Sterlite Technologies Ltd

NSE:STLTECH

Earnings Call Transcript 2024-Q4

[Chetan Wani, executive]

Ladies and gentlemen, good day to you, and welcome to the STL Q4 and Full Year FY '24 Earnings Conference Call. I'm Chetan Wani, and I'm responsible for Investor Relations at STL. We are joined by Ankit Agarwal, MD STL; and Tushar Shroff; Group CFO, STL, to walk us through the Q4 and full year FY '24 results and to take your questions.

[Operator Instructions] You can also download a copy of the presentation from our website that is www.stl.tech. Please note that this call is being recorded.

Before we proceed with this call, I would like to add that some elements of today's presentation may be forward-looking in nature and 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.

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

[Ankit Agarwal, executive]

Thank you, Chetan. Good day, everyone, and thank you for joining us for our Q4 and full year FY '24 earnings conference call. As we reflect on the financial year 2024, we have made significant progress on all of our outlined strategic priorities. Starting from the Optical business, we have made significant progress on the strategic goal of increasing our optical connectivity business by securing our first large orders in North America region. We undertook various fixed and variable cost optimization initiatives and we optimize our cost structure to become more efficient so that we can deliver better returns from future operations.

In the Global Services business, we improved our EBITDA margins year-on-year from 3.1% to 7.6%. We're also very happy to share that our digital services business we have scaled the business and more than quadruple our revenues year-on-year.

During the FY '24, we also completed our CapEx cycle with the operationalization of our U.S. facility and we are now fully set up to fulfill demands of U.S. made optic fiber cable products. We are evaluating options for fund raise, and we worked extensively on this priority during FY '24. I'm happy to share that we have successfully completed INR 1,000 crore QIP fund raise in April '24 by on-boarding our key institutional investors who will partner with us on an exciting journey ahead.

Last but not the least, we continued efforts on cash generation and net debt reduction. In FY '24, we will -- we divested our holdings in MB Manshaan for EUR 5.95 million. I'm glad to share that our cash generation from the business helped us reduce our net debt by INR 334 crores during FY '24. Our cash generation and debt reduction focus aided by the QIP fund raise will enable significant debt reduction and balance sheet centering and propel us to achieve our strategic objectives with renewed Z.

Let us now look at our strategic priorities for FY '24 -- FY '25. As we enter FY '25, our strategic direction remains the same. Our optical networking business, we shall continue to grow the Optical business by increasing OFC market share and connectivity attaching. We shall continue our efforts to drive our cost leadership in the Optical business. On the Global Services business, we shall continue to build new capabilities and value-added services. We will stay focused on improving project mix to improve profitability and we will work towards successful demerger of our services business. Lastly, on our STL Digital business, we shall continue to scale business through focused investments in building new technologies, capabilities and focus on profitable growth.

Sterlite endeavors to be a responsible leader in ensuring a connected and inclusive world. This focus reflects in the way we have designed and implemented our ESG agenda. We have diverted 245,000 plus metric tons waste away from landfills during FY '19 to FY '24. We have also reduced ambitions of 30,000 tonnes of carbon dioxide equivalent through various initiatives in the plants during FY '21 to '24. We have recycled 830,000 cubic meter of water during FY '19 to FY '24. I'm proud to share that we are the world's first optical manufacturer to launch externally verified eco-labelled methodology. We remain committed to become carbon-neutral company by 2030.

Through our various initiatives in education women empowerment, over 900,000 lives have been positively impacted during FY '19 to FY '24. We have also positively impacted 2.7 million plus lives through our various initiatives in healthcare during FY '19 to FY '24. We are proud to share that we have won over 100-plus ESG awards for our work during FY '19 to FY '24.

In the next few slides, let's talk about optical networking business and our efforts towards becoming the top 3 players globally in the optical connectivity business. Before we look at the demand outlook let us first reflect on FY '24. As part of the CRU estimates -- latest estimates, OFC consumption for 2023 declined by 7.1% globally. This was led by a 12% decline in North American markets for the calendar year. Inventory at multiple layers played a major role during this time and the suboptimal factory utilization was a trend across the industry. It is important to note that we observed continued fiber deployment, resulting in healthy inventory digestion during FY '24. Analyst reports suggest demand improvement from '24 onwards and robust demand scenario from a medium to long term.

As we look at the future projections from CRU, the medium-term demand for the optical fiber cable volumes is forced -- is expected to go up to 617 million fiber kilometers by 2026 and 666 million fiber kilometers by 2028, up from 536 million fiber kilometers in CY 2023. This is a healthy 4.4% annual growth rate from 2023 to 2028 and approximately 8% annual growth excluding China. The positive demand outlook by CRU, along with the continued client commitments on increasing fiber deployment. And STL's order book surge in quarter -- in quarter 4 FY '24 is indicative of the recovery in the coming quarters.

Let us also look at the major technology trends such as AI and its impact on the fiber demand. As we all know, AI shape -- is reshaping the technology landscape and influencing every technology theme that is unflown like -- such as cloud computing, AR, VR, IoT, online video game streaming, online gaming, et cetera. The consumption of these technologies and their overall market size is expected to continue at a healthy pace for the foreseeable future.

Moreover, we have 1/3 of our global population, which still remains offline and yet to be connected. AI and machine learning are gradually taking center stage and are swiftly blending in with all these technology trends. AI's role in reshaping the new digital society is unabated. No wonder, various industry airports suggesting 2/3 of network traffic shall involve by 2030. For this high-growth of AI and technology users, which sustain and succeed, the technology backbone shall need massive, massive data center capacities with fiber-rich interconnections that smoothly manage the data explosion. It is estimated that the fiber demand in AI data centers, maybe 5x to 8x higher than normal data centers.

These -- to access these AI data centers and applications at the front end users shall need reliable connectivity through FTTx of 5G or future generation like 6G where fiber again shall be at the core of the connectivity. As we digest this further, I believe that stronger every day that [indiscernible] will be a necessity for a success of the futuristic AI-led digital society.

Apart from AI, there are, of course, 3 other key themes that are playing out globally on the optical connectivity product demand, mainly the global investment in 5G network creation, FTTx deployments and new age data center buildouts. These demand drivers are expected to bring significant growth in investments in the foreseeable future. 5G is one of the fastest growing technologies in the world and tower fiberization is at the core of 5G. 5G subscribers are to grow at a very fast pace in the next few years. And as we can see, 5G subscribers at all key regions such as North America, Western Europe and India, expected to clock a CGR of more than 30% for the next 5 years.

With high tower fiberization required for 5G, clearly, 5G global expansion should continue to drive demand for more optical fiber. Apart from 5G FTTx connectivity demand for homes and businesses globally remains strong. In the U.S. alone, approximately 100 million homes await FTTH connections. Fiber Broadband Association predicts 12 million homes to be passed in U.S. just in 2024. Europe FTTH passes are expected to grow at 4%, at least for the next 5 years, and India is expected to lead the global growth in fiber insulation with 26% CAGR between 2023 and 2028.

Data center is another driver of optical products demand. Data center capacity in North America expected to grow at the 10% CAGR during 2024 to 2029. And in Europe, expected to grow at approximately 9% CAGR for the next 4 years. Similarly, India data center capacity is expected to grow even faster with a CAGR of 26% over the next 5 years. In addition to the demand coming from these technology divisions -- departments, the mega government projects such as BEAD in the U.S., BharatNet in India and other such programs in Europe and U.K. can substantially add to the overall global demand of optical connectivity products. The application of antidumping duty on Chinese products in India, Europe is expected to balance out the optical connectivity product supply and help non-Chinese players such as STL further strengthen up our global positioning.

If we just zoom into the North America region, CRE is projecting the regional optical cable demand to grew at a fast pace of 13% CGR till 2028. More than 9 million homes were passed in 2023 alone. And as we just said, another 9 to 12 million homes pass additional expected just in 2024. Various telecom internet providers in North America has had aggressive ambitions on FTTx home pass targets for the next 2 to 3 years and announced these targets publicly. For instance, in the very near term, AT&T intends to add 19 million new home passes, Lumen plans to add 9.2 million home passes and Frontier has announced plans for another 5 million new home passes.

The government spending through BEAD and other programs should only add to this fiber deployment plan by the private sector. It seems -- it is estimated that in North America nearly as much fiber will be deployed for the next 5 years and has been deployed through its history. So very strong demand in North America in the coming years.

As we now reflect on our market share and optical connectivity attach rates. Basis CRU global consumption data, during FY '24, we had 8% market share on global cable demand, excluding China. FY '24 is clearly a year of challenging demand environment, where inventory [indiscernible] impacted fresh procurements, and we believe that the market share shall normalize as the fresh demand slightly picks up. Our optical connectivity tax rates have increased from 13% to 10% last year. We are continuously working on new product development and commercialization in optical connectivity space to further increase our attach rate.

Coming to the financial performance of our Optical business as guided in Q4 of '24. In Q4 to FY '24, revenue has declined on account of lower volumes and stand at INR 777 crores. The full year FY '24 revenue stands at INR 3,830 crores. In line with the reduction in revenues, quarter 4 FY '24 EBITDA stands at INR 60 crores, and for the full year '24, EBITDA stands at INR 621 crores. Due to the lower absolute EBITDA, the EBITDA margins of Q4 FY '24 stands at 7.7%, although full year FY '24 EBITDA margins is at 16.2%.

It has been a challenging quarter but with a strategically located manufacturing facilities globally, optimized cost structure, continued production innovation efforts and customer approvals for our products from Tier 1 customers across the globe, we believe that we are well positioned to capture significant market share and grow as the demand picks up.

Now let's discuss the progress in the Indian market and how we are pivoting in the Global Services business. In the Global Services business, Q4 FY '24 revenues stands at INR 323 crores and full year FY '24 revenue stands at 140 -- INR 1,456 crores. We have been selective in our order intake and execution, which has helped us improve our Q4 EBITDA to INR 39 crores and margin -- EBITDA margin to a healthy 12.1%.

Favorable project mix and effective execution resulted in improved full year FY '24 EBITDA to INR 110 crores and EBITDA margins for FY '24 to 7.6%. We continue to build our capability towards value-added services to improve margin profile and reduce fund involvement. We made substantial progress on all the projects and as you can see on our slide, among the major India public projects include our BharatNet project in state of Telangana is now 68% complete, including all the packages, the network modernization project is 74% complete, the data center project with the PSU stands at 88% complete. And on the India private side, fiber rollout for a large telecom operator, Stage 2 is 55% complete and fiber rollout for modern optical network and other private customers 94% complete.

Coming to STL Digital. On the STL Digital, we are continuing the growth momentum. We are continuously working with new customers for growing our business in U.S., Europe and India across technology and services verticals as observed during strong order flow during FY '24. With more than 25 global customers at the end of quarter 4 FY '24, we have 40-plus active technology partnerships. We have signed strategic partnerships with SAP and Google to offer the solution jointly to our customers. We expect the growth to be driven by robust order book of more than INR 660 crores and the right leadership as well as consultants.

In line with our expectations and despite a tough industry environment for IT services, we have achieved a quarter for FY '24 revenue at INR 78 crores and the full year FY '24 revenue of INR 298 crores. The full year FY '24 revenue of INR 298 crores is more than 4x the full year FY '23 revenues. The EBITDA loss of quarter 4 FY '24 stand at INR 17 crores, and the full year FY '24 EBITDA loss stands at INR 83 crores.

I will now hand over to Tushar to talk about the financials.

[Tushar Shroff, executive]

Thanks, Ankit. Good day, ladies and gentlemen. In line with our guidance, the consolidated quarter 4 revenue stands at INR 1,140 crores. Full year FY '24 revenue stands at INR 5,478 crores, a reduction in the revenue on a year-on-year basis is mainly attributable to lower optical fiber cable sales volume in Optical Network business.

In quarter 4, EBITDA stands at INR 67 crores. The full year FY '24 EBITDA stands at INR 627 crores. While for quarter 4, after tax losses stands at INR 83 crores and full year FY '24 after-tax losses stands at INR 58 crores.

In terms of new orders in the Optical business, we continue to win multimillion-dollar orders for optical fiber cable in our focus market. We secured large orders in U.K. for multiple large telecom operators. We also secured large orders in Italy from fiber optic network operator. We secured the first large orders in North America for our optical connectivity products.

In the service business, we secured large fiber rollout orders from large private telecom operator in India for 5G deployments. On the back of our Global businesses, our revenue mix was well diversified during last quarter and we expect this to further improve towards North America and Europe as the demand for the optical products pick up in the global markets.

Our open order book at the end of quarter 4 FY '24 is INR 10,290 crores. We are happy to share that robust order book addition amounting to INR 2,064 crores happened during last quarter. Our order book is well diversified across our customer segments and all our businesses. We now place a breach version of our reported numbers for [indiscernible]. The net debt has reduced by INR 334 crores during the financial year.

Now let us understand the current status of the demerger of the service business. During the quarter, the first NCLT hearing was conducted in April 2024. NCLT has directed us to convene the meeting of the shareholders, secured and unsecured creditors to approve the scheme of demerger, and we are working on next steps in the process.

In summary, I would like to say that in the Optical Network business, we shall target to drive the cost leadership and pursue our ambition to be a global top 3. We shall increase the sales of our focus market to grow our Optical Network business. We will continue to increase the optical connectivity growth and attach rate. In the Global Services we will continue to focus on select projects to improve the profitability and optimize on the working capital. In the Digital business, we will continue to scale up and grow our revenue along with focused profitability.

Now I hand over this particular call to Chetan.

[Chetan Wani, executive]

Thanks, Tushar. Ladies and gentlemen, with this, we come to the end of our presentation, and we shall now move towards the segment of Q&A with management.

[Chetan Wani, executive]

[Operator Instructions] We'll take the first question from the line of Nikhil Choudhary. Nikhil, please go ahead with your question.

[Nikhil Choudhary, analyst]

This was a tough year for.

[Chetan Wani, executive]

Nikhil, can you speak up a bit louder, please.

[Nikhil Choudhary, analyst]

Is it better now?

[Ankit Agarwal, executive]

Just give us a minutes, maybe it's at our end.

[Chetan Wani, executive]

Yes, try speaking now.

[Nikhil Choudhary, analyst]

So this was tough year for industry and for us. Okay but I won't to discuss especially related to the market share loss, which we had during the year. Especially in America, we still have had negative growth in quarter 4 as [indiscernible] much lower. One of your peer, the largest optical fiber company globally has reported much better result in quarter 1 of CY '24. So any color there?

[Ankit Agarwal, executive]

Okay. So I think you -- I think the question was a little unclear but what I understood is in terms of our market share in North America and vis-a-vis some of our global competition. So I won't be able to comment on the competition. But what we can definitely say is that we do expect that we have talked in the past about principally the market deployment, the fiber deployment continuing to be strong, more than 9 million homes, as we shared, has been deployed, which is one of the highest ever in history. And that is also leading to a strong reduction of the inventory, especially with our customers and end customers and distributors.

So that's where we continue to believe that we are probably 1 to 2 quarters away from the market normalizing, where during this time, we have focused on 2 or 3 things. One is improving our product portfolio, both on cable as well as connectivity. As we shared recently, we have shared in the results, we have also started our first sale of connectivity in North America market, which is a positive development. We're also focusing on ramping up our U.S. factory in terms of production and output. So I think these are our focused areas. And definitely, as the market rebounds, we are confident that our volumes for the U.S. sales will improve.

[Nikhil Choudhary, analyst]

Sure, Ankit. The second one is regarding the update on BEAD project, they are some article about change in time line, which generally happen with government projects. So any update on how the overall implementation for the development process is going on? And when do you expect any meaningful uptick in terms of contribution from -- especially related to the U.S. spectrum?

[Ankit Agarwal, executive]

Yes. Thank you, Nikhil. Good question. So I think broadly, our sense is that I think somewhere in the time frame of probably our quarter 3 or Q4 is where we can see some initial demand coming in. But when we look at our discussions with customers and even what we see with our peers, most people are factoring in probably meaningful demand coming in next. So calendar year FY '25 is where they see meaningful demand for connectivity.

Again, here, we are working closely with our customers who we do expect would get the BEAD funding. We're also working both on our product portfolio as well as readiness of -- and capacity readiness of our U.S. factory. And recently, we have also made a public announcement to this effect where we are meeting the BABA compliance, for the -- which is important for the BEAD requirement. So that's where we stand today. There is efforts going on locally in the U.S. around how the timing can be fast tracked. But currently, the visibility is probably our -- Q3/Q4 of our financial year is where we can see some initial impact or benefit and then meaningfully from next onwards.

[Nikhil Choudhary, analyst]

Understood and very helpful. If I can speak last one related to services business. We have seen some change in [indiscernible] business margin profile you can see more meaningfully at the cost of revenue. Is it fair to assume that this will be our strategy going at where we would like to [indiscernible] EBITDA margin while revenue growth for now will take next services business.

[Ankit Agarwal, executive]

Yes, absolutely. I think as we've been sharing on the services business in India and overall for the business, we've been very focused on taking on the right kind of projects with the right margins and most importantly, right cash profile to reduce our fund involvement. So that efforts continue. We do have strong relationships with the telecom operators. We have some interesting projects, which we have and have also recently won on the system integration side.

So I think that's the whole focus. We will continue to drive towards the good balance the fiber deployment and system integration. One caveat and all of this is that we will see how the BharatNet gets played out over the next 1 to 2 quarters. And definitely, that will be an interesting opportunity for STL across our fiber, cable, connectivity as well as deployment. So I think let's see how that gets played out. And again, as long as the terms are to our liking that can be a good opportunity for STL.

And sorry, one more thing to add is that we also had in line with what we had promised, we have been able to get our U.K. services nearly to breakeven. So I think that is also something that's positive and we see good order flow there.

[Chetan Wani, executive]

Thank you, Nikhil. We'll take the next question from the line of Balasubramanyam A. Bala, you may please go ahead.

[Balasubramanyam A., analyst]

In this quarter, we have seen more than 80% de-growth in optical networking business. How much impact from volume and realization trend? And how is the realization on optical fiber and OFC side in this quarter? Are we seeing any improvement on the prices side, or it will likely continue to be reduced in coming quarters?

[Ankit Agarwal, executive]

Yes. I think as we've been sharing, Bala, primarily, if we compare to last year, the biggest delta has been lower volumes, primarily in the U.S. and then in Europe. We have increased some of our volumes in some of the other markets, and that also reflects when you look at our geographical distribution in Slide 25, where you will see our India revenues, for example, have grown from 26% to 35%. So that's something that we are mindful of.

The volumes have reduced, as we have shared in a couple of discussions in the past, our utilizations have also been at sub-50% level. So I think that's something that we do see a good opportunity for the business improving going forward, volumes improving going forward. I think on the realization part, we have seen that to be reasonably steady. And I think from our perspective, because of the mix, where typically we see lower realizations in India and Europe compared to U.S. because of that, our average realization would have come down at the Optical business level.

So I think these are the 2 main factors. Again, with the -- as we see the U.S. demand coming back, both for cable and then eventually for connectivity, I think that will be a positive trigger both for the top line and bottom line for the company. In parallel, we have been doing a lot of work on the cost side, looking at all the elements of costs, which we've shared in the past, both fixed costs, admin costs and various other costs. So I think that will also help us once we start seeing some of the volumes coming back.

[Balasubramanyam A., analyst]

What kind of products are in pipeline in optical interconnects from 13% rate in this year to where we can see improvement over the next 2 to 3 years?

[Ankit Agarwal, executive]

Yes. I think -- look, I can share at a macro level, this definitely remains a strategic priority for us. It is part of our strategy to provide an end-to-end solution to our customers. And certainly, there is a good focus from our side from product development side, from building the right team and capability both for our global markets. So I think that continues as a priority. And I think certainly, we do -- we are keen that we increase our attach rate as we scale up.

[Balasubramanyam A., analyst]

Got it, sir.

[Chetan Wani, executive]

We are not able to hear you.

[Balasubramanyam A., analyst]

Hello?

[Chetan Wani, executive]

Please go on.

[Balasubramanyam A., analyst]

Sir, on the Global Services side, we have witnessed the highest ever margin at 12.1%. So what are key triggers for this improvement and where we can expect from current levels? These are my last question.

[Ankit Agarwal, executive]

Yes. So I think -- as I shared, I think, principally, we are focused on executing the right kind of projects at the right margin. And directionally, we have shared that we want to keep this business somewhere in the range of at least 8% to 10% with the right mix. So that's what we continue to believe in. There is a good discipline with the team and the business and some good system integration opportunities that are coming up over the next 12 to 24 months. So there's good discipline with the team, and then we will see, as we discussed with BharatNet, that could be a interesting opportunity and upside for this business.

[Balasubramanyam A., analyst]

Okay, sir. Sir, my last question regarding the situation in Europe, U.S. and Indian markets regarding about inventory piled up with operator levels? And like what are the changes are like going on in this quarter and coming quarters, like is there any order slowdown due to elections in India and U.S. market?

[Ankit Agarwal, executive]

No, we are not seeing any impact of the elections per se, whether in India or globally. And in fact, when you look at our own order book, that has been quite high in the last quarter. Overall INR 2,000 crores plus order book and even in the optical business, very strong order book. So I think that gives us some level of confidence that the inquiry -- customer inquiries are increasing in orders that we are taking in from a variety of customers are increasing. So I would say that the deployment is strong, the inventories are continuing to get depleted, and we have 1 to 2 quarters away from some level of normal demand coming back.

[Chetan Wani, executive]

Thank you, Bala. We'll take the next question from the line of Darshil Zaveri. Darshil, please go ahead.

[Darshil Zaveri, analyst]

I just wanted to ask like we've had like maybe not a stellar FY '24. But so any kind of guidance that we would like to give in terms of our growth and margin in FY '25.

[Ankit Agarwal, executive]

No. Currently, Darshil, we are not looking to give any specific guidance because we are still in that phase, as I've been sharing that principally in our optical business. We have made all the right investments in our capacities, in our team, product capability but our utilization levels are still on the lower side. So once we start seeing some of the regular demand coming in. When we start seeing -- especially in our focused markets in Europe, U.S. and even in India with BharatNet kind of projects, so once we start seeing that and we're able to get some comfort on that demand, then I think we'll be able to provide a better guidance.

Right now, as we are sharing is the primary driver, especially in U.S. market is inventory drawdown, which we do expect that will lead to demand normalization in 1 to 2 quarters.

[Darshil Zaveri, analyst]

Okay. Fair enough, sir. So just like from someone like from someone who's not currently in the business like a common man like us. So what could be a inflection point where we would see that okay now thing have come back to normal, like something on the broader sense, like what would be a turning point for us?

[Ankit Agarwal, executive]

Yes. See, in simple terms, we have added a fair bit of capacity. We are fully backward integrated from glass fiber, cable, and now connectivity. So essentially, we would like our capacities to be running at least 70%, 80% plus levels. And so really, I think once we are able to get to that level and continue at those utilization levels, I think that will be where we get that comfort in terms of our volumes and ultimately, the profitability.

[Chetan Wani, executive]

Darshil, can I put you in queue for your next question?

[Darshil Zaveri, analyst]

Yes, okay.

[Chetan Wani, executive]

Thanks. We'll take next question from Ashish Chopra. Ashish, please go ahead.

[Ashish Chopra, analyst]

Ankit, could you just help us with what would have been the utilization levels in this exit quarter as compared to how much was in the last quarter?

[Ankit Agarwal, executive]

We won't give specific numbers, Ashish, for competitive reasons but it was sub 50% levels. And as I said, I think the -- while the volumes have been largely flattish, Basically, if we have seen that, principally, there have been lower volumes from North America and more volumes from other markets like Middle East and India, et cetera. which would have driven down the realization and profitability.

[Ashish Chopra, analyst]

Understood. And also on the inventory levels that you've been calling out, which has been on its way down and hence, the outlook turning slightly positive, any qualitative or quantitative color on how and where do these inventory levels stand today? Where were they at their peak? And how -- what's really the steady state, the norm for the industry in general?

[Ankit Agarwal, executive]

I think, Ashish, it varies a little bit because there's inventory essentially in 3 places. It's with the manufacturers, it's with the distributors and with the end customers, it's across 3 levels. So that's the data that we're tracking closely and in our conversations with more distributors and customers. They do see these drawdowns, which we're now tracking monthly and on a quarterly basis. So that is why we get the confidence. And when we look at what is kind of a basic or bare level of inventory, they would still need to maintain, it will never go down to 0. At which point, they need to make sure that they're ordering and replenishing.

That is where we are seeing that we are probably at current run rate levels of reductions. That is where we believe that we are 1 to 2 quarters away from reaching those levels that they are comfortably needing to refinish and that the whole cycle kind of picks up to a normal level. And that is where if you look at also the CRU forecast and other forecasts from the industry on optic fiber volumes picking up, you will see that kind of uptick, particularly towards the end of CY '24 and into '25 onwards and quite meaningfully in '25, '26 on the back of BEAD and other projects.

[Ashish Chopra, analyst]

Understood. And just a last couple of quick ones from my side. One was on the order booking, how was it from the U.S. in this quarter in terms of contribution, did you already see a pickup there? And lastly, on the data center business, how much would be our exposure? And do you think that you need to build separate capabilities and/or accreditation to be a significant player in that market?

[Ankit Agarwal, executive]

So we had normalized, I would say, normalized demand from U.S. and probably some more orders, some good long-term orders, particularly from Europe market, some from India market as well. Typically, in our customers in Europe and U.S. would look at 2- to 3-year contracts. So as it depends on where some of those opportunities come up. So that's where we see that. And also from distributors, I think that those opportunities will continue to start coming in including in Q1, Q2, et cetera, for the U.S.

On the data center part, I think definitely, as we shared in our slides, it's quite exciting, and I think there is more and more of an understanding for the industry and ourselves that clearly, these kind of gen AI based data centers almost or gen AI enabling data centers, we will have fairly dense kind of fiber networks within them, much more fiber is required per rack and it could be the magnitude of 5 to 6x or even more. So we are trying to understand that more we are trying to understand what is our own product portfolio required both from the -- literally starting from glass, fiber, cable and even connectivity. And certainly, we would look to increase our own capability and team to cater to this market. But this is something, which will take a little bit more time, probably over the next 2 to 3 years, we will look to build this and make more of a presence in this market.

[Chetan Wani, executive]

Thank, Ashish. We'll take next question from the line of Vipul Shah. Vipul, you may please go ahead.

[Vipul Shah, analyst]

So since you are reluctant to share your absolute production and utilization levels, May I ask what -- at what percentage of capacity utilization will break even in our optical fiber business?

[Tushar Shroff, executive]

So Vipul, at about 60% kind of utilization. We see that we should be -- 60% to 65% of utilization, we should be back on track in terms of the profitability for the Optical Network business from OFC perspective.

[Vipul Shah, analyst]

So what was your exit rate for quarter 4?

[Ankit Agarwal, executive]

It was up 50%. That's what I shared.

[Vipul Shah, analyst]

Okay. And do you see any near-term improvement Mr. Agarwal?

[Ankit Agarwal, executive]

Yes, absolutely. I mean, that's what I've been sharing that it's really a function of how we see the inventories drawing down and the demand coming up. And that's why we are broadly guiding that we're 1, 2 quarters -- 1 to 2 quarters from that. But directionally, of course, we do believe Q1, Q2 will be better than previous quarters.

[Tushar Shroff, executive]

And Vipul, the good part is that what we have seen is that the kind of an order booking that we have for this particular quarter, which gives us the confidence that the order booking will start to roll in the coming quarters, which will help us in terms of booking the revenue and facility both.

[Vipul Shah, analyst]

And sir, last question, [ I mean ] if you can directionally comment the prices of at the exit of last quarter as compared to 2 years back, how much they are down?

[Tushar Shroff, executive]

The prices of what, Vipul?

[Ankit Agarwal, executive]

No. So I think, look, it's -- I don't think I'll be able to give us a specific answer there because it -- the pricing really varies by geography, both on fiber and cable quite a bit between prices locally in China, prices in India, Europe and U.S. as kind of distinct markets. I would at least comment that in the last couple of quarters, the market has been fairly stable. And we -- at least from our focus markets, we don't see any reduction in realization. We are continuing to focus on our solution offering of cable plus connectivity together, which would help us increase our attach rate and profitability in the next 1 to 2 years.

[Chetan Wani, executive]

Thank you, Vipul. We will take next question from the line of Krunal. Krunal, please go ahead? Krunal Shah.

Krunal, can you go ahead with your question?

[Krunal Shah, analyst]

Yes, can you hear me?

[Chetan Wani, executive]

Yes.

[Krunal Shah, analyst]

This is [indiscernible] here. Ankit, great job on the reduction of employee costs. So one, I just wanted to understand how much of this is coming from a reduction in contract labor or production cost or production manpower and how much of it was -- some idea of as we ramp up volumes again, how much of these costs will come back?

[Tushar Shroff, executive]

So Krunal, I think with respect to the employee cost, if you see the manpower cost, it's all about the permanent employees. While the labor cost, which is -- generally it's a contract labor, which is not part of the manpower cost, that's getting reported as other expenses part of the line item in the expense. So from that perspective, you see it on a like-to-like basis, we have been able to reduce the substantial amount in terms of manpower expenses. So some part of this particular expenses as we build up some kind of capability. On optical interconnect side, correct, that is something that we will have to keep investing to build up the entire portfolio in terms of an R&D as well as on the marketing side as well as the sales engineering support side.

So as we structurally grow that particular business, we'll see that the structurally increase in this particular cost but from the OFC perspective and for OF perspective, whatever the cost optimization that we have done and we continue to drive to reduce this particular cost further down for these 2 segment of the business.

[Krunal Shah, analyst]

Yes. Great. So firstly, I think it's great to hear that we made some breakthrough in the U.S. But in terms of our overall journey in terms of capability development, whether it's the range of products or R&D or sales capability on the interconnect side for the U.S. market, so where are we in our journey from 0 to 100?

[Ankit Agarwal, executive]

I think -- I would put it this way, I think there's been a lot of work over the last 12 months, I would say, overall, both for Europe and U.S. markets also for some of the other global markets. There's both been focused on building our intellectual properties. There will be focus on product development, prioritizing it. We also look very closely at cable plus interconnect development together because of the linkages between the two. So I would say, particularly to your question on U.S., I think we have a good, strong base of products but one of the areas where we do see our strength is our agility to customize for our customers.

And so that's something that we continue to co-create with our customers. And as those solutions get developed and put into the field, I think that will be an important driver of our business, particularly in the U.S. We're also building some strong technical resources and capability in the region. So as those teams come on board and they help support us on the ground, I think that will also be a positive driver.

[Krunal Shah, analyst]

So how many would you -- do you think this would be like a 2-, 3-year journey or a really long-term journey for us?

[Ankit Agarwal, executive]

No, I think a 2- to 3-year journey, I think that is fair. It also takes some time to build credibility in the market to get a deep understanding of on ground how the network behaves and network requirements. So that's the phase we're in. And typically, I think it takes 1 to 2 years sometimes in that period to even get some of the customer approvals.

[Krunal Shah, analyst]

Sure. And last question, Ankit. We -- of course, on the IT services side, we are very close to breakeven. We had a little bit of a blip this quarter. But how is next year overall looking on IT services growth and profitability?

[Ankit Agarwal, executive]

Yes. I would actually mix the 2, as you said, we're looking at profitable growth. So I think that's really where Raman and the team are driving that. That -- while there could be many opportunities, we're really keeping that focus and discipline that we -- while we want to grow, how do we find that balance and still make sure that we first get to breakeven as we've been discussing and then look at profitability. So that's something that I think we are aware that probably overall IT services sector is currently a little bit challenging.

But certainly, as that also overall environment improves over the next 1 to 2 quarters, the intent is certainly first to get to breakeven quickly and then look at profitable growth. So we are also mindful of our own investments into the business so far. And hence, it's important that going forward, the business creates a profitable growth.

[Chetan Wani, executive]

Thank you, Shah. We'll take a last question, and that would be from the lines of Suhan Joshi. Suhan 1 or 2 last questions from you, please.

[Suhan Joshi, analyst]

So Ankit, when do you expect the allocation of tenders in the BharatNet project? Will we have any growth coming this year from that?

[Ankit Agarwal, executive]

Yes. Suhan good question. I think basically, there is some of the responses to the inquiries, et cetera. So it's to the BharatNet tender and so currently, it is probably expected. Current visibility is probably in the next 1 to 2 months there could be a response to the tenders, and then there could be some more work around that. So practically, I think some work could happen towards our financial year Q3 or maybe Q4 is where there could be some impact. Again, it is vary depending on whether its business to us on the fiber deployment side or its business for us on cable supply or possibly even fiber supply to other cablers. So -- but broadly, we do think that there will be some activity on the ground probably by Q3 and Q4 of our financial year.

[Suhan Joshi, analyst]

Okay. Second question is, how are we seeing the demand of tower fiberization in India? Since India, I mean, as a rate of, say, just around 37% of tower fiberized and with 5G rolling out very fast, do we see any big upside in demand coming from India itself is regard to over tower fiberization?

[Ankit Agarwal, executive]

Yes. I mean I think it will, at the least, be steady and maybe some healthy growth primarily. I would separate the 2 that probably we do see particularly the demand from at least one of the two large operators to scale up given that they want to get to higher tower fiberization probably at 70%, 80%. So I think definitely, one of the two large operators will scale up. The good thing is both the large operators Jio and Airtel have very ambitious plans for fiber-to-the-home as well fiber to enterprise. So all of this is converging, I would say. So when look at it as one ubiquitous network, whether it is for towers, fiber to enterprise, fiber to home, all of it is kind of getting built, including fiber for data center requirements, is all getting built at one time. So we do see this kind of coming together.

And definitely, the -- on top of this, then you will have the BharatNet kind of requirements, which will be in rural India. So we are bullish on India. It's our home market, and we do hope that the demand increases over the next 3 to 5 years.

[Suhan Joshi, analyst]

Okay. One small question, if may I ask, just a small question.

[Chetan Wani, executive]

A last one, Suhan.

[Suhan Joshi, analyst]

Yes, yes. Sure, sure. I mean with this prolonged high interest rates and U.S. elections coming up, do you see any impact on BEAD project? Or you will continue with irrespective of which of the political parties come into power in U.S.A?

[Ankit Agarwal, executive]

Yes. The BEAD project is bipartisan approved. And by both the parties, both the houses. So to that extent, we don't see any negative impact on BEAD based on the elections. On the interest part, I think definitely, it's been -- at least for STL, it's been positive to the extent with our fund raise. Now we'll be utilizing that for our debt reduction and to that extent, our interest cost will come down to some amount in -- for the current year.

[Chetan Wani, executive]

Thank you, Suhan. Ladies and gentlemen, with this, we come to the end of the question-and-answer session. And Ankit, I hand over the call back to you for closing remarks.

[Ankit Agarwal, executive]

Thanks, Chetan. I would like to thank everyone for attending this call and showing interest in our company. Despite a challenging market environment, we have managed to make progress on our key strategic priorities, and we have reduced our net debt by INR 334 crores, majorly through internal accruals. We have successfully completed the QIP and onboarded marquee investors, which is a testament to our capabilities and future potential. I thank these investors when placing their trust on STL.

During the last FY '24, we have worked on all factors in our control and attempted to become lean, agile and established, an industry-leading cost model. In this new financial year FY '25, we'll continue to aggressively pursue business opportunities presented by the market on the tenets of deep customer engagement, product innovation, sustainability, and we're confident that we'll reap benefits of this into the future. We are very positioned to execute in our robust results and create shareholder value as the demand normalizes.

I hope we'll be able to address and clarify all your questions and comments. For any further questions and discussions, please feel free to contact the Investor Relations team, which includes myself and Tushar. We look forward to continuing the conversation with you in the future. Thank you. Jai Hind.

[Chetan Wani, executive]

Thank you, everyone. We close the call.