Tejas Networks Ltd

NSE:TEJASNET

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Tejas Networks Q3 FY '23 Earnings Conference Call hosted by ICICI Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Bhupendra Tiwary from ICICI Securities Limited. Thank you, and over to you, sir.

[Bhupendra Tiwary]

Thank you, Faizan. Good evening, everyone. Thanks for joining in for the call. From the management, we have Mr. Sanjay Nayak, who's Chief Executive Officer and Managing Director of Tejas Networks, Mr. Arnob Roy, who's Chief Operating Officer; and Whole-time Director; Mr. Venkatesh Gadiyar, who is the CFO; and Dr. Kumar. N. Sivarajan, who is CTO. So without much ado, I'll hand over to Sanjay. Over to you, Sanjay.

[Sanjay Nayak, executive]

Thank you, Bhupendra. Welcome to Tejas Networks Q3 earnings call. We had uploaded the presentation on our website. I hope you had a chance to review it or download it because I would be going over that presentation during the next -- in the course of the call. So I'm on the Slide 1, which is the key updates for the Q3 FY '23. On the financial side, our net revenues were INR 275 crores, which you will see that on a consistent basis between Q2 and Q1, we have been improving. Loss after tax is around INR 11 crores on a consolidated basis, and we have been -- the account for Q3 include the consolidated accounts of Saankhya Labs that we acquired. And on a stand-alone basis, we were profitable at around INR 5 crores. Cash and cash equivalents are at INR 1,221 crores and we again continue to be a no-debt company. And order book at the end of Q3 stands at INR 1,431 crores, which is quite healthy. In terms of highlights of our business, the optical business, which has been the one which has a lot of products that we've been working on for many years. The strong momentum continues. In addition to the routine business that we win, we are also L1 in a very large pan-India tender for building a backbone for our 4G and 5G, winning against global MNCs, and we believe this will have a significant revenue potential during next year. The order we expect to close sometime in this quarter. And this will possibly be the largest single order for optical networking business till date. On the wireless business side, we've been working on a 4G project, again, a pan-India project with a large customer in India. All the technical, commercial and all other related issues have been closed with the customer. And it's just the process that is going through. And we again expect the order to come to us in the next few weeks. On the R&D side, in line with our significant increase in product portfolio and our aspirations to become a much larger business. We do need to continue to invest a lot more in R&D, both in wireline as well as wireless products. So we have a lot more focus on 4G and 5G. And as such, we have increased our employees to 1,250, out of which around 800 are in R&D, and which compared to 1 year back is a 60% increase in head count on R&D compared to December 31 of the previous year. So this just gives you a sense of the significant investment focus we have. Arnob will talk about what all are the key initiatives within R&D that we are working on. On the supply chain and manufacturing side, which is a very important aspect for our business because we have a lot of orders, but we are supply constrained for fulfilling customer orders due to shortage of certain chips. While overall, the semiconductor shortage situation is improving, there still are many category of chips and there are certain specific components that do have long lead times. We discussed in the previous earnings call that we reengineered our supply chain processes and instead of just relying on contract manufacturers, we have now got far more better visibility. So we have upgraded our internal systems, processes, tools and of course, added more manpower as well. But net effect of all of that is we believe that we have far better control on the situation. And given that the lead times for certain components will continue to be more than 52 weeks, even during the current calendar year. We do believe that with the inventory actions we have taken with the changes that we have made in our systems and processes, we are confident that we will continue to see revenue improvement. And most importantly, we have lined up a lot more production capacity because on the large orders that we are talking of not just in wireless, but also in wireline, -- we do believe that there is a significant revenue scale up opportunity in the next financial year. And we have signed up 3 new EMS vendors as our contract manufacturing partners. In addition, we have made investments in our own internal facility in terms of warehousing or production floor or people so that we can execute these large orders that we are expecting on time and within the criteria that had been set out. We do have -- in Q3, we have seen some gross margin pressure. A lot of the deals that we had signed were in rupees and were signed 6 months, 9 months, 12 months or even earlier. So a combination of chip prices for certain kinds having increased and hit us. Second is the exchange rate, which from the time that we had signed the deal to what we have been supplying right now. And third, as you saw -- as you'll see in our total numbers, the percentage of revenues in India has been higher. Our international revenues in this quarter have been lower. So the combination of these 3 things have resulted in gross margins being lower compared to previous quarters. We do believe that going forward, we will have much larger revenues so the percentage level of gross margins may be lower, but the volume advantage that we will get because of economies of scale should mitigate that and give us the right amount of profitability that we are looking at despite India business going to be a high percentage of revenue in the next year. So on an overall basis, between R&D and supply chain, our philosophy is that we are investing in our business, both from a technology angle and process and systems and manufacturing angle. -- so that we -- rather than focusing on very short-term profitability for the quarter or so, we would really be focusing on long-term profitability, which should start resulting and be visible starting from next fiscal year itself. So that's the kind of viewpoint we've been taking on our business. In addition, we've also received an investment of additional INR 300 crores from Panatone Finvest which is a subsidiary of Tata Sons against the final subscription of Series B warrants for which in today's Board meeting, shares have been allotted to them. Post this, Panatone would be earning 56.38% of the total shareholding in the company. Of course, the additional investment will ensure that our balance sheet gets stronger, and we are able to take the right business calls to grow the business for the opportunities that are ahead of us. Now going onto the next slide, which is titled corporate update. So we talked about last time that we had applied for the PLI scheme for the Design linked PLI, where we had upgraded our application from INR 100 crores to INR 750 crores of investment commitment. This can result into PLI incentives of potentially close to INR 2,800 crores over the next 5 years of the PLI scheme. So we do subject to, of course, getting the higher revenues and so on. So, so far, we will be meeting the year 1 requirements for investment as well as the incremental sales and do expect to get the payouts starting from -- I mean, based on the first year performance itself. Next is we've also -- on the product side, the products converged optical products, wireless and optical product that we have won the "Broadband Innovation of the Year" award at the Mobile Breakthrough Award Conference in USA at last year. We, of course, are expanding R&D both in Bangalore, but we do believe that IIT Madras has a fairly good amount of talent, which rather Madras -- Chennai has a lot of talent. And we have set up our R&D facility in IIT Madras Research Park, where we can actually now hire local talent and augment the team that we have in Bangalore as well as in Gurgaon and Mumbai. On the patent side, we have increased our portfolio to 443 patents between Tejas and Saankhya. And later this month, we will be showcasing a lot of our products at the Mobile World Congress in Barcelona, both in terms of the new 4G and 5G products as well as the optical and xPON product that we have. Saankhya Labs integration is on track. We acquired 64.4% in July of last year. And for the balance, we filed for the amalgamation through the NCLT process, which is underway. In line with synchronizing things much better. We have transferred 169 people from Saankhya and now they are part of Tejas and are reported as – in the Tejas financials. And this will, of course, strengthen the 5G radio programs and time to market for some of the new products in the wireless side. And the Saankhya team, which is the subsidiary at this stage, continues to focus on the 5G broadcast and satellite communication and fabless chips, which they are designing for us in 5G and 6G products. Next slide, I'm going to -- on the Q3 financial update in terms of details, I would ask Gadiyar to walk us through the next couple of slides. Gadiyar?

[Venkatesh Gadiyar, executive]

Yes. Thank you, Sanjay. Good evening, everyone. You are in slide Q3 FY '23 financial update. Yes. As Sanjay just mentioned it, despite of our supply chain challenges, we had our quarterly revenue consistently grew over the 3 quarters. The net revenue -- the consolidated revenue for the Q3 was INR 274.6 crores on a year-on-year growth of 156.4 percentage. And we had -- for Q3, the EBIT loss of INR 21.3 crores and the PBT loss of INR 5.1 crores and a PAT loss of INR 10.9 crores. And similarly, for the 9 months, revenue the revenues were INR 620.3 crores on a year-on-year basis, the growth was 46.3 percentage. EBIT loss of INR 56.3 crores. PBT loss of INR 7.1 crores and a PAT loss of INR 16.4 crores. It's important to note that on a stand-alone basis, Tejas had a revenue of INR 253 crores for Q3 and a profit of -- PAT profit of INR 5 crores in Q3 '20. And a stand-alone basis for 9 months, we have crossed the last year's FY revenue. And typically, Q4 revenues will be in large in nature. And above revenues -- in the above revenues, the Saankhya revenue for the quarter Q3 was INR 20.9 crores. And for the previous 9 months, it was INR 34.9 crores. And Saankhya EBIT was -- EBIT loss of INR 14.5 crores. And for a 9-month EBIT loss of INR 20.1 crores. And the Saankhya EBITDA loss of INR 13.5 crores in Q3 and INR 18.8 crores for the 9 months. Next slide. We are in Q3 FY '23 key financial indicators. The cash outflow from operations was -- for the quarter was INR 114 crores. The net worth was INR 2,567 crores. Inventory has increased from INR 399 crores to INR 494 crores, and there is an increase of INR 95 crores during the quarter. It's primarily increased because we could not ship the complete or imbalance or balance system due to the critical component shortages we had. And also, we have secured some long-lead inventory in anticipation of the expected order requiring faster delivery of the products. And the trade receivables have moved up from INR 380 crores to INR 500 crores. And despite we have collected about INR 215 crores during Q3. The net working capital has gone up from INR 639 crores to INR 766 crores, primarily due to the increase in the inventory and receivables. Finally, the cash and equivalents as of December 31, 2022, stood at INR 1,021 crores. Post our quarter end on February 3, 2023, we received an investment of INR 300 crores from Panatone towards the final subscription of Series B warrants for which the allotment of the shares has been taken place today. With this strong cash in time, we have and a strong balance sheet, it will enable us to execute large opportunities and scale up our business going forward. With this, I will hand over to Sanjay.

[Sanjay Nayak, executive]

Thanks [indiscernible]. The next slide, which is the sales breakup on a cumulative basis for the first 9 months. So if you see the chart on the left-hand side, it is the total FY '22 revenue breakup between India government, India private and international. And the chart on the right-hand side gives the corresponding numbers for the 9 months period. So if you see, we have done INR 620 crores year-to-date. If I look at the run rate business, which is India private plus international, during the 9 months contributed to 76% of the total. India government was 24% of that 9-month cumulative revenues, which constitute a year-on-year growth of 139%. India private was 54% of the 9-month total, which is a year-on-year growth of 83%. And international was 22% of 9 months, which is a decline of 24.1%, which is what I had mentioned earlier that we did have a decline on the international side. On the backlog that we have of the total backlog, India is INR 1189 crores and international is INR 242 crores. So one of the things we expect that Q4, we should have a significantly higher international revenues. Part of it is because for international customers, we are expected to ship complete systems in most cases, and we cannot ship part inventory. So if something was missing, we had to held back those shipments. So we do expect international to improve in Q4. If I were to look at the sales outlook going forward. So our focus, if I would say, over the medium term, would be to really expand the business volumes and achieve economies of scale at the earliest possible. What this really means is that we have to grow the top line much more aggressively, and the opportunities are clearly visible to us, not just for wireless business, but also for wireline business. And as a result, we do see that given all the growth opportunities in India, the CapEx push in India, the Atmanirbhar agenda and our own positioning in all of that, we do see that there's a very large revenue opportunity in India in the next 4 to 8 quarters. And we are well leveraged to take advantage of that. So once we gain the market share in India, -- we should get the economies of scale. So for example, on the large order that we have been working on using that as a volume, we have now been able to derive cost advantages for the rest of the business as well. So what is likely to happen going forward is that on a percentage basis, while our gross margins may look challenged. But at a profitable level, profitability level at the EBITDA level or PAT level, we expect things to continue to expand and achieve closer to the long-term business model that we would like to see. So I just wanted to kind of call that out that while on an absolute basis, international will continue to grow, the growth of India on a relative basis will be much faster. Hence, the percentage of international contribution in our business will be reduced both this fiscal year as you have seen as well as in the next financial year. One other thing was that in terms of this financial year that while we have a backlog of international, which will again as I said make sure that the international revenues have come up in Q4. The challenge for growing and winning new customers in the near term was that we did not have enough inventory coverage to give them deliveries in a short period of time. And if we required a very long delivery period, they had less motivation to shift from their existing suppliers. So we really kind of focus more on retaining the international customers that we have rather than going and going after too many new customer wins. However, with the supply chain situation coming under control, both because of internal actions as well as macro improvement in the overall semiconductor situation. We will be changing that and the growth on the wireline business for international exports during the next fiscal year will continue. Wireless, of course, we will continue to focus more on India to begin with and then go international in the subsequent -- in the next calendar year. So I kind of wanted to give a broader view of the sales strategy that we are thinking from a business perspective. At this point, I will ask Arnob to go over the next 2 slides, both in terms of just a recap of the portfolio of the different segments. And from an R&D investment perspective, what are we doing to kind of make our portfolio more competitive and catch up on things where we may not already be there.

[Arnob Roy, executive]

Yes. Thanks, Sanjay. So as you are all aware, our conventional business and our product line has been in wireline, where we have a very strong end-to-end portfolio of products from access aggregation to the core, which are used for building optical networks for many different applications. However, the past few years to our investment in wireless technologies and our recent acquisitions. We also acquired a fairly comprehensive wireless portfolio, 4G, 5G base stations, broadcast radio heads and satellite communication products, all of which put together give us a fairly large additional addressable market to grow our business. Together with all of this, I think one of our few big differentiator is our end-to-end network management system, which is very unique in terms of being able to manage an end-to-end network across multiple technologies and multiple layers. So -- these -- we are in the technology business, which -- where technology is continually evolving, and we had significant R&D investments to make sure that we are upgrading the technology and products and staying competitive. So in the next slide, I'll kind of give you a flavor of where our R&D investments are going in right now. So in the area of wireline products, for the long-haul equipment with WDM OTN, we are investing a lot in higher capacity, long-haul transmission and OTN switching where the data traffic capacities for transmission and switching are going up significantly year-over-year. For the fiber to the home for the PON technologies, we already have a very comprehensive portfolio of 2.5 gig and 10 gig PON. Now we are evolving our portfolio to grow to 25 gig and 50 gig PON. So that will enhance significant capacities in the access network, which will enable many more applications than what FDA serves today. For packaged switching and transport, again, we are investing in higher capacity switching fabrics for addressing metro capacity growth and also investing a lot in software protocols for the next-generation mobile backhaul applications. For the wireless products, we are expanding our range of TDD/FDD videos, supporting 4G and 5G in low and mid-band including massive MIMO considerations. We are also investing in evolving our broadcast radio head solutions for direct to mobile and data distribution as a service applications. And finally, we are also upgrading our RAN solutions to support the latest 3GPP releases and also achieve ORAN compliance. We are investing in both the standards in terms of our RAN product development. I talked about our management staff software and the strength of this being a multilayer multi-technology solution. And we are investing a lot in building intelligence in our management software solutions to be able to manage these networks more efficiently. One of the areas of investment is our AI-based network failure prediction engine. Given the visibility of our network management software across the network, across multiple layers, we have a unique opportunity of correlating all the events and data which can be extracted from the network at all levels and to be able to predict failures that can happen based on the events and allowance that we see today. So we expect this to be a very big huge benefit to operators going forward in terms of maintaining their networks proactively. We're also evolving our management software to make it more affordable for smaller vendors using cloud-based NMaaS service products. We are also investing in management software. We're making radio networks more efficient by developing intelligent video mapping and control technologies for interface reduction and network power savings. We also, with the acquisition of Saankhya, we also acquired a lot of semiconductor design capabilities and IPR. And the investments going on over there is one of the important ones is developing the next-generation television broadcast standard, ATSC 3.0 based receivers modulation demo relationships. And also the development of next-generation, software-defined radios processors for 5G radio design. So with all these investments, we are taking our portfolio and our products and technologies to the next generation, and we hope to see significant customer traction in using all the upgrades in our products.

[Sanjay Nayak, executive]

Okay. Thank you, Ana on the last slide, just to summarize and then we'll open up for questions. So again, if you see that we've seen consistent improvement in revenues with better supply chain management, in terms of internal processes. And of course, while the external environment will stay challenging for some more time, at least on a few ships, we figured out how we can manage the situation better. Our order book is good, and the pipeline of new orders, both for optical as well as 4G is quite significant and substantial. So we expect that we will accelerate our quarterly revenue growth to quite good levels. And next financial year, we expect to achieve serious economies or still in terms of the growth of the business. We continue to be invested in R&D to increase our time to market for our 4G and 5G products. We have scaled up all our manufacturing capacity between what we needed to do internally in tees and externally with other EMS partners in the local vendor ecosystem. And we are confident that we can execute any large order that we're expecting orders we are expecting on time. And the Saankhya integration is progressing well. Our cash flow position is good and with the additional INR 300 crores from Panatone. From a balance sheet angle, we are in a very good shape. In summary, our focus is to focus our efforts and business to scale up to global levels very quickly. And all the proactive investments are in place. And I can mention that with everything that we've accomplished in terms of progress during the quarter, I can confidently say that we are on track on achieving our objectives of scaling up the business in a short period of time. So thank you. And maybe this is a good time to open up to questions, and we'll be happy to answer specific questions that you may have.

[Operator]

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Mukul Garg from Motilal Oswal Financial Services.

[Mukul Garg, analyst]

Sanjay, first of all, congratulations, on achieving the highest revenue number in on a quarterly basis. Good to see the 275 figure. First question was on the in terms of investing into the business. –

[Operator]

Sorry to interrupt Mr. Garg. The audio is getting slightly muffled. Please use the handset mode.

[Mukul Garg, analyst]

Sure. Sorry. Yes, Sanjay, a couple of questions from my end. First was on the philosophy in terms of operating expenditure. Clearly, as you highlighted, there were lead time impacts on the inventory cost. What really is kind of keeping the sending cost still elevated or wait time at like almost a year, given that we are hearing from multiple semiconductor companies that they are now running into a oversupply kind of a scenario. And also in terms of the R&D investments, which you again indicated, how should we see the impact of that on the profitability side, I think it's fair to invest and kind of come up with a good portfolio. But can you give an indication of like how we should kind of look at that from a profitability perspective? Is it something which will kind of weigh on margins for next 1 to 2 years? Or can that be absorbed far earlier than that?

[Sanjay Nayak, executive]

Okay. So let me answer your first question. So in general, yes, the semiconductor supply situation is improving. But there are 2 categories of semiconductors where there are still problems there. One is the analog and power systems kind of thing. There are a few specific companies. I wouldn't turn in them here, but whose parts still have a lead time of more than 52 weeks. So that is one area where you could have done, and they may not cost a lot more, but they do influence whether your system gets complete or it gets remains incomplete till those particular parts come. We do believe that as this calendar year progresses, those things will also improve. The second category of semiconductor chips, which are digital chips, where there is still a challenge in shortage or is that a lot of the semiconductor capacity of the older nodes, which is more than 28 nanometers or 28-nanometer and above was shifted for newer semiconductor node technology. However, the demand for those things are still there. So hence, there is a backlog of those parts, which sometimes again, block the rest of the supply chain as well. So given these 2 categories of things -- we do believe that we have to continue to be more proactive and more advanced in terms of our planning action. As regarding the cost is concerned, yes, for semiconductor components like memory chips and others, there is a cooling off both in terms of lead times. You can literally buy memories in spot as well as in terms of cost. I think there is a lot more competition in capacity available. But for these specialized chipsets, which go into our kind of products, I don't think that tipping point has come as yet. As the year progresses, it will, we are seeing improvement signs. But given that we have to do planning for next fiscal year almost right now, it is prudent for us to take actions on those, which is what we have taken. So I would say that the supply situation will continue to improve. We have made progress, and we'll continue to do far better in Q4 and Q1 and so on and so forth. But I would still be a little bit cautious in terms of saying that everything is all under control. The second question you had in terms of, yes, we are increasing R&D investments. If you have to compete with the best in the world, we have to have the best products and this requires investment. So when will that investment come into play and when do we see benefits of that to the company and to the investors. I think we'll start seeing the benefit of that as early as next fiscal year itself. So while if you see it, one of the good parts of our business and the product business in general, is that our costs, which are R&D costs in primary terms, if you saw, we have INR 800 crores out of INR 1250 crores -- 250 people are in R&D. They're almost [indiscernible] fixed in nature. So as long as we continue to increase the revenue significantly, that percentage of R&D cost or all our operating costs, why just R&D, SG&A and everything else, will start diminishing quite significantly on an absolute basis, it may increase, but if we significantly increase the revenues on a relative basis, the percentage will quite dramatically reduce. So we do expect that next fiscal year itself on a consolidated basis -- again, on a consolidated basis, because our revenue base is small, I think the contribution of Saankhya consolidated the account had a negative financial impact. But once the revenue numbers scale up, I do believe that the profitability will start showing up. So I would say that next year itself, we should see significant improvement in profitability because of the scale of business. And despite the fact that we are anticipating and planning that we percentage GM will be lower than what we have been historically operating, but the absolute number of gross profit will more than compensate and give us the economies of scale, which I talked about earlier. So short answer is whether the R&D investment, the manufacturing investments and all the investments that you made during this fiscal year are in line with the business that we expect to scale up in -- starting from -- I mean, Q4 itself in some way and then continuing over the next fiscal and the fiscal after and so on. So I think we are prudent about making sure that we are investing in stuff that should give us a decent return in the medium term itself.

[Mukul Garg, analyst]

And just one more question. The L1, which we are on the optical side, we are interesting to see us come back very aggressively on optics. But is it the same customer right now, which given that it is an L1 is it fair to assume that public [indiscernible] customer and 4G, 5G indicate that it will be the same customer where we are looking at radios?

[Sanjay Nayak, executive]

We -- for confidentiality, of course, we cannot name the customer as yet. But all I can say that it was an open bid for all the global competitors to bid into. And on the strength of our product and everything else, I think we are L1. And as I said, it's a very, very large deal, the largest that we've ever had in optical. So that, again, gives us a good cushion in terms of revenues as well as profitability going forward.

[Mukul Garg, analyst]

So that basically means that next year, the public sector will be a fairly large portion of our revenues, if both the orders kind of go through?

[Sanjay Nayak, executive]

Potentially, yes.

[Operator]

The next question is from the line of Vimal Gohil from Elkem Capital Management.

[Vimal Gohil, analyst]

Sir, my question on your L1 disclosure has been answered. On the second question is on our operations and supply chain. I wanted to sort of have your view. It's been almost 2 years since we've been grappling with this issue. In your opinion, has this issue sort of panned out in line with your estimates, let us say, whatever you thought in the end of last year to where we are currently. How has the situation been -- could it be -- could it have been a bit better than what the we are or we are probably worse?

[Sanjay Nayak, executive]

So with the wisdom of hindsight since you asked that what would -- compared to what we expected it to last year versus year. So I think there are 2 parts of the supply chain improvement that we have finally seeing. One part is, as I said, the external environment is certainly improving. Certain category of semiconductor components and lead times have reduced, but there still are certain category of components where the lead times haven't reduced as much as they should have. And unfortunately, in our business, the weakest link dominates. So even if there are a few parts which are not available, it chokes the entire supply chain. So I think in that sense, we had anticipated that things could be better by now, but they are in most cases, but there are still some cases where they are not there. The second part of the question is that -- and if you knew this 1 year back, we would have taken more aggressive procurement actual for those parts and said, let's secure not for 52 weeks, but for 80 weeks because that's what it takes. So it was always a balance between how much of inventory risk you take in terms of ordering 12 months in advance, 15 months in advance when you don't have a direct visibility into the business. So I think that balance of judgment, of course, if I were to say with the wisdom of hindsight, I would say that, yes, some parts did not come back in time as much as you said. But there's a second aspect, which I think I had articulated in a little bit more detail in the last earnings call that we were working in a turnkey model with the EMS companies. And we figured out that if the EMS company saw that the lead time for certain components is 52 weeks ahead. Many other components, they will not order because that's how their tools and systems work. Hence, many other parts, which would have a 30 weeks or 20 weeks lead time, they would not order till the guy with the 52-week lead time had visibility. Whereas with our efforts, we were able to pull the gap for 52 weeks down to say 40, but then the other materials were not available. So what we have done and which is what I mentioned that we have reengineered our supply chain. Now we have entire visibility through our MRP system, our planning system into the EMS systems so that we can see the end-to-end problem and actually solve it upfront, which is why we have been able to see some improvement in last quarter in Q2 and a little bit better improvement in Q3 and hopefully a lot more improvement in Q4. So essentially, as a company, we were tooled to completely rely on EMS companies to do all the supply chain management. Which we felt that in the turbulent times that we have been living in the past 2 years, they have not been able to respond as effectively and not just a problem for us, but anybody who did not look at the end-to-end supply didn't ran into this problem. So again, with the wisdom of hindsight, if I would have figured this out 1.5 years back, we would have been far better shape. We figured this out that we needed to do things differently about 6 months back. And in the last 6 months, I'm happy to say that we have a good handle of the problem. So going forward, we do believe that we have far better visibility into every single component where the problem are, where the weak areas are, and we are finding a way to manage it. So net-net, I would say, could have anticipated better. But where we are today, I think we now know what needs to get done. And again, one last part, I didn't precisely say that for executing the large orders going forward, we would be using a model where we will use a lot more EMS, but the component procurement will be done by us, and we will be giving them a conversion on a job work basis. was on the turnkey basis that we have been doing historically. And of course, to do that, we have [ seed ] up with the supply adequate payment terms so that it does not at all come back and challenges in terms of our working capital flow. So those are all the changes in supply chain, which I think has been done. We have kind of also are in a unique situation because in the electronic industry, if you are a very large company, you've got the right kind of attention from the suppliers and you were able to manage things a little bit better. If you're a very small company, your needs are too little, so it could have been managed from pocket chain. But from midsize companies like us, we are kind of not getting the right amount of attention, the EMS guys didn't do the right things in terms of process and systems. And we came back with a revenue shortfall because -- the revenue shortfall also had an impact because if you're not clearing the backlog of orders, we could have done a lot more business if we had clear backlog of orders. So when I say it's confident that our wireline business is quite healthy. I mean, actually, I can see that a lot of run rate customers could have given us a lot more orders. We could have one international deal and said, okay, if you supply in time, I'll win that deal. But we were handicapped on those. And I feel that having solved the supply chain issues in a reasonably holistic way by now, we feel confident that going forward, we should see less surprises on this account.

[Vimal Gohil, analyst]

I have a 2-part question on your financials. Firstly, on your gross margins. We've historically comfortably operated at 40%, 45%. We are way below that at this point in time. So your comment about your gross margins remaining in pressure. I hope that is not very structural in nature, that is point #1. And the second point is on our balance sheet. So if I were to look at our cash and cash equivalent in Q4, we were at about INR 1,100 crores. Since then, we've received roughly INR 1,000 crores of capital from our parent. And despite that, our cash accretion, if you look at our net-net cash where we are since March, it's just about higher by about 100 crores -- and our working capital has gone up by roughly INR 300 crores. So if you can just help us understand the math over there.

[Sanjay Nayak, executive]

Okay. So let me answer the gross margin question first. So for the wireline business, I do expect our gross margins to come back to our normal levels starting from next fiscal year because just the way things are happening, I feel the dip that we had in this quarter or in the near term would be offset by all the other actions that we have in place. So the wireline gross margins or the optical gross margin should be close to our historical numbers during the next fiscal year. The wireless, which is the new business that we are entering and especially for -- if you're going to start up with one large order, naturally, we will not be at the same gross margin level that we have been -- we will achieve in the wireline business. So as a percentage, the gross margin will be lower, but that will be more than offset by the volume of the business. So on a volume basis, at a gross profit level on an absolute basis, we feel comfortable that we will have enough gross profit to sustain all the investments and also deliver profits at the end of the picture. So that's kind of the view. I would say that our wireline business will be back to normal levels, wireless business will be new. Now coming back to the working capital thing, and Venkatesh can add to that as well. Basically, in the near term, what has happened is our focus because of the imbalance inventory situation, our inventory levels that we really see over the last 9 months have gone up, part of it is what I already described in the context of supply chain. So once the inventory starts becoming smooth, and we are able to get that going, we should be able to get that to the working capital on a normalized basis come to normal levels. Again, what is going to happen is if our business volumes increased quite significantly, which is what we are expecting. We have to make sure that the payable and receivable gap, which is what assuming the inventory happens on a smooth flow, the payable and receivable gap is managed. We have done all the advanced working of all of that. And we feel confident and comfortable that there will be no working capital stress on the system and the balance sheet that we have as it should be quite adequate to increase our revenues to quite significant levels as we are anticipating. I don't know Venkatesh you want to add anything or if any part of your question didn't get answered Venkatesh can?

[Vimal Gohil, analyst]

Sir, I just wanted to understand what has happened in the last LTM on an LTM basis, if you can just help us -- help me understand the cash accretion because if I were to look at your cash as on Q4, it was about INR 1,100 crores. Right now, it is INR 1,200 crores after your capital infusion of roughly INR 1,000 crores in the middle of the 4 quarters. So your working capital has increased by roughly INR 300 crores. There's hardly any CapEx because we don't cap balance sheet like that.

[Sanjay Nayak, executive]

Okay. So I think 2 things. We invested in Saankhya so the cash outflow there –

[Venkatesh Gadiyar, executive]

There was the investment in the Saankhya. That's around INR 284 crores. That was in Q2 -- Q2 of this fiscal year. And as Sanjay was mentioning, the net working capital increase was primarily due to the inventory, which we had piled up in the last several quarters, this prosecute a long lead of inventory in anticipation of the expected orders and the imbalance inventory in the system.

[Operator]

The next question is from the line of Sangameshwar Iyer from Consilium Investment Management.

[Sangameswar Iyer, analyst]

Sanjay, good to see 2 consecutive quarters of INR 200 crores plus in revenue. My question here is to understand the Saankhya bit here in terms of operations. Is this INR 40-odd crores, is that the fixed cost out there? I mean, when I look at the stand-alone business and the consolidated business, there is about a INR 20 crore revenue, we are doing a INR 15 crore EBIT loss. So is it something that's fixed and which on scalability will be covered up? Or is there any onetime that is involved -- a onetime cost that's also involved here, which we need to keep into consideration?

[Sanjay Nayak, executive]

So in October, actually, there is a onetime charge -- I wouldn't say onetime, but once we -- as a part of the Saankhya acquisition, we had to issue RSUs to Saankhya employees, right, in up as a part of the transaction deal. So the noncash charge of RSU for this but across between Saankhya and Tejas. I mean what is the Q3 RSU total.

[Venkatesh Gadiyar, executive]

No. For the Saankhya, it was around INR 15 crores.

[Sanjay Nayak, executive]

Yes. So INR 15 crores of the expense that is shown on Saankhya's expense for this quarter is on account of noncash charge of RSUs that has been issued to them. From a cost structuring perspective, the significant cost of the Saankhya team, which is 169 people, we've already transferred them to pages. So if you see the corresponding cost of Tejas on an absolute basis, when you look at our R&D cost and others have increased. So we expect the Saankhya budget from an overall angle in another 3 or 4 quarters, it should be over. But the way to think of the Saankhya business is as follows:They have an existing business, which is on broadcast and some of the other selling of their chips, which are -- which is currently the main revenue source. We need to find ways to increase that. The prospective investment that they were making on 5G is what is now a part of the Tejas ecosystem. And one thing I did mention -- I didn't mention, sorry, but I should mention now, is that part of the 4G deal that we are working on in the same order, there will also be an additional portion for upgrade to 5G. So in a sense, it will be a deal that would be for 4G and 5G. And hence, it is important for us to accelerate those programs and also release 5G. And then we talk about the closure of technical and commercial that's on account of both 4G and 5G. So I think we are investing on the 5G side using the Saankhya team in Tejas along with what we are doing. So that the total product focus and the time to market is improved. So coming back stand-alone Saankhya which you are seeing the finance will continue to increase revenues from the broadcast and the chip side and everything else has come into Tejas for now.

[Sangameswar Iyer, analyst]

So on a -- excluding the RSUs, which is like one time, it will not be there every quarter, right? So when you look at that, Saankhya had INR 20 crore revenue run rate is breaking even at the EBIT level?

[Sanjay Nayak, executive]

Yes. Ballpark Saankhya was breaking even. That is what the objective is because the stand-alone Saankhya entity, we wanted to be at, at least at a breakeven level so that they can continue that business and all the larger investments, which are getting me will be there. So RSU in that sense is, I would say exactly onetime, but you, of course, when you assign it for the first time, the numbers are higher. And going forward, of course, it would reduce as per the chart because it's a noncash charge.

[Sangameswar Iyer, analyst]

Okay. So now secondly, at the end of Q2 -- sorry, during the second quarter, we did mention that 40% of the then order backlog, which was around INR 1,400 crores would get executed by this year-end, right, which wherein we are halfway through with INR 275 crores on the -- in Q3 revenue on the stand-alone. So how is the traction going ahead? And in terms of the availability of your key components, et cetera, do we see that what we saw or what we guided for at the end of Q2 should stand good stead in terms of overall execution? Or is there any hiccup or any headwinds there? A and B, because of the inventory of close to INR 100 crores that's got added this quarter because of finished products not shipped in time, et cetera. Was it finish products? Or was there waiting for some components to be received before it will be finished. I mean just trying to understand the cost component or gross margin dynamics in Q4 and going forward.

[Sanjay Nayak, executive]

Yes. So first question, yes, we are on track. So we should -- Q4 typically has been a good quarter for us, and we expect to see the same, especially now with the supply chain situation under more control than it was in the past. So we should be seeing a continued improvement in Q4 revenues compared to Q3. So compared to what we had guided at the end of Q2 that from the backlog, we'll be able to ship. I think that looks fine. And in terms of the inventory buildup that you talked about INR 100 crores, there are 2 elements. So when we say imbalanced inventory, it is in 2 forms. So think of some of you have seen our products in real life. So I suppose the system has 10 different kinds of cards. We may have built 9 cards and everything else is ready. On the 10th card, there is 1 chip, which has not come on. We had demand for 1,000 and we only got 500. So -- but you cannot wait for all the others to be not manufactured because then you would be perennially waiting. So when we talk of imbalance inventory, it is of I would say, quasi finished goods, which is at the PCB assemble level, which is there. So that is part one. Second part is for the anticipated order, we do expect that we will get some pressure potentially to supply in this quarter itself, some of the wireless stuff at least for a minimum number of sites. So we have also procured the chips and the others and of course, trying to avoid procuring all the materials. But at least the long lead one has been procured, so that in case we are required to supply at least some initial quantities or test quantities in this quarter, -- we should be ready to do that and shouldn't have to start from 0 because the success of the project and success of our execution is on being able to do things very fast. So that -- those are the 2 combination why the inventory went up in this quarter.

[Sangameswar Iyer, analyst]

And finally, if I may, in terms of your international business, we used to have a very strong international business earlier when domestic private was not doing that well. But now with order book swelling predominantly on the domestic side, be private or the government -- we are seeing that there is a stagnation on the international front. Is there any strategy that you're looking at? Any way to kick start or take it to the next level so that the growth is uniform or at least there's a good backup growth coming into the international also because the order book is not selling that much there as compared to the [indiscernible].

[Sanjay Nayak, executive]

Yes, no, a good observation, Sangam. And so there are 2 things we are doing. So for the wireline business, which is let's call where we have mature products, which are proven and all that, we were supply constrained even for the orders in hand. So winning new international customers and giving them a very long lead delivery commitment would not have served our cost well at all. In fact, we are -- even for the existing customers, run rate customers internationally, as I mentioned earlier, we could not -- if we fulfill the order, we get a lot more order. So I think what we believe is that by fixing the challenges around supply chain, we think we are in a much better position to go back and get more orders from existing customers internationally for our wireline products and also target new customers. So that effort in terms of business development effort is on, but I think pushing it to business closure. So we do expect that on an absolute basis, international orders and revenues next fiscal year will be better than this year. But that would primarily be on account of the wireline product. Now the wireless products, as I said even in the earlier call, that our first priority is that a couple of large anchor deals in India which is where we will supply the product, get all our processes, systems, product, maturity, scale, everything established. And a later part of this calendar year, in the second half of this calendar year, we will start testing our wireless products in the lab of various operators around the world with whom we are in constant touch. So we believe that later part of this calendar year, we would get qualified, we would be, I won't say, selected or order secured, but at least be in the fray to secure orders so that as things settle with respect to our execution capabilities and all the product capabilities that are supposed to be in place, we can actually start closing international deals and actually start supplying because once we win, then you have to supply and execute. So I would say wireline business will grow next year and all the action is in place. For example, revamping different therapies, adding things there and so on. Wireless will be still domestic focus, at least for this calendar year in terms of business revenues, business development, yes, but revenues will still be. So if I blend the 2 together, international as a percentage of total will be lower next year compared to what -- if you remember, at some stage, you were at 40% international, 60% India, but that number will be less. And the other plus, I would say, is that among other economies, at least India is still in a very strong CapEx mode, and it's a home market for us, and all the experiences of anybody who has scaled up a telecom OEM company to global levels, one of the recipe for success has been dominant in the home market. So given that our home market is scaling up quite well with 4G, 5G, FTTH investment, we are right there. We are getting stuff done. We believe that we want to continue to not miss out on the India opportunity to begin with while keeping our eyes internationally, which may have other challenges in terms of which economies are spending are not spending and so on. So that's the way I would calibrate ourselves. But if I were to say calendar '24 onwards, we should start ramping up international business quite significantly again.

[Sangameswar Iyer, analyst]

And what percentage of your order backlog would get executed over the next 12 months? I think around 70% is what I think should get executed, 70%, 75% depending on what it is. But -- so if I were to take Q4 of this year and next fiscal year, around 70% would be the number.

[Operator]

The next question is from the line of Sugandhi Sud from InCred Asset Management.

[Sugandhi Sud, analyst]

Yes. I wanted to understand your outlook on profitability. You have mentioned that in absolute terms, the volume of business would make up for the additional investments. Then just to get clarity, how much of that profit contribution are we breaking in some benefit from the PLI incentive and from other income? Or are we completely talking on a core operational level, this breakeven of incremental investments, whether it's in R&D, business development and the delta that we are going to get in the gross -- at the gross margin level from the business mix change. So if I were to set aside the nonoperational income, would you still be -- would there still be a delta -- the additional investments being made up by the additional gross profit that will make?

[Sanjay Nayak, executive]

Absolutely. In fact, the way we are running our business is to make sure that the core business is independent of the PLI incentive where anything else should be healthy. It should generate our steady-state business model profits, which we have achieved in the past. And PLI and other incentives should be on top of it, although they can be quite substantial and meaningful. But the investment philosophy is that our core business should be healthy, it should grow, show the right kind of PAT percentage and EBITDA percentage and the PLI incentive will only be adding on top of it. So yes, I mean, I would say that we -- that's the way we review our business.

[Sugandhi Sud, analyst]

So is it possible to give a kind of range of EBIT margin that you are targeting, you would be calibrating your investments? And I know that it has to be front-loaded, but you have -- at least on the commercial side, you would have some criteria of how much -- how far you're going to negotiate with a certain margin percentage, like you've kind of given us some kind of indication on a historical basis. Is that sort of the range that you're hoping to fall within?

[Sanjay Nayak, executive]

Yes. I think historically, I think a couple of years back, I think we were at an EBITDA level of around 15%, if I'm not mistaken, Venkatesh will correct me. And I'm not saying that we'll achieve it next year itself. But with the investments that we are making, I think in between the medium term, when this next year and the following. I think we should be able to reach our EBITDA levels at that level. By the way, this is on the core business and if the P&I incentives get added in, hopefully, we reach it sooner than otherwise. So that's the way to think of it.

[Sugandhi Sud, analyst]

Sure. And also, you mentioned that with your wireless customers -- there's an element of 5G also involved there. So is it something that's in discussion phase with the customer? And is it going to be a non-stand-alone network?

[Sanjay Nayak, executive]

No. So it will be -- so it's not a -- I mean, it's more than the discussion stage. So as a part of the bid, we had also added -- or they have requested us to add for a certain percentage of the sites whether our equipment can be upgraded to give 5G services in the same band for which they have currently got the spectrum. So that is where we have close to their -- the conversations with them. So I think it's more of a -- it will be a part of the potential rollout order that we give at different points in time during the year.

[Sugandhi Sud, analyst]

And then could you give us an idea of the pace of investment you've mentioned that as well this next quarter, you will have to make inventory available for the wireless shipments. So are we -- is -- could you give us an idea of the pace of this the contract that whether it is less –

[Sanjay Nayak, executive]

Yes. So on one hand, the customer wants the deployment to have an ASAP. But if I look at the -- what is required in the tender within 21 months from the date of the order, we should have completed the supplies. They want us to do it faster, hopefully. We are also, I mean, technically geared up to do at a faster pace, but there is a function of how the rollouts happen and all that. So I would say primarily between next fiscal year and the year after those 2 fiscal years, we should be able to execute all the orders, including the 5G upgrade, which will start at a later part of the -- this calendar year or early next year, something like that.

[Sugandhi Sud, analyst]

Sure. And I just said that I just noticed that your other [indiscernible] you provide, there is a slight dip in the domestic order book, is that from the security number that you had reported? And you had mentioned some public – PSU orders that you had -- government orders that you had received, which are wireline in nature. So has there been any change there?

[Sanjay Nayak, executive]

So I think if the -- I mean if I look at the -- I'm assuming you're alluding to the backlog that we have at the end Q3 -- India part, that just could be that we have shipped more of the India customers and less of the international customers compared to during the Q3. And by the way, in terms of the order book, when I mentioned that we are L1 in another wireline tender and other stuff. We don't yet count that into our order book because until we get the purchase order in our hand, right? -- is still a prospect and not a firm order in that sense.

[Sugandhi Sud, analyst]

And final one on the international order book, is it largely driven by stages legacy business or is [indiscernible] material portion of that?

[Sanjay Nayak, executive]

No, it's mostly Tejas's historical business. There is some element of Saankhya order book, I think, which you also mentioned, but a significant part of this is the Tejas business. I think we are almost out of time or have actually overrun on time. So we will take one last question maybe.

[Operator]

Yes, sir. The next question is from the line of Navin Bothra from Sualab Research.

[Unknown Analyst]

Congratulations for continuous improvements in our operating performance and the investments we are making in the 5G side to increase 5G as well as EMS side to increase our capacity for the upcoming orders. My question is to Mr. Arnob regarding the we talked about the management software solutions and as well as DDaaS and NMaaS on cloud-based platforms. So my question will be, if you can throw more light on the service -- expected service revenue, how do you see it panning out in the coming quarters, this service side of business software?

[Arnob Roy, executive]

Yes. Will I cannot quantify in terms of absolute numbers. for the NMaaS service, we -- we have a lot of interest from a lot of operators, the smaller -- the ISPs who were looking at a solution like this and are ready to engage. So we are working out with the commercial model with them in terms of how the service would be -- subscription will be paid for. So I don't have any absolute numbers right now. So we are working on the business model. For the DDaaS, for the data distribution as a service, that's again in early stages of customer engagement into how to take this forward because this will be very targeted towards some specific application segments where the rare distribution over a wireless kind of thing broadcast, our technology will be very relevant. There are a few sectors that we are engaging with partners who have -- who are the infrastructure who have the spectrum and stuff like that. So that is still a little early stage, but the market opportunity looks quite big over there and especially in terms of international business, but we're not a in a position to quantify those numbers.

[Sanjay Nayak, executive]

Yes. I mean the flavor of the kind of technology that we are working on Mr. Arnob has articulated was also to give a sense because from an investor perspective, 2 questions get asked to us many times. One is, are we investing enough? And second thing is, what are you actually investing into? So we just wanted to give a feeling of both of those areas that these are the technology areas we are investing -- we are continuing to increase our investment. I think we'll continue -- we'll have to do a lot more investment as we go forward. But I think with the scale business that we are thinking of right now of achieving, we should be able to absorb those R&D investments in a meaningful way like one of the person who had asked the earlier question. So that is really the way we are seeing things.

[Unknown Analyst]

So apart from the hardware revenues, we do see the service revenue scaling up in the future. That's quite nice. And if you can -- question to Mr. Sanjay, regarding the PLI incentive and the size of opportunity we are seeing in this space for the coming 4 to 5 years as we are we will be making -- we have got the approval for INR 750 crores, the highest approval, almost 25% of the scheme incentive we have got the approval for. So if you can throw some more light, the calculations will be as per the earlier con calls or some difference will also be there?

[Sanjay Nayak, executive]

No, no. I think -- Yes, the same -- the design like PLI, as I mentioned in the earlier con call, we get 1% extra incentive compared to the other PLI. So this is the only PLI scheme of the government of India where there's a design link, and they give 1% extra for design in India product, which we qualify. So your observations are absolutely right, Mr. Navin that the INR 750 crore we have subject to -- so the investment part, now that our R&D investments or the manpower investment is also counted as a capital investment. So we are confident that the investment commitment of INR 750 crores will be met without breaking the discipline or the financial model of the company. The second aspect in terms of the incentives that can accrue, I think the calculation we have done could come to something like INR 2,800 crores of incentive over the 5-year scheme period for us. So if we are able to scale up our revenues, we do see that as an opportunity to secure those incentives. And as I mentioned to one of the earlier question person, we are still designing our base business that the investments and the return should be good on their own merit. And the PLI incentive will top up those and help us have a bigger envelope to -- for profitability as well as for making more investments to accelerate the growth. So yes, all the calculations and all the assumptions about the design in PLI we had articulated earlier are still intact. And we do expect that the year 1, we will meet the thresholds and at least be eligible to claim some incentives based on incremental revenues and the investment made.

[Unknown Analyst]

So first year will be financial year only?

[Sanjay Nayak, executive]

The first year will be this financial year as well. Yes.

[Unknown Analyst]

Okay, thank you very much. And all the very best and we look forward to seeing the BSNL order very soon in the coming two or three weeks because it's getting quite late. Thank you, sir.

[Sanjay Nayak, executive]

Thank you again. And I guess I'll hand it over to the moderator.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.

[Sanjay Nayak, executive]

Thank you, everybody. I guess we had a very insightful set of questions. We tried our best to give you as much insight as we could. All I can say is from a business angle, we feel quite positive that all the efforts that we've been making over the last several years and more recently in the last few quarters to upgrade our technology, to upgrade our processes, systems, manpower and lining up to build a good -- a fast-growing profitable business. I think we have made a good amount of progress. The supply chain is thing, which was constraining us, but that also is coming under control. I will say it's 100% under control, but it's getting in the right direction. So I would say we are quite positive and confident about the potential for the company and look forward to a solid execution going forward so that we can realize all the potential for which we've been lining up things. So thank you again, and thanks for your patience and commitment to Tejas.

[Operator]

Thank you. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.