that, most of the operators are doubling down in terms of fiber-to-the-home networks. We shared the example of AT&T and others. Where we are seeing is that they are looking at other means to probably reduce our CapEx. And so there is really a doubling down of fiber that we're seeing and probably various operators having other plans on how to reduce some investments on other parts of the network.

To your third question, in terms of ramp down of the wireless business, I think there's 2 parts to it. One, I think at a very fundamental level, what we've been sharing is that we really want to focus the company into a few areas and become world-class at that. So we clearly see an opportunity here, given what I've just said on global demand for fiber. That itself is a $20 billion opportunity, and where we are hardly $500 million $100 million. So there's a huge opportunity for us to grow there and also take a world top 3 position, which is what we stated. I think that's one really at the core of it. The second part is, I think, probably from where we started out, we had certain assumptions that we had also shared of where we believe some of the wireless solutions, particularly in open rank, and how that uptake will happen.

Probably what we are seeing is that, that's getting pushed out to some extent. And we felt that given the capital allocation we want to do between our core optical versus other places, we felt it's probably better to reduce the cost for STL, find an alternate partner for this business and bring our focus back to the core.

[Pankaj Dhawan, executive]

We'll take the next question from the line of Mukul Garg.

[Mukul Garg, analyst]

I hope my voice is okay. I just wanted to focus a bit on the North American market. You guys have grown quite strongly there. The revenues were equal to what you generated there in the pool of FY '22. How should we see the growth in the market? Was there something which kind of kind of scale of revenue this quarter and is not personable -- or do you expect the automation market to continue to scale up and be your largest market in a few quarters? And the specific thing here is how to look at the profitability of this market. The prices are usually a bit higher. But at the same time, you need to do transposition of the preform and everything when our factory is coming on board. How should we see the respective profitability of the North American market versus your optical business profitability?

[Ankit Agarwal, executive]

Yes. Sure. Yes, good questions. Thanks, Mukul. So a couple of things. I think we're obviously quite excited about our growth in the North America market. It is probably one of the fastest, if not the fastest growing market globally, both for cable as well as interconnect. So there's been a real strategy for us. It's not happened overnight. We've been focusing on R&D and product development probably over the last 3 to 4 years and have been in continuous communication with our customers and potential customers in that region at that time. We've really worked a lot on the product development, ensured that we are just not one more supply in the market, but really creating pretty innovative solutions for the market there, both on the cable, and we believe over the next few quarters on the interconnect as well where we should start seeing some success. So that's really our view of the market.

We continue to see strong interest from Tier 1, Tier 2 telecom operators. And in line with our overall global key account strategy, we're also focusing on certain large accounts. One of them we were able to conclude in North America, and we shared that, which is a multiyear contract. Similarly, with other customers in the U.S., we are working towards multiyear contracts. And that part of our strategy also has been then to further cement our presence in the market and continue to be there for the long term. 

We have also invested in the factory there. It's really a world-class factory for the cable as well as some R&D that we will do there. And again, the whole intent is not just to supply out of a grocer, but to work in a very collaborative way with our customers. They have built solutions for them locally and then be able to supply that. In terms of the -- one correction I'd like to make, Mukul, that we'll not be supplying pre-comp to that market because it's a cable factory. So we'll actually be making the fiber in India or China or other locations and making -- well, India and China and then making sure that we supply the fiber to the U.S. factory, cable factory, which is, of course, very easy to transport and fairly low cost.

And really, from the profitability of the market, definitely, it is a good market. It's a strong market. But again, I would reiterate that the key lies in creating those solutions and innovative products rather than something that is standard. And as long as you can keep doing that for a select group of focus customers, we believe that the nature of the market is that you can have -- you can enjoy long-term relationships.

[Mukul Garg, analyst]

The other question was on the investment ramp down, which we're doing, how much of the revenue impact will this wireless [ Randon ] will have for you? And are there other areas where you are looking to optimize to kind of refocus on relatively higher profitable businesses?

[Ankit Agarwal, executive]

Yes, absolutely, Mukul. So a good question. I think, currently, wireless for us was largely, I would say, on R&D mode. So that's where we were incurring the losses that we had on the P&L. So by and large, there will be practically no impact on the top line. In terms of other areas, I would say I would break it into two parts. One is services. As we said, structurally, we're looking to focus on a few projects, which are the right margins, both in India and the U.K. So that's the structural part that will continue quarter-on-quarter. And then I think the second part is what we said. We have a telecom software business. So that we're looking at how do we pivot that towards digital and give us probably a quarter, we'll share more update on that.

[Mukul Garg, analyst]

Just one mention on the path to kind of profitability which you used to enjoy earlier, we are still far away from that with about 8% EBITDA margin this quarter of that one of Ban. How do you see the path moving back to that 70% to 20% half EBITDA margin? And is that something which will take a few years? Or there something which is in sight?

[Ankit Agarwal, executive]

Yes. So I'll answer it in slightly differently. One is I think it's one part we should recognize is that we've largely been in the range of about INR 5,000 crores top line for the last 3 years. Now we are seeing a meaningful shift over INR 7,000 crore, INR 7,200 crores range that we've been sharing for this year, right? So I think that itself is one good shift that we're finally making. And then at the same time, we are very consciously exiting or ramping down noncore businesses, which should further hit the bottom line.

So I think both of those are something that we are confident of. And then particularly, I would say, very strong focus on the optical business, where we really believe we have a right to win and we see strong market growth. So that is something that is really clear that we will scale up. As you are aware, we are already scaling up our cable capacity going from 33 million to 42 million cables. And we've also talked about our OI attach rate, which we are targeting to go towards 40% in FY '25. So these are probably some metrics that I can share. We're not really guiding in terms of 2 to 3 years out, but we are very clear in which areas we will invest, which areas we will grow. And I think one overarching theme will be we will continue to invest in R&D, but that will be focused largely on the optical part.

[Pankaj Dhawan, executive]

So we'll take the next question from the line of Subhankar Ojha.

[Subhankar Ojha, analyst]

Yes. I have multiple questions. So first, being on the margin. So on the optical segment, your margins have come back to about 20% in the quarter. So what is the outlook here in terms of is this the peak that you have achieved or there is still further scope to improve margins here on in terms of price hikes, operating leverage? And how should we look at that for the coming quarters?

[Ankit Agarwal, executive]

I guess we'll just answer them on the one. So I think broadly, what we feel is that there are 2, 3 levers here. One is absolute volume itself that we're sharing. We are adding the capacities, U.S. factory coming up, China factory coming scaling up. So as all of these happen, I think, one, of course, in the short term, there might be some scale-up say, start-up costs. But beyond that, as we start operating, that will give you, at the very least, the volume gain. On top of that, what we are really looking at is rather than just increasing more and more volume over time, we're looking at increasing our optical interconnect attach rate. And that we have shared historically also is a better margin profile than the cable. So I think we will not be able to guide where we will end up back, but really as we are able to execute on this optical interconnect attach rate going, that will lead to improvement in margins.

[Subhankar Ojha, analyst]

Got it. So if I can read what you're saying correctly, the near term, this could be the range in terms of 20-odd percent margins, but as your optical attach rate increases, and both our U.S. and China facilities improve utilization to higher levels, we could see margins trending upwards, say, over the next few -- like beyond 3, 4 quarters?

[Ankit Agarwal, executive]

Yes. So I would say, yes, the bigger trigger for the margin will really be the optical interconnect, right, because we're already selling a good portion of cable today. So that's how I would split what you have said.

[Subhankar Ojha, analyst]

In terms of the China factory, if you can help us understand like what's the status there? How much utilization are you operating at? And what's the scope to take the utilization of that plan?

[Ankit Agarwal, executive]

Yes. So ballpark -- we adjust to give you some context, there is a facility where we had a 10-year joint venture with Tongguang. This is in the name. And basically, at the end of 10 years, that period actually coincided with COVID and shutdown and other challenges during that period. But we also use that period to renegotiate with our JV partner to buy the 25% balance [indiscernible]. So now it's a 100% owned entity of STL with the fiber draw of operations.

So essentially, the glass gets manufactured in India. We manufacture, we draw the fiber in China, and then we use that for our global cable operations. So that's something that has just ticked up because we had to get certain permissions and close some elements of this transaction. So I would say, in early stage, we largely believe the capacities will come onstream of full stream between quarter 1 and quarter 2 of next year.

[Subhankar Ojha, analyst]

And how much is the growing capacity in China?

[Ankit Agarwal, executive]

We don't typically give a breakup, but out of, say, about 50 million, that would contribute to about, say, 7 million to 9 million.

[Subhankar Ojha, analyst]

My next question is on the wireless segment. So the company in the last 2 years, would have invested a few hundred crores in terms of R&D and IP generation. So although we going forward, have decided to scale this down in terms of further investments, but there would be some value of the IP and whatever work has already gone into it. So what's the out process strategy in terms of monetizing that? And does this mean that wireless become is completely defocused, or we look for alternative strategies there.

[Ankit Agarwal, executive]

Yes, good question. So I'd say that, yes, definitely, we have invested a significant amount. We actually built a fantastic team. We also launched, I think, between 8 to 9 products that were available. So I think there's been a good momentum there. There's been some good IP that we have also already been awarded or has been filed. That's something that we are very mindful of. The way we are looking at it is that clearly, this -- as we've decided is noncore, we're looking at ramping it down. We're also looking at discussions with partners, whether members of which parts of the business may be useful to other players in the industry. So those are the competitions that are going on. We'll probably update you in about a quarter's time. Either way, what we are clear is from an impact to P&L, we will not have these losses in Q4.

[Subhankar Ojha, analyst]

But basically, there is potential to monetize this IP in some form, whether through a strategic partner or some other way.

[Ankit Agarwal, executive]

Yes. I mean putting it very simply, there are other players who continue to be focused on and scaling up, say, on the open band space of broadly on the wireless space. And those are the players and conversations with. And I think it's a bit early to say if or how much value could be ascribed to the IP, and that's probably what we'll be able to share with you in a quarter's time.

[Subhankar Ojha, analyst]

And if I may, I have one last question. So basically, in the last 2 quarters, you have sold some smaller businesses, including IDS. So are there any similar identified pieces of business, which would be noncore, and there is further potential to monetize any of those businesses?

[Ankit Agarwal, executive]

So yes. So broadly, I think we're sticking to what we shared in terms of what is core and what's non-core, right? So at a very macro level, we've talked about optical being the main driver in the core. We've talked about services business, where we're focused on certain markets and certain profitability. And then we've talked about this conversion from the network software business to digital. So I would say these are the 3 that we are -- our team and management bandwidth is going. Everything else that is in the company is what we have described as non-core. So I would say the wireless is where some of our work is there for the current quarter. But apart from that, there would be maybe very, very small items that we would continue to look at, but nothing that would be as meaningful as probably an idea of that size.

[Pankaj Dhawan, executive]

We'll take the next question from the line of Parthiv Jhonsa.

[Parthiv Jhonsa, analyst]

Yes. firstly, [indiscernible] the breakup between the margins in the iBusiness versus the interconnect business or the blended margin of 20%?

[Ankit Agarwal, executive]

Margin was stable.

[Parthiv Jhonsa, analyst]

[indiscernible] what is the cable margin and what's the optional intergenic margin? Is that correct?

[Ankit Agarwal, executive]

Right. Yes. Parthiv, don't typically break it out for competitive reasons. But at a macro level, as you can -- we have largely given our, say, 90/10 ratio on cable OI right now. Largely, you can take that guidance about 20% margins on the cable. But the interconnect is higher than that, and that's where we are focusing on growing that part.

[Parthiv Jhonsa, analyst]

Basically, the core is to determine how much has been the improvement in terms of the fiber cable business for us in this quarter. So basically, I was trying to ask that we think the margin improvement come from in this quarter versus the previous quarter in the optical business.

[Ankit Agarwal, executive]

So that largely came from both volume increase as well as price increases largely linked to the cable as well as some amount of product mix improvement on the table. So a good portion of what we are asking as a large portion of it has come from the cable part.

[Parthiv Jhonsa, analyst]

And in terms of attach rate, I just wanted to understand that when we say attach rate, so if you are selling, say, fiber cables worth $100 million, right, in that scenario, if you are talking about a 10% attach rate, that means you're talking about $10 million worth of sales in optical interconnect?

[Ankit Agarwal, executive]

That's right. That's right.

[Parthiv Jhonsa, analyst]

Okay. So based on the guidance, like if 40% is the attach rate, then we would be talking about almost $800 million worth of gains in the product business by FY '25.

[Ankit Agarwal, executive]

So when you say product business, you are saying the optical business as a whole?

[Parthiv Jhonsa, analyst]

Yes, the fiber cable plus interconnect. I think the way to look at the fees that we've not given any guidance in terms of revenue of the segment, right? So one is, obviously, as the cable capacity comes up, the revenues would grow to the full utilization of that. And every quarter, we'll update you on as optimal Internet attach rate is going as you would see in the last 2, 3 years, it has already grown from 3% to now close to 9%. And the idea is that can we take it up to 40%, right? Now can you throw some light on how do you plan to increase this attach to 10% to 40% in like 10 quarters?

[Ankit Agarwal, executive]

Yes. So basically, I think there's 2 parts to it. One is we've had a successful acquisition and capability build through Apotex, which we had acquired in Italy. That's actually served as a very strong platform in terms of the product portfolio they have, particularly for the Europe market. In addition to that, we have started building all the product portfolio, particularly again now for U.S. as well as Australia kind of markets and Middle East. So I think where we are at is that, again, we've given we're a very small share of global market, which is, say, close to $8 billion to $10 billion, there is a tremendous opportunity where the value life is 2 parts. If you see, we already have great relationships with telecom operators globally, but probably only selling cable today.

So part of where we are -- we see positive momentum is going back to the customers and being able to sell OI to them. where the real value lies, or say the key to success, will be to ensure that for these customers, we are able to create some unique solutions for them and able to create value to them compared to the incumbents that they're buying from. That's something in terms of design capability and knowledge we've been able to bring on both to Optotec as well as now bear a pretty strong base in India as well. So this gives me the confidence on top of our conversations with existing customers that we'll be able to scale this up, both in the rope as well as in the U.S.

[Parthiv Jhonsa, analyst]

And in terms of the virus business, after ramping down, like what kind of quarterly losses would be there like after like reducing this cost by INR 50 crores to INR 50 crores.

[Pankaj Dhawan, executive]

Sorry, you're talking about the quarterly losses that because of the wireless business, what improvements you see or what further losses will come?

[Parthiv Jhonsa, analyst]

Yes, more further closures that will continue in the business.

[Pankaj Dhawan, executive]

So that would be minimal these large passenger cars, significantly, the other businesses will ramp up. So this will be like not more than INR 20 crores, INR 30 crores is cutting down with all of the losses.

[Parthiv Jhonsa, analyst]

So is there anything which is lying in the balance sheet, which would require any write-downs from our end with respect to this business? [indiscernible]

[Pankaj Dhawan, executive]

So to the extent, we've been doing that on a quarter-on-quarter basis, but that will keep evaluating, but nothing significant because we're also looking at in terms of I'll get to explaining in terms of how we monetize the IT as well, right? So that's something that we are evaluating.

[Ankit Agarwal, executive]

And one also part, we have also shared that we have written off close to INR 950 crores of -- in our order book. And part of that -- or some part of that was also an order on some orders on the wireless side. So we've been able to discuss with the customers and close those out.

[Pankaj Dhawan, executive]

So can we take some questions from the chart that we had come? So we want to understand that our working capital continues to increase despite a decline in India business. And so you want to understand going forward, does this mean that the working capital requirements will go up [indiscernible]?

[Ankit Agarwal, executive]

So I think the one part to remember is that, especially coming to the services business, the fiber project, which may be shared that's really big. And as we continue to execute on that, clearly, the working capital requirements will come down, and cash will get released. Also, there is a certain amount of projects that we shared have been completed. So again, as we are able to successfully get the collection on those projects, that will also lead to an improvement in the working capital. Currently, we have about 270 days of net working capital in services, which we are to bring down to around 10 days. So that's something that we are very focused on. Again, probably another quarter 4 to 5 months from now, we should be able to get some of these developments to showcase.

[Pankaj Dhawan, executive]

The second question is that CapEx for the first half was INR 247 crores. Can you give us the CapEx for the rest of the year?

[Ankit Agarwal, executive]

So that's actually quite in line with what we've been sharing. For the year, we talked about INR 500 crores CapEx, about half of that right now. So that still continues our visibility on the timing growth. Again, the key part is that it's very much focused on the optical part, largely scaling up our cable and maybe to some smaller extent, the interconnect.

[Pankaj Dhawan, executive]

What the sustainable EBITDA margin that the company can expect. And are we doing any more divestments that we are planning going forward?

[Ankit Agarwal, executive]

So I think we touched on it. Really, I think one is the optical today. As we said, we're quite proud of each probably industry-leading at 20% EBITDA. That's something that, as we continue to grow on the interconnect in particular, from a percentage basis, that should improve, but that will take a few quarters. And then really on the services part, we are really at that 7%, 8% EBITDA margin that we are very clear, has to move towards the 10% to 12% range with the kind of projects we are now taking. So and the ratio that we are broadly at is about, say, 70% of revenue coming from the optical and 30% services. So as we improve the profitability of these 2 business units, in particular, that should improve the overall EBITDA margin.

[Pankaj Dhawan, executive]

Pritesh wants to understand the pricing trend in fiber and cable as we move forward.

[Ankit Agarwal, executive]

So one, I think, just to reiterate, a big part of the SCL strategy has been very consciously to move away from sale of commoditized fiber bar fiber to more and more cable and interconnect solutions. And that's something that we've really moved very aggressively on. Even a few years ago, we would have probably been 50% of our sales was there for 50% is stable. Now almost 90% plus of our fiber that we manufacture is applied to our own cable units, which then provide unique solutions to our customers as well as the interconnect, which is almost always the, spoke for our telecom operators along with [indiscernible]. So to that extent, I truly believe on the back of all of this, back of our key account engagement and increasing customers signing long-term contracts with us to probably be less susceptible than before to ups and downs of the bare fiber market and particularly dependent on, say, China and those factors.

So having said that, market continues to be stable. And obviously, with the demand growing, particularly in U.S. and in some pockets in Europe, we continue to see stable fiber prices. On China itself, the demand continues to be strong. We are expecting some tender results from China Mobile, where the general consensus is that demand should actually increase. So that's something that we are watching. But we do continue to see at least in the short term, the prices continue to be stable.

[Pankaj Dhawan, executive]

We'll take the last question from line of Sachin Relekar.

[Sachin Relekar, analyst]

Sir, if you could explain the reasons for increase in the employee cost on a Q-on-Q basis also and on the early business also that has gone up from INR 24 [indiscernible].

[Ankit Agarwal, executive]

So I think one of the critical parts has been actually the employees that we've added as part of our network services business as well as over the last few quarters on the wireless business. So as you can imagine, these are largely software-centric kind of businesses that people is the majority cost. And having said that, we're very conscious that at least some of these now businesses will not be core for us going forward.

So we do expect these costs to start coming down as well as wherever we see some of these businesses, like I spoke of network business that we will repivot to digital business. So very conscious of our employee costs have been increased, and we're also now taking active steps to make sure that employee cost as a percentage of revenue and also relative to profitability comes in better control.

[Sachin Relekar, analyst]

So looking forward, what it should be? And today's percentage is significantly higher. So what are we looking forward when then when we have taken and our recruitment for new employees and taking the costs being significantly higher. What is the percentage we are looking going forward? [indiscernible].

[Ankit Agarwal, executive]

Directionally, today, we are at about 15% to 16% of our employee cost as a percentage of revenue. And one way to look at it is if we were a pure-play manufacturing then probably the global benchmark somewhere 9% to 10%, and if you look at services business, we would have a slightly different issue. So I think if we largely focus on the businesses that will remain as core for STL, certainly, it should come down from 16%. I won't be able to give a specific number right now but give us probably another quarter. We are working actively to improve this percentage.

[Sachin Relekar, analyst]

And then, can you put forward a number of how much CapEx you have done for China and U.S.A. since the capacity will be operational and will start contributing, and what should be their likelihood contribution revenue from brand work at the optimum level?

[Ankit Agarwal, executive]

So maybe let's share the CapEx front. What we spent on the JV acquisition.

[Pankaj Dhawan, executive]

So essentially, just to clarify, right now, in terms of the China JV operations that we bear operation, that is the initial operating cost. What we spend mainly on the China was in terms of the acquisition cost of the 25% share that we bought from the JV partner. So that's around close around INR 79 crores is what we have set. [indiscernible]. Yes. So that's a... 17 to the balance, 25%, and there's the very minimal operating cost. So as we are ramping up the same, we'd be in a better position. So we've just started operations in the China factory.

And as we ramp up operations, we're doing the first by the end of November, we'll get some kind of data in the outer cost that we need to incur to reach that desired level of production. And also just to add, the U.S. essentially is around INR 60 crores is what you can consider for bivalent because these were also some of the costs that you are seeing in terms of CapEx, you have to come more in terms as we go into H2. But what you've seen is some of the expansions that we've already undertaken, that is the case that you're reflecting or you're seeing in terms of the CapEx that we have so far.

[Ankit Agarwal, executive]

Sachin, due to cost of time, we may have to end it here, we can collect top line, and we'll answer your way.

[Sachin Relekar, analyst]

So the last question is, you gave us an understanding that post the first half, you would be guiding as how the second H2 would be looking like in terms of our revenue guidance and how lightly the business is proven to shape up. So this to conclude that is the bust over for the organization in terms of the bleed that we have gone through, and now it is only due the building on what we have reported for this quarter. So what should we expect for H2 in terms of revenue and profitability?

[Ankit Agarwal, executive]

I would say that there's no brief. There's only a learning and there's an experience. So I think in any business, you have to take calculated risk, and I think there'll be a lot of learning for us. I think what we have stated stays very much on the same. We are guiding towards the INR 7,000 crores, INR 7,400 crores revenue for the year. I think we are quite confident of reaching those levels. We've talked about our focus on the optical business in terms of investment and profitability that we are confident we've already demonstrated in Q2 itself about the 20% margin.

And as we said, as we continue to grow in the coming quarters on the optical interconnect, we'll see how to improve the margins. Services as well, we are really focusing on few profitable projects as well as whatever projects we have completed to ensure we do the cash collection. So this is what I can guide for H2. We are very, very focused motor learning. Wherever things are noncore, we're exiting that, bringing the cash. And to that extent, we'll look to reduce the debt.

[Pankaj Dhawan, executive]

With this, we come to an end of Q&A session, and I now hand it over back to Ankit Agarwal for closing remarks.

[Ankit Agarwal, executive]

I'd like to thank everyone for attending this call and for showing interest in our company, and I hope we were able to address and clarify all your queries and comments. For any further questions and discussions, please feel to contact the Investor Relations team, which includes myself. [indiscernible] forward to continuing the conversation with you in the future. Thank you.

[Pankaj Dhawan, executive]

Thanks, Ankit. Thank you, everyone. Grady, you can stop the recording, please.