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Edited Transcript of STRTECH.NSE earnings conference call or presentation 24-Oct-19 11:30am GMT

Q2 2020 Sterlite Technologies Ltd Earnings Call

Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Sterlite Technologies Ltd earnings conference call or presentation Thursday, October 24, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anand Gopaldas Agarwal

Sterlite Technologies Limited - Group CEO & Whole-time Director

* Anupam Jindal

Sterlite Technologies Limited - Group CFO

* Vishal Aggarwal

Sterlite Technologies Limited - Head of IR

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Conference Call Participants

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* Neerav Dalal

Maybank Kim Eng Holdings Limited, Research Division - Analyst

* Rajesh Kothari

AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director

* Sangameswar Iyer;Consilium Investment Management;Investment Advisor

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Presentation

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Vishal Aggarwal, Sterlite Technologies Limited - Head of IR [1]

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Good evening, everyone, and thank you for taking the time to join us today for this conference call and review of our business results for the second quarter of FY '20.

Joining us today are Dr. Anand Agarwal, CEO; and Anupam Jindal, CFO of STL. Let me quickly outline the agenda for today's call. Anand and Anupam will give a brief overview of the company's business performance for the first half of the year and our yearly outlook, followed by a Q&A session. We have uploaded the presentation on our website for those who cannot access it live.

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

With that, I'll turn the call over to Anand.

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [2]

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Thank you, Vishal, and good evening, everyone, and thank you for joining us for our Q2 results. Our Q2 results have marked a strong end to a great first half of the year, and we have delivered significant innovation across the entire portfolio. Our teams have executed well through an extremely dynamic environment. We've made an entry into the inside data center space through the IDS acquisition, which we did brief you about a month ago. And we're now focusing our resources and investments into being 5G ready. I will touch upon all of these parameters as we progress in the presentation.

So our technology is getting fundamentally aligned to the redefined data architectures and to help our customers manage the complexities of the future through our integrated solutions approach, let me cover some recent highlights across our portfolio. I'll start with the programmable network. So -- and that is [because is an] AI-powered, big data, next-gen business intelligence solution helps analyze teleco user data to make real-time network and customer targeting decisions. Then there PODS, which is programmable, [open], disaggregated software that we have. So these networks have been built by static, large vertically integrated [boxes] with monolithic goals and proprietary interfaces. These have been expensive to procure, maintain and they haven't allowed too much flexibility to launch new services quickly using automation, open and software principles.

This aspect of the network, PODS, resolves this by providing specific solutions to different business needs. PODS is Programmable, Open, Disaggregated Solutions developed through a combined network of open community as CSO [IT] and collaboration of global partners.

On the network services side, we had 3 launches, 360 degree 2.0, FTTx Mantra and iCore. These culminated to an end-to-end solution that empowers the ESPs to swiftly roll out data networks at massive scale, near 0 response time, great agility as well as -- and at optimized costs. Coming to the connectivity solutions, we launched cutting-edge products such as TruRibbon and Stellar Fibre. Stellar is one of a kind in the current industry to have a bend insensitive fiber design that has the [mode] field diameter of the size of a legacy fiber. This feature enables service compatibility with existing networks, which are provisioned with the legacy fiber while bringing in the next-gen advantages of macro bend insensitivity, which makes Stellar Fibre an ideal choice for an existing network's capacity enhancement. Our new network provisioning for Metro as well as Long Haul or Fibre to the X application.

With this, I come to the inroads that we have made into the new customers and geographies. We continue to see strong inroads across the majority of our portfolio. As compared to the previous quarter, we have added 26 new customers organically, due to new -- inorganically [through ideas] and entered 2 new countries through our connectivity products. The geographic mix for this quarter has been largely similar to Q1 with international customers accounting for close to 40% of our revenues.

Just sort of recalling the IDS acquisition, wherein we did this acquisition to acquire new capabilities. We had spoken to you about the IDS acquisition in our last call. But as I recap, IDS is a great capability addition to our inside data services with access to global hyperscale cloud customers. The integration is progressing very well, and we are starting to see synergy opportunities, which will unfold in the coming few quarters.

We also are very excited, and we take pride on seeing our R&D investment and patent count rise every quarter. I'm extremely proud of what our teams have built -- developed and innovated and continue to focus extensively on our preparedness towards 5G for next-gen technology solutions to drive greater impact and success. In that direction, we have accelerated our investment in R&D in second half of this year towards investment in new solutions offering on programmable networks as well as passive connectivity products. And this has resulted in tangible outcomes.

We are seeing increased customer traction and have added almost INR 7,000 crores of additional sales funnel at the end of H1 of FY '20. We are attracting global best-in-class industry experts, which are highlighted there. And it is our constant endeavor to continue to provide growth platform and opportunities for our employees, which is recognized through multiple industry recognitions.

Now talking about the state of the industry and the outlook for the next half as well as beyond that. So far, what we see is our teams have executed well despite the volatility and dynamic business environment that most of you are aware of. What is now clearly coming out looking at global telco CapEx trend is that 2019 seems to be a sort of year where most telcos are taking a pause in terms of an investment point of view. I think it is more of [their comment and time] delaying CapEx investments driven by some macro trends like asset sharing as well as 4G to 5G transition that we are witnessing in the current year.

We have had multiple customer interactions through [XFOX] or summit across India, Europe, Asia in the last quarter, and believe that while there is some cautiousness about the economy and geopolitical developments, which is leading to the telcos delaying their macro CapEx investments by a few quarters. At the same time, these discussions also reinforce our belief that the structural demand drivers for our industry remain intact. And we've seen the telco CapEx growing from a long-term perspective as they start their 5G investment cycle.

Coming specifically to the optical fiber demand, it is estimated that the global consumption of fiber will be muted as compared to last year. The dip is largely on account of China slowing down after a massive 4G build out. But we are seeing signs of revival in China, evidenced by the China telecom tender.

Coming to India, we are seeing signs of slowing demand on account of 0 spending pause and other incumbents deferring their CapEx investment. India forms a significant part of our business, and hence, we expect it to impact our business in the coming time. On the positive side, we are seeing Europe growth continuing, which, after India, has been our strongest geography.

While as a company we do not provide any yearly guidance or estimates, but I would like to apprise you of the potential impact of the above-mentioned trends. As for our current visibility, we expect flattish volumes for fiber in cable, coupled with lower-than-expected network creation for Indian telecos that will impact the H2 FY '20 against our own initial plan. A large part of it is attributed to low order booking in our last quarter and evident signs of our customers delaying pickup of other existing order book. We also expect some pricing pressures on contract renegotiations for 2020 because of short-term oversupply situation, which has been created in the industry to address the expected 5G demand.

Taking both these factors into consideration -- on a consideration basis, we see lower growth in revenues in FY '20 as compared to FY '19. And we see, as a result, H2 profitability would be weaker than H1. And this would also include the impact of the additional 5G-related R&D investment in H2 of the current year, which are over and above our original plan.

As I look ahead though, I cannot be more confident about our unique position in the market and the tremendous opportunity in front of us. With new age networks characterized by both densification, deep fiberization, vendor neutral as well as disaggregation and with compute and storage moving closer and closer to the edge, we have the -- we continue to have the most compelling portfolio and a very, very credible and robust roadmap for future development, which has been made possible by our continued investment in capacity and capability as well as an end-to-end solutions based offering.

Talking briefly about 5G, 5G is now a clear reality, and it is moving fast with almost 25 countries will have multicity commercially available 5G services by the end of this year itself and a whole lot of them continuing to do the rollout by 2020.

Our strategy, which we have shared with you in the past several quarters, we are geared towards this 10-year deployment cycle with our 4 star strong strategy of continued investment in technology with deep customer engagement, continue to build the talent pool from the world class people and I'm in the clearly, clearly addressable market of $75 billion by 2023. Our addressable market with these strategies continues to grow year-on-year, and we are now going full throttle to further enhance our capability to capture the 5G opportunity, which will start, as I said, from 2020 onwards.

With this, I now come to an end of the business overview and hand over to Anupam.

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [3]

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Thanks, Anand, and good evening, everyone. Coming to the financial performance, we have delivered a good quarter with more than 25% Y-o-Y growth in revenue, 7% Y-o-Y growth on EBITDA and 22% Y-o-Y growth on PAT, which includes a positive effect of the change in corporate tax rate.

Our order book stands at a healthy level of INR 8,100 crores and new product to revenue ratio of [about] 20%. ROC as at the Q2 end stands at 23%, a dip from our earlier levels on account of low integration of enhanced capacity.

On a Q-on-Q basis, the revenues have been flattish with a slight dip of 5%, mainly on account of lower cable volumes. Our realization for the quarter on fiber side has remained stable, driven by a good mix of high value-add fiber. On the cable side, while the realizations have remained the same as compared to the last year -- last quarter, the volume was about 80% of the last quarter.

Going forward, we expect the volume to be in similar range for H2, which to an earlier point of Anand, is indicative of an order deferment from our customer. Our customer base is expanding and diversifying. Telcos, which earlier would account for a majority of our business, would account for about 56%. This is clearly demonstrative of our strategy to cater to the larger pool of customers who are investing in creating data networks.

The share of citizen networks has increased from 12% last year to now at 20%. You would also see that we have now started seeing traction from the global cloud players from our revenue until last year. And today, they are at about 2% of our revenue. As I said earlier, our endeavor will be to keep diversifying our customer base and add new market clients to our list of customers globally.

The order book for the business stands at INR 8,132 crores, as we close the first half of the year. Our order booking result in the last quarter was quite low as compared to our initial estimates. The customer segment is stable and the current order book is fairly balanced. The telcos at about 47%, enterprises about 33%, citizen networks at 19% and cloud providers at about 1%.

STL focuses strongly on good corporate governance practices as key to sustainable corporate growth and long-term shareholder value creation. STL's approach towards growth, earnings and capital allocation service are to help it grow in a value-accretive manner for all its stakeholders. The company's success will continue to be backed by a strong foundation that will enable its sustainable growth going ahead.

For your reference, we have kept (inaudible) of this version of the P&L and a simplified version of balance sheet. Our EBITDA margin has been largely consistent with that of FY '19 and Q1 of FY '20 is standing at roughly about 22%. Based on the visibility that we have today for FY '20 for both, overall volumes of fiber and cable would be mostly flattish. This supports the deferment of some of the orders of high value-added fiber to translate into lower average fiber pricing for the second half.

On the revenue front, we are confident of growth this year a bit driven by more system integration [in] software business. The profitability will be impacted mainly on account of lower utilization of our new capacity, higher interest and depreciation costs and incremental investment in 5G-related R&D investment.

As for our current visibility, H2 profitability will be weaker than H1. As we progress further into the second half of the year, we will keep you apprised on any new developments.

On the cash flow front, we are very happy to share that we have generated strong positive cash flow of INR 460 crores in H1 of the current year, and net debt-to-equity has been consistent at less than 1. We could bring down our debt levels by around INR 300 crores as compared to the previous quarters through a strong cash flow management.

As we reach towards the end of the opening remarks, we would also like to update you of our continued focus on environment, sustainability and governance initiatives, of which, one of the most important developments in H1 of the current year was making our optical fiber cable plant in Silvassa the first Zero Waste to Landfill certified plant.

With this, we come to the end of our opening commentary and will be happy to take questions.

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Questions and Answers

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Operator [1]

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Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) We take the first question from the line of [Mukul Garg] from Haitong Securities.

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Unidentified Analyst, [2]

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Before I start the questions, Anupam, can you please help us with the -- a couple of bookkeeping numbers. The utilization in the OFC business and the pricing, which you saw this quarter.

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [3]

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In terms of utilization, cable, the fiber plant was broadly about 100% capacity. We had about 7 million of volume in terms of fiber. But in terms of cable, we were close to 80% of utilization of the capacity at 18 million. So this is how the numbers have panned out in the current quarter.

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Unidentified Analyst, [4]

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And the pricing?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [5]

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And cost of realization, the Q2 realizations were broadly in line with the Q1, [7] close to that.

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Unidentified Analyst, [6]

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Okay. And just given your guidance, how should we look at the growth in the second half and the margins? Your earlier margin guidance was 18% to 20%. So is it possible to give some indication of exactly where would margins stabilize, given the commentary on lower utilization and increased R&D spending? And if you can just quantify that as well a bit?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [7]

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Sure. In terms of, I think, from volume perspective, as we said that as compared to the previous estimate, we're now looking at flattish revenue -- flattish volume number for the full year. And in terms of the margin, we are looking at close to 21%, 22%. So I think for full year, we are still looking at some impact will be there because of lower realization and some R&D impact, but I think it's still -- we are still looking at maybe plus 20%.

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Unidentified Analyst, [8]

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Sir, you said the margins will be 21% to 22%.

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [9]

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I mean, we have done H1 with about 22% in totality. And from what we see, we are still looking at 20% plus.

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Unidentified Analyst, [10]

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Understood. And just a clarification, again, on the cable volume number. If you look at the installed capacity after the new capacities came on board, both OF and OFC capacities are up 40% Y-o-Y to about 43 and 24 million. So can you just help us understand how the volumes will be flat?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [11]

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The capacity will come in June 2020. And the fiber capacity is still getting deployed and installed right now. As we said, by Q4, we expect the capacity availability at the run rate of 40 million. Q2 right now is in the process of just getting commissioned and trials are happening.

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Unidentified Analyst, [12]

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Okay. So I was including the metallurgical capacity also from (inaudible).

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [13]

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That's included, 18 million on the cable side also. So 18 million is the current capacity including the metallurgical capacity.

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Unidentified Analyst, [14]

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Okay. So can you just help us with the total capacity right now in OF and OFC?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [15]

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Yes. So OF, as we have largely completed the CapEx, so it's about 50 million and cable is about 18 million, which we are taking it to 33 million by June 2020.

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Unidentified Analyst, [16]

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So at 50 million OF, you still think that you will be able to get about 30 million type of volume?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [17]

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Yes.

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Operator [18]

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(Operator Instructions) Next question is from the line of Neerav Dala from Maybank.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [19]

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I have a few questions on the India business.

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Operator [20]

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Mr. Dalal, I'm so sorry to interrupt, but I'm requesting you to please speak a bit louder.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [21]

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I wanted to understand on the services and solutions business, what is the outlook there? How are the 2 large projects going on? And the second question is on the tax rate. What do we expect the tax rate for the full year?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [22]

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On the services business, Neerav, we are continuing to be extremely bullish on and our outlook for the year on the services business is better than when we had started off the year. Both these current projects, the Navy project as well as MahaNet, the large project that we have, are fully on schedule and we might even be -- we are looking at ways to expedite them so that we are able to finish them earlier. At the same time, the funnel that we have added for almost INR 7,000 crores in H1 is extremely strong both on -- some on the product side but very high also on the services end. So that service and solution part, we are extremely happy and bullish with the way it is progressing. On the tax rate?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [23]

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On the tax rate, Neerav, so one is that we are offering for the new rate of tax, which is 25.17% and some accounting gain on account of deferred tax liability, that's about, I would say, INR 15 crores. So broadly, we will be close to 24%, 25% for full year.

Going forward, it will be 25.17%.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [24]

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Okay. And just quickly, a follow-up on the first answer. The INR 7,000 crores funnel that you're seeing, would you have a split of how and when do you see these orders coming in?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [25]

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For this funnel, everything will not flow in that order, but these are new opportunities that we have secured during the first half. So we see a good amount of decision should happen in H2; some amount will flow in. This is a new funnel, which we have added, and that should propel into increasing our order book into H2 and that's a great degree of confidence and comfort that we have.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [26]

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Okay. And just finally, the services and solutions funnel would be largely in India at the moment?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [27]

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We have added some international geographies as well that we have spoken about that in the current year, there will be an international project that we will acquire and start.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [28]

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Okay. And any specific geography that one should...

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [29]

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We are looking at a couple of them so let us come back once it has been finalized.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [30]

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Sure. And so sorry, the size of that opportunity?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [31]

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The international ones will be small that we will start with not more than INR 100 crores to INR 200 crores.

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Operator [32]

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Thank you. Next question is from the line of [Rishabh Chudgar] from Enam Holding.

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Unidentified Analyst, [33]

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I just had a question...

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Operator [34]

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Requesting you to please speak a bit louder. We are unable to hear you.

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Unidentified Analyst, [35]

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Can you hear me now?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [36]

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Yes.

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Unidentified Analyst, [37]

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I just have a quick question regarding -- since we have already indicated that H2 was expected to be soft on the back of low volume because of softer demand from telcos. In FY '20, we had guided a CapEx estimate of close to INR 550 crores, which will take our capacity of optic fiber to 50 million. So I was just wondering, are you planning to delay this CapEx a little bit, given the current demand environment?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [38]

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Rishabh, most of the CapEx in terms of fiber is already done. The INR 550 crores is the cash flow part, which we talked about, and we still maintain that. And the other part on the CapEx side, we are running a cable expansion, which we will continue because we continue to believe that there will be some short-term blips in terms of demand, but the kind of projects we have taken, we want to continue rather than holding them in between because we know that when the capacity, the demand comes in, which we are very confident of, we need to have the capacities and the kind of engagement we are having with the customers, we don't really see that the capacities will remain unutilized for a long period of time.

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Unidentified Analyst, [39]

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Okay. So we have no plans on delaying this?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [40]

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Yes.

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Unidentified Analyst, [41]

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So basically -- so you're expecting demand environment to revive in FY '21, then?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [42]

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Yes. So I mean, we continue to be bullish on the overall demand side driven by the various drivers, including 5G and various other indicators. So definitely, in some time, we expect that to be able to happen.

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Unidentified Analyst, [43]

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I'm sorry, I missed out on the earlier question, which you have indicated. So what was the capacity utilization for the optic fiber business?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [44]

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Optic fiber, the existing capacity is 30 million broadly, 100%.

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Unidentified Analyst, [45]

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That's the utilization.

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [46]

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The expanded capacity is still not getting utilized.

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Unidentified Analyst, [47]

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Okay. So we are at -- currently, our capacity is at 30 million, you're saying?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [48]

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Yes.

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Unidentified Analyst, [49]

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Okay. And by Q4 FY '20, we will reach 50 million?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [50]

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Capacity will be 50 million.

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Unidentified Analyst, [51]

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How are we seeing the current realization for optic fiber, sir? I know you mentioned that it remained at 7, but how are we seeing in terms of when you're going and talking to clients right now, are you seeing some of the...

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [52]

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For us, Rishabh, we are still looking at in terms of member realization close to $6, $6.50.

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Unidentified Analyst, [53]

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So in new contracts, you're looking at $6.5 kind of realization.

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [54]

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$6 to $6.5. They have come down a bit, but that's the kind of things we're looking at.

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Operator [55]

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Next question is from the line of Gaurav from Systematix Shares.

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Unidentified Analyst, [56]

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I just want to know about the market updates on Chinese, like in China, what is the market outlook and how it will impact our price, the fiber price?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [57]

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Fiber price part, Gaurav, we just talked about and the market outlook for China, as we said, China mobile tenders are out, the China telecom tenders are out. China Mobile has been awarded 5G license. So the decrease -- what had happened in China market in 2019 versus 2018, we do not believe it will decrease any further from all the market reports. Whether it remains flat or it grows from 2020 is early for us to comment on. But China market, from what we understand, I believe, is at its lowest levels than what it has been in [for] years.

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Operator [58]

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Next question is from the line of [Abhishek] Shah from ALCO Capital.

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Unidentified Analyst, [59]

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Just -- most of my questions have been answered. Just one clarification. You said that for the growth guidance for the entire year would be flat. So that is -- we did INR 5,100 crores approximately in the last year. And in first half itself, we've done INR 2,800 crores. So does that mean that second half will be a de-growth that we're looking at?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [60]

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So let me clarify, we said that volume will be flattish, revenue will be growing.

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [61]

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Essentially, we talked about the fiber and cable business volumes being flat but at the same time, we are having great growth in the services and solutions business. We essentially talked about the fact that the growth percentage of FY '21 -- FY '20 over FY '19 might be lower than the growth. We have had a CAGR revenue growth of almost 35% year-on-year. We're essentially saying that FY '20 may not be at that rate.

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Unidentified Analyst, [62]

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Understood. And is there a specific R&D expense as a percentage of revenue that would be worth tracking? As you said, at this time, R&D expenses would be much higher.

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [63]

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So essentially, what we are saying is that we are preparing and investing for the 5G products and solutions. Therefore, the technology investment, we call it R&D technology, that's going up. We are not measuring it as a percentage of revenue, because until we have that as a sustainable number, we don't want to really talk about that. So definitely, the investment in technology is going to be much higher than what we have done in the past few years.

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Unidentified Analyst, [64]

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So how much would that be? Would it be possible to quantify it?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [65]

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In the past, we used to do about INR 50 crores, INR 55 crores. This year, it would be closer to INR 85 crores to INR 90 crores.

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Operator [66]

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Next question is from the line of from Sangam Iyer from Subhkam Ventures.

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Sangameswar Iyer;Consilium Investment Management;Investment Advisor, [67]

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Sangam Iyer from Consilium Investment. So actually, I just wanted to check with you, sir. When you mentioned that the China Mobile and China Telecom 5G license have been received and the tenders are out, are the tenders for the next financial year also out for optical fiber?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [68]

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These are tenders which have been out for the current financials. China Mobile came in Q1, China Telecom came in Q2.

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Sangameswar Iyer;Consilium Investment Management;Investment Advisor, [69]

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Okay. So whatever price dips that we are talking about because, in the initial comments, we did mention about the slowdown, because of the fact that China is slowing down. So is it a slowdown on the volume front that you are witnessing from China? Or is it more because of the kind of tenders and the pricing in the tenders, which is resulting in a slowdown?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [70]

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Yes. So volumes have been lower in the current year. China, after almost 10 odd years, in China, there is a 13% volume de-growth, which is happening in 2019 and that volume de-growth is coupled with supply side economics, which are rising, and which has led to a price dip in the year that we have seen and we've talked about it (inaudible).

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Sangameswar Iyer;Consilium Investment Management;Investment Advisor, [71]

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Got it. Got it. And sir, when we mentioned that the realization based on the negotiations for the renewals of contracts have happened close to maybe $6 to $6.50 per fiber kilometer, does this apply to -- what percentage of the overall order book would this apply to?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [72]

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This is essentially the average realization, which we have seen as we start moving forward. So our average utilization was closer to $7, which was a mix of our -- [prior to publishing] standard fiber and value added. Right now, we are seeing it to be closer to $6.50 to between $6 and $6.50 as we move forward.

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Sangameswar Iyer;Consilium Investment Management;Investment Advisor, [73]

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Got it. So for the second half, when we look at the flattish revenues, this is the kind of realization that one should have.

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [74]

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Right.

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Operator [75]

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We next question from the line of Rajesh Kothari from AlfAccurate Advisors.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [76]

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Sir, my question is, can you break up about what is your total services revenue in Q1 and Q2?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [77]

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In the current quarter, broadly, we had 50% revenue coming in from the services and software business.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [78]

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50%?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [79]

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Yes.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [80]

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And what about quarter 1?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [81]

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I think it was about 40%, 45%. I'm not having the number right here, but it was about that, 40, 45%. So we have increased services revenue in the current quarter.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [82]

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So basically, that's about roughly about INR 950 crores. So for the full year, do you think there also you have a revision of guidance? Because I think last year, full year revenue was INR 1,800 crores in this year first half is...

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [83]

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We also have growth in the current year in terms of services, that's what Anand mentioned that full year revenue will be growing (inaudible) and there will be flattish revenue, but revenue at the company level will still grow driven by the growth we are seeing in services and software business.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [84]

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So I'm slightly confused because your services business execution, whether that is on track with what originally you have estimated.

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [85]

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Services business, as we said, is moving better than what we had estimated. We'll have a much stronger growth in services business compared to how we have grown in the previous year. As we said we [over] INR 1,800, and we are already running at a run rate of INR 1,900 crores. We continue to have good order book on services on the parts side as well as funnel is getting stronger. The muted revenue and the flattish revenue that you are talking about is more on the product side on the [pipeline] .

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [86]

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So overall, again, there is a confusion because there are different, different lines, which are -- we are still not able to understand. One, whether your total revenue is going to be flat for FY '20? Or is it your product revenue is going to be flat FY '20?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [87]

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On a totality basis, FY '20 growth would be lower than the growth that we have seen in the previous years. The product revenue will be close to flattish, services revenue will grow. And the growth rate for the year will be lower than the growth rate in the previous year.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [88]

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Got it. Any impact on your service revenue margins?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [89]

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No, it's actually better than what we have anticipated what it is now.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [90]

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And would you like to comment on cable realization? Any impact on cable realization?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [91]

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We don't track by realization, we track by markets and cable margins are -- central cable is about 2% and cable margins continue to be strong.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [92]

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Okay. And can you give us full year interest and depreciation in your estimate?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [93]

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We do not give out guidance for line items for the full year. I think you can estimate based on how we have turned current H1 performance.

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Operator [94]

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Mr. Kothari, I'm sorry to interrupt but (inaudible)

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [95]

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This is an important question. My question is with reference to the total CapEx, what has been capitalized and which will commence in the second half, what would be that amount?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [96]

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So I think this capitalization of the CapEx for capacity function is largely complete. So we don't really expect much impact on depreciation going forward. Interest also large impact has come, and in fact, we are looking at lowering interest going forward, but maybe run rate wise, we can have a similar number.

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Operator [97]

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(Operator Instructions) Next question is from the line of Ravi Mehta from [B] Financial.

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Unidentified Analyst, [98]

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Most of the questions are answered. Just one question on the service business margin, what would it be around?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [99]

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About 14% to 15%.

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Unidentified Analyst, [100]

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Okay. And we've already clocked INR 1,250 crores kind of revenue. So can we actually annualize that number, looking at the order book size or...

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [101]

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Basically, this is the kind of margin profile we have started getting in services business, significantly higher than about 11%, which we had last year.

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Unidentified Analyst, [102]

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And on this top line run rate, INR 1,200 crores plus in first half, so can we repeat that?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [103]

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As I said, it's higher than INR 1,500 crores in the first half. Out of the total sales, INR 3,300 crores, we are almost 47%, 48% is services and parts. And we believe we'll do better than that in the second half.

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Unidentified Analyst, [104]

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Okay, okay, both on the top line and margins?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [105]

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Definitely on the top line, margins [will be in here] .

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Operator [106]

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We take the next question from the line of [Saket] Kapoor from Kapoor and Company.

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Unidentified Analyst, [107]

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Sir, if you could please specify the increase in the employee benefit expense on a Q-on-Q basis, also on a year-on-year basis, that has gone up from 134 to 166 and 146 to 166 if we take June '19 to September '19.

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [108]

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Yes. I think, largely, it is in line with growth we have shown in terms of revenue. We continue to expand our services and software business, the volume, which the capacity we have set on fiber and cable plus impact on a Q-on-Q basis, largely, our revision cycle starts from July. So the impact comes in Q2 as compared to Q1.

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Unidentified Analyst, [109]

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So for the full year, this is going to be the run rate now every quarter?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [110]

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Run rate wise, we still continue to have more talent coming in as we continue to talk about it. So we really don't put any specific number or the run rate on that.

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Unidentified Analyst, [111]

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Okay, sir. And sir, secondly, the segment wise reporting was not available. Any -- what could be the result of that?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [112]

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Essentially, we are having more and more business getting transformed into integrated business while we do have the fiber and cable business, but as we see more and more business, the company is (inaudible) into integrated position for (inaudible). And we are finding that it is becoming increasingly difficult, so some parts are tangible, which we can talk about volume realization and some margins. But from an overall perspective, we are seeing more of integration happening.

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Unidentified Analyst, [113]

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And for the receivable front, sir, anything due from the BSNL or the government enterprises, that 1,700?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [114]

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So BSNL, I would say that normal revenue on the product side, we are getting timely collection. In terms of the overdue, we have close to about INR 300-odd crore essentially for the supplies of fiber cable done, which are now more than 6 months due. We see early resolution of that happening maybe in Q3 itself. All that is happening, while we see good development happening where we can collect even the old dues which are there for product supplies.

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Operator [115]

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Next question is from the line of Rishabh [Chudgar] from Enam Holding.

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Unidentified Analyst, [116]

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Sir, just a quick question. What would be the margins from the product business in Q2 FY '19?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [117]

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FY '19? You are saying last year?

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Unidentified Analyst, [118]

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Yes, last year, last quarter, right. Q2 FY'19 last year.

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [119]

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I think last year it was definitely higher. I'm just trying to get the number, but yes, last year was close to about 30%. This quarter is about 25%, 26%.

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Unidentified Analyst, [120]

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Okay. And sir, just earlier when I when you eluded to the point that the other new contracts, the realization in optic fiber is close to $6 to $6.50 per SKM. So going forward then, will that lead to further margin pressures in the product business?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [121]

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To some extent, yes, but we are also offsetting [frankly] offset by operating cost-reduction plan. So we are working on the cost side since last 7, 8 months. So some results have started coming in. That's why our profitability has not got significantly impacted as compared to the realization drop we have seen and we continue -- we want to continue working on that. So there are still some opportunities we still see on cost side. How do they materialize, we will see, but we see such realization impact getting partly offset right now the more cost realization presents.

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Unidentified Analyst, [122]

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Okay, but still, you can expect around 100 bps kind of margin pressure you can expect from the current levels in the product business?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [123]

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Yes, there will be some margin pressure.

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Unidentified Analyst, [124]

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Okay, okay. And just, sir, one -- another bookkeeping question. Regarding the order book, could you just give the split of the product and software services like product will be 47% of the order book currently?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [125]

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Currently, it's about 50-50 broadly, out of 8,000, 4,000 and 4,000.

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Unidentified Analyst, [126]

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So it's 4,000 and 4,000 approximately? Okay.

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Operator [127]

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Next question is from the line [Mukul Garg] from Haitong Securities.

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Unidentified Analyst, [128]

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Anupam, I just wanted to understand the levers for margin, which you have in H2. What we are hearing today is that the utilization will have some amount of impact. There will be higher share, which will be there from the services in the second half. And given the lower pricing, there will be a bit of a hit from product margin as well. So what are the levers we have, which will help us kind of keep margin pressure under check?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [129]

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Yes. So essentially, what we are looking at is that how we can improve on the operating side of the costs, which we talked about in the previous question. How we can have more value-added, particularly in the cable side, how we can have more value-added products coming in. And some squeezing in cost in general. So those are the things which we are looking at to offset some of the impact on high investment in technology and some of the realization we'll be getting in Q2. So that's why instead of 22%, maybe we'll have some correction in H2, but we are still looking at maintaining about 24%.

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Unidentified Analyst, [130]

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I understand. And this includes pressure from R&D investment, about an incremental INR 40 crores, INR 50 crores coming in, will be -- you are confident that you will be able to manage that as well?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [131]

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Yes. So basically, you're looking at that we need to invest for future for sure. So how we sort of have this investment spread out and how we start getting some benefit [on an that] basis, what other potential we will still work on. But yes, I mean, we are factoring in these numbers as well.

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Unidentified Analyst, [132]

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Great. And just a few questions on the order book. In the presentation, you mentioned that there was a bit of a deferment of the order book. Can you give us some sense of out of the INR 8100 crore, how much was executed this quarter and how much was deferred? There's almost INR 2,000 crores decline in the order book from Q1 to Q2?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [133]

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Yes, basically, Mukul, in terms of the overall order book, we have sort of INR 8,100 crores which we are having at the end of Q1. It also has the new order book, which you have received over Q1, Q2. And also some of the orders which we continue to have, but we don't see good visibility in terms of -- that we are not listing. We actually knocked them out of the order book, which we have focused here. And that's why you see a drop of almost INR 1,700 crores versus revenue, which we did INR 1360 crores. So in fact, we have cleaned up some of the order book while contracting, but we still have those order book in place. But we are not seeing a timeline or delivery commitments from the customer. Therefore, we have taken certain orders out of our order book.

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Unidentified Analyst, [134]

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Can you give a number is like, how many...?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [135]

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I think close to INR 800 crores or so we have deferred, we have taken out from the order book.

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Unidentified Analyst, [136]

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And is there a risk that this might continue in the second half, given the industry is...?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [137]

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Based on a fair assessment of -- we have done -- we are -- what we are hearing from customer confirmation from them. What we could see on a conservative basis, we have taken them out. We'll continue to see -- we don't see any more correction happening, but I mean, the market is quite dynamic. As we are talking, our realization still continues to be far above what we have seen in China. We continue to have broadly similar volume we have done. So the market is settling. In spite of that, we are doing all these things. So I mean, we continue to have good confidence based on the remaining order book, which we have, and we'll continue to monitor that.

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Unidentified Analyst, [138]

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Got it. If I may, I just ask one final question. You mentioned about the funnel of INR 7,000 crores. Is it possible to break up between the product and services? Because we heard recently, there was a number of projects, which got approved by the Central cabinet. So any breakup between the INR 7000 crores between what is there in product and services?

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Anupam Jindal, Sterlite Technologies Limited - Group CFO [139]

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Mukul, right now, it's a good fair mix. We are seeing some part of the funnel being annual global contracts for products as well as multi-year contract, which is a part of the funnel. And some of them, as you rightly said, are some contracts (inaudible) as well as some incumbent telcos in India as well. So we would not have the breakup in that matter. And some of these actual funnel is that we are doing products and services together as part of 1 contract.

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Operator [140]

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Your next question is from the line of Neerav Dalal from Maybank.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [141]

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Just on the India business, last week, we had the Reliance Jio presentation and they were talking about increasing their fiber parameters from 700,000 that they have currently to about 1.1 million route kilometers. So just wanted to understand how do you see this? And when do you see this happening? How should you benefit out of this? Would you benefit out of this?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [142]

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Clearly part of Jio's phase of rollout for city and tower connectivity has happened. And now they are moving in an aggressive manner in creating the Jio fiber access connectivity. We are extremely strongly associated with that and part of that, and we would definitely, as the rollout happens, we would benefit as well.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [143]

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But no indications at the moment, right?

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [144]

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There are discussions, there are engagements currently, but over the last few months they were busy with moving the assets through the [invest] structure which they had done. Now the engagement is back on in the rollout for the Jio fiber as well.

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Operator [145]

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With that, we end the conference. I would now like to hand the conference over to Dr. Anand Agarwal for closing comments. Over to you, sir.

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Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [146]

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I'd like to thank everyone for attending this call and for showing interest in our company, and I hope we were able to address and clarify all your queries and comments. For any further questions and discussions, you can feel free to contact the IR team, which includes myself and Anupam, and we really look forward to continuing the conversation with you in the future. And all the very best wishes for a very happy Diwali to everyone attending the conference. Thank you.

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Operator [147]

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Thank you very much. On behalf of Sterlite Technologies, that concludes today's conference. Thank you all for joining us, and you may now disconnect your lines.