Sterlite Technologies Ltd

NSE:STLTECH

Earnings Call Analysis

Company Sees Q3 Recovery, Readies for Demand Rebound

The company reported improved Q3 FY '24 results with an EBITDA of INR 22 crores and margin of 5.4%. The nine-month FY'24 EBITDA stood at INR 71 crores, marking a margin increase to 6.3%. STL Digital continues to experience growth, underpinned by a robust order book of INR 780 crores, and the firm anticipates further expansion fueled by newly acquired U.S. and Indian customers. Despite a soft demand in North America and Europe, leading to predicted lower FY'24 volumes and revenue compared to FY'23, the company's endeavors include significant debt reduction, targeting a decrease by INR 50 to 75 crores this quarter. Capacity utilization has reached around 50% over nine months, with an optimistic outlook on improving this metric, particularly if U.S. demand recuperates, promising a boost in both revenue and profit margins.

STL Digital Continues to Forge Ahead Amidst Industry Challenges

STL Digital is maintaining its growth trajectory despite a tough industry environment. The unit has forged strategic partnerships with major players like SAP and Google, enriched its customer base in the U.S. and India, and boasts over 25 active customers. With a strong order book of over INR 780 crores, STL Digital achieved a revenue of INR 80 crores in Q3 FY '24 and INR 220 crores over 9 months. Although the division posted an EBITDA loss of INR 12 crores in Q3 and INR 66 crores for 9 months, this loss is on a downward trend, indicating improving financial health.

STL's Consolidated Financials Reflect Lower OFC Volumes but Show Resilience

STL's Q3 FY '24 revenue aligns with its lower guidance, standing at INR 1,322 crores, with a 9-month total of INR 4,338 crores. This decline is chiefly due to reduced OFC volumes. EBITDA for Q3 is at INR 109 crores, dropping to INR 559 crores over 9 months. Despite this, EBITDA margins remain stable compared to the previous year at 12.9%. The company's post-tax profit suffered due to lower EBITDA and increased interest and depreciation, resulting in a Q3 loss of INR 49 crores and diminishing 9-month profits to INR 24 crores. Nevertheless, STL continues to secure new orders in both the optical and service businesses and has reduced its net debt by INR 174 crores from FY '23.

STL Maintains Strong Customer Relationships and Focuses on Value-Added Fibers

STL stands resilient in the face of declining volumes with average realization rates holding steady. This stability can be attributed to multiyear contracts and enduring customer relationships globally. Additionally, the company places emphasis on value-added fibers and cables, which support its goal of delivering high-quality, innovative products and sustaining its market positioning.

Earnings Call Transcript 2024-Q3

[Chetan Wani, executive]

Ladies and gentlemen, good day, and welcome to STL's Q3 FY '24 Earnings Conference Call. I'm Chetan Wani and I'm responsible for Investor Relations at STL. And to take us through the results and to answer your questions, today, we have Ankit Agarwal, MD STL; and Tushar Shroff, Group CFO, STL.

Please note that all participant lines are in listen-only mode as of now. There will be an opportunity for you to ask questions after the presentation concludes. Please note that this call is being recorded. You can also download a copy of the presentation from our website that is www.stl.tech.

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

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

[Ankit Agarwal, executive]

Thank you, Chetan. Good day, everyone, and thank you for joining our quarter 3 FY '24 earnings call. I wish all of you a very, very happy Republic Day. I look forward to our conversation with questions at the end. .

Just to reiterate our strategic priorities remain the same and as follows. Firstly, we shall continue to grow our optical business by increasing optical fiber cable market share and optical connectivity attach rate. We will continue to drive these initiatives to optimize the raw materials and the fixed cost of the businesses to improve our overall cost competitiveness.

Secondly, we shall continue to consolidate our global services business in selected segments, work towards achieving profitability in the U.K. operations. Last but not the least, we shall build the digital business through focused investments in building technology and domain capability and as discussed, progress towards EBITDA breakeven. On the ESG front, we remain committed to achieve net-zero emissions by 2030. Our ESG rating from MSCI stands at A. We are very proud that we continue to be one of the leading companies in the world in our sector in the ESG domain.

Let us talk about our optical business first. About the demand outlook, CRU has recently updated the estimates from 2022 to 2028. The short-term headwinds in the main markets in North America and India continue to -- continue with demand projected to contract by 10.8% and 1.7%, respectively in '23 against the 2022 revised estimates. For North America specifically, the demand is estimated to contract by 12% during 9 months of calendar year '23 over 9 months over the same period in 2022. The demand in Europe is estimated to be contracted by 5% during quarter 3 -- quarter 3 calendar year 2023, compared to quarter 2 calendar year 2022.

The near-term downturn in North America is on account of inventory digestion, which is expected to correct steadily towards by quarter 2 FY '25 onwards. While the near-term demand contraction, the medium-term demand volumes are revised upwards to 684 million fiber kilometers by 2028, up from 577 million fiber kilometers in 2022. The global demand ex-China is expected to increase to 417 million fiber kilometers by 2028, up from 293 million fiber kilometers in 2022. STL's focused markets of North America, Europe and India are high potential and estimated to grow at CAGR of 11.4%, 5.2% and 15.6%, respectively, during the period from 2023 to 2028.

This is an important slide, which shows how the global data consumption across top categories is expected to rise multifold in coming years. And there's simply no alternative than to expand fiber networks to support such massive terrific expansion. Be it network parameters such as bandwidth offered, latency data loss or energy savings and in fact, even environmental friendliness and reliability, fiber is undoubtedly the most efficient and reliable data transfer technology. This is recognized and echoed by various industry experts and CEOs. There we've shared examples of comments by the Airtel CEO; by Ericsson CEO; and also Elon Musk, talking about SpaceX and the comparison with terrestrial cellular networks.

With the growing use of fiber in various applications such as fiber-to-the-home, AI in data centers, edge data centers, smart cities, small cells and the smart enterprises, fiber demand is bound to increase many fold going forward. Coming to North America. There are certain strong drivers, which we believe will lead to sustained growth for the market. In North America, as per Omdia, the 5G subscriptions are forecasted to grow significantly from $173 million currently to almost $600 million. 5G is expected to become the most dominant mobile access technology by 2028. And as we all know, fiberization will be at the core of this 5G deployment. In the case of fiber-to-the-home as well, U.S. has close to 100 million homes, which are remaining to be passed. AT&T alone is having 10 million to 15 million additional locations to be passed in the coming years. And as was CRU, FTTH Homes passes expected to rise with BEAD projects from $8.7 million per year in 2023 to almost $12.2 million per year by 2025 at a CAGR of almost 18%.

Data Center for CapEx is also forecast to grow to $139 billion by 2028. Lastly, the BEAD program allocation is progressing steadily. And recently, Louisiana became the first state to move from planning phase towards the execution phase.

Coming to India, we also see similar strong drivers for sustained growth in the market. In India, 5G subscriptions are expected to grow at a CAGR of 33%, a total of close to 500 million subscribers by 2028. The tower fiberization currently stands at close to 38% and expected to grow towards 70% by 2025 onwards. Telco is expected to spend close to $1.5 billion to $2.5 billion for tower fiberization in the coming years. In case of fiber-to-the-home, India is expected to be the largest -- second largest fiber broadband market by 2030 and India's FTTx installations are expected to grow fastest globally at CAGR of 26% between 2023 and 2028.

India has 15% of the global Internet users whereas limited data center capacities exist in the country. Crystal estimates that the tune of INR 45,000 crores will be invested in data centers between now and FY '26. VSNL also has recently released a draft of BharatNet Phase III RFP for industry consultation. This program intends to connect the 2.5 lakh gram panchayats with fiber connectivity and should provide a major boost to India demand, particularly in rural India.

Coming to the Chinese players that we have currently in the market. The government in the European Union, U.K. as well as in India have imposed significant antidumping duties on the Chinese optical fiber and cable manufacturers which resulted in significant decline in the optical fiber and optical fiber cable exports from China to Europe as well as to India. These measures from the government are expected to support the overall demand and realizations for non-Chinese suppliers like ourselves. So even though we observed a minor decline in our market share, we also see a good improvement or minor improvement in our attach rate. Our market share slightly declined to 9% in the first half versus 10% in the first half of previous year.

We expect OFC market share to grow from FY '25 onwards. Optical connectivity attach rate has improved marginally to 14% in the recent quarter. And as we continue to commercialize new optical products, we believe that there should be a further increase in attach rates in the coming quarters. Coming to the financials for the optical business. As guided, quarter 3 FY '24 has declined on account of lower volumes and stands at INR 857 crores, which is lower by 42% year-on-year basis. The 9-month FY '24 revenue stands at INR 3,053 crores in which is lower by 22% on a year-on-year basis. In line with the reduction in revenues, the quarter 3 FY '24 EBITDA stands at INR 104 crores, which is 66% lower on a year-on-year basis. And for 9-month FY '24, absolute EBITDA has declined to INR 561 crores, which is 23% lower on a year-on-year basis. Due to the lower EBITDA and EBITDA margins -- due to lower EBITDA, the EBITDA margin for Q3 FY [ '24 ] has declined to 12.1%. Although the 9-month FY '24 EBITDA margin has been stable at 18.4% on a year-on-year basis.

We are well positioned to grow our optical business. With our strategically located manufacturing facilities, our optimized cost structure and our continued product innovation and customer approvals for our products from Tier 1 telecom operators and customers across the globe, we believe that we are well positioned to capture significant market share as the demands come back up.

Let us now go through the performance of our Global Services business. In the Global Services business, the quarter 3 FY '24 revenues have increased by 6% year-on-year to INR 405 crores. For 9 months FY '24, revenue stands at INR 1,133 crores. And we have been selective in our order intake and execution which has helped us improve our Q3 FY '24 EBITDA to INR 22 crores and EBITDA margin to 5.4%. Favorable project mix and effective execution resulted in improved 9-month FY '24 EBITDA to INR 71 crores, and EBITDA margin to 6.3%.

Our project execution on the services business is on track. Amongst the India public projects, our BharatNet project in the state of Telangana is now 67% complete, the network modernization project is 71% complete, fiber rollout for public sector unit is 17% complete, and we have progressed well on a large data center project in large quarter, and the project is now 70% complete. On the India Private side, fiber rollout for large Indian telco is 35% complete in Phase III, driver rollout for another large Indian telco is 51% complete, fiber rollout for modern optical network for Indian private customer is 78% complete. I would also like to share with a lot of pride that your company was actively involved in the network build-out in Ayodhya and our team worked diligently day and night for 7 days to build a world-class infrastructure -- fiber infrastructure in Ayodhya, so we could have all the amazing videos and pictures over the last several days.

Shall now talk about the performance of STL Digital. In STL Digital, we are continuing the growth momentum. We continue to add new customers in the U.S. and India across technology and service verticals and observe a strong order flow during FY '24. We have more than 25 plus active customers at the end of quarter 3 FY '24. We have 46 plus active technology partners and have signed up strategic partnerships with SAP and Google to offer the solutions jointly to our customers. We expect the growth to be driven by a robust order book of more than INR 780 crores and the right team of leadership as well as consultants. In line with our expectations and despite a tough industry environment, we have achieved a Q3 FY '24 revenue at INR 80 crores and a 9-month FY '24 revenue of INR 220 crores. The EBITDA loss for Q3 FY '24 stands at INR 12 crores, and 9-month FY '24 EBITDA loss is at INR 66 crores. As a result of our efforts, EBITDA losses are now trending downwards on a Q-on-Q basis and expected to further reduce going ahead.

I shall now hand over to Tushar to take -- talk through the financials.

[Tushar Shroff, executive]

Thank you, Ankit. Good day, ladies and gentlemen. In line with our low guidance, the consolidated quarter 3 FY 2024 revenue stands at INR 1,322 crores. While 9 months FY '24 revenue stands at INR 4,338 crores, the drop in revenue is attributable to lower OFC volumes. The Q3 FY '24 EBITDA stands at INR 109 crores. The 9 months FY '24 EBITDA has dropped to INR 559 crores on account of lower revenue. Q3 FY '24 EBITDA margins are at 8.2% vis-a-vis FY -- 9 months FY '24 EBITDA margins are at 12.9%, which is stable as compared to previous year. On account of lower EBITDA and higher interest and depreciation costs, Q3 FY '24 profit after tax stands at INR 49 crores in terms of the losses.

Due to Q3 FY '24 PAT loss, the 9 months FY '24 PAT is reduced to INR 24 crores. In terms of new orders, the optical business, we continue to win multimillion-dollar orders for optical fiber cable in our focused markets. In the service business, we secured large fiber rollout orders from a private customer for 5G deployment in India. In light of lower demand from North America revenue mix has shifted to India in Q3 FY '24 versus FY '23, and India regions started to account for 40% of revenue during FY '23 -- Q3 FY '24. Our order book at the end of Q3 FY '24 is at INR 9,849 crores. Our order book is well diversified across all our customer segments and our businesses. We placed the average version of the reported numbers for your appraisal. Our net debt for the 9 months FY '24 has reduced by INR 174 crores from FY '23.

On Global Services, the business demerger status, we have filed the application with NCLT and awaiting the first hearing from NCLT, which is expected to get scheduled somewhere in the month of February. In summary, I would like to say that in optical network business, which will target to drive the cost leadership and pursue our ambition to be a global top 3 increased the sales in EMEA, India and APAC market to fill short-term volume gaps, increased optical connectivity growth and attach rate. In Global Services, we continue to focus on select projects to improve profitability and optimize net fund involvement. In digital business, we continue to grow our revenue and achieve the EBITDA breakeven in subsequent quarters. Our guidance on overall business, given the softness in demand in North America and Europe, we expect the volumes and revenue to be lower in FY '24 vis-a-vis FY '23. We continue to -- continue our significant focus in terms of a debt reduction going forward.

Now I hand over to Chetan for Q&A.

[Chetan Wani, executive]

Thank you, Tushar. Ladies and gentlemen, with this, we come to the end of our presentation, and we shall now move to the Q&A session. Please note that if you want to ask a question, you can click on the raise hand button and we shall take your questions one by one.

So we'll take the first question from Harshal Shah. Harshal, you can go on. Please repeat your question, Harshal. We'll take next question from Aditya Javeri. Aditya?

[Unknown Analyst]

I have a couple of questions. Firstly, a disappointing set of numbers from this quarter 3. But I want to specifically understand on the optical business. What are the gross margin in this optical business? Because you mentioned the volume decrease, but I see there is a lot of pricing pressure and the pricing trending towards downward. Can you throw some light here? That's my first question.

And the second question is I want to really understand on the long-term nature of our optical business. So we are in this industry for quite some time. And how can we increase value per cable, like suppose it is in the range of INR 1,000 to INR 1,200? How can we maximize that? And there is optical interconnect because I see you said that optical interconnect should be a bigger by bigger value addition. But what levers take us through that? And can you explain, throw some light on these 3 parts?

[Ankit Agarwal, executive]

Take the first one?

[Tushar Shroff, executive]

Yes. So let me take the first one with respect to the margin. Our optical business has a material contribution margin to the extent of almost 54%. So 54% is material contribution margin that we have in the business. This quarter, very specifically, the margins are lower, mainly on account of lower revenue which has resulted into the contribution loss for this particular quarter, has resulted in a lower margin profile.

[Unknown Analyst]

What is the gross margin in this quarter? Gross margin?

[Tushar Shroff, executive]

I'm talking about material contribution margin is about 54%.

[Unknown Analyst]

So what is the difference between material and gross?

[Tushar Shroff, executive]

So material contribution margin and gross margin includes the plant-related specific cost, gross margin when you talk about gross margin, it includes the plant specific cost. I'm talking about material margin because in this particular quarter, since the plant was not completely utilized. So margin comparable is -- it is not right to compare margin on quarter-on-quarter margins.

[Unknown Analyst]

Generally, in this business, we are having 54% to 55% gross margin, you say.

[Tushar Shroff, executive]

Material contribution margin. That is what I'm saying. That is revenue minus material cost.

[Ankit Agarwal, executive]

I think your question on cable. So one, I think I just want to highlight that we continue to see at an average, the realization still hold up positively for STL. So I think want to definitely highlight that, we have not seen any material reduction in realizations. This has both been a combination of multiple elements One is we continue to have strong relationships with our customers globally, even in some pockets, while volumes have come down, we do have multiyear contracts with several of our customers and hence, our realizations have been steady.

Second part is we continue to focus on more value-added fibers and cables. That's been part of our focus, which has continued and helps us keep the realizations up. Third is part of our focused strategy where we see minimal competition, which includes U.S. and Europe, where we see minimal competition from Chinese. That is also something that has helped us in terms of the realizations.

So I think these are -- this is how we see the market from the cable as well as from the interconnect, the intent very much is to continue to drive customization to create value-added solutions of cable and interconnect together. We would like to have seen probably faster growth in our interconnect, but the approval cycle has been longer than we expected. We are continuing to get approvals from our customers as we speak and into this quarter as well. So certainly, going into next year, we do expect the attach rate to start improving from next year onwards.

[Unknown Analyst]

So what are your debt targets for this year? I see that's a good improvement for 9 months, INR [ 184 crores. ] What are the targets?

[Tushar Shroff, executive]

So this quarter also, we are targeting debt to reduce by INR 50 crores to INR 75 crores. That's the target that we have -- we are working towards it.

[Unknown Analyst]

Okay. Okay. And sir, if I take some medium-term guidance from the optical business, what sort of revenue and the margin for next 2 to 3 years, you'll see in this business?

[Ankit Agarwal, executive]

We won't be giving any specific guidance at the moment. What we can definitely share is our capacity utilizations have been some 50% on a 9-month basis. So certainly, the focus is on -- in the short term to make sure that we cover that to other geographies. And it certainly has -- especially the U.S. demand comes back, the intent is certainly to improve our capacity utilizations from here. We've shared in the past our capacity is almost $50 million on fiber level and $42 million plus on cable level. So there's sufficient capacities that we've now invested and as those utilizations improve, you will see a meaningful improvement in topline, but more so on the bottom line basis.

[Chetan Wani, executive]

We take questions from our next caller. Nikhil, you may go ahead with your question, please. Nikhil Choudhary?

[Nikhil Choudhary, analyst]

Yes. So Tushar, what I want to understand is, particularly problem in North America, while we are seeing some volume and inventory buildup, which is impacting our growth, but industry decline is 10%. But for us, the decline is more than 50%, right, 9 months comparing to FY'23. That clearly shows that there is a significant market share loss is better than just industry decline, right? So just want to understand what's happening there and what are your expectation going in.

[Ankit Agarwal, executive]

No. Nikhil, good question. I think I'll put it in 2, 3 pockets. One is our own view is that the decline in North America was more aggressive than what CRU has shown, CRU is an external third-party house. Our own view is that certainly in the last 6 months, we have seen and experienced the market being a steeper decline than that. As we've been sharing consistently in our conversations, and analyst calls that there has been inventory at 3 levels in the -- at the customer with the distributors as well as with the manufacturers like ourselves. .

So we've been tracking those inventory levels. We definitely are confident in saying those inventory levels have been coming down meaningfully, but probably not as fast as we would have liked. So that's where we believe that probably it will take another 4 to 6 months for those -- that inventory to come back to normalized levels. But we do believe in that the Q3 was probably the bottom from our experience of sales into the market and particularly in North America. And volume should improve in Q4 and going forward. We are watching every quarter, obviously, very closely. But given current visibility and also our understanding from our own conversations with customers, that probably it will take 4 to 6 months for all of that inventory to normalize and the volumes coming back in a good way.

[Nikhil Choudhary, analyst]

Sure. Just a couple of follow-ups. First, it's even if there was a material decline, 50% is -- I guess, this my estimate that should be higher than the industry, right? So still other than just industry to highlight...

[Tushar Shroff, executive]

Nikhil, we are not able to hear you properly, Nikhil. There is a lot echo behind.

[Nikhil Choudhary, analyst]

So again, just a couple of color. First is even though there was a material industry decline, 50% I think still significant. So anything one-off here or it was all due to industry decline?

[Ankit Agarwal, executive]

So I think the main factor is definitely the inventory with the customers. We've also shared the -- we have also seen that the interest rates have continued to be on the higher side. That's also something that we foresee as that stabilizes and starts to come down that should also lead to some of the projects which are on the edge, some of those should start coming through in terms of fiber deployment. From our own perspective, we do both have the facility in U.S., which is now ready and functioning. We also have our operations in India. So we are very well set up in terms of our capacity product portfolio for the North America market. We continue to engage with our customers, some of whom we've announced, we're making -- we'll be making some more announcements. On top of this, we are also looking to grow our interconnect business in North America. So that will also be something that we focus, especially as we get into next year.

[Nikhil Choudhary, analyst]

Just last one, given you highlighted that we have leased a bottom in terms of overall pain in optical fiber. Is it fair to assume on an absolute level, we have leased [indiscernible] revenue? And from a year on, Q-on-Q basis, we should see some improvement, some part of the perspective.

[Ankit Agarwal, executive]

Yes. So I think that's what I shared a little bit earlier. We do believe that certainly, from a volume perspective, that it should improve quarter-on-quarter. I don't think it will be a significant improvement. I think as I said, it will take time for the inventories in North America to reduce and our sales to improve. But certainly, directionally, I would agree with what you've said.

[Tushar Shroff, executive]

So Nikhil, one good thing is that -- yes. So Nikhil, one good thing that we have seen is that now customers have started engaging in terms of their requirement. They have started floating the RFP. We started participating in some of the RFPs. And that is a positive sign. I think that is what we believe that is...

[Ankit Agarwal, executive]

For North America.

[Tushar Shroff, executive]

Especially in North America. So probably in next couple of quarters, probably the -- all this RFP will get converted into the orders. That is what we believe.

[Chetan Wani, executive]

We will take question from Sohan Joshi, our next participant. Sohan, please go ahead.

[Unknown Analyst]

Ankit, in the India Mobile Congress, you said that there is a lot of opportunities in enterprise 5G. So are we in talks with any of the corporates for the 5G deployment, data centers or say, driver fiberization? I mean like to increase more focus on India since the North America business is not picking up? Or is there any such plans?

[Ankit Agarwal, executive]

Yes. So good question. I think there's 2, 3 parts to it. We do have a very strong fiber as well as copper connectivity portfolio. So to that extent, we have our own brand called [ Estela, ] which we have launched and looking to sell that to enterprises, both in India as well as Middle East, some of that business is starting to come in.

We're also seeing other opportunities in sectors like oil and gas, et cetera, which are low-volume but high-value opportunities. In India as well, as you mentioned, especially on the data center side, there is interesting opportunities where there's a significant amount of fiber optics required within data center as well as interconnect between data centers. So those are some of the conversations ongoing in terms of these -- again, these are typically lower volumes, but higher value and good margin opportunities. So those are things that we're evaluating in India as well as on, for example, on the fixed wireless side, where some of the operators are deploying even there, there will be some amount of cabling required, and we are in some conversations with the telcom operators for some solutions linked to fixed wireless.

[Unknown Analyst]

But then we are not planning to enter into the open end segment, right? We are strictly other optical fibers only?

[Ankit Agarwal, executive]

No, no, absolutely. Just to reiterate, we have -- we were in that -- we had explored that business. We had invested in it. We have clearly exited that. We are very, very focused. Our core being only optical cable connectivity. We have a services business, which does the deployment system integration, and we have a digital business. These are our 3 very focused businesses.

[Unknown Analyst]

Okay. And just 2 more questions, if may I. There were some connection issues from one of the receivables in Maharashtra. I think it was put up on the announcements. So is there any provision made or will it be made in the coming quarters or it's not required?

[Tushar Shroff, executive]

So I think with respect to -- see, this particular Maharashtra project, especially with one of our customers. It's a matter presently subdued, so I will not be able to comment very specifically on the provision related to this particular project, but the company has a robust provisioning policy with respect to unbilled revenue as well as on outstanding data that we have. That is the normal -- the economic credit loss kind of a provision policy that we have at the company level.

[Unknown Analyst]

Okay. But the talks are going on for the collections, right? I mean still, there are no signs that we may require a provision on it.

[Tushar Shroff, executive]

No, so we have a very strong case. That's why we have gone ahead with the litigation in this particular matter.

[Ankit Agarwal, executive]

In arbitration.

[Tushar Shroff, executive]

In arbitration.

[Unknown Analyst]

Okay. And any impact on our container cost due to ongoing Red Sea issues or we are not impacted at all?

[Ankit Agarwal, executive]

We've not seen anything significant currently. We have seen slight delays in our shipments to Europe and slight price increases. But I think it's still -- from a value perspective, it's not been significant. As we've done in the past, if this does sustain, then we would have conversations with our customers as well to see what portion of the cost we could share with them. It's not meaningful at this stage.

[Unknown Analyst]

Okay. And when can we expect the right issue? I mean, will it be after demerger or we may further delayed when the demand starts picking up?

[Tushar Shroff, executive]

I think we are exploring the various fundraise option at this point in time. At appropriate time, when we see a larger engagement of investors, I think that is a point in time will get into the market and launch the fund raise.

[Chetan Wani, executive]

We'll take next question from Saket. Saket, please go on with your questions.

[Unknown Analyst]

Sir, just coming to the point which Tushar sir just mentioned that on better engagement with investors and at an appropriate time, so sir, when we are seeing that at one side, our core business is not performing because of the reasons as mentioned. And on the other side, we are trying to develop a business in the digital part. So it would not be a prudent exercise on the part of the promoters to infuse fund at this level to put the confidence on track from the promoter instead rather than waiting for an opportune time and then engaging your investors. What's the stake -- what's the take on of the promoter currently and since Ankit Ji you are here, in terms of infusing capital at this appropriate time since the valuations are also low, if I may call so, but what's the understanding currently, sir?

[Ankit Agarwal, executive]

See, Again, I won't be able to comment specifically on a rights issue. But as Tushar mentioned, we're definitely exploring all the options we have taken enabling resolution up to INR 1,000 crores from our Board. And we are evaluating the options. It definitely very clear on growing the business, taking the business forward. I think also, you commented on digital, as we've been discussing, we've been looking at reducing the losses in that business quarter-on-quarter, which we have demonstrated. So I think that position -- that business unit will also be well placed for growth going into next year. I think on overall fundraises, I would still say that we are exploring all the options. Certainly, as the time goes, we will share the update and our intent definitely is to scale up the business, and we continue to be very bullish on the business.

[Unknown Analyst]

Sir, on the U.S. part, particularly, I think so you mentioned that our utilization levels have been on an overall basis at 50% on a total basis. So I think so we have done a new capacity addition for the U.S. factory. What are the current utilization? And sir, what's the order booking, especially for the new facility which we have created.

[Ankit Agarwal, executive]

Saket, for competitive reasons, I won't be able to give utilization at our factory level. What I can share is that it's truly a world-class factory that's come up. We've had several government officials, several customers visit the facility, and it has -- feedback has been very, very positive. And it is also really helping us grow the brand and positioning of STL. We're also mindful that there are large government projects like BEAD, which are coming up, and that is placing the company very well for these large -- to be qualified to supply for such large projects. So I think we are now well placed to scale up this factory within the next few months. And certainly, as these large projects come up, we are very well pleased to set up -- very well set up to supply from the factory locally in North America with very quick lead times and turnaround types.

[Unknown Analyst]

So this is $100 million investment we have done?

[Ankit Agarwal, executive]

U.S. Saket.

[Tushar Shroff, executive]

It is about $40 million to $50 million in terms of overall investment in U.S.

[Unknown Analyst]

Okay. Sir, debt number Tushar Ji, you told that the debt has been reduced for 9 months. Can you give me the net debt number and the split up between long-term and short-term debt?

[Tushar Shroff, executive]

Yes. Long-term debt is about INR 1,300 crores. And the net debt is INR 2,947 crores.

[Unknown Analyst]

Okay. And we are about to close at INR 2,900 lower than that for the current fiscal. This is what our target is, INR 50 crore deduction.

[Tushar Shroff, executive]

Yes, INR 50 crore to INR 75 crores that we are targeting for this quarter.

[Unknown Analyst]

And one more small point is, when you mentioned about interconnect growth going ahead, what factors are you taking into account that will play out in the larger percentage of interconnect because this interconnect story was -- we are harping on it for more than one year. So what is the reason why anticipated growth [Foreign Language].

[Ankit Agarwal, executive]

So thank you, Saket. I'm guilty of harping on it for a year. The reason is that essentially, we have already great relationships with Tier 1 telecom operators around the world. And the whole intent was along with selling cables, the same customers buy large volumes of these interconnect, especially as you go more closer fiber-to-the-home connectivity, then you need more of these interconnect solutions. So we were very clear that we had the relationships the customers were spending, probably what we didn't factor was the very long approval cycle that happens. These are very, very technical, very, very customized solutions where multiple stakeholders at the customers and installers have to approve the product.

[Foreign Language] to get the approval process, we are still in multiple approval processes with various customers. And then as those RFQ cycles come up for the interconnect, that's where we believe that we will be a much better place now. A lot of product development has happened. A lot of good team has come in place. We recently also announced David has joined us as a leader for this business who comes from CommScope. So good team is there, good product is there. That gives me the confidence that going forward, we'll be able to improve this business.

[Unknown Analyst]

Right. But any number which you want when an interconnect contribution to the total optical business as for the 9 months? And what are you projecting going ahead? And for Tushar sir, we had a foreign arbitration case also wherein we lost. So what's the status on the same? I missed the amount. It was a substantial one we lost at Singapore forum. So these 2 points, if you could answer.

[Tushar Shroff, executive]

Yes. So I think it was about a minimum -- so this is one of the supplier to us and in past, we had some kind of a volume commitment from that particular supplier. Due to certain reasons, we have not been -- we didn't pick up that kind of material and that was a reason that entire that was in arbitration. These are not the current contracts, these are the past contracts. And for those past contracts, the recently the arbitration award was against us that we have to fulfill the minimum commitment requirement. This was mainly during the COVID time that the entire arrangement was. And because of the COVID time, we couldn't pick up the material, and that was one of the reasons that we got into its liability. And we challenged this particular order on certain grounds in the Supreme Court also and -- sorry, at the High Court, but unfortunately, the decision has not come in our favor.

We had adequately provided for this entire loss in our financials impact of this in our financials. There will be a cash flow impact because there will be some kind of a payment structure that we have agreed with this particular vendor. And the gradually, the payment will have to be made to this particular vendor based on the arbitration award that we have.

[Unknown Analyst]

Right. And value of interconnect number, you can give, sir, for 9 months? How much is the revenue contribution?

[Ankit Agarwal, executive]

Absolute value?

[Tushar Shroff, executive]

Yes.

[Ankit Agarwal, executive]

No, so look, I think directionally, what we can share is that the intent has always been to grow this interconnect trade while we had 14% attach rate currently. Clearly, the intent is when we look at our global peers and the customer demand as well, the intent is definitely to scale this up. We won't be able to give a forecast at this point. But certainly, as we get into our business planning for next year and we look at next 2 to 3 years out, the intent is definitely to scale this up.

[Unknown Analyst]

Percentage, can you give, sir, for 9 months? What percentage of the total revenue would be from the interconnect, a ballpark number?

[Ankit Agarwal, executive]

So that is the attach rate. So we are saying 14% of interconnect to our cable sales.

[Unknown Analyst]

Right, sir. And lastly, sir, on the Jio, this air fiber issue, sir, now broadband being available also on this -- on the Wi-Fi -- so what kind of threat do you think to the structure for OFC can be experienced going ahead? I think so one more competitor, Tejas has developed, I think so one of the AI software where we can use -- we can view videos in mobile without the Internet. There were some sort of story on that front also. So what kind of threat for OFC as a product, do you find going ahead with WiFi and these technologies coming into play with more and more focus. And although that you have been mentioning that $1.5 billion to be spent by the telcos on fiberization. So if you could give this number for the 9 months and what is the expected spend by them and also the percentage of fiberization.

[Ankit Agarwal, executive]

It's a lot of questions. So I'll take some of them. One is, I think, as we said, at a market level, we are probably around 37% to 40% tower fiberization today. That has to go to 70% to 80% at least for good 5G network coverage PAN India. So I think that's the work over the next few years, which the operators are working on. I think to your point on fixed wireless, which particularly one large operator in India is looking at. I don't see that as a threat. I think we look at this technology, we've been studying it. In principle, this is really where you're not able to get right away and other challenges on the last 100 meters or so. And this is also getting deployed more in kind of Tier 3, Tier 4, where you see the demand pick up. Most of the telecom operators see that you can get much better ARPU with fiber-to-the-home services as well as bundling that and so the intent continues to be for operators to balance, as much as possible, take the fiber to the home and provide direct fiber service.

And then the backup alternate is through fixed wireless. There are multiple bandwidth issues, latency issues, uplink, downlink issues with fixed wireless. And we don't see that as a threat. Anyways, up to the last 100 meters, we would need a very, very large and intensive fiber backbone. So from our business perspective, we don't see it as a threat to fiber demand. In fact, overall characterization is a positive for us because it will mean more dense networks, both on long distance and ultimately within the metros. So we don't -- we see this as a positive development. And overall, in terms of connectivity, as we shared in one of our slides as well. Fiber continues to be the best medium by far compared to copper, compared to satellite, compared to fixed wireless. And that gives us a lot of positivity and bullishness in terms of demand for fiber going forward.

[Unknown Analyst]

Sir, on the CapEx part, you want to elaborate on $1.5 billion figure being mentioned in your...

[Ankit Agarwal, executive]

We don't have -- that is a number we have quoted from the research reports, but certainly, we have seen that there continues to be investments in fiber networks by the telecom operators in India. On top of that, we will have BharatNet networks getting deployed at large scale. So we continue to be quite bullish on fiber demand in India going forward.

[Unknown Analyst]

Yes, thank you for answering, sir. And for the employee cost also please show some rationale, why we have these -- why the employee cost as a percentage of sales is higher, mainly due to the utilization levels being lower, and this will get offset once the utilizing picks ups, sir. And I think so we also heard about a lot of layoffs also, sir, in our organization. So if you could...

[Chetan Wani, executive]

Saket, in the interest of time, I think we'll just look at addressing one question that you asked about employee costs and then we'll move to the next participant.

[Tushar Shroff, executive]

Yes. Saket, you are right. I think that is a one-off cost. We have paid some ex gratia payment, which is to the tune of INR 12 crores to INR 13 crores, which is accounted in this particular financial period. So there's a one-off cost, which is an excluding gratia payment of INR 12 crores, INR 13 crores.

[Chetan Wani, executive]

We'll take questions from next participant. Sunny Gosar, you may please go ahead with your question.

[Sunny Gosar, analyst]

So just continuing on the -- basically the last question of the previous participant. So you mentioned that there's an ex gratia cost of about INR 12 crores to INR 13 crores which has been paid out. So except that our employee cost comes to around about INR 240-odd crores for the quarter. So I assume that there are some basically rationalization in our employee strength, which has been undertaken. So what should be a revised base basically post this entire exercise in terms of the quarterly employee cost? And is there any other cost item that we are basically rationalizing? So overall, on a quarterly basis, what is the cost savings that we can expect over the coming quarters?

[Tushar Shroff, executive]

So Sunny, thanks for this question. I think, as I said that there is a one-off cost, which is provided for in this particular quarter, which is related to ex gratia payment. I think structurally, what we are looking at is that since the capacity utilizations are at lower level. We are also looking at each and every cost, whether it's fixed cost or its employee cost or any kind of admin expenses, correct, which is controllable in the nature. We are trying to see that all of those costs are rightfully being rationalized. We are also looking at all the discretionary spend in terms of marketing, business development, wherever it is required to be rationalized, and that's the way we have been looking at. So I think if you see the structure also, if you take out this one-off cost, you will see that the other expenses and the employee cost on a quarter-on-quarter basis has reduced to the meaningful level. I think -- and we continue to pursue that kind of a path in terms of managing the cost efficiently so that we remain profitable going forward.

[Sunny Gosar, analyst]

Sure. That's helpful. So basically, just to get some quantitative understanding or basically some reference points. So on a -- so excluding our cost of goods sold, our overall quarterly cost between employees and other expenses comes to about INR 580 crores, INR 590 crores for this quarter. So any percentage or any reference point in terms of how much can this come down in terms of overall fixed cost level, that will be very helpful to get some context.

[Tushar Shroff, executive]

Yes. So I think as a journey, I think because the manpower cost and other expenses, is also a function -- a lot of expenses, which is a function of the revenue, correct? So as the revenue goes up, there are certain expenses like freight and other things also which is linked to the other expenses also starts to go up. So from that perspective, I mean, when you look at other expenses, it has both the components. There's a component of fixed cost also and it has a component of variable costs also. But structurally, we are targeting that to INR 100 crores to INR 150 crores of cost rationalization over a period of time in the next 3 to 4 quarters, that is what we are targeting for.

And I must -- so Sunny, from our perspective, I think if you see that the employee cost has gone up mainly from the fact that there is a substantial -- I mean the way we have been growing this digital business the lot of ramp-up has happened in the digital business, which is contributing to the increase in the employee cost. Otherwise, if you see that the [ ONB ] business or a [ GSB ] business, both are at a sustainable level in terms of employee expenses. Rather it has reduced, not increase, for sure.

[Sunny Gosar, analyst]

Sure. That's quite helpful. In terms of -- so basically, the digital business. So we are currently at about like last quarter, we were at INR 78 crores of quarterly revenue, this quarter has been about INR 80 crores of quarterly revenue. So like going forward, like how should we look at this business in terms of growth? We have a INR 750 crore order book, but that obviously is over a time period. So like basically, if I have to project, say, next 2 years or 3 years, and I'm not looking for any immediate guidance as such, but like short-term guidance, but how should we look at this business in terms of the quantum of revenue, like can this be like a $100 million revenue over the next 2 to 3 years? And at some stable state, what is the kind of margins that this business can generate?

[Tushar Shroff, executive]

Yes. So I think specifically on this particular quarter and -- with respect to the revenue. This particular quarter being a year-end for most of the U.S. customers. And there is always -- this particular quarter remains done not only for STL, but probably for the industry as well. So from that perspective, probably we have not seen a very significant order book building up for the digital business in this particular quarter. However, we remain bullish in terms of building up the customer base, especially in the U.S. market. The way we have been trying to grow and the way the team has been built up. We see that you are absolutely right. We are targeting that in the next 2 to 3 years, we should be able to make this particular business to the extent of $100 million with a reasonable EBITDA margin of 10% to 15% because the initial -- the first INR 30 crores to -- INR 350 crores to INR 400 crores would be about breakeven level, and that's the incremental revenue, which should start to reflect into EBITDA margin.

[Chetan Wani, executive]

Sunny, I'll move to another participant so that we can cover maximum questions. Thank you for your questions. I'll move to Vaibhav Jain. Vaibhav, your line is open, you can ask your question. Okay. We -- next to -- we move to the next participant. Ravi? Ravi B.

[Unknown Analyst]

Sir, I have 2 -- few questions. First can you give me some update on the...

[Chetan Wani, executive]

Ravi, we cannot hear you.

[Unknown Analyst]

Is it audible now?

[Unknown Executive]

Yes.

[Unknown Analyst]

Can you please provide me with update on the T-Fiber and the U.K. Services, there's really no movement there in the progress? And the other thing is like, based on all these conversations, what I understand is like even in this calendar year also, we don't see really any growth in our revenues based on all the discussions right now. So I think solely the 2 important things, which could improve the BEAD project and the BharatNet project, which anyway would take its own time. Please correct my understanding because each project will take [indiscernible] and even BharatNet project even that to [indiscernible] probably be at the end of the year, if not earliest. Is my understanding right, sir?

[Ankit Agarwal, executive]

So Ravi, good questions. I think I'll take a couple of them. One is, on the positive side, one BEAD is fully approved by [ Partisan ]. There has been allocation to the states. And there's Phase I of immediately 20% of overall $42 billion getting allocated. So our own view is from a calendar year, 2024 basis, probably around quarter 3 of calendar year is where we expect people to start getting some of the projects, the states and then on to some of our potential customers. BharatNet, as we said, the phase III RFP is now out where it is up for industry consultation.

So I think it will take probably a quarter or 2 for a final release of an award. But this is broadly the time frame of these 2 very, very important projects. But at least from a STL perspective, we're not complete -- we are not dependent on these projects. These would be further volume upside for the company. We are already seeing, as we mentioned, inventory reductions from our customers. And as those come down, volumes come back, and probably positive triggers on interest rates, et cetera, coming down. We do expect the volumes to come back for STL.

Coming to T-Fiber and the U.K. services. On U.K., we had talked about getting to profitability in our last call. Happy to share that we have taken good actions in terms of cost reductions, admin and other travel and all of those costs. So we do believe we are on path to exit the current quarter with at least getting to breakeven. It has taken us more time than we would like, but we do believe that we have taken some of the actions and those costs should help us come to EBITDA breakeven towards the end of the quarter. On T-fiber, we are actively both looking at improving our execution. There have been some delays due to forest clearances in particular, which is a responsibility of the state government. But we are in conversations to both look at how do we get our cash release as well as for whatever we have executed to remove -- to complete the milestones and improve our execution percentage.

[Chetan Wani, executive]

Thanks, Ravi, sorry to interrupt, and we are mindful of the scheduled time. So we'll now hand -- we'll come to the end of the question and answer session with this. I now hand it over back to Ankit for giving the closing remarks. Ankit.

[Ankit Agarwal, executive]

Thank you. Thank you, Chetan. I'd like to thank everyone for attending this call showing interest in the company. Despite the challenging market environment that we spoke about, we have managed to reduce our debt by INR 174 crores, and we are focused on reducing it further. We continue to aggressively drive business fundamentals of deep customer engagement, product innovation and sustainability. We're using this period to drive all factors in our control, becoming Lean, agile and as we discussed, established industry-leading cost model. While this downturn is temporary, our customer centricity and the capabilities we have built around product design, quality and manufacturing presence globally, will reap us benefits well into the future. We are well-positioned to execute and deliver robust results as we see the demand normalize.

I hope you were able to address and clarify all your queries and comments. For any further questions and discussions, feel free to reach out to the Investor Relations team, which includes myself and Tushar. We look forward to continuing our conversations with you in the future. And again, wish you a very, very happy Republic Day. Thank you.

[Chetan Wani, executive]

With this we come to the end of the call. Thank you, everyone.