Sterlite Technologies Ltd

NSE:STLTECH

Earnings Call Analysis

STL Sees Revenue Growth Amid Cost Optimization and Market Expansion

In Q2 FY '25, STL reported a revenue of INR 1,413 crores, reflecting a quarter-on-quarter improvement, although down year-on-year due to reduced optical fiber cable volumes. EBITDA rose to INR 151 crores with a margin of 10.7%. Notably, after-tax losses decreased to INR 13 crores. The company secured significant orders across North America and Europe, leading to a diversified order book of INR 8,630 crores. For the second half, robust demand in optical connectivity and data center segments is anticipated, supported by successful cost optimization strategies. Future revenue growth is projected as demand stabilizes and the demerger process progresses.

Navigating Current Financial Performance

In the second quarter of FY '25, STL reported a consolidated revenue of INR 1,413 crores, an increase from the previous quarter, indicating a positive trend despite a year-on-year decrease largely attributed to lower demand in the Optical Network business. The EBITDA for this quarter stood at INR 151 crores, resulting in an EBITDA margin of 10.7%. This margin signifies a strong recovery in operational efficiency, aligning with the company's strategic goals to optimize costs and improve profitability across its business segments.

Sales and Growth in Key Markets

A critical factor for the growth in revenue was the improved order intake in key markets such as North America and Europe. STL's order book is robust, reaching INR 8,630 crores, diversified across multiple customer segments. Notably, the company has secured substantial orders from leading telecom operators in the U.S., U.K., and India, which positions STL favorably as demand for fiber and connectivity products gains momentum, especially with upcoming large-scale governmental projects like BharatNet and BEAD.

Focus on Data Centers and Technological Advancements

STL is shifting towards expanding its data center product portfolio, aiming for 25% of its optical business revenue to stem from this segment in the medium term. The strategic focus on data center solutions is in line with the growing global demand for high-bandwidth connectivity driven by advancements in technologies like AI and GPU-based data centers. This expected pivot underscores STL's commitment to tapping into emerging markets and maintaining technological leadership.

Challenges and Mitigating Strategies

Despite solid performance metrics, STL faces challenges such as lower optical fiber cable (OFC) volumes affecting year-over-year growth. Company leadership has acknowledged these trends and remains focused on strategies to enhance operational efficiency, including streamlining production processes and diversifying the product offering to include more value-added services. This operational adaptability is key as STL navigates through potential slowdowns anticipated in the upcoming quarter due to seasonal fluctuations.

Financial Outlook and Guidance

Looking forward, STL provided guidance for future quarters, with expectations for improved performance in Q4 of FY '25 as client budgets reset post-holiday seasons and demand visibility increases. The company aims to drive growth in both revenue and margins as market conditions normalize, particularly leveraging their presence in the North American and European markets. The leadership team reiterates confidence that the prevailing trends toward fiber deployment will positively impact STL’s financial health in the mid to long term.

Debt Position and Financial Health

STL has made commendable progress in reducing its net debt, reported at INR 2,169 crores, which translates into a debt-to-equity ratio of approximately 0.74. This strategic financial management demonstrates the company’s focus on strengthening its balance sheet, especially in light of significant cash flows expected from ongoing and future projects. The demerger of STL's services business is also anticipated to create additional avenues for financial restructuring, aiding in higher operational stability.

Earnings Call Transcript 2025-Q2

[Chetan Wani, executive]

Ladies and gentlemen, good day to you, and welcome to the STL Q2 FY '25 Earnings Conference Call. I'm Chetan Wani, and I'm responsible for Investor Relations at STL. We are joined by Ankit Agarwal, Managing Director and CEO, Optical Networking Business, STL; and Tushar Shroff, Group CFO, STL; to walk us through the Q2 FY '25 results and to answer your questions. [Operator Instructions] You can also download a copy of the presentation from our website that is www.stl.tech. Please note that this call is being recorded.

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 may be based on management's belief and must be viewed in relation to the risks pertaining to the business. The safe harbor clauses indicated in the presentation also applies to this conference call.

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

[Ankit Agarwal, executive]

Thank you, Chetan. Good day, everyone. Thank you for joining us for our Q2 FY '25 earnings conference call, and we wish all of you had a wonderful Diwali celebrations over the last few days.

As we advance to H2 of FY '25, directionally, our strategic priorities remain the same as we've been discussing. On the Optical Networking business, we shall continue to grow on driving growth by increasing optical fiber cable market share as well as our connectivity attach rate.

To achieve our ambition of delivering significant revenue through data center and enterprise segments, we will focus on rapidly building data center suite of products to tap the huge potential in that area. We shall also continue to focus on drive our technology and cost leadership in our Optical business.

On our Global Services business, we shall continue to build new capabilities for value-added services while we stay focused on improving project mix and improving our profitability. We will also work towards completing the demerger of our Services business.

Lastly, on our STL Digital business, we shall continue to scale business -- scale the business through conscious investments in building new technology and domain capabilities while keeping our focus on achieving profitability intact.

STL has always endeavored to be a responsible leader in ensuring a connected and inclusive world. Through our various initiatives in education, women empowerment and health care, we have positively impacted millions of lives since FY 2019.

To achieve -- to highlight some of the achievements, some of the initiatives include, through our RoboEdge program, we intend to empower students with next-gen skills on robotics and enable their career growth. We have covered more than 11 schools and more than 5,000 students till quarter 2 FY '25.

We are proud to share that 2 teams from RoboEdge secured positions in the Robotex national championships, and 12 qualifying students from Aurangabad and Silvassa will represent India in the international championships in Estonia in December 2024.

Next to the right is our flagship Jeewan Jyoti program founded by Ms. Jyoti Agarwal, which intends to empower underprivileged women by training them in various vocational skills to make them financially independent. We celebrate Jeewan Jyoti's 10th anniversary recently. So far, 5,100 women artisans have benefited from this program. Program recently collaborated with the ONDC network, and Jeewan Jyoti class will now be marketed under the new [ ACI ] brand.

We also feel proud to share that we have now benefited more than 25 lakh lives through the hybrid health care programs we started during COVID for providing primary health care as well as telehealth facilities to marginalized communities in the rural parts of select districts of Maharashtra. We will continue to make meaningful contributions to environmental preservation through our forestation and water replenishment programs. A part of our social responsibility, we sincerely continue to drive such initiatives in the coming future.

On the ESG front, we are committed to our goal of being net zero emission organization by 2030. We present here some of our accomplishments on landfill waste removal, reduction of carbon dioxide emissions and water recycling efforts. We are proud to share that we now have won 100-plus ESG awards for our work. We take pride in being the world's first optical fiber manufacturer to be Zero Liquid Discharge certified and first optical products manufacturer to launch externally verified eco-labelled methodology.

When compared to standard products, these eco-labelled products utilize 52% less energy, carry 75% less global warming potential and use 18% more recycled content, 25% more recycled package material. These products also reuse and recover almost 20% more waste and enhance the longevity of the network by 13 years, thereby benefiting both clients as well as the environment.

In the next few slides, we will cover our Optical Networking business, highlight some of our efforts towards becoming the top 3 players in the optical connectivity business globally.

As we reflect on the last quarter and half year, as per CRU's latest estimates, global OFC demand until September 2024 contracted marginally. This was led by demand contraction in China and Europe markets and slower-than-expected demand pickup from North America. As per latest estimates released by CRU, calendar year 2024 remains projected to stay flattish or marginally contract.

Despite the lower fresh demand during the last few quarters, we observed steady fiber deployment and continued client commitments towards fiber network creation. Various analyst reports estimate that demand improvement from 2025 and a robust demand growth for medium to long term.

As per latest CRU projections, the medium-term demand in optical fiber cable volumes is to go up steadily to 652 million fiber kilometers by 2028. This projects a healthy 4.3% annual growth in annual demand and a strong 7% annual demand growth for ex-China during 2023 through 2028.

STL's focus markets of North America and India are projected to grow faster. The positive midterm demand outlook by CRU, along with continuous client commitments on increasing fiber deployments suggest steady recovery in the coming quarters.

We have discussed about AI and anticipated impact on the fiber demand previously last quarter, and the sheer scale of data center capacity additions planned in India present a great opportunity for your company. As AI and machine learning takes stage with mega technology trends, the need for massive data center capacities is unabated.

Experts are unanimous that the overall optical connections and fiber requirements in AI data centers will be significantly higher than traditional CPU-based data centers. As per initial estimates, India is expected to boost its GPU-based server capability in these AI-led data centers to 5.2 lakh GPUs by 2026. These GPU-led -- GPU-heavy data centers will require 36x more fiber than CPU racks, driven by an increase in server density and higher bandwidth requirements.

We will also require compact high-density optical fiber cables with up to 70% more fiber in the cables compared to traditional data centers. The data center capacity itself is reaching almost double, and the AI data center capacity is expected to be more than 1.5x in the coming 3 years.

The need to fiber as the core of connectivity within and outside data centers, which is leading to a fiber explosion and the massive data center capacity, presents an unprecedented opportunity for STL.

Progressing towards our ambition of achieving significant revenues from data center/enterprise segment in the medium term, we launched our AI-DC portfolio in the recently concluded India Mobile Congress 2024. Our Made in India data center portfolio is also a big boost for Make in India initiative by the government.

As we have been sharing with you, globally, the fund [ infusion ] in the 5G network creation, FTTH deployments and cloud data center continues to be strong. The investments in these technologies continue to have healthy demand for optical connectivity products. 5G [ STS ] is one of the fastest-growing technology in the world, and tower fiberization is critical to enable this 5G network growth.

5G subscribers are expected to grow rapidly. And as we can see, 5G subscriber growth in North America, Western Europe and India is expected to be robust all the way up to 2029. As per the last report of Analysys Mason, the blended average fiberization of mobile sites -- of total mobile sites stands at 38% in India in 2024, which is expected to reach 63% by 2029.

With higher 5G subscribers leading to higher number of 5G towers requiring fiberization, 5G expansion will continue to drive demand for more optic fiber globally.

FTTH connectivity enhancement efforts remain strong globally. In the U.S. alone, approximately 100 million homes await FTTH connections. Europe FTTH [ passes ] are now expected to grow over 4% over the next 5 years, and India is expected to lead the global growth in FTTH installations with a whopping 26% CAGR between 2023 and 2028.

As we discussed data center capacity additions, we continue attracting strong investments in India and the world. North American data center capacity is expected to grow more than 10% CAGR during '24 and 2029, and Europe data center capacity are expected to grow at 8.5% CAGR during -- between now and 2027.

Aiding to the above technology trends, improving telecom tariffs in India and the mega government projects such as BEAD in the U.S., BharatNet in India, NBN in Australia and various other projects in Europe; are expected to substantially add to the overall demand of optical connectivity products, both cable as well as connectivity.

We have built significant technology capability across the optical fiber value chain in the past 3 decades. From creating ultra-pure preform to optical fiber drawing optical fiber cable, and most recently, the optical connectivity. We offer truly a glass to gigabit connectivity. We're amongst very, very few companies in the world who offer this end-to-end connectivity.

Our high-tech and new-age products offering are backed by strong patent portfolio of 730 filed and granted patents. We take pride in our advanced fiber solutions, and many of our products are first in the world or first in India, such as India's first multi-core fiber, which is Multiverse. This product should consist of ultra-thin fiber with 7 and 4 cores instead of having a single core and along with multicore fibers drawn from the indigenous developed multicore preform technology.

At the recently concluded India Mobile Congress 2024, we showcased the power of the optical fiber innovation through a live 4G network transmission with real-time traffic simulation.

We are also amongst first global companies to develop miniaturized advanced fibers with diameters of 180 micron and 160 micron versus a conventional 240 micron, which is the world's slimmest optical fiber. Our Make in India innovations are laying the groundwork for scale-up in advanced technologies like quantum computing and silicon photonics.

At the India Mobile Congress 2024, we also marked the entry into the AI data center portfolio segment with full fledged demonstrations of our integrated optical fiber cable connectivity and interconnect solutions. Our noble telecom minister, Shri Jyotiraditya Scindia, inaugurated this Make in India AI-DC portfolio. And in his words, STL's AI-led data center portfolio is a significant innovation for the AI ecosystem and will also strengthen India's data center capabilities.

As we reflect on our market share on cable as well as connectivity attach rates, basis is the CRU global consumption data. H1 calendar year, we had 8% market share on optical cable ex-China. On H1 calendar year '24, market share seem to be 6%, amidst a challenging environment.

Our quarter 2 FY '25 market share, however, seems to have come back closer to 8%. And we believe that our market will normalize as demand grows steadily and picks up. Our intensive sales development efforts have started showing results.

Our optical connectivity product line continues to demonstrate strong growth momentum, as we noted our highest ever quarterly revenue for optical connectivity products and attach rate of 22% during the last quarter. We are continuously working on new product development and commercialization in optical connectivity space to further grow attach rate.

As we reflect on our financial performance for the Optical business, in line with our guidance of quarter 2 FY '25, revenue stands at INR 1,027 crores, which showed a healthy improvement on quarter-on-quarter basis.

EBITDA for the quarter stands at INR 133 crores at 12.9% of revenues. EBITDA margin reflects substantial improvement on a quarter-on-quarter basis and stands lower on a Y-o-Y basis because of lower OFC volumes and change in product mix. The quarter-on-quarter EBITDA improvement also indicate a success of various cost optimization measures undertaken by the company.

As we've been sharing with you our strategically located manufacturing facilities, completed capacity expansions and CapEx cycle and our continuous focus on cost structure optimization, product development and innovation, emphasis on data center portfolio and Tier 1 customer approvals; we are very well placed in India and international markets to capture significant market share as the demand picks up in the coming quarters.

Now let us reflect on our Global Services business. In the Global Services business quarter 2 FY '25, revenue stands steady on quarter-on-quarter basis at INR 356 crores. Our selective order intake and execution focus has helped us achieve quarter 2 FY '25 EBITDA of INR 24 crores and EBITDA margin of 6.7%. We continue to build our capability towards value-added services and improve margins and reduce our fund [ involvement ].

On the large projects, execution in Global Services business, we've made steady progress on some of the key projects during this quarter. We are very excited about the opportunity that the large announced and contemplated programs such as BharatNet Phase 3 and NHAI nationwide fiber rollout presents with the extensive large project experience. We are well positioned to tap into such opportunities in the coming quarters.

Let us now discuss about STL Digital and its business performance. In our STL Digital business, despite the challenging business environment, we observed robust new deal flow for marquee customers across U.S. and India. We acquired a large and strategic global customer in Europe as well.

We continue to work with our customers for growing our business in the U.S., Europe and India across technology and service verticals and expect the future growth to be driven by robust order book of more than INR 336 crores, healthy order pipeline and executions strength, backed by the right team of leadership and consultants.

In line with our expectations and tough industry environment, with a focus on profitable growth, we have achieved a quarter 2 revenue of INR 64 crores. The EBITDA losses for quarter 2 stand at INR 15 crores. Despite the lower revenues, EBITDA loss is trending downwards year-on-year and quarter-on-quarter basis.

And I now hand over to Tushar, our CFO, to talk about the consolidated financials.

[Tushar Shroff, executive]

Thanks, Ankit. Good day, ladies and gentlemen. The consolidated quarter 2 FY '25 revenue stands at INR 1,413 crores, INR 1,413 crores, showing healthy improvement on quarter-on-quarter basis. The year-on-year basis drop in revenue is mainly attributable to lower OFC volumes in Optical Network business.

The quarter 2 FY '25 EBITDA stands at INR 151 crores, and EBITDA margin stands at 10.7%, in line with our guidance. Our EBITDA margins have improved on a quarter-on-quarter basis. For quarter 2, after-tax losses stands at INR 13 crores. The after-tax losses have reduced on a quarter-on-quarter basis.

As we look at STL first half FY '25 performance, first half FY '25 revenue stands at INR 2,631 crores, INR 2,631 crores. EBITDA stands at INR 244 crores, INR 244 crores. And H1 FY '25 after-tax loss stands at INR 60 crores.

We observed the new orders additions during the last quarter and secured several important orders from our marquee customers. To highlight the few key events, we won new orders from a leading American customer and from a leading U.K. operator, telecom operator for optical connectivity and fiber solutions. We have received new order in Italy for optical fiber cable and specialty cable products.

And in India, we won the new orders from Indian private telecom player for enabling their FWA, fixed wireless access deployment. We also secured a long-term order from another large Indian telecom company for fiber, cable supply and deployment.

On the back of our global business, our revenue mix as well diversified during quarter 2 FY '25, we expect the revenue mix to improve towards North America and Europe as the demand for optical product pick up in the global market.

Despite of increased quarter-on-quarter revenue and significant order descoping, our open order book stands at INR 8,630 crores, INR 8,630 crores at the end of Q2 FY '25, backed by steady order wins. And our order book is well diversified across the customer segment and all our businesses.

We placed the abridged versions of our reported numbers for your perusal. The net debt of the business stands at INR 2,169 crores. Let us go through the updates and the status on our Global Service demerger.

We are progressing steadily on the demerger process. The shareholders and creditors of STL India have approved the scheme of arrangement in a meeting dated 10 July 2024. The basis state approval demerger petition has been filed with the NCLT, and the hearing was conducted on 11th October 2024 with NCLT. We are awaiting the order from this particular hearing from NCLT.

The date for the final petition is pending with NCLT Mumbai branch. The final NCLT order is expected an indicative timeline of next 3 to 4 months, that is Q3, Q4 of FY '25. Resulting [ companies ] expect to get listed in a stock exchange. However, we remain dependent on NCLT progressing on the hearing of our matter.

In summary, our focus areas for our business are clearly identified as: In Optical Network business, we shall target to drive the technology and cost leadership and pursue our ambition to be a global top 3. We will increase the sales in our focus market to grow our Optical Network business and fill the volume gap. We will continue to increase the optical connectivity business growth and attach rate. We will focus on rapidly building our data center product portfolio.

In our Global Service business, we will continue to focus on select projects intake to improve the profitability and optimizing the net fund involvement. In STL Digital, we continue to scale the business and grow our revenue along with focused profitability.

With this, now I hand over the call back to Chetan.

[Chetan Wani, executive]

Thank you, Tushar. Ladies and gentlemen, we have now come to the end of our presentation, and we shall take questions from the audience. [Operator Instructions] Okay. We'll take first question from Nikhil Choudhary. Nikhil, please go ahead with your question.

[Nikhil Choudhary, analyst]

Yes. This is Nikhil from Nuvama. Good quarter, Ankit. Finally, we have seen very strong growth on a Q-on-Q basis, especially on Optical business. So first thing is around -- the growth looks like is driven by U.S. and Europe geographies, especially the Europe business.

So I just want to understand and get more clarity about what was the driver for this quarter, such a strong spike in growth? And how sustainable is this revenue number? And just addition to it, I just wanted to get some color around BEAD and BharatNet program.

[Ankit Agarwal, executive]

Yes. Thank you, Nikhil. I think definitely, the whole thought process has been that we've been well established in terms of our capacities. We've touched about how all our investments have happened over the last 2, 3 years in terms of glass, fiber cable, including our capacities in Italy and most recently in U.S. So that has set up that kind of technology and manufacturing capacity platform for us.

And really then, what we've been talking about is how do we keep on looking to improve our utilization of the facilities. So that's really what's happened to a large extent between quarter 1 and quarter 2, where we've seen an improvement in our optical fiber cable and to some extent, improvement in our accessories, our connectivity portfolio.

And that's something that we want to continue to see that how do we drive these utilizations up from this current 50%-odd levels and take this really back to that 75%, 80% levels, where then we have meaningful EBITDA performance. So that's really the thought process.

In terms of BEAD, probably versus where we were 4 to 6 months ago, we do see that the larger volumes of BEAD-related cable demand and connectivity demand is probably got pushed out by a few months.

So while we have started winning a few initial projects linked to BEAD, the main significant volumes are now expected probably second half of calendar year 2025 and then with it peaking in 2026 and '27 calendar years. So that's really what is the general industry understanding.

The second part, we've spoken about the U.S. was the inventory levels. That continues to come down. So on a positive way, the execution of fiber for 5G, for fixed wireless, data center, fiber to the home; all of that continues to accelerate in the U.S., and that is leading to some of these inventories coming down. And again, there, I believe that we are probably 1 or 2 quarters away from those inventory levels normalizing.

BharatNet, I believe, is a project that will get probably decided during this quarter in terms of the results. And then it is probably anywhere between 3 to 4 year, maybe even 5-year execution period, depending on the complexity of the projects. So that is something that as the results come out, that will have an impact on our Services business from an EPC perspective, but equally then from a cable and fiber business from a supply perspective.

[Nikhil Choudhary, analyst]

Sure, Ankit. Sir, second one is especially regarding the U.S. geography. Corning in its last call mentioned that the buying and deployment rate is now completely in sync for them. So is it fair to say that we'll see further improvement in U.S. contribution in our geography going ahead, given they are the Tier 1 and benefit from the long-term contracts and now the player like Sterlite should benefit?

[Ankit Agarwal, executive]

Yes. I mean, I would say, broadly, that's true. If I look at the next, say, 12-month window or 12- to 15-month window. I would have to call out that particularly this period, November, December kind of period typically in Europe, North America; things do slow down because of winter months, deployments do slow down, et cetera. And then they have -- they run their budgets on calendar year, so then they start typically on quarter 4 on a stronger note, which is our quarter 4 and their quarter 1.

But I think thematically, what you mentioned in terms of demand in North America, we do see all of those sectorial teams do play out as we get -- over the next 12 to 15 months. And of course, from a longer-term perspective as well. North America continues to be probably the most positive growth territory globally, where anywhere between 12% to 15% annual growth is expected.

[Nikhil Choudhary, analyst]

Sure, Ankit. Makes sense. Next one is on margin, Ankit. While we have seen improvement in margin on Q-on-Q to 13%, but our revenue is now like more than INR 1,000 crores. And at this scale, we have delivered much better margin compared to what we delivered this quarter despite of having higher optical interconnect business, right?

So I just want to understand what happened? And why we haven't seen such an improvement in margin compared to what we used to deliver at this scale?

[Ankit Agarwal, executive]

I think it's linked to the previous view as well. Largely, we typically enjoy better realizations in the North America market. And so since those volumes have come down, as you would have seen in the last few quarters, our average realization at company level would have come down compared to maybe last year or 2 years ago.

So that's predominantly what you would have seen as -- and also Europe, as you would have seen, it's been flattish or marginal. There also, our realizations have been flattish or a slight decline. So that's really what's been driving it.

Again, as we start moving to increasing our value-added products, our products for segments like data centers, as well as our accessory connectivity portfolio, that should start driving the realization up. Plus, of course, as a share of North America sales itself starts coming back, that should drive the improvement in our realizations.

[Nikhil Choudhary, analyst]

Sure. The last one from my side. Just wanted to understand the impact of antidumping duty, which is introduced in Europe. So any impact on your financials this quarter?

[Tushar Shroff, executive]

So Nikhil, Tushar here. So from the supply chain perspective, absolutely, there's no impact because whatever the customer orders are being placed, we have been able to serve all of them without any kind of a disruption, so -- which is very, very positive.

However, we have seen that in terms of as we scale up our European facility, we are able to bring down the overall manufacturing cost, and we are able to see the higher profitability coming from the European market as compared to the kind of profitability that we used to enjoy from the European manufacturing site.

So I think the two positive levers are that there is no disruption with respect to the supplies that we meet to the customers, European customers; and second, with the kind of a volume and kind of the leverage that we are able to take operational efficiency that we are able to bring at the Italy site, which is also helping us in terms of improving the overall profitability of the site as well as for the ONB business.

[Chetan Wani, executive]

We'll take the next question from Sunny Gosar.

[Sunny Gosar, analyst]

Yes. Can you hear me?

[Ankit Agarwal, executive]

Yes.

[Chetan Wani, executive]

Yes, sir.

[Sunny Gosar, analyst]

Yes. And congratulations on an improved set of numbers after many quarters of us -- basically a sluggish period. So my first question is on the optical interconnect. We have seen very good performance in optical interconnect with attach rate improving to 22%. And some rough calculations indicate that the quarterly revenue run rate should be closer to INR 150 crores or plus/minus of that.

So a couple of questions here. Like what has driven this improvement? Is it more customers in Europe? Or have we been able to penetrate better in the U.S.? And the second question is, going forward, how should we look at the growth outlook? And how should we look at the revenue trajectory going forward in the optical interconnect space?

[Ankit Agarwal, executive]

Yes, sure. Thanks. So Sunny, essentially, important to remember that the interconnect business is very closely linked to essentially fiber-to-the-home connections. So what we've clearly seen is globally, especially Europe, U.K., which are our strong markets for this business, and of course, in the U.S.; there are very, very strong and aggressive targets for the fiber-to-the-home.

And some of our customers, which we have talked about, like British Telecom, Netomnia, some of the other customers that we have been very, very active with; they continue to push forward on not only passing the homes, but also taking the fiber all the way inside the home.

That's really where the strength of our interconnect portfolio comes through. And something that we've been very proud of doing very well is being very, very agile in our product portfolio, very, very rapid product development and at the same time, being competitive and creating value for the customer.

So that's something that has served us well. We continue to expand both in U.K. and in Europe, and we are starting to make some initial inroads in the U.S. market as well. But certainly, as this momentum continues, the whole thought process is for us to continue to sell it as a solution of the cable and the connectivity together to our customers. And then going forward over the next, say, 2 to 3 years; we would also look to build a portfolio for the data center segment.

[Sunny Gosar, analyst]

Right. Sir, any outlook in terms of the revenue trajectory or the attach rate? Like does this keep improving at a steady pace in terms of percentage points? Like how should we look at the next few quarters or, say, next 2 years?

[Ankit Agarwal, executive]

Yes. I wouldn't comment on the immediate quarters, et cetera. As I said, again, this November, December, for example, is a slower month for -- so I won't get into specific quarters.

But generally, the whole ambition for us has always been to scale up the interconnect business meaningfully and make it a substantial part of our Optical business overall. So that vision continues. We continue to invest in our product portfolio, in our IP, as well as the team. And so we continue to be quite bullish about this.

[Sunny Gosar, analyst]

Sure. And while 22% is the average attach rate over the entire optical sales, like have there been customers where we have already reached 100% kind of or closer to 100% attach rate, which basically will signify that our product has very strong acceptance in the base customers or the base markets?

[Ankit Agarwal, executive]

Absolutely. That's absolutely true. As you can imagine, as you can do the math, we are disproportionately selling our interconnect in U.K. and Europe markets. So you can imagine, in some of those customers, our attach rate would be close to 100% or even more than 100%.

[Sunny Gosar, analyst]

That's good to hear. My next question is basically on the U.S. business. So after -- so U.S. quarterly revenue run rate has come closer to like INR 240 crores, INR 250 crores in this quarter versus a peak of, I think, INR 600 crores to INR 800 crores in a few quarters before.

So once BEAD demand starts kicking in and some of the other new customer wins and all of the initiatives that we are trying to drive come through, basically, can we go back to that INR 600 crore to INR 800 crore quarterly revenue run rate? And basically, is there a time frame we can attach, like 4 quarters, 6 quarters, within which this is possible?

[Ankit Agarwal, executive]

So I won't comment on a specific revenue target because I'm not keen to give a specific forecast right now. But directionally, definitely the whole intent is for us to scale up globally.

North America remains our biggest growth opportunity. And as you suggested, we have done significant numbers in the past in the market. So the whole thought process is as new demand, as inventories come down and the new demand is there, the whole market itself is supposed to go actively from, say, anywhere between 80 million, 90 million fiber kilometers to 130, 150 million kilometers.

So the whole thought process is that we should be part of that growth and continue to take good market share from our current customers as well as new customers. And then on top of that would be a growth of our -- these connectivity products that we spoke about, which should start scaling up in the next 2 to 3 years.

So that's the whole thought process, that both combination of cable and connectivity, we should start improving. I think the time frame is really tough, given that projects do get pushed out, et cetera. Plus, it will also be a function of how the interest cycle -- interest rate cycles play out, et cetera.

But broadly, the whole thought process is that within 1 to 2 quarters, market should start seeing some improvement for STL. And certainly, over the next 12 to 15 months, we do see that improvement.

[Sunny Gosar, analyst]

Got it. Got it. That's helpful. And I have one last question before I join back. It's related to the debt level. So post the fundraise in the first half, you have been able to bring down the debt by about INR 600 crores at a net debt level. So there are two questions in this.

One is when the demerger of the Service business happens, I understand the capital employed in the Service business, which is your segment assets minus segment liabilities, about INR 1,650 crores. So at the time of demerger, what is the likely debt that could move with that demerged entity?

And second question is, apart from the operating cash flow generated, are there any further levers in terms of any noncore assets or any, basically, like sticky receivables, which we can -- which can come back in terms of accelerating the debt repayment?

[Tushar Shroff, executive]

Yes. Yes. So Sunny, I think a couple of questions. With reference to the debt, as you have rightly mentioned, we raised about INR 1,000 crores in quarter 1, which has been used to repay the debt. And we successfully repaid the major part of the debt from the proceeds that we have received. The current debt level that we have is about INR 2,169 crores, net debt that we've been talking about is INR 2,169 crores. And our debt-to-equity ratio is about 0.74% at this point in time.

The idea is to ensure that some of the fund that which we have -- which are involved in terms of the execution of some of the large projects, mainly from a [ T-Fiber ], MahaNet; we continue to see that how we can liquidate that. That Itself is, I would say that almost INR 1,000 crores kind of a level. So we -- I mean, we are pursuing the various -- at various levels to see that how best we can liquidate this unbilled and the debtors that we have with some of these particular customers, mainly for BharatNet Phase 2 project.

So structurally, we are trying to work with the customers to see that how do we get the necessary right-of-way approval, so that the central government should be able to provide the right of way to the customer, and we should be able to initiate the work which is pending for the right of way, and we should be able to complete the project and liquidate the cash. So that's the priority for us, topmost priority for us.

Of the total -- the capital employed that you talk about of Service business, we expect -- as of September, we were expecting the net debt to be in the range of INR 550 crores to INR 600 crores. That is what -- based on the current capital employed, that is something that we are looking at, which will get transferred to the Service business.

So there's other things, there's other levers that we have been working on, so that we have been able to generate cash. And structurally, because this particular demerger is a tax-neutral process. And from a tax-neutral process perspective, we need to allocate debt in a certain proportion, in a certain way, in a certain manner, which has been prescribed under the Income Tax Act.

So whatever the cash gets generated till the time of demerger will help both the businesses in terms of improving the respective balance sheet of the respective business. So our all focus and the entire commitment from the management team is to liquidate the working capital that we have blocked in the Service business.

[Sunny Gosar, analyst]

Got it. And the internal cost...

[Chetan Wani, executive]

Sunny, can you just join back?

[Sunny Gosar, analyst]

It is related to the debt, and then I'll basically go back to the queue. The interest cost in Q1 came down to about INR 70 crores, which saw an increase again in Q2 to about INR 84 crores. Is there any one-off element in the Q2 interest cost? And since we have already repaid a significant portion of debt through the QIP proceeds, what should be the quarterly interest outflow or interest expense going forward?

[Tushar Shroff, executive]

So yes, in Q2, I think we have incurred one of the expenditure for the necessary approvals that we have received from the bank for a demerger and the expenses or charges from the bank for giving the NOC that we have received. Those are the one of the charges.

The run rate, I think, is -- absolute run rate should be anything between -- I would say, the interest cost should be in the range of, I would say that between INR 75 crores to INR 80 crores is something that we have been working on, saying that it should not go beyond INR 75 crores to INR 80 crores in terms of our run rate of the interest cost.

[Sunny Gosar, analyst]

Thank you for the detailed responses, and all the best for the coming quarters.

[Chetan Wani, executive]

We'll take next question from Saket Kapoor.

[Saket Kapoor, analyst]

Yes. Can you hear me?

[Chetan Wani, executive]

Yes. Saket, we are unable to hear you clearly.

[Saket Kapoor, analyst]

So you can hear me now? Hello?

[Chetan Wani, executive]

Yes.

[Saket Kapoor, analyst]

Yes. Yes. Sorry for the same. Firstly, sir, you mentioned about interest cost to be ranging in the band of INR 75 crores to INR 80 crores. So I think -- so we paid a large chunk of the money for this quarter. So won't that be a very conservative number? Or what are you factoring in, in terms of the higher working capital requirement?

[Tushar Shroff, executive]

So Saket, as you know that the 2 large projects that we have been talking about, if we are been able to liquidate at least 50% of that in the next 2 quarters, I think substantially, we should be able to reduce our interest cost, and that is what we are driving.

What I've said is that with respect to the kind of interest cost that we are looking at or are targeting is assuming on a conservative basis that probably, whatever the challenges that we have and because of any reason, we have not been able to liquidate; then what will be the kind of a trend that -- what will be the run rate that we should be expecting. That is what is the plan.

But having said, we are targeting to collect the substantial part of the money in the next 2 quarters. Having said that, demerger is closure. So structurally, we are working to see that the benefit of reduction in our working capital and the reduction in our debt overall should help us in terms of bringing down the consolidated interest expenses for the both business.

[Saket Kapoor, analyst]

But sir, just to get more clarity, the fiber rollout project for Telangana, I think so the completion percentage is stuck somewhere in the 69% [ bank ]. So how much have we invested there? Or how -- what is the amount stuck, if you could just allude? And what is the thought process now going ahead? When can we achieve this nearest milestone and then the release of fund for this [ T-Fiber ] project, please?

[Tushar Shroff, executive]

I think on a previous call also, we had mentioned that the current project of [ T-Fiber ] that we have been executing as a requirement of a right of way for a forest area to complete certain part of the activity for to complete the execution, which has been defined as per the tender contract, correct, we need to rollout off the laying of the cable and to ensure that we are able to connect the entire network in Telangana, which is impacted because of the right of way in the forest area in Telangana, which requires a necessary approval from the central government as well as from the state government, which is pending.

And this obligation is on the customer. We have been pursuing regularly with the customers in terms of ensuring that we have a right of way. But because of their internal or whatever the complexity that they have, probably, they have not been -- at this point in time, there are some challenges which they are trying to solve with the central government to provide us with the right of way.

But yes, we have been continuously pursuing with the customer to ensure that they are able to fulfill their obligation with respect to the terms and conditions provided in the contract of providing us with a right of way so that we can complete and execute the contract.

With respect to your specific question on the fund involvement for this particular project, at this point in time, fund involvement is almost to the extent of INR 700 crores for this particular project.

[Saket Kapoor, analyst]

And sir, secondly, Ankit, for the digital and the technology part, I think we have seen a degrowth in the revenue for this quarter. And also, we are flattish on the H1. So [Foreign Language] Is the lower business has resulted in lower EBITDA losses? Or what's the way forward? I think order book you mentioned at INR 298 crores, something closer to that. Your thoughts?

[Ankit Agarwal, executive]

So I think, Saket, we maintain the same focus that essentially, what we want in this business is profitable growth. That's really very, very clear. So we've been very focused on what kind of orders we've taken with which kinds of customers and really want to make sure that we start driving our EBITDA upwards and start getting into breakeven. So that's a clear mandate for the leadership of this business, to get this to EBITDA breakeven ASAP and then look at growth from there in a measured way.

Of course, I think industry tailwinds itself have been tough in the last 1 year or so. I think that should also start improving in terms of new orders coming in and new opportunities. But I would say broadly, Saket, there is a lot of discipline with this team. The new CEO, [ Naveen ], who's come in; has done fairly significant cost cutting as well to really make sure that focus is there on getting to EBITDA breakeven.

[Saket Kapoor, analyst]

So sir, H2 [Foreign Language] how should H2 be for this segment only in particular? Because we were flattish here and the losses have been reduced. Definitely, we are on trend, but how should we close since we have the blueprint ready for how H2 will behave?

[Ankit Agarwal, executive]

Yes. As I said, there's nothing different. A single priority for the business is to get to EBITDA breakeven. So that's what we're expecting.

[Saket Kapoor, analyst]

Okay. And no guidance on how the volume -- that revenue growth will be?

[Ankit Agarwal, executive]

No. As I said, more than revenue growth, we're targeting on the bottom line. We're just looking at deal by deal and making sure that it's at the right merchants.

[Saket Kapoor, analyst]

And last point, sir, I think in the presentation, in your press release part, you did allude to the fact of our cables, intent of entering AI-DC segment and garnering 25% share. These are very exciting praises and I think so -- what we are eyeing.

So if you could give us some color on how our OFC will play a major role? And getting to this 25% market share, what is the size of the market? So how should -- how have we arrived at this number, firstly, in terms of that, if you could just give some more color to it?

[Ankit Agarwal, executive]

Sure, sure. So I think, see, from a simple perspective, today, a lot of our focus has been on the telecom segment, Internet service providers, as well as large government projects like BharatNet or others. And the whole thought process is that clearly, we see that data center itself will be a much larger user of fiber, consumer of fiber going forward compared to the past. That is something that we see because of this change of AI.

What you're seeing is the processors are going from CPU-based to GPU-based, if you would have heard of NVIDIA and other companies. What happens in this scenario is that you need a very high fiber connectivity from each GPU to another GPU. And so this is a very big change in the data center that's happening in India and globally. And this will lead to a very large increase in fiber requirement within data centers and to connect large data centers with each other as well as edge data centers.

So looking at this requirement, which we believe will be a build-out over the next 8, 10 years, there will be continuous fiber build-out and data center build out; we have taken a target that 25% of our Optical business revenue should come from this segment in the medium term. That's the whole thought process. And we also looked at our benchmarks of our global peers, where we do see that some of our global peers are anywhere between 30% to 40% of their revenue coming from data center segment.

[Saket Kapoor, analyst]

Correct, sir. And the pricing front, sir, I will join the queue. How differentiated are the pricing for the OFC in terms of that goes into this...

[Ankit Agarwal, executive]

Pricing is definitely better, but it's also because the products are much more technologically advanced. Then the approval cycles themselves are very, very long. Anywhere between 2 years, 3 years is quite typical. So that is the work that we have kickstarted. We have launched some products, and we will undergo approval cycles with some of these large customers, and we'll update you quarter-on-quarter.

[Saket Kapoor, analyst]

Yes, sir. Thank you, sir, and all the best to the team, sir.

[Ankit Agarwal, executive]

Happy Diwali.

[Chetan Wani, executive]

We'll take next question from [ Rohan Vohra ]. Rohan, please go ahead and ask your question.

[Unknown Analyst]

Hello. Am I audible?

[Chetan Wani, executive]

Yes.

[Unknown Analyst]

So the first question was around BharatNet. I wanted to understand your addressable market across fiber optic cable, your Global Services business and the fiber that you will supply to other players, you might supply to other players. And then adding to this, the interconnect product. So what could be the addressable market that you are looking at in the BharatNet project?

[Ankit Agarwal, executive]

So there are, overall, 16 packages, and we have participated across the packages, some directly, some with a partner. That -- those results are expected within this quarter itself.

And in terms of the opportunity, of course, overall is INR 65,000 crores on the CapEx and other INR 40,000 crores, INR 45,000 crores on OpEx. So it's north of INR 1 lakh crore opportunity. Of that, it's tough to say what we expect to win. But logically, we would want us to be one of the winners in the packages. So it depends on the size of package that we become as L1. So let the results come out, we'll see where we are placed.

And then on the cable part, the cable and connectivity part is roughly in the range of INR 4,000 crores to INR 5,000 crores overall. And so again, there, depending on who the winners of the packages are and our partnership with them, we would take a certain market share of the cable and connectivity.

[Unknown Analyst]

Okay. Okay. So broadly, this INR 4,000 crores to INR 5,000 crores is that addressable market size, is this right to assume?

[Ankit Agarwal, executive]

For the cable and connectivity, yes.

[Unknown Analyst]

And then for Global Services, there will be additional -- addressable market that will be there?

[Ankit Agarwal, executive]

Correct. There is one caveat to this that there are some EPC players who also make their own cable and connectivity. So to that extent, probably we -- that opportunity may not come to us.

[Unknown Analyst]

Understood. Understood. And then about the interconnect products, how big is the addressable market in that as far as BharatNet goes?

[Ankit Agarwal, executive]

It's part of that INR 5,000 crores. Typically, in India, the interconnect attach rate, et cetera, spend on that, et cetera, is on the lower side. That's why our focus on our portfolio is much more on Europe and North America.

[Unknown Analyst]

Understood. Understood. Second question was on the order inflow. So you also, I think, spoke about descoping that happened in the first half. So hereon, how do you see the order inflow in the second half?

[Ankit Agarwal, executive]

So I think that this is an important period. As I said, if our focus markets are in -- talking of Optical business to begin with, there, we definitely see that as the budgets get frozen,typically between, say, December period and start getting released in January time frame or Jan-Feb time frame; so definitely, for our focus markets, probably we should see an order uptick in our quarter 4 time period.

And then equally, for our Services business, we have seen an improvement in our pipeline of bids that we are participating apart from BharatNet. So again, we do expect that we should see an improvement in order booking in the quarter 4 time frame.

[Unknown Analyst]

Okay. So quarter 3, we might expect to remain slightly sluggish? Is that correct?

[Ankit Agarwal, executive]

Yes. Largely because of what I explained that November, December is typically quite slow. And not much of decision-making in this period.

[Unknown Analyst]

Right, right. Also just one last, if I can squeeze in. So on the non-U.S., non-India demand, so the other regions, what is the outlook on that? And also, along with that, on the fiber prices, so any color on that would be helpful.

[Ankit Agarwal, executive]

Yes. So I think we are looking at, of course, apart from the two you mentioned, Europe has remained flattish. But where we are focused like U.K. market, in certain parts of Italy, which is also where we have large manufacturing, and we are also looking at some growth in the Middle East markets where we have been quite active; I think these markets remain steady for us.

Going forward, we do expect very strong growth in Germany market over the next 3 to 5 years, as well as Eastern Europe, like Poland, et cetera. So these are 2, 3 areas we are watching very carefully and building our product portfolio.

In terms of fiber prices, I think they have been flattish or slight decline in these markets. But again, as demand picks up, we do expect them to normalize. And that should probably happen in the quarter 4 time frame.

[Chetan Wani, executive]

Thanks, Ankit. Ladies and gentlemen, we have come to the close of the planned time. So we'll come to the end of this Q&A session now. If I hand over the call back to you for giving your closing remarks.

[Ankit Agarwal, executive]

Thank you. I'd like to thank everyone again for attending this call and showing the interest in our company. Despite the market -- challenging market environment that we spoke about, we have managed to make progress on key strategic priorities. We continue to focus on all the factors in our control. We look at driving our customer focus, becoming lean and agile and also driving growth based on our technology leadership. And I also touched upon our growth in our IP portfolio that we've been having now.

We continue to aggressively pursue business opportunities presented to us in our focused regions and based on our high-technology manufacturing, innovation as well as industry-leading products. We are very well positioned to execute and deliver robust results going forward and create shareholder value as the demand normalizes.

I hope that we were able to address and clarify all your queries and comments. For any further questions and discussions, please [ leave ] your contact with Investor Relations team, which includes myself and Tushar. We really look forward to continuing the conversation with you in the near future. Thank you.

[Chetan Wani, executive]

Thank you, everyone. You may disconnect from the call now.