Sterlite Technologies Ltd

NSE:STLTECH

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Unknown Executive]

Good day, and welcome to STL's Q2 FY '24 Earnings Conference Call. I'm [ Lakshmi Iyer, ] Head, Investor Relations at Sterlite Technologies. To take us through the results and to answer your questions, we have Ankit Agarwal, MD, STL; and Tushar Shroff; Group CFO, STL. Please note that all participant lines are in listen-only mode and now. There will be an opportunity to ask questions after the presentation concludes. Please note that the call is being recorded. You can also download a copy of the presentation from our website at www.stl.tech.

Before we proceed with this call, I would like to add that some elements of today's presentation may be forward-looking in nature and must be viewed in relation to the risk pertaining to the business. The safe harbor clause indicated in the presentation also applies to this conference call. For opening remarks, I now hand over the call to Ankit Agarwal. Over to you, Ankit.

[Ankit Agarwal, executive]

Thank you, Lakshmi. Good day, everyone. Thank you for joining us for our Q2 FY '24 earnings conference call.

Just to reiterate, our strategic priorities remain the same and are as follows: Firstly, we continue to grow the Optical business by increasing the optical fiber cable market share and connectivity attach rate. Initiatives to optimize raw materials and fixed costs in the business to become more competitive are ongoing. Secondly, we shall continue to consolidate our Global Services business in select segments. We're building new capabilities for value-added services and looking at improving the profitability. Lastly, but not the least, we shall build the Digital business to focus investments in building technology and domain capability and looking at getting to the EBITDA breakeven in the near term.

We shall now cover the outlook and performance of our Optical business. Coming to the demand outlook. As per CRU, the medium-term demand for optical fiber cable volumes is expected to go up to 623 million fiber kilometers by 2027, up from 535 million fiber kilometers in 2022. The short-term headwinds are mainly in the markets of North America -- and expect it to continue with contraction in the U.S. -- in North America by 7.7% and in China by 1.9%, respectively, in 2023. CRU has made a downward revision of the earlier forecast in North America for 2023 by 7%. The near-term downturn in North America is an account of an inventory correction, which is expected to correct in Q1 or Q2 of 2024 calendar year. Service providers are already in the process of participating in various government-funded opportunities, including the USD 42.5 billion BEAD program.

STL's focus markets of North America, Europe and India are high potential and is estimated to grow at a CAGR between 2023 and 2028 of 10.1%, 4.7% and 9.5%, respectively. This is something we wanted to share with all of you in terms of how the networks are evolving and the new way of operators looking at carpet coverage of fiber.

Telcos on a global scale are prime for substantial expansion of the 5G subscriber base. Moreover, we now see 60 technologies starting to create more and more noise in the market, and it will be forefront by 2028. From being linear with limited applications, as you can see on the left-hand side, fiber has now become denser and all-pervasive. With the growing utilization of fiber in various applications like fiber-to-the-home, AI, data, AI-based data centers, edge data centers, smart cities, small cells, and the integration of 5G to smart enterprises, demand is expected to increase multifold.

Presently, about 5G penetration is 36% as per [ Ondia ] and the 5G [ subscription ] is for [ Casa ] to go at 184% in North America from 173 million to 601 million subscribers. In the case of fiber to the home, currently, 67 million unique homes have been passed out of the 129 million homes. As per CRU, FTTH shows partial increase in line with BEAD, from $8.7 million per year to $12.25 million in 2025 with a CAGR of almost 18%. Also, the current data center expansion on CapEx between $50 billion to $60 billion and is forecasted to grow to $90 billion by 2027.

Coming specifically to the BEAD program. As on date, the broadband mapping has been completed and state-wise allocations for BEAD funding has been announced. The initial grant will release 20% of the funding, with funds expected to flow into the respective states by early 2024 and should kickstart the demand recovery in the market. The final grant will release the balance funding by early 2025 and will drive a continued demand phase beyond that.

Since the deployment need to be completed within 4 years of the award, there will be an adequate runway of growth beyond 2025 as well. Our U.S. factory in North America is fully compliant with Build America by America regulations. STL is well positioned to capture the growth impetus from this BEAD program.

Coming to India. The 5G subscriptions are expected to grow at a CAGR of 48% from 100 million subscribers currently to 700 million subscribers by 2028. A telco is expected to spend between $1.5 billion to $2.5 billion of a 5G fiberization, as per research reports. Similarly, the data center CapEx is also expected to grow significantly. Between 2023, where about $4 billion will be invested, it will grow to as high as between $16 billion to $20 billion by FY '25.

And just 1 example is Amazon Web Services is expected to invest $12.7 billion in data centers in India between now and 2030. As you may be aware, the India fiber capita -- fiber per capita stand is only 0.25 kilometers compared to China at 2.5 kilometers and U.S. at 1.8 kilometers, indicating a massive potential ahead. The government has recently approved the INR 1.3 lakh crores from Phase -- for Phase 3 of BharatNet, which is envisaged to upgradation of the fiber network that lay across the 2.5 [indiscernible] of India.

Our market share remained stable at 11% in H1 of calendar year 2023 versus H1 of calendar year '22. We remain -- we expect the OFC market share to grow from second half of FY '24 onwards. Our connectivity business attach rate has increased to 13% from 10% on a Q-on-Q basis. Commercialization of the new optical connectivity products will further increase our attach rate from H2 FY '24 onwards.

Coming to the financials for the Optical business. The H1 FY '24 revenue stands at INR 2,196 crores, which is lower by 10% on a year-on-year basis on the back of lower OFC volumes, but partially offset by improved realization. Although revenue has declined in H1, H1 FY '24 EBITDA has gone up by 8% on a year-on-year basis to INR 457 crores. EBITDA margins for H1 FY '24 stands at 20.8%. Reducing reduction in operating costs have ensured increase in margins.

Moving on to the performance of our Global Services business. Our project execution on the Services business is on track. Among Indian public projects, our BharatNet project in the state of Telangana is 66% complete, including all packages. The network modernization project is 71% complete, the managed services project is 31% complete. And additionally, we have just started the data center project.

On the India private sector, the fiber rollout project for a large Indian telecom operator is 30% complete for Phase 3. Fiber rollout for another large telecom operator of Phase 2 is 42% complete. And fiber rollout for a modern optical network for other private customer is 70% complete. In the U.K., fiber-to-the-home rollout in the U.K. for all projects combined is 31% complete.

In the Global Services business, H1 FY '24 revenue stands at INR 728 crores. We have been selective in order intake and execution. H1 FY '24 EBITDA has gone up by 81% year-on-year basis to INR 49 crores. Due to favorable project mix, EBITDA margin for H1 FY '24 stands at 6.7%.

We shall now talk about the performance of STL Digital. In STL Digital, we are continuing on the growth momentum. We acquired new customers in the U.S. and India across technology and services industry verticals. We have 20-plus active customers at the end of Q2 FY '24. We also had a strong order deal inflow in Q2 FY '24. Currently, we have 43-plus active technology partners and signed strategic partnership with SAP and Google to offer the solution jointly to our customers. Growth will be driven by a robust order book over INR 780 crores and the right team of leadership and consultants.

In line with our expectations, and despite a tough industry environment, we have grown revenues to INR 62 crores in H1 FY '24, a 25% growth Q-on-Q basis. The EBITDA loss for H1 '24 is at INR 54 crores. EBITDA losses are trending downwards on Q-on-Q basis and expected to further reduce with increase in revenue run rate. I now hand over to Tushar Shroff for further talking about the financials.

[Tushar Shroff, executive]

Thank you, Ankit. Good day, ladies and gentlemen. Now we talk about STL Q2 FY '24 financial highlights. Q2 FY '24 revenue stands at INR 1,494 crores. The 11% drop in revenue is on account of the reduction in OFC volume, which was down on a year-on-year basis, but partially offset by improved realization. Q2 FY '24 EBITDA margin is however, up at 14.4%. Margin increased by 50 bps on a year-on-year basis due to improved -- improvement in operating efficiency. Q2 FY '24 PAT is at INR 28 crores, is on account of higher depreciation of U.S. factory and increase in interest cost led by higher interest rates.

Now we talk about STL H1 FY '24 financial highlights. STL recorded H1 FY '24 revenue at INR 3,016 crores, H1 FY '24 EBITDA at INR 451 crores, which has increased 31% on a year-on-year basis, along with margin expansion of 240 bps. H1 FY '24 PAT stands at INR 74 crores.

Now we talk about the revenue mix, which is now moving from U.S. to other geographies. In terms of new orders in Optical business, we continue to win multimillion dollar orders for optical fiber cable in Europe and Americas. In Service business, we continue to win system integrator contract in our data center space and fiber rollout for 5G deployment in India. In light of lower demand from North America, revenue mix has shifted moved towards EMEA and India in Q2 FY '24 versus FY '23, with those regions accounting for 72% of the revenue.

Open order book highlights. Our open order book at the end of Q2 FY '24 is INR 10,516 crores. Our order book is well diversified across our customer segments and across all our businesses. The financials abridged version is placed before you. The main highlight of the financial is with respect to the net debt of FY '24 for a 6-month period has reduced by INR 111 crores from FY '23. We expect to complete the demerger of global service business by Q1 FY '25.

The current demerger status. We have recently received the NOC from both the stock exchanges for the demerger of the scheme, and we will be filing the application with NCLT shortly. In summary, I would like to state that in Optical Network business, we shall target to gain market share across our focus market, particularly in EMEA, India, APAC markets to fill the volume gap from U.S. markets. Ramp-up of U.S. plant to capitalize on demand surge in North America going forward, that is in '24, '25 onwards. Increase in optical connectivity to drive the growth and the attach rate.

In Global Service business, we continue to focus on select projects to improve the profitability and optimize the net fund involvement. In digital business, we continue to grow revenue and achieve EBITDA breakeven by Q4 2024. With operationalization of U.S. plant, our CapEx cycle has completed. Our capital allocation priority will be towards the debt reduction.

In terms of guidance, given additional quarters of inventory correction in North America, to play out fully, we expect the revenue to decline in FY '24. For FY '24, significant focus will be towards reduction in our debt -- net debt.

Now we talk about our initiatives on ESG, our ESG rating from Morgan Stanley, capital investment has improved from BBB to A. Major updates for the quarter, STL has become the world's first optical fiber manufacturer to launch independently verified eco level methodology. STL has collaborated with [ Hygenco ] for supply of green hydrogen for use in its manufacturing. Now I hand over to Lakshmi for closing remarks.

[Unknown Executive]

Thank you, Tushar. Ladies and gentlemen, with this, we come to the end of our presentation, and I shall now move on to the Q&A. Please note that if you want to ask a question, you can click on the Raise Hand and we shall take your questions one by one. Sorry, go sir, please go ahead with your question.

[Sunny Gosar, analyst]

First of all, if you can help us understand that -- how is the demand situation evolving in North America? And basically, when you say that inventory correction will continue for a few more months, how should we read that in terms of the base revenue that you have done in, say, Q1 and Q2 from North America, whether the worst is over and things start improving from here on? Or do you expect things can even worsen from here on?

[Ankit Agarwal, executive]

Yes. Thank you, Sunny. So I'd put it in 2, 3 areas. One, definitely -- probably since what we spoke last and guided last, we still see more time required in North America market to really get through that inventory and for the demand and the right kind of demand coming back with full steam.

So earlier, if you remember, we had probably guided that somewhere around Q3 or Q4, we should start seeing that demand come back. We now see that it will probably be closer to Q1 of next year -- financial year where we start seeing some of the regular or the good volume of demand coming back from North America. So that's 1 shift that we're seeing from the market perspective when we speak to our customers and also look at our peers in the industry.

From the operations perspective, that also means what we have shared is we've also looked at other markets, including EMEA as well as India for growing that and making sure some of the volume drop gets covered in those markets. Of course, our realizations are, as we've shared in the past, are higher typically in North America and then in Europe as well. So to that extent, we do expect a decline from a revenue perspective. So that's what we have just shared in our last slide that overall, that will impact the revenue of the Optical business and then overall for the STL for the rest of the year.

[Sunny Gosar, analyst]

And by recovery, do you mean that basically, you will go back to what you were doing before, say, like in Q3 or Q4 of FY '23 in terms of the run rate from North America? That is what you mean by recovery? Or you mean that things improve from the current base? Because what is not clear from any of the commentary or the presentation is where is the new base looking like.

[Ankit Agarwal, executive]

Yes. So I think that's fair. I think -- look, I would say that, Sunny, there is still uncertainty certainly over the next 6 months of how the demand pans out. So I would say we are still looking and continuing to converse with our customers on how that demand comes through. So we'll probably be able to update you as we see that.

What I'm structurally saying is that we do see fundamentally as inventory comes down, the projects like BEAD and other demand for that starts coming in, as well as the other projects start to kick in, we do fundamentally believe that the North America market will continue to start growing back in that time frame, as I shared from Q1 next fiscal year onwards. So that's when we see that the demand should be strong. And on the back of that, and especially now with our U.S. factory fully ready and fully compliant, we are very well positioned to capture that growth as that comes back. But we don't see it as kind of a hockey stick. There will be quarter-on-quarter improvement.

[Sunny Gosar, analyst]

Sure, sure. And basically, if you can give some color on interconnect because there is no outlook or any description on the interconnect business in the current presentation. So basically, how is that progressing? And what is the attach rate we are operating at currently? And how do we see the outlook of that business in the near future and the medium term?

[Ankit Agarwal, executive]

Yes. So as we shared, Sunny, this is -- continues to be a top priority for growth for the Optical business. We -- the key areas for us have been very, very focused in terms of improving the attach rate compared to the cable that we do. What we had shared earlier also is that we have seen some success, particularly in Europe. So we want to continue to scale up in that market. But also exploring how we can scale up in other markets, including North America.

The reason we cannot give very specific forecast is because of the fairly long cycles that it takes to get the approvals and to get in with some of these leading telco operators. What I can share is that this is certainly a top priority for us. We currently have improved from 10% to 13%, which is in Q2. And as we've said earlier as well, the intent is to continue to improve that going forward. And certainly, we'll continue to give more visibility, particularly as we start improving our positioning in Europe and U.S.

[Tushar Shroff, executive]

Sunny, you can refer to Slide 12, where we have given a little color on OI attach rate in terms of how we are seeing -- in the quarter, it has gone up to 13%. So I think we have provided some information about OI on Slide #12.

[Sunny Gosar, analyst]

Sure. And if I may, I have 1 last question. Basically, on the Global Service Business, what is the status of your [ T fiber ] project? Because the completion rates look to remain stagnant there. So is that project moving very slowly? How should we look at the completion of that? Because I believe that the large amount of capital employed stuck in the service business through some of these government projects. So what is the outlook there? Any color will be helpful.

[Ankit Agarwal, executive]

So, no, absolutely, Sunny. So you're right that, that is an important project for us. We -- so just to be clear, we continue to make progress in that project. There were probably been slower execution on the account of factors like monsoon and other things. But what's important to also remember is that the way these projects are structured, especially from a cash out perspective, are on achieving certain milestones. And so it's 1 of those elements where even if smaller amounts from a kilometer perspective are achieved. But as you keep completing those links and milestones, then the cash payouts happen.

So fundamentally, we believe that that's the focus for us. We want to continue to move, and you will see progress in this project broadly over the next 6 months. And there, we see as we start hitting the milestone, there will be disproportionate cash out from these projects. But structurally, there's a good understanding between us, T Fiber. And as we complete these milestones, we have good confidence on the cash getting released.

[Unknown Executive]

We'll now move on to [ Bala. ] [ Bala, ] just for the benefit of the others, can you also state your organization name and state your questions.

[Unknown Analyst]

Thank you so much, sir. I'm [ Bala ] from [ Medical Capital. ] Sir, I have 1 question regarding on the realization side. You mentioned the improvement on the realizations. 1 of your competitors talked about like a decrease in that AFC side. On the AFC side, they come in share to INR 2,200 per fiber kilometer to [ INR 2,300 ] per fiber kilometer price corrections. Under the [ OEF ] side, INR 380 to INR 350, INR 345, in that range per fiber kilometer price corrections. But mentioned about improvement on the realizations. How do we understand in this quarter?

[Ankit Agarwal, executive]

Yes. Thank you, [ Ian. ] So firstly, I mean, we don't normally comment on our competitors. What we can share at least is that we've strategically always looked at our focus markets being Europe, North America and India, which largely contribute to over 90% of our sales. These are markets where we've been very focused on selling our innovations, selling our products, and as you can also -- some element of the interconnect that comes through.

Specifically on fiber and cable, I won't be able to comment on specific realizations. But we have been able to push some of the price increases to our customers successfully, and that is what has come through in our realizations improving from last quarter to this quarter.

[Unknown Analyst]

Okay, sir. Sir, on the debt side, like how much we are focused to reduce in this financial year?

[Tushar Shroff, executive]

So [ Bala, ] we -- our internal target is to see that anything in terms of INR 200 crores to INR 250 crores in terms of debt reduction that we are internally targeting.

[Unknown Analyst]

Okay, sir. And sir, like on the volume side, like you have mentioned some volume drop, is there like -- this volume drop specifically, like is in a domestic market or in the international markets?

[Ankit Agarwal, executive]

Yes, this is largely international market. In fact, since we saw some of the slowdown in North America, we've, in fact, increased our sales successfully in the Indian market as well.

[Unknown Executive]

We have Nikhil Choudhary.

[Nikhil Choudhary, analyst]

First question is regarding the revenue growth guidance. So Ankit, on 1 hand, the CRU is guiding less than 1% decline in overall volume ex-China in '23. Our own guidance states that our revenue growth will be negative, let's say, right? Is it fair to assume that we might be losing market share in some geography, given our overall revenue growth is negative while overall market is more or less flattish?

[Ankit Agarwal, executive]

Yes. So I would put 2, 3 for sure, one, categorically, I want to share that we are not losing market share. In fact, a big focus for us is how do we in fact increase our market share in this market scenario. As I also shared, we're very, very well positioned now in North America with absolute Tier 1 customers, Tier 2 customers we have on board with the facility that we have now set up as well as now getting [ Baba ] BEAD compliant. We are, in fact, very strategically well positioned to capture good market share as the market comes back.

So that's 1 on the U.S. and Europe also with our facility of Metallurgica and our Optotec acquisitions, we are in a good position, strong market position to capture the Europe market. And India, as well, as I just shared, we are, in fact, increasing our share in the Indian market with customers like Airtel and some others.

So overall, we are quite well positioned. I wouldn't comment on the numbers between how we are growing versus CRU because CRU is also an external market forecast. What we are very clear is that these are the 3 current markets that we are operating in. Within this period, we are seeing how to maximize our market share on 1 side with our customers. We're looking to increase our interconnect business that we spoke of. And what Tushar has touched on is from our operational perspective, really looking at cost efficiency to ultimately improve our profitability.

[Nikhil Choudhary, analyst]

Sure. Second is, again, on operating efficiency only, what you mentioned. Clearly, we have seen quite a bit of improvement despite of challenging quarter and margin phasing challenge due to lower Americas revenue. But just want to understand where we are in the journey, how much we have already traveled. And also regarding -- we hired external consultancy to guide us in terms of cutting our overall cost. So any -- maybe a directional guidance you can give where we are, how far we have reached. And any color on that will be appreciated.

[Ankit Agarwal, executive]

Yes. So I think timing-wise, we're probably halfway or 3/4 into that journey. So we still have a few months where some of the impacts of these initiatives should continue to come through. I think what's important to understand is the way we've gone about it is that to make sure that structurally, we're in a better cost efficiency base so that whenever as the market improves and other operations improve, were able to hold on and get the benefit of these costs in the years to come. So that's how we've gone about it.

These are structural focus that we had, structured initiatives we've had, looking at every element of our cost and making sure that we see the benefit of that. So that's broadly where we are. We continue to believe that there are opportunities for further cost improvements, and we are focused on that.

[Nikhil Choudhary, analyst]

Sure. That's it from my side. Thank you. Good luck for coming period.

[Ankit Agarwal, executive]

Thank you. Thank you.

[Unknown Executive]

Thank you, Nikhil. We'll now move on to [ Sohan Joshi. ] Sohan, please state your organization name as well.

[Unknown Analyst]

Hi, am I audible? I'm from ASC Consultants. I want to ask 1 question. What is the time frame now within which we can achieve the net debt to EBITDA to 2.5, below 2.5? I mean, I want to understand up to what time frame [indiscernible] that. Are we now factoring the right issues as well, achieving this 2.5 -- 2.5 to below 2.5 net debt to EBITDA level?

[Ankit Agarwal, executive]

Sure. So I think as Tushar just mentioned, I think definitely, if 1 data point is we have reduced our net debt by about INR 110-odd crores in the first half. And overall, we're looking at somewhere between INR 200 crores to INR 250 crores net debt reduction for the year. So that's a clear priority in line with what we have guided in the past of generating cash on the business and reducing the net debt.

We have also looked at our CapEx for the full year and broadly looking to reduce our CapEx from around INR 350 crores, INR 400 crores, probably closer to INR 250 crores for the year. So these are 2, 3 areas where we're looking at it very closely from a cash. And second part also from a fund involvement, looking at how we can reduce that further, particularly in the Services business. So these are some of the areas that we are very focused on.

The last part is also on our digital business, where this year, we would have spent about -- overall, we'll be spending close to INR 120 crores as an investment into this business. As that also gets into EBITDA breakeven by Q4, then that cost and cash also comes away.

So these are the areas that we're focused. I won't be able to comment specifically on the net debt to EBITDA at this moment, particularly given how we are looking at the next 6 months. So we're just watching this very, very closely in terms of the market dynamics. And as we get better visibility, we'll be able to share with you.

[Unknown Analyst]

Okay. My second question is that given the bleak outlook on the demand side, will we push back our right issues, proposal? Any guidelines on that?

[Ankit Agarwal, executive]

We've got the approval in terms of the rights issue and overall fundraise. We have got approval up to INR 1,000 crores. So depending on the strategic requirements as well as market conditions, et cetera, we'll continue to evaluate. I won't be able to comment on it specifically at this time.

[Unknown Analyst]

Okay. One last question. What is the current order book status from the BharatNet project? I mean, what is the value addition we are now gaining from the BharatNet project?

[Ankit Agarwal, executive]

So just to be clear, the new Phase 3 BharatNet is the almost INR 1.4 lakh crore project. That is a clear priority of the government to take that forward, and the conversations and the discussions are progressing even since we last spoke. So there's a real intent to go get the project executed. I think the way the CapEx is structured is broadly 50% -- the investment is structured is broadly 50% CapEx and 50% OpEx, where the execution would happen over 2.5, 3 years and maintenance would be for 7 years.

So this presents a very exciting opportunity for STL across -- from supply of fiber, supply of cable, supply of interconnect, as well as, of course, our Services and Maintenance business. So this is something that we're very much actively participating. And as we shared earlier, we are very mindful of looking at this and the government business. So very mindful of the cash and exposure as well.

[Unknown Analyst]

Just 1 thing. Are the bids submitted for the BharatNet project and allocation is pending? Or even the allocation part, what is the status on that?

[Ankit Agarwal, executive]

No, we are not at the bid stage. We're before that.

[Unknown Executive]

Thank you, [ Sohan. ] We'll now ask [ Ravikant ] to ask the questions. Ravikant, please state your organization name.

[Unknown Analyst]

Thank you for the opportunity. My question is, sir, a couple of quarters back, we heard from you like the Chinese and the Chinese and the China Mobile tender offer has been released, right? So did we get any business from that particular complete, sir? We acquired even a joint -- we had 20% stake, right, from the joint venture? And did we get any business from that?

[Ankit Agarwal, executive]

Yes. Thank you, Ravi. So we are -- we did acquire the balance 25% stake. So it's 100% STL-owned entity now in China. But strategically, just to be clear, we've always set up and build that facility to not just meet China requirements but our global requirements, both whether it is for our own cable requirements or any other external cables. So to that extent, that's how the factory is operating, and we continue to serve our global requirements of fiber from that facility.

Regarding specifically to China Mobile, of course, that tender has come through. The volumes continue to be in the market. We do not currently serve -- we do not supply from that facility into the China market. We do see more strategic reasons to supply to our global cable operations or to external markets or other cables globally.

[Unknown Analyst]

Okay. Just 1 more question, sir. From past 6 months, we have been hearing from North America, like there's a lot of inventory pending, right? I mean even today, we are also saying that it will take about 6 months. So in the past 6 months, isn't really any business -- isn't really any commissioning going on there? I mean despite such slow progress, can you provide some insight on that?

[Ankit Agarwal, executive]

Yes, sure. So just to be clear, there's still deployment going on. And so it's just a function of how quickly does the execution happen across the broader customer base to ensure that the inventory comes off. Essentially, as I've shared earlier, the inventory is in 3 places. It's inventory with us as a supplier, it's inventory with the distributors, and it's also inventory with the end customers. So it's a function of all that inventory cumulatively coming off, and that's what we've been sharing will take some period of time versus what we had expected in last quarter as well, it has still taken more time.

Part of that also is because the execution speed on the ground is actually not picking up with -- as much as we would have liked or hoped for in terms of physical deployment on the ground. So hopefully, as that also picks up over the next 6 months and 12 months, we get more manpower into the ground to execute as a market. Hopefully, that also leads to more execution.

In terms of actual funding commitments, interest from private equity or from telecom operators to deploy, that we fundamentally see to continue. And also from a mid- to long-term perspective, we continue to be very bullish on the North America market.

[Unknown Analyst]

Okay. Sir, just 1 last question. The U.K. service business, I think even there also, we didn't really see much movement. I mean, can you throw some light on that one?

[Ankit Agarwal, executive]

Yes. So absolutely. So as we shared last time that currently, in -- for part of Q1 and then into Q2, the U.K. services was still looking to scale up but was operating at losses. So to that extent, as we've said, we have evaluated the business closely. And we're closely evaluating strategic options to take the business forward.

There, we clearly see there is an operating model and a cost base that we're looking to reduce towards to make the business breakeven and profitable. And partly, we're also evaluating other strategic options. So we will come back to you on that shortly.

[Unknown Executive]

Thank you, Ravi. We'll now move on to [ Adetia Rabiri. ]

[Unknown Analyst]

My question is regarding the North America market. So everyone is expecting that next year, there will be growth, right? So firstly, I wanted to ask regarding what is our capacity utilization? And the second part is if everyone is waiting to dump next year, then the pricing also pressure can come here, right? So can you throw some light here on the pricing front? And the capacity utilization.

[Ankit Agarwal, executive]

Yes. So at least on the North America part, just to be clear, I think it's not that the market, we expect will dump and prices to go down. We've, in fact, seen even in this market, prices to actually be quite healthy. And that's just nature of that market specifically, where you typically have good Tier 1 suppliers with you. Through market conditions, we continue to supply. What we have seen is lead times have come down from -- at its peak was probably north of 50-plus weeks -- have probably come down to somewhere around 8 to 10 weeks currently. And to that extent, wherever we need to supply from our North America market, we have started supplies from those operations. That factory is still scaling up. And overall, at STL level, we are operating at close to 60% utilization for first half of this fiscal year.

[Unknown Analyst]

So next year, any additional capacity is commissioning or it is already commissioned with us?

[Ankit Agarwal, executive]

So we are -- as we said in the past, our main investment is to look at our U.S. facility. So there'll probably be some in the second half of this fiscal year, there will be some more capacity getting added as per our current plan for North America. But beyond that, we have no other capacity addition plans. And that's also where we have talked about our CapEx plans for the year coming down from INR 350 crores, close to INR 250 crores. So we are pretty much done with our CapEx investment, apart from maybe some maintenance CapEx, et cetera. And the prime focus will be to look at various markets for our sales and to ensure we improve our factory utilizations.

[Unknown Analyst]

Okay. And the next question is regarding the demerger. I had 1 question, right. How will be the debt restructure there? Can you throw some light there?

[Tushar Shroff, executive]

So I think from a debt restructuring for our GSP business, I think it's a function when we are going to get the necessary approval from NCLT. On the date when we get the approval from NCLT, whatever is very specific debt attributable to the GSP business, which will get transferred. And we looked at current debt, which is attributable to the STL service business, is about INR 550 crores to INR 600 crores.

[Unknown Analyst]

Okay. But I think the working capital is high there only, right? So it comes 550 only to the services business, the [ startup ] is on the optical business?

[Tushar Shroff, executive]

That's correct. But the way it is required from the income tax perspective, the debt has to be very specifically attached to that particular business. When you borrow the funds, for the purpose for which you borrow the funds is important. So the lines that we have, very specifically 4 years, the business, which has been utilized is about INR 550 crores to INR 600 crores as on date.

[Unknown Analyst]

Okay. On the -- this product business, how much working capital or debt would be required?

[Tushar Shroff, executive]

So the working capital cycle for ONB business is in the range of 60 to 75 days. So the balance debt will be with ONB business. That would also -- at STL level, which will be attributable to ONB business as well as to the digital business, right?

[Unknown Analyst]

Okay. My last question is on the digital. I see there is a quite a jump up in our revenue, right? And I know that you are taking a consultancy model here, you are hiring the consultants here. But if you think of a long-term strategy, if you want to scale this business big, do you think this is the right strategy to go forward? And can you talk about the projects here? What kind of projects we are doing? Does that -- we are getting the revenue like INR 140 crores within a span of 1 year?

[Ankit Agarwal, executive]

Yes. So I think I would say at a high level, it's still very early stages in this business. What we've focused on what we shared earlier as well is we want to focus on few segments, make sure that we have strong customer relationships in those segments, and we create value for those customers. That's really been the focus.

And really from a financial perspective, I think we've got a fairly healthy order book, close to INR 750 crores. We have a very, very strong team in place and leadership in place. And the very specific near-term target for the business is to look at EBITDA breakeven by Q4. We continue to evaluate how we want to take this business forward, how we want to scale it up. What are the areas we want to focus on, what are the capabilities going to build? But really, from a management focus, that is the immediate priority in terms of breakeven. And from there, then we will provide more updates as we get clarity on the plan ahead.

[Unknown Analyst]

But...

[Tushar Shroff, executive]

Just to clarify, the consultant [ meets ] -- these are our own employees, having the capabilities of delivering the requirement of the customers. So they are not third-party consultants. They are our own people.

[Unknown Analyst]

Okay. So how many people are there here?

[Tushar Shroff, executive]

So if you go to Slide #18 of the presentation, we have 900-plus consultants.

[Unknown Analyst]

So then why are we calling as consultants?

[Tushar Shroff, executive]

It's our internal terminology. So that's why we bought the consultant, but these are our own employees because they provide a consulting to the -- to the customer. That's why we call them internally as a consultant.

[Unknown Analyst]

But what kind of work can you give -- can you throw some -- like it is a typical IT services work or it is core...

[Ankit Agarwal, executive]

It is IT services business, just to be very clear. It's very focused. We have some Tier 1 customers on board. And as we continue to scale up with these customers. That's where we see, particularly by Q4, we have -- we see a path where we can get this to breakeven.

[Unknown Analyst]

So basically, this is like banking, retail like this only the...

[Tushar Shroff, executive]

Yes. So you go on Slide #18, the service offering we have, the second bullet is on service offering, where we have clearly mentioned that we provide on enterprise SaaS services, product engineering, cloud and cybersecurity services, data analytics and AI services. So these are the specific services that we provide to some of our customers.

[Unknown Executive]

Thank you, [ Adetia. ] I will now move on to Saket Kapoor. Saket, please say your organization name as well.

[Saket Kapoor, analyst]

Yes. [Foreign language] Yes. Saket Kapoor from Kapoor Company. Sir, you did mention that we are lowering our CapEx target to -- I think INR 250 crores from INR 350 crores, INR 400 crores. So if you could elaborate more, where are -- where is this reduction going to happen? And what was the earlier thought-out plan and why this reduction now? And the capital work in progress is, I think, at INR 180 crores. So that has increased year-on-year. So if you could explain these 2 numbers.

[Tushar Shroff, executive]

So I take your first question is with respect to our CapEx program. So when we had -- early when we started the financial year, we looked at what was the overall CapEx program, which was acquired. It had the U.S.-specific Phase 2 CapEx plan. Now looking at the current -- the demand in U.S., we will have to defer some of those things till the time the demand picks up and we see that sustainable demand. And then we'll try to revive the second phase of any kind of a CapEx program that we may have for U.S. plan. So that's -- I mean, that's your first question.

[Saket Kapoor, analyst]

Sir, just 1 second. Is it a capacity building or operational efficiency building for the U.S. part, which you are differing right now?

[Tushar Shroff, executive]

The U.S. part is a capacity building. The Phase 2 of the capacity building based on the demand. So at this point in time, since the demand is still to pick up, I think we have curtailed this particular CapEx in order to manage the cash efficiently.

[Saket Kapoor, analyst]

Right. And point 2, sir. The current capital work in progress, I think, is around INR 180 crores. So when we are going to capitalize this and where is this money [indiscernible]?

[Tushar Shroff, executive]

So these are the CapEx related to -- a large part of the CapEx is related to U.S., which will be capitalized once we are able to commission some of these particular lines, correct? So as we commission some of these lines, the capitalization will happen.

[Saket Kapoor, analyst]

Sir, when we look at your employee cost as a percentage of sales, that has remained elevated at the consol level. So if -- what's your comment on the same? Is it because of the ramp-up exercise for the U.S. facility? Or how should we take this number of -- this run rate of INR 250 crores on a quarterly basis, correct me there.

And also, sir Ankit, when you mentioned that we are looking at muted numbers going ahead. So on an H1 basis, do we look at the exit of H1 as what we can look for H2 as of now? Or will be competitively lower than what we have done for H1?

[Tushar Shroff, executive]

So with respect to your employee cost, I think we need to understand that we are into 3 businesses, 3 separate businesses. The 2 businesses are highly -- the employee-intensive or people-intensive. I would say that service business as well as our digital business, which is -- which requires a kind of headcount that is required to serve the customer. With respect to -- that's the reason that we are into high employee cost as an organization because we are into 3 different businesses. The second is -- your second question is with respect to -- I missed that particular question.

[Saket Kapoor, analyst]

The revenue trajectory for H2. Yes. H2 versus H1. What we exited H1 at 2,200, especially for the -- I think the muted -- the pessimism is towards the optical network business, our core. It is not, I think, regarding the global services, neither for the digital part. There, I think, so a better time so they can. But for the -- our core business, things look on the lower side. So what should be passing going ahead for H2 for the 2 segments?

[Tushar Shroff, executive]

So I think for this, both the segments will continue to grow the -- continues to solve the customers based on the -- the auto execution plan that we have. So it will -- on a sustainable basis, they will grow on -- these 2 businesses will grow on a quarter-on-quarter basis, except for ONB business.

[Saket Kapoor, analyst]

So how should we look at the ONB business, sir? My question is ONB is all planning trend. So this is done with [indiscernible], more decline is expected for H2 going ahead. What should we be pursuing in?

[Tushar Shroff, executive]

I mean, see, we have given this guidance with respect to the overall, we see that this year, we will be -- we may have -- we may see the decline with respect to the previous -- previous year. And a large part of the revenue comes from the ONB business.

[Saket Kapoor, analyst]

So no percentage you can give guidance where we can let...

[Ankit Agarwal, executive]

No. As I said, I think we are watching the market closely and particularly the impact on North America. So as we get better visibility, I think it will be fair for us to comment at that time.

[Saket Kapoor, analyst]

Okay. So 2 very small point. For the receivable part from P5 project, how much is the receivable pending? And what kind of milestones are we going to complete so that these receivables get liquidated?

[Tushar Shroff, executive]

So our working capital employed in this T Fiber business is about INR 700 crores. The T Fiber, as Ankit mentioned, is a very complex project because it requires the entire state level, the network to be built up. So each [indiscernible], then the district, then the village, then the city and then the entire state needs to be built up to ensure that we have built up the entire network at the state level. So which is a little bit of a complex project because each and every -- the segment of the network should work efficiently to get the necessary approvals from the customer, which we call it as ATC, the acceptance test certificate. I think that's the way we have been working on to ensure that we complete progressively on each and every segment so that we move ahead on this particular project faster.

[Unknown Executive]

Thank you, Saket. Yes. With this, we come to the end of the question-and-answer session. And now I hand it over back to Ankit for closing remarks.

[Ankit Agarwal, executive]

I'd like to thank everyone for attending this call and showing interest in our company. Despite a challenging market environment, we managed to maintain EBITDA margins at consistent levels. At H1 FY '24, we have reduced our debt levels by INR 111 crores, and the CapEx cycle has been completed with operationalization of the U.S. facility. With us well positioned to execute on our growth strategy of being world top 3, we are be able to deliver more robust results when the demand particularly in North of America market recovers. I hope you were able to address and clarify all your queries and comments. For further questions and discussions, feel free to contact our Investor Relations team, which includes myself and Tushar. We really look forward to continuing the conversation with you in the near future.

[Tushar Shroff, executive]

Thank you.

[Unknown Executive]

Thank you, everyone. With this, we end the call.