Sterlite Technologies Ltd

NSE:STLTECH

Earnings Call Transcript 2022-Q4

[Pankaj Dhawan, executive]

Ladies and gentlemen, good day, and welcome to the STL Quarter 4 and Full Year FY '22 Earnings Conference Call. I'm Pankaj Dhawan, Head of Investor Relations at STL.

To take us through the quarter 4 and full year FY '22 results and to answer your queries, we have Mr. Ankit Agarwal, Managing Director, STL; and Mr. Mihir Modi, CFO, STL. [Operator Instructions] Please note that this call is being recorded. You can also download a copy of the presentation from our website at stl.tech.

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

[Ankit Agarwal, executive]

Thank you, Pankaj. Good day to everyone. Thank you for joining our quarter 4 FY '22 earnings conference call. At a macro level, the overall digital infrastructure is very well poised for rapid and sustained growth. We see 4 key themes playing out. First, the network creators and governments continue to invest heavily in the digital infrastructure, and we can see various instances for the same.

Just to quote some of them, as you can see on the slide. For example, AT&T is increasing its CapEx from about $16 billion to $20 billion in 2022. FiberCop, which is out of Italy, is looking to invest in fiber-to-the-home coverage of 60% of Italy by 2026. Lumen, Meta, Airtel and so on, as you can see, are all investing multibillion dollars across, whether it's on telecom operator side or on the data center side, to build out massive networks for their future requirements.

On the government side also, we see various incentives and programs that have been announced. The biggest 1 we clearly see globally is the U.S. government, as part of the infrastructure build, is committed to $65 billion in investment in broadband infrastructure. Similarly, the Italian government has also looked at $2 billion to provide 5G and connectivity, which is now approved and will go into the rollout.

Also, another example is Germany, where historically they've had largely copper networks across the board, are now investing clearly in switching from copper to fiber at a massive speed and scale. And the government is continuing to invest about $12 billion -- EUR 12 billion to provide gigabit cable -- capable fiber connectivity.

Next slide. Second, we see that these CapEx investments are powering deployment of 5G, FTTx, data centers and Open RAN. It's extremely important to understand that all of these things are happening in parallel. 5G is clearly the fastest-growing technology in the world today. Operators will invest more than $500 billion in 5G from 2022 to 2025. The number of subscribers is projected to grow from 660 million currently to about 4.4 billion by 2027.

Leading the 5G deployments globally is China, which plans to triple its base stations from 1.4 million to 3.7 million by 2025. I do want to call out here that historically, in the last 5 to 10 years, every single projection by the Chinese government has not only been met, but by (sic) [ been ] exceeded before time.

FTTx is clearly becoming all pervasive. In Europe, Italian broadband operators Open Fiber, plans to connect 24 million households, up from 13 million households currently. In the U.S., Altice is planning to spend $1.8 billion of CapEx for fiber-to-the-home. And another example, a customer of ours, CityFiber, is rolling out and is on track to reach 8 million homes in the U.K. by 2025, which is just 3 to 4 years away.

The data center CapEx is also set to grow by 10% over the next 5 years to $350 billion. Google announced $9.5 billion investment in building offices and data centers in the current year in FY 2022. Lastly, Open RAN is moving from pilot phase to initial deployments globally in 2022 and large-scale deployments look likely by next year.

In our own conversations with telecom operators at Mobile World Congress, it was no longer a concept. It was very clear with our engagement that operators do believe into this technology, have bought into this and are now looking at how to roll this out globally at a certain speed and cost.

While Vodafone's 5G Open RAN site has gone live in U.K., Telefónica is scaling Open RAN in more than 800 sites. These are many examples where Open RAN, we believe, will start taking center stage towards the end of this year and into next year. Next slide.

The third theme is that in terms of -- we see playing out large-scale fiber deployments globally. In the U.K., for example, Openreach, an important customer of ours, is planning to reach 25 million homes by 2026. Netomnia, another important customer of ours, is planning to pass 1 million homes by 2023. That's just next year. And Hyperoptic is planning to target 3 million homes by 2024. Many such examples where clearly a massive amount of fiber in developed countries.

Another example in Europe, we talked about the government investing in Germany, but Deutsche Telekom is investing to touch 2 million homes by 2022. Open Fiber is planning to touch 24 million homes by 2031. A very, very important example as well for us is North America. AT&T plans to deploy FTTP to additional 30 million homes by 2025.

In India, in our home market, apart from BharatNet, private telecom operators expect to deploy 200,000 cable kilometers of network in FY '23 and going forward for the fiber backbone.

Next slide. I think this is a very important chart in terms of forecast from CRU, which is the leading provider of the forecast and research in our sector. Clearly, as you can see on the chart, 2022, we were at about 554 (sic) [ 544 ] fiber kilometers -- million fiber kilometers of optical fiber cables, and that will continue to grow at least at 5% rate, arguably stronger than that, into the next 4 to 5 years. And this is clearly on the back of all those demand requirements that we had shared earlier.

In terms of CRU, the global OFC demand is supposed to expect to reach 648 million, so close to 650 million by 2026. My own estimate and our own view is that probably be even stronger than that, given the kind of focus the government and other operators are playing in.

STL's focus markets of North America and Europe are clearly high potential, fast growing and also have high realizations. This is an important element also, again looking at CRU data, which is industry-wide, very important to see that as you look at the pricing, we've all gone through this over 2018 into 2019 and 2020. We really believe 2021 and now clearly into 2022, all these tailwinds of the market demand are playing out and starting to look at the trends in terms of prices starting to go up.

If you clearly see from 2020 on to '21 and now into 2022, between about 10% to 20% of price increases are what we expect through the course of the current year across again, as you see in terms of our core markets of North America, Europe, and APAC non China, where we are currently focused on markets like India and Australia.

So based on all these 4 themes that we have just discussed, we confidently reiterate that we're in a multiyear network build cycle across the globe. This is clearly the best network build cycle I have witnessed. And as a company, we're extremely excited with the potential that this presents to us. The 3 investment cycles of 5G, FTTx and hyperscale build-out have coincided, and we expect that these will continue for the next 7- to 10-year time frame.

With these favorable industry tailwinds our growth strategy is on track. In the following section, we shall talk about this in more detail. FY '22 was a pivotal year in terms of global expansion, product development and getting tremendous and professional leadership on board. Before we deep dive into the strategy, I want to take a moment to look at the year gone by and summarize the progress we have made during the year.

On the financial front, I'm proud to share that we have achieved our highest ever revenue of INR 5,700 plus crores, a growth of 19% year-on-year, and yet we are well poised to grow further in FY '23. We have a stable order book at north of INR 11,500 crores, out of which U.K. services, in particular, we're proud to share, is now stands at INR 1,000 crores.

We have crossed many strategic milestones we have outlined for ourselves. We have increased our OFC, our cable capacity from 18 million to 33 million. We have established a foothold in Americas and proud to share that now we have 6% market share of Americas in a very, very short period of time.

We have also clearly established ourselves in the U.K. for the services business by acquiring and integrating Clearcomm, which is an acquisition we had done earlier. Clearly, we have delivered cutting-edge solutions in FY '22. We launched Garuda, our 5G small cell and programmable fiber-to-the-x solution, providing 10 gig speed. All of these are currently going field trials, not only in India but with our global customers. We continue to develop our intellectual property and extremely proud to share as an Indian company, we have more than 733 patents, which are global patents and will serve us very well for the future.

I'm also proud to inform you that Gartner has recognized STL as one of the key players in the 5G small cell market, which is not a small feat for us. And last but not the least, we have moved towards world-class standards. I'm very proud to share that we are now certified Great Place to Work for third time in a row, and we have really committed ourselves to net zero by 2030.

We have also onboarded world-class leadership to further build and create a global business. Looking at the key growth levers as we have shared in the past, we could not have achieved this 19% growth in FY '22 with a clearer focus on these 3 growth levers. Just to reiterate them: firstly grow the optical business; second, globalize the system integration; and third, build a strong wireless solutions business.

We shall talk about our progress in each of these in detail in the subsequent slides. As you can see from the chart here, we have consistently gained our market share across all of our focus markets. In the 9 months of FY '22, we have reached 10% market share globally, minus China, up from 8% in FY '21.

In Europe, we have reached 25% market share from 16% in FY '21. This is something we're really proud of, and I want to reiterate. In terms of Europe, which we have clearly laid out as a strategy of focus, we're now at 1/4 of the market in terms of cable. And finally, in North America and Latin America combined, we have now reached 6% market share from just 2% a year ago.

Clearly, with this market opportunity and the potential that lies for us, our target and our vision is to be a top 3 global player in the near term and achieve this global leadership. In terms of establishing our foothold in U.S. and scaling up the optical interconnect facility, we have now established a foothold in the U.S. and now are strengthening our presence by putting up a world-class manufacturing facility for our optical fiber cables.

As you can see on the photo on the left, that's the current facility. We're in final stages of setting this up and running this. So very, very excited as that facility comes onstream. This facility will go onstream in Q3 FY '23. Also, we have established our facility in India for optical interconnect with more than 300 resources. And a large portion of those are women, which again, I'm very proud of to share with you.

We have also increased our optical interconnect attach rate from 3% in FY '21 to 11% in FY '22. For some of you who may not be familiar with this concept of attach rate. It is essentially for every dollar of cable that you sell, how many cents or dollars can you sell or are selling of the optical interconnect. And that is the attach rate.

As we ended FY '22, we were at 11%, which is a very strong growth from the 3%. This was at the back of our Optotec acquisition that we had done. I'm proud to share that we are now projecting it to go to 20% by FY '23, as we had also been guiding in the past. And our vision continues to be at 100%, which is for every dollar of cable we sell, we will sell $1 of interconnect. And that's clearly a task cut out for us in the next few years.

Coming to the second growth lever of globalizing system integration. In the U.K., we expanded our partnership with Netomnia. As part of this partnership, we will provide integrated network deployment services along with our optical solutions. We will enable Netomnia to increase home pass speed and reduce the total cost of ownership. This partnership validates our strategy of providing end-to-end solutions to our customers.

Overall, in terms of our services business in the U.K., we have an open order book of approximately INR 1,000 crores. In the U.K. market, we have ramped up our talent and execution to convert order book to revenue. The market is faced with a tremendous shortage of trained resources and currently, it is the only constraint for network deployment in the U.K.

I'm happy to share that we have multiple customers looking at us as a partner for their multiyear build-out. And we are actively looking at how do we augment our resources and bring in additional resources to the U.K. to support this build-out. We are building a unique competitive advantage by training resources at our own academy, STL Academy, providing them with certification in the areas of project management, installation, testing and quality assurance, and keeping that deployment team ready for U.K. deployment.

A second batch of 100 trained telecom engineers will be deployed in this quarter, quarter 1 FY '23. We aim to increase our U.K. revenue contribution to 25% of global business services by FY '24. In the wireless business, our product development is on track. On the back of efforts by engineers, we have over 120 patents on our name now and again, something to be very proud of as an Indian company to build this kind of IP in the wireless and access space.

We now have 8 products that have the general availability milestone, which is a critical milestone to now bring these products into the market and large-scale requirements. We have also announced general availability of Garuda, a 5G small cell, programmable FTTx, which will provide 10 gig speeds and WiFi 6.

We are targeting general availability of our very important 5G radio unit and Radio intelligent controller, the RIC, and therefore full portfolio of our offerings in the current financial year. In terms of customer engagements on the wireless side, as I shared, 1 example being the Mobile World Congress, we continue to engage with our customers globally. We have secured more than 10 engagements currently, which are anywhere between early stage to POCs.

We are also very happy to report that we have got very good response at the Mobile World Congress, where we showcased all of our 5G solutions, and customers are actively looking at how to take these discussions forward. In line with our industry, we aim to acquire customers and build order book for this business in FY '23, and that we believe will start generating meaningful revenue in FY '24.

So to just summarize the business priorities again. I really want to reiterate that our core is the optical business, and we are very, very clear we want to be a global leader in this space. In the Global Services business, we want to focus on profitable segments, both in India and the U.K., and we want to be very straightforward here. We are not chasing revenue out here for sake of it, we're looking at profitable businesses both in U.K. and in India to grow this forward.

And lastly, on the wireless business, we believe that we have built some very positive products. We have started to get some customer traction. We'll continue to build out our product portfolio and in this year, start building some of our order book. We shall now discuss the financials for quarter 4 FY '22, and the outlook for FY '23. I would now like to hand over to Mihir, who will discuss the financials.

[Mihir Modi, executive]

Thanks, Ankit. Hello, everybody. A very good day to all of you. Let me dive straight into the financials funnel. Right at the top is the order book. Our order book at the end of quarter 4 of FY '22 stands at INR 11,639 crore and the spread between FY '23 and '24 plus is about INR 5,000 crore in FY '23 and INR 6,600 crore in '24 and beyond.

I think it's important that we are moving into the right customer segments that we want across all of our businesses for the order book. We also have a significant O&M order book which will start to yield revenues from FY '23 onwards.

Moving down the order in the funnel, coming to revenue. I think our revenue mix is also shifting to the right customer segments that we are deliberately focusing on, and geographies of our choice. If you notice, we -- 55% of our revenues in FY '22 are from EMEA and America, that's -- and these are the key markets that we are focusing on. Of course, India remains a large chunk as well.

So we are happy with the shape that the mix is taking. In terms of notable wins this quarter, we've already talked about Netomnia and PGCIL orders. In addition to that, this quarter we've also won multimillion dollars' worth of multiyear fiber cable contracts with the leading Italian telco. We've also won new cable orders in the North American market. So overall, good progress this year and continuing to win orders in the areas, geographies, segments that we desire.

Looking at our project execution, pretty much on track. Amongst the India public projects, T-Fibre is 50% complete, including all the packages. PGCIL is close to 50%, 47% complete. On the India private side, the fiber rollout for a large Indian telco is 88% complete for its Phase I. And of course, we have the second phase, which is yet to start in -- for that client.

We are also starting the execution of a fiber rollout for yet another Indian private customer. Looking at the U.K. that the fiber-to-home rollout has started for -- in the U.K. in a good way. All projects combined, we are at 3% completion, and we expect that to continue to improve.

In the data center connectivity projects, we have completed 58 projects and are currently working on 21 projects. So that continues to have its good momentum. Looking at the middle line now, as I had mentioned in my newsletter a few weeks back, we are seeing some headwinds in the raw material and logistics costs, particularly in the optical business.

And I'd like to go into 1 more level of detail into that. If we look at our raw material mix, we can look at 4 broad categories, polymers, metals, gases and specialty resins. And if I look at indices or proxies for these, crude oil prices, which can be looked at a proxy for polymer prices, it went up by 29% in Q4 of FY '22.

The LME Index, which is a decent proxy for metals, went up by 15% in Q4 of this year. Similarly, natural gas prices went up by 49% in this quarter. So we've seen some key raw material price increases in Q4 itself. Similarly, on the freight side, if we look at the Freightos Index. And if we look at the route from China to North America as a representative indicator, it went up by a whopping 175% in FY '22 in the full year, so almost 3x freight cost increase, and it does remain at elevated levels, particularly to the U.S. route.

I must add here that this, in some senses, also has an accelerating effect for us, as our U.S. sales, as we saw in the earlier charts, continued to go up, U.S. and Europe sales. Our mix requires more freight cost. And then if we add the pricing of that rate, that just makes it a little more adverse for us. But we're tracking this very closely, and I'll come to some of these -- the actions that we are taking there.

But for now, let me get back to the revenue growth. Our quarterly revenue grew to INR 1,582 crore, which is about 17% growth quarter-on-quarter and 7% growth year-on-year. We expect to maintain the quarterly momentum as we enter quarter 1 of FY '23. Of course, our PAT was -- our quarter 4 EBITDA and PAT stand at INR 122 crore of EBITDA and a negative INR 22 crore of PAT for the quarter 4.

As I mentioned in the previous chart, this was largely impacted because of the raw material prices and logistics cost increases. I mean there -- obviously, there was a global supply chain disruption, and we were impacted by that as well. I must say that despite that and looking at the potential opportunities as well as the momentum on the demand side, particularly in the U.K. on the services side where we are expanding, we continue to invest and not hold back in that particular area, while we will focus on the right areas.

So as an overall thought process, in the optical business, we're working to optimize costs. We have gone back to -- and we have gone back and started having conversations with our customers for price increases, and they have started to trickle in. This should compensate for the raw material and logistics cost increase, is what we believe. Of course, the services revenue increase will also help absorb the fixed costs, overall resulting in the right direction for the profitability.

Last but not the least, like I mentioned earlier, a very calibrated and focused approach in -- for our investments will also help us improve the EBITDA margins. So we expect, as we've shared in the past, we expect our EBITDA margins to normalize by H2 of FY '23. We have placed in a bridge version of our quarterly and full year financials for your perusal.

These are available in the presentation on our website. So if we look at the quarter 4, we delivered -- and the breakup of our revenues, we delivered INR 1,070 crore of revenues in the optical business. We delivered INR 502 crore revenue in the services business and INR 54 crore in the digital and wireless businesses. We expect as a whole to grow between 23% to 25% in FY '23 over the full year of FY '22. And we believe that our revenue mix will continue to be very likely in favor of the optical business.

In terms of margin, our sustainable quarterly EBITDA margin in the optical business is in the range of 20% to 22%, and the services business is in the range of 10% to 12%. As I mentioned earlier, we plan to reach sustainable margins by H2 of FY '23. In the optical business, the increase in U.S. revenue share, increase in the cable pricing, the cost-saving initiatives, increase in the optical interconnect business, which is high-margin -- that attach rate, as we know, continues to go up, and we will continue to push that up -- will be the key levers for our margin expansion.

In the services business, not just the incremental profitable revenue from India, but also the increase in U.K. revenues shall be key to margin expansion for us. In terms of capital allocation, our clear priority is timely investments in the optical business. We continue to invest in our optical fiber cable capacity expansion, in addition to the maintenance CapEx that we need to incur. On the services side, we aim to generate strong cash flows from the business, and that remains an important focus area. At the same time, we will continue to divest noncore assets in FY '23 as well. As you would recall, last year in FY '22, we sold interest in Metis or Adda247 and [ acquired ] MTCIL in this quarter. So our goal is to move towards a 20% RoCE at a steady-state operations post the investment phase.

I think it is important to mention that there's a fine balance that we need to maintain between not letting investments -- not missing investment opportunities, at the same time keeping our debt under control. So therefore, in terms of cash flows, we plan to maintain our net debt levels at flattish FY '22 or slight improvement levels. But our investments, particularly in the optical fiber cable side of the business, will be from internal accruals.

The cash generated from operations will be used to fund CapEx. Even on the working capital side, we plan, we have focus to reduce the outstanding in the services business. And as we grow the optical business, we will kind of try to keep that -- improve our working capital levels to try to keep it flat at least in terms of the absolute numbers for the U.S. markets.

Overall, the year FY '23 is in a way a year of inflection for us. As a feedback from all of you, we are moving away from giving long-term guidance to providing more short-term to 1-year outlook. In that context, we want to share our thought process and expectation for FY '23.

Our revenue for full year shall be in the range of 23% to 25%. Of course, our aspiration is to grow more than that, but we expect that to be 23% to 25% over FY '22. Our absolute net debt shall remain flattish to a slight reduction. And the objective is to move towards a steady-state RoCE of 20%.

Besides the financials, I think we are also very, very committed on our ESG targets. I think we -- STL's endeavor, our endeavor is to be a responsible leader in ensuring a connected and an inclusive world. If we just look at some of our key and very proud achievements, we have diverted 45,000 metric tons of waste away from landfills in the year FY '22. We've reduced emissions with 7,500 tons of CO2 carbon oxide equivalent through various initiatives in the plants in this year. And we have announced our commitment to become a carbon-neutral company by 2030.

All in all, we believe and continue to work in this area and have set ourselves environment-friendly targets, inclusive targets for ourselves for STL. Net-net, through our various initiatives in education, training, livelihood upliftment, we have impacted 1.47 million plus lives cumulatively over the last 2 years. And for our work, we have won 29 ESG awards in the year FY '22. I'm very, very proud of our focus and work in this area.

In summary, I'd like to say that the decade-long cycle of network creation is in full swing. The global optical fiber cable volumes and pricing are both expected to grow in the next 12 months in FY '23. Our capital allocation shall be focused, as we said earlier as well, on the optical business. We have established ourselves in the U.S. market already by reaching a 6% market share, and we would want to continue to grow there.

We have increased our attach rate, which is what Ankit earlier mentioned, the attach rate of the optical interconnect through the fiber cables, to 11% now, and we'd want to continue to push that upward as well. In the services business, we're focused on profitable projects and cash generation. We already built a good order book in the U.K. and are ramping up our execution there.

The wireless business products are gaining traction and the focus is to now build order book to -- and eventually deliver those products in the form of revenues. Overall, we aim to grow between 23% to 25% in revenues, keep net debt flat and move towards an RoCE of 20% after the investment phase in the optical business.

[Operator]

With this, we come to end of our open [ R&D ]and we shall now move to Q&A.

[Operator Instructions] So first question we'll take from the line of Mr. Pranav Kshatriya.

[Pranav Kshatriya, analyst]

My first question is regarding the news article which talked about Sterlite Technologies considering demerger of various businesses into different entities. So what is the management thought process around it? I mean, if this is a possibility in the near to long term?

And how should investors see this? Second question is regarding the margin trajectory. You talked about margin reaching to broadly the sustainable margin of around 18-odd percent by FY '22. But will H1 FY '22 see the current level of margin, or how the trajectory will be, that is what I would like to know. And lastly, what should be the CapEx for FY '23?

[Ankit Agarwal, executive]

I'll take the first one, you take the other 2. Okay. Yes, thank you, Pranav, for the questions. So I'll just comment on the first part. So the company has taken in principle approval from the board that if the need arises, and only at the right valuation price, we may consider raising funds at the equity route.

The company is currently investing in new verticals, as you're aware. And at the current juncture, these investments are being made primarily through the internal approvals and the company does not plan to increase, as Mihir was sharing, to increase the consolidated debt of the company any further.

So keeping all of these aspects in mind, the company has sought in principle approval to keep the options open, and if the need arises at the right time and place.

[Mihir Modi, executive]

On the margin, Pranav, so you're right that we have spoken about the H2 margins. All I will say is that we expect it to improve quarter-on-quarter, if not by significant amount certainly in the right direction in Q1 and Q2, till we get to the H2 numbers that we are talking about.

I will not be able to comment specifically on what's the order of magnitude of that, because these are variables which are still moving, as you saw the significant increases in quarter 4 by the indices that we shared. And therefore, talking about a specific number may be difficult at this stage.

But our objective will be, and aim will be to certainly not let it get worse. Lastly, on the CapEx side, we are looking at cash flow. We are looking at about INR 500 crore CapEx out of which the INR 400 crore will be new CapEx and about the rest will be maintenance.

[Pranav Kshatriya, analyst]

Sure. I mean if I can just follow up with 1 small question on the first part. The demerger is primarily for equity raising, I mean and the value unlocking? Or is it for debt reduction? What exactly is the management thought process if there's a demerger and...

[Ankit Agarwal, executive]

So what I'll just comment, see one, at a high level, we are operating clearly 4 business units, right? And they are also in different stages of maturity. So you have the core business, so to speak, of the optical where we have been for 30 years, is mature services business, is in India and now U.K. And then we have the emerging businesses, so to speak, of digital and wireless where we continue to put in investment for future growth.

And also from a capital allocation perspective, very clear focus and prioritization is to invest in growth of the optical business. And there are certain ongoing investments in the tune of INR 160 crores, INR 180 crores per year in the current year that we will do in the digital and wireless part. So that's the current plan that we have.

To the extent that we want to look at opportunities, for example, of inorganic growth for further growing again in broadly the optical space. We do believe that it will be important to capture this market opportunity. So to that extent, we will continue to evaluate those opportunities in the current year as well. We've also talked about growing in our focus markets in North America and Europe. So again there, any investments required to grow our capacities, if required, based on market demand, we'll continue to focus on that.

So that's the overarching theme. Clearly, as we've said, we are -- while we are not seeing options today to substantially reduce debt, at the very least we're saying we want to maintain the debt we are at or reduce it marginally. So that's where we stand from a focus and priority. And as we've said and also shared in response to the article, currently there's no immediate plans for any of this demerger or hiving off. We will continue to evaluate and update the market at the appropriate time.

[Pankaj Dhawan, executive]

We'll take the next question from the line of Mr. Neerav Dalal.

[Neerav Dalal, analyst]

Three questions from me. One is on the India tendering, when do you see the India tendering to happen on the BharatNet Phase 2? Second is on the investment phase. When do you see the investment phase ending? So if 1 looks at your presentation, you're talking about U.S. being completed by third quarter. There were also plans about U.K.

So if you could clearly articulate what is what you're going to add in U.S.? And then whether you're going to add U.K. or not. Third piece was on -- you just commented that you would be putting in INR 160 crores to INR 180 crores in the digital wireless side. If 1 looks at this year, you have -- on the P&L side, you have put in about INR 155 crores plus INR 51 crores has gone to the balance sheet.

So how should 1 look at this INR 160 crores, INR 180 crores moving between the P&L and the balance sheet? That is #3. And lastly, on the EBITDA side, you did answer the question. But -- so you're clearly trying to say that EBITDA sustainability will come in second half of FY '23 and not by second half of FY '23, right? And within that, when, [ you're still ] not clear on that.

[Ankit Agarwal, executive]

Yes. yes. So I think good set of questions. I think definitely, we are in a very positive investment phase in India overall, both on private sector as well as BharatNet in particular. Clearly, with 5G, looking fairly promising to happen soon and getting rolled out. Our own view is that 5G should get accelerated, particularly in the Tier 1 cities. And a pretty large network investment will be required both to connect your 5G towers and small cells, which will need to be almost between 70% to 100% backhauled on fiber.

So I think that -- timing of that looks quite promising, probably by end of year or early next year, 5G services should start coming through and the network build-out that will be required, we believe, will at least be 3 to 4 years of network for that.

On your question of Bhartnet, government is looking at some changes to the model versus what they had earlier announced. And this has come on the back of some concerns that have been raised in terms of ability to generate revenues and the requirement where the -- essentially the private sector, the bidders would have to generate the revenues from connectivity in the villages.

To that extent, the model is getting shifted more to a kind of CapEx and OpEx model. We do believe the quantum of investment will also increase, plus there is a good amount of urgency to create this network probably in the next 2 to 3 years. So we do see this as a positive momentum, both for our services business as well as our optical business, and clearly a large opportunity for STL to take leadership in. You can comment...

[Unknown Executive]

Yes. Just on this piece. So at the moment, there is no clarity from the government in terms of first half, second half when they would start tendering.

[Ankit Agarwal, executive]

So yes, so as I said, because the model is getting shifted itself, that consultation is going on both internally as well as with the industry. So I won't be able to comment on what is the final model, but certainly, there is a high urgency from the government and a very positive discussion, to conclude the model and then take this out for bidding.

So definitely at some point this year, that will happen. And my own guess is it happens sooner rather than later.

[Mihir Modi, executive]

Coming to the CapEx question, Neerav. So as I mentioned earlier, there's expected to be about INR 500 crores of cash outflow on account of CapEx. To answer your question, about approximately 300 million out of that will be on account of U.K. and U.S. So both included, to specifically answer your question, and there is some maintenance cash flow and some past year cash flow, that kind of adds to the INR 500 crore, therefore.

We expect that to be it. Of course, some shifts of cash flows between this year and next year may be possible where we -- if we have an opportunity to get the right terms, we may push out some cash flow onto next year. But these are good numbers to anchor on from a cash flow standpoint and a spending [ good ] standpoint.

The next question is on the digital and wireless investment. So INR 155 crores and INR 51 crores. Yes, that's -- these are the numbers for FY '22. We expect the OpEx to be a little higher and CapEx to be a little lower than this, adding up to the number that we mentioned earlier for the total investment that [ we gave out ]...

[Neerav Dalal, analyst]

The FX for last year was about INR 155 crores, and we're talking about INR 160 crores to INR 180 crores so...

[Mihir Modi, executive]

That's right. That's right. So in short...

[Neerav Dalal, analyst]

Largely it will be OpEx...

[Mihir Modi, executive]

That's correct. That's correct. Yes. Yes. On your EBITDA point, you're right, the EBITDA, when we say it will be at normalized levels in H2 or by H2, it is indeed in H2, to be clear about it. We expect that to happen in H2. Given all these headwinds that we are facing, we believe that is the kind of time it will take for us to not just optimize the cost, but also our effort on the prices to be increased from our customers.

So that's the time frame that I see we will need.

[Pankaj Dhawan, executive]

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

[Mukul Garg, analyst]

Ankit and Mihir. so I just wanted to follow up on the margin question. Is it possible for you to break the margin impact, adjusted of provision, for last quarter between raw material cost, freight and increased investment? If you can just help us kind of gauge exactly how much hit came from which particular element.

[Mihir Modi, executive]

Sure. So I'll give you a high-level number. I think about 100 bps came from increased investment, about 200 bps came from freight, and thereabouts came from raw materials.

[Mukul Garg, analyst]

Sure. that's helpful. Also, Ankit, just wanted to check on the revenue guidance. The commentary overall seems to be that demand environment continued to improve meaningfully and certainly was better versus last quarter. Then in that scenario, what drove the change in revenue guidance versus the previous one, which was focused on Q4 '23? It sees that guidance has come off a bit.

[Ankit Agarwal, executive]

No, absolutely, Mukul, and I think this is 1 at a macro level, there's no question in terms of the tailwinds and the positive tailwinds. Again, growth in our focus markets of North America, Europe and India are clearly there. As some of these capacities come onstream, the price realizations come onstream as well.

And for example, as we continue to scale our U.K. services, these will all help drive that top line growth. So that gives us a comfort. I think what we are very consciously driving also is both profitable growth as well as ensuring the cash. So we want to make sure that the projects we're involved in, that the cash cycle is at the right levels that we want it to be.

So with that intention in mind, we've had to -- we have taken conscious calls in our plan for the current year. We don't want to just drive revenue for sake of it but drive the right kind of revenue growth. And so that's been the decision, the focus and also the communication with our teams, and that's where we've come out with our plans.

[Mukul Garg, analyst]

Understood. So just another -- probably another word, does it imply that the caution is more on the India services element, where the cash obviously has been stuck for a while?

[Ankit Agarwal, executive]

Yes, absolutely. So what I do want to reiterate, there has been positive developments in the cash collections and it continues even into quarter 4 and into the Q1 that we are quite positive about. And then in terms of the services, I think there is 2 parts. One, what we are saying very categorically, we will only do services in India, whether it is for private sector, BharatNet or defense, at a certain profitable -- minimum profitable threshold. So that's 1 part.

And then the second part is, so far we have invested in services opportunities in the U.K. While we have borne some costs currently, we do believe that as we start scaling up, some of these fixed costs will get covered through that revenue. So that's the focus for the services business. But to answer your question very specifically, yes, we have been very mindful of what services opportunities will pick up in India. We'd also talked about this in the previous quarter in some of our discussions, and that is clearly the thought process in our teams.

While there is significant opportunities also that will get played out in India, we're very mindful of which of those we'll pick up, at what profitability levels.

[Mukul Garg, analyst]

Sure. If I may ask just 1 clarification, Mihir, what portion of your product order wins this quarter had higher prices baked in? Is it fair to assume that especially given the price chart which you had showed, that at least 10% of the value increase compared to Q3 would be from the higher prices?

[Mihir Modi, executive]

So before I answer that, I think it's not necessarily that way because a lot of the revenue that got booked in Q4 was actually dispatched much earlier. And therefore, it's not necessary that this quarter revenue has those higher price increases.

So to answer your question, I mean, the revenue increase that we've got is on the back of volumes as well in addition to some price increases that we've taken in the last quarter or so.

[Mukul Garg, analyst]

No, no. Mihir, I was talking about the booking.

[Mihir Modi, executive]

Order book, yes. So order book, I think we can safely say that about 10% to 15% of our order booking in the cable side was on higher pricing, and we continue to have that journey.

[Pankaj Dhawan, executive]

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

[Unknown Analyst]

My question is related to the margin and sorry for repeating it again. But basically, in the current quarter margin, we are at about 7.5 -- between 7.5% to 8%, versus if we look at our Q3 FY '22 adjusted margins, adjusting for the write-off and the provisions was about 11.5%, 12%.

So we have come down by about 5%. So what I wanted to understand here is that what elements are being contributed incrementally on the cost side? And do we have provisions even in this quarter which has also impacted the margin? Because I see your other operating cost was INR 449 crores in Q3. And this quarter, it is INR 429 crores.

And if I remember correctly, in last quarter, your other operating cost included about INR 130 crores of provision. So that hasn't moved much. So some clarity on that will be helpful.

[Mihir Modi, executive]

Indeed, absolutely, Sunny. So first at the macro level, the 500 bps or the 5 percentage points that you mentioned, I broadly shared that about a percentage or 100 bps is because of our increased investments in the digital and wireless space. About 200 bps is in raw materials and about 200 bps is in the freight. Now these are the broader elements. Of course, these are Q4 versus Q3, exactly the way you're asking.

These would appear primarily in the line item that you're referring to, so INR 429 crore includes the freight, the investments and some of these packing material, et cetera. So some of those increases are sitting in, in that category itself. So if you adjust for -- so that's 1 point.

Second is the line items where the provisions were sitting last quarter were spread across a few line items. And in this particular line item, there was about roughly about less than INR 100 crore sitting in this particular line item. So if you adjust for that, you will find the increases that are sitting in those line items.

Last question on the provisions. No, we don't have any one-off provisions or abnormal provisions this quarter. This is routine operational business this quarter.

[Unknown Analyst]

Right. So basically you're saying that, but I don't see that bigger drop on the gross margins as such? Or is it the right way to look at gross margins, because your revenue will also include service revenue. So how should we look at that? How do we compare that revenue?

[Mihir Modi, executive]

Yes. So service revenue also -- so yes, I mean, some direct costs are a part of service revenue as well. So if you take only material, then yes, the service revenue gross margin will not show up, only the -- I mean the costs will not show up, only the revenues will show up and therefore, you'll have to adjust for the service revenue gross margin because the direct costs sit in largely manpower costs.

[Unknown Analyst]

Sure. And going forward, I understand that the normalized margins will likely come from H2 FY '22. But -- sorry, H2 FY '23, but basically, how quickly will you be able to pass on the increasing RM cost? And have the contracts started to get repriced already, or how does that work?

[Ankit Agarwal, executive]

Yes. So happy to take that thought. So at a macro level, as we've been sharing, our teams have been extremely focused on going after what we call our key accounts, and that's been the progress that we've also been sharing. So these are typically where we work with our customers for their multiyear build-out.

Some of the examples we have been sharing, like Openreach, [ do ] more recently, Netomnia and some of the others. And the whole thought process is to partner with them and have multiyear arrangements with them to give them also surety of supply. In each of their cases, there is typically a conversation and a negotiation that happens.

And what we have definitely found is across the board, we are not the -- we are -- every one of the players in the market is having the same conversations with the customers. So it's clearly something that we continue to be convinced is a global phenomenon. Our customers are also not surprised with the conversations or our request for the price increases. They clearly see the underlying elements getting -- the costs getting increased.

So it's typically just a function of, a, the conversation happening, agreeing a certain amount of price increase, which is different depending on product portfolio and the negotiation. And then as Mihir was referring to, there is a time lag between when the negotiations conclude, then we manufacture and then we sell it and be mindful of the fact that a large portion of our sales today is today coming from pockets of Europe, and Americas.

And also, we do see some growth in Australia in the current year. So given just the time period between, say, 2 months to even up to 3 months, there is that time period between when we negotiate, conclude and then be able to see that visibly in our P&L. So that's where also where we are saying, while we will go through this period, a lot of the conversations are going on with these large accounts. Between when we conclude these over the next few months and be able to see it in our P&L, we will see largely the benefits of these towards end of Q2 and into H1.

[Unknown Analyst]

Right. Got it. And 1 last question, basically, on the margin side that you have guided, say, 20% to 22% on your optical products and 10% to 12% on the services side. So on a blended basis, when you talk about 17% to 18%, does this factor in the 3% to 4% R&D spend that you are passing to the P&L? Or that will be over and above that?

[Ankit Agarwal, executive]

No. So that will be the over and above that. So depending on how much we invest in the R&D area, and particularly in the digital and wireless space, it will offset that to that extent. And that's why this time, Sunny, we've kind of broken it down for a more clearer communication so that our stakeholders including ourselves, understand the different pieces that [ our side ] are building upon.

[Unknown Analyst]

Sure. So basically, just to confirm, you're saying that 17% to 18% is pre-R&D EBITDA or margins for -- at a company level.

[Ankit Agarwal, executive]

So the way I would put it is that for the optical business, we believe 20% to 22% is the sustainable margin. For services business, it is 10% to 12% sustainable. Now if we choose to and if we have to make investments in R&D, like I said, in digital and wireless space, then we'll adjust it accordingly, but we're going to follow a very calibrated investment approach. And to that extent, we'll take calls as we go further. And whatever impact comes, yes, mathematically, we'll have to adjust that to reduce that at a company level when we add it up [ once ].

[Mihir Modi, executive]

Just to add probably to it. One is clearly -- there is a certain amount of confidence in this 20%, 22%. A very important factor also is how we can quickly grow our optical interconnect attach rate. As we've historically shared, we do get better margins in that part of our business.

And so a very important focus for us is to grow that optical interconnect globally. The second part is that we have incurred certain costs as we have scaled up, particularly in the U.K., and we're looking to have very, very strong margin discipline in our business in India. With these 2 effects, we do believe the margin profile will improve and go to that steady state of 10% to 12% that we have stated.

So I think these 2, I would say, the steady states that we have shared, we do see that panning out, especially as we get into H2. On the R&D part and certainly investments in, say, the new growth areas of digital and wireless, we're very mindful -- and also feedback from the investors in terms of how do we look at these businesses -- we are very, very closely evaluating what is the investment we want to put into those businesses in the current year.

While I've shared that guidance of INR 160 crores to INR 180 crores, we'll continue to evaluate that and share the update on a quarterly basis.

[Pankaj Dhawan, executive]

We'll take the question -- next question from the line of Mr. Tejas Sheth.

[Tejas Sheth, analyst]

Ankit [ Panye ]. I have 2 questions. One on the margin projects [ were started ] you highlighted for H2. How much of that is dependent on the negotiations with the clients? And how much of that is dependent on softening on these costs a [ thought towards ] softening on these costs? I just wanted to know where is the more dependent [ life ] for this achieving or moving towards the sustainable margins?

[Mihir Modi, executive]

So Tejas, the way we look at it is, so we're looking at about 7% to 9% margin improvement. So just -- I mean to break that down, we are approximately at about 12% to 13% this quarter for the optical business, and we are saying it will get to a 20% to 22%.

Now let me break that down, not just in the 2 elements, 2 buckets that you mentioned, and I'll cover that. There's a third element as well, which is the growth of our optical interconnect attach rate in that business, because that is inherently higher margin than the fiber cable businesses.

If I have to kind of spread it across all 3, I expect it to be pretty much -- so the 7% to 9% will come evenly from each of the 3 categories, as we see currently. We would -- if you have to ask me what would I prefer, I think clearly the customer pricing, we are trying to push for more than the cost [ plus ] is what it is to some extent, and customer pricing is something that is more valuable also in the long term as we see right now.

But if I have to just kind of at a broad level, these are 3 pretty much spread evenly across the 700 bps to 900 bps that we're talking about.

[Tejas Sheth, analyst]

Okay. On the demand side, Ankit, you mentioned that the demand guidance that -- or sorry, the revenue guidance but for the -- for FY '23 is mainly because you don't want to chase a low-margin business kind of [ thing ]. But I believe that when you said that the sector savings are so strong, wouldn't the business come at a higher margin proposition?

I mean, why you believe that the margins -- that the book of business itself is coming at a low margin. I mean when peers like Corning are talking about they're running short of supply to meet the high demand scenario. While we are believing that or while we are stating that the business which is coming is a low margin business and we don't want it.

[Ankit Agarwal, executive]

No. Maybe I'll just clarify it. That was completely aligned with what you said. On the core optical business, we continue to focus on our large accounts. We see very strong demand and growing demand. And the intent very much very clearly laid out is with our current capacities, with our new capacities coming onstream and our efforts on price realization improvement, margin improvement that will be a core focus for the team to grow that. And I think that will happen profitably. So just -- and what we just spoke in terms of growing from this 12% to 13% going towards 20% plus, that is the core focus for the company going forward.

Where we have historically also shared is that we have made a conscious shift where a good portion of our business which is government-dependent, today has moved more towards the private sector, in working with the Tier 1 operators in particular. And we are also making a second shift in terms of just being India-dependent to India plus U.K.

As we do this shift, certainly over the next 3 to 6 months, et cetera, we are very, very conscious that there are margin challenges, for example, in private sector in India. And while that is an important part of our business, we really want to be very selective with what kind of business we pick up. All the operators, in my opinion, would want to give more opportunities for STL given our quality of execution.

But we are mindful from our perspective of what of that opportunity we want to pick up, given our margins that we want to ensure. So that's really the area where we are very conscious of how much revenue vis-a-vis profitable growth.

[Tejas Sheth, analyst]

Okay. Okay. Just last on the clarification of what Mihir mentioned about 7% to 9% equally divided. So that broadly is that the price hikes will be assumed in the range of 2% to 3%. But again, when you were opening the amounts, you mentioned that optic fiber prices are seeing a very upward trajectory. Why is it becoming difficult to pass on even 5% to 7% price hike to get the margin back?

[Mihir Modi, executive]

So what I said is 2% to 3% of the EBITDA contribution will come from there. So how do I put it, so we will get higher price increases, but then part of it will be offset. And again, we're not necessarily going to get price increase on 100% of our portfolio. So the net impact on that, directionally, you're right.

We are not taking 2% to 3% price increase on any single customer. I mean it's all higher than that. But there will be a mix. And the net impact we expect on the EBITDA to be that range, in H2 again. So we don't want to go beyond that. It's looking quite good, like we said in the opening remarks, beyond that. But if you stick to just the H2, this is a reasonable assumption that we can make there.

[Ankit Agarwal, executive]

And also just 1 important element in this year is, as we start running our U.S. operations and scaling that up, at least to that extent, whatever we can manufacture and supply for the current year. To that extent at least, some of these container costs, et cetera, would be minimized.

So these are some of the plans we have to then further improve the margins.

[Pankaj Dhawan, executive]

As we take the last question from the line of Mr. Saket Kapoor.

[Unknown Analyst]

Currently, if you want to sum up, what are the key areas of concern for the organization and what steps are in the end will -- that will guide us to a better margin proposition going forward?

[Ankit Agarwal, executive]

Yes. So I think to almost summarize our conversations today. Clearly, on the positive side, very, very robust market demand. We believe, fundamentally, a lot of our strategies and our thought process is starting to play out. I think addressing your point on the concerns, I think very, very clearly -- very important for us as we continue to grow our business globally.

We've talked of 23% to 25% growth. Very, very important, 2 things, to do that at the right profitability level and to generate cash as a business. I think those are some things that we are very clear on. We're also mindful that we have a certain debt level. At the same time, we want to make certain investments.

So ensuring that the cash gets generated for the business itself, we're able to utilize that for our CapEx, also start making our working capital more efficient. These are very, very important focus areas for our business. I continue to believe that with the market opportunity that we have and the leadership that we've brought in over the last 3 to 6 months, we are very well placed to make those shifts.

I also would say that our strategy over the last 3 to 4 months, insight of these price increases, global disruptions, I'm very confident of our own supply chain team and planning team that we will continue to push forward on our cost reductions, not only from operations, but also from supply chain and from planning side.

So I think this is what I would put it this way, that while these are concerns, we also have clear plans in place and management in place to execute on these areas.

[Unknown Analyst]

Sir, on this INR 300 crore investment for the U.K. and U.S., which you are planning for this year, the CapEx part. Where is this going into? And what kind of turnover are we going to generate out of it? If you could elaborate where is this investment exactly planned out. How much we have already invested and with INR 300 crores is the balance amount, I think.

[Mihir Modi, executive]

So we -- this is for fiber cable factory, manufacturing factory that we are putting up in the U.S. and in the U.K. And we've just started that process of investing there. So the INR 300 crores is the expected total amount that we'll spend across these 2.

With this, we expect to increase our cable capacity, manufacturing capacity by about 8 million to 9 million fiber kilometers. And that is where it is going. The whole thought process behind this is to get closer to customers in terms of our manufacturing capability and, of course, local manufacturing in those locations, to be able to be more agile, to shorten the delivery times and so on and so forth.

And that's the reason why we are, we are going ahead with building our facilities in U.S. and U.K.

[Ankit Agarwal, executive]

Just to add 1 thing, if you can see the screen. A lot of focus is also as you go closer to the customers, you also build very interesting product portfolios for their requirement. So this is what I'm holding is -- as an example, the world's largest fiber optic cable, almost 7,000 strands of fiber in it. To -- in India, for example, they put 48 or 96 strands in a cable, but for this data center customer in U.S., we are putting 7,000 strands in a cable and selling it for their global requirements. So this gives you an example that as you go closer to customers, you also build such kind of niche products for them. And that then gives you a long-term relationship and profitable business.

[Unknown Analyst]

So on an incremental turnover then can you give some ballpark number, what kind of business with 8 million fiber optic kilometer being added, what kind of incremental revenue are we expecting going forward?

[Ankit Agarwal, executive]

Ballpark, you can take an average of $15 for the cable. So you 8 million into $15 essentially.

[Mihir Modi, executive]

Of course, Saket, I should clarify that the capacity will be built over a period of time. And this is a number, once the full production capacity is in place, this is the kind of incremental revenues that this plant -- this capacity, I'm sorry, capacity, we'll be able to generate. I think if we have to look at just FY '23 we shall -- we expect the growth in revenue, overall blended, to be about 23% to 25% versus FY '22.

[Ankit Agarwal, executive]

For the year.

[Unknown Analyst]

Mihir, question on the net debt level on an absolute number. What is the net debt level and the absolute number? And what is the cost of debt currently and the current maturity for FY '22?

[Mihir Modi, executive]

So the net debt levels are around INR 2,700 crore. The cost is approximately at 7% blended. We have a reasonably phased out maturity period over the next kind of 5 to 6 years. So we're -- that's not a huge concern for us in terms of the maturity period. That is in a comfortable zone as well.

[Unknown Analyst]

And sir, we have also seen this increase in inventory over a quarter-on-quarter for December also and now for March.

[Mihir Modi, executive]

Yes. That's right. So the reason -- primary reason for that is that, as we increase our revenues or if I may say, dispatches, to the U.S. and U.K., it requires an additional transit time of anything between 45 days to 90 days. And that we have to carry it as inventory, and that's the sharp increase in inventory that you see, because of our revenue mix being more and more skewed in favor of overseas markets.

Just to link it back to the question you asked earlier on the manufacturing facility in the U.S. and U.K. As we get closer to the customer and as we improve our response time or delivery time lines, this inventory obviously will also come down, because then we may not need to see this 45 days to 90-day kind of an inventory, which is in transit.

[Pankaj Dhawan, executive]

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

[Ankit Agarwal, executive]

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

[Mihir Modi, executive]

Thank you, everybody.

[Pankaj Dhawan, executive]

Thank you, everybody.

[Ankit Agarwal, executive]

Jai hind.