U.S. Markets closed

Edited Transcript of STRTECH.NSE earnings conference call or presentation 15-Jan-20 11:00am GMT

Q3 2020 Sterlite Technologies Ltd Earnings Call

Jan 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Sterlite Technologies Ltd earnings conference call or presentation Wednesday, January 15, 2020 at 11:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anand Gopaldas Agarwal

Sterlite Technologies Limited - Group CEO & Whole-time Director

* Anupam Jindal

Sterlite Technologies Limited - Group CFO

================================================================================

Conference Call Participants

================================================================================

* Alok Deora

Yes Securities (India) Limited, Research Division - Research Analyst

* Bhupendra Tiwary

ICICIdirect.com, Research Division - Research Analyst

* Mihir Manohar;CapGrow Capital Advisors;Equity Research Analyst

* Mukul Garg

Haitong International Research Limited - Research Analyst

* Neerav Dalal

Maybank Kim Eng Holdings Limited, Research Division - Analyst

* Pranav Kshatriya

Edelweiss Securities Ltd., Research Division - Research Analyst

* Pritesh Chheda

Lucky Investment Managers Private Limited - Analyst

* Subhankar Ojha

SKS Capital & Research Private Limited - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the Sterlite Technology Limited Q3 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. Along with this call, we are also running a live webcast of the presentation covering the Q3 FY '20 results. Investors can also download a copy of these slides from the STL website.

I now hand the conference over to Mr. Neerav Dalal from Maybank Kim Eng Securities. Thank you, and over to you, sir.

--------------------------------------------------------------------------------

Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Hello, everyone, and thanks for standing by. We at Maybank Kim Eng Securities are pleased to host the management of Sterlite Technologies today. To take us through the third quarter results and answer your questions, we have Dr. Anand Agarwal, CEO; and Mr. Anupam Jindal, CFO of Sterlite Technologies. For the opening remarks, I hand over the call to Dr. Anand Agarwal. Over to you, sir.

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [3]

--------------------------------------------------------------------------------

Thank you, Neerav, and good evening, everyone, and thank you for joining us for our Q3 FY '20 results. I'll start off with how the year has gone by for 2019, as we have just finished 2019 and getting into 2020. So as we've been talking to you earlier, 2019 has been a year of pause for the global telecom industry. At the same time, we have several growth drivers in the -- in place for 2020 and beyond. In 2019, what we saw was that at a global level, telco CapEx has paused because of 4G to 5G transition, which is similar to the trend -- whenever the technology transitions have happened in the past, we saw similar CapEx pause. We also saw that globally fiber demand had come down by 17%, which was largely -- sorry, 7%, which was largely led by fall in China demand by about 13%, and while U.S. and Europe demand growth happened at about 4% in 2019. And the Indian telecom industry, as you would all be aware, was restructuring to a large extent, and that was where 2019 was.

At the same time, we see a good degree of growth drivers intact in 2020 moving. One clear point which is coming is the commercial 5G services are getting launched in key economies. At the same time, large edge data centers are getting deployed with the network on top of their own network connectivity. We are also seeing that data ARPU is increasing as a percentage in the total global ARPU and both tower fiberization as well as broadband connectivity continue to grow. And with the recent changes in ARPUs and the tariff changes in the India telecom industry, we believe the profitability is likely to improve as it moves forward.

In the last earnings call, we had said that by end of 2019, almost 25 countries will have multi-city, commercially available 5G services. And they shall continue to do rollout in 2020. Further, we want to give some data points on how 5G is evolving. In U.S., we have seen AT&T and Verizon, each expanding their reach of 5G services to 20 cities and 30 cities, respectively, before end of 2019.

China has launched one of the world's largest 5G network in 2019, reaching to 50 cities. In Shanghai alone, 12,000 5G base stations have been activated to support 5G coverage. And the 3 state-run operators, China Mobile, Telecom and Unicom are offering 5G plans that start at $18 for 30 GB data per month.

In Europe, 5G trials are continuing, and it is targeting commercial rollout in 2020. So on the base back of 5G deployments, the CapEx by major telcos is expected to go up to $141 billion in the current year, following a pause year of 2019. Further, we also expect that a large part of this CapEx shall go towards optical fiber spend as 5G network requires significantly much more fiber than a typical 4G network.

Coming to India, although 5G deployment is still some time away, the telecom industry profitability is going to increase following the tariff's hike. And we believe that the investments required to create future networks, which are pretty much due in terms of tower connectivity, et cetera, should start happening in the country.

In terms of cloud, we have seen a massive hyperscale and edge data centers getting built by global cloud companies. In 2020, the CapEx by global cloud companies is expected to grow by around 20% to almost $103 billion. The new cloud network infra architecture will require many more data centers to be built. And additionally, we are also seeing cloud companies owning their transmission, the fiber network between data centers. Going forward, this customer segment shall significantly impact the optical fiber demand. And we have also, as we have been talking for the last 2 quarters, we have initiated sales in this segment.

If we move on to the citizen networks, we -- the Indian government launched the national broadband mission in December of 2019, which aims to fast-track growth of digital communication infrastructure, bridge the digital divide and provide affordable and universal access of broadband for all. The main objective of this mission is to provide access to all villages by 2022. And this -- it envisages almost INR 7 lakh crore investment in the next 3 to 4 years. The ambitious project will involve going beyond what BharatNet has been doing. And it talks about laying almost 3 million route kilometers of optical fiber cable, which will involve increasing fiberization of towers from 30% to 70% and increasing tower density from 0.42 to 1.0 tower per 1,000 population. Thereby, significantly improving quality of services for mobile as well as Internet.

Coming to the fourth segment, which we cover. The enterprise segment, we -- particularly India where we are focused, we see a lot of investments are happening to create digital infrastructure. Example, as the warfare in defense is moving from tactical to digital, Indian defense forces are increasing ICT investments. These investments are in the areas of network modernization, secure data communications as well as physical security.

Indian railways is spending to overhaul its signaling and telecom systems to both improve speed and safety. Power grid corporation is investing in smart rate in addition to building modern MPLS/SD WAN networks for its own use as well as leading out to tenants. And this emphasis in building out networks is creating a good degree of investments as we move forward.

Now coming, particularly to the connectivity solutions segment for us, which includes our fiber and TV business. The global optical fiber demand after several years came down in 2019 for the first time by almost about 7% to reduce -- the overall demand reduced about $478 million from about $511 million in 2018. This -- as I said earlier, it happened mostly in China. Our key markets of India also degrew, while we saw growth happening by about 4% in Europe and about 4% in North America. We expect the global optical fiber demand to pick up as the pace of 5G deployment picks up across the globe. And this should happen meaningfully from the H2 of this year.

In line with the decline that we saw in some of the key markets. Our volume in Q3 in fiber has come down, but our cable volume has remained overall intact. We are currently operating at about 46% utilization for the expanded capacity of 50 million kilometers in optical fiber, and 76% utilization in the cable capacity of 18 million kilometers. The cable capacity, as we have talked about, will go up to 33 million kilometers by June of 2020.

So even though global demand in the fiber and cable business will remain flat in the short term till H2 of FY '21, our volumes are expected to increase on the back of volume gains through new market entry, which -- a lot of emphasis and efforts have been made over the last few quarters. These new markets will give us access to almost a new global demand, which is almost 25% of the world's demand, which had not been under focus for us. We are planning a phased entry in some of these markets. And we have in the -- as you would have noticed in the last few years, we have our -- of our total sales in the fiber and cable business, the international or global sales we've been increasing significantly from about 38% in FY '16 to almost more than 68% year-to-date in the current year.

In the new product segment, we have launched some of the new product, the one product that we launched called TruRibbon is -- in March of last year, is finding very good response from the customers. As the networks of the future is requiring dense fiberization, TruRibbon is answering the call by offering almost 2,000 fiber in a single cable, which is -- and it does it as the most compact cable packaging and superior handling design to enable first-time light installation.

On the fiber side, we have launched the Stellar Fibre, which is the industry's first universal fiber in October of last year. As the networks are requiring deep fiberization, they are also requiring bend-in sensitive fiber. The Stellar Fibre is one of a kind in the current industry to both have a bend-in sensitive design with a more field diameter, which matches the size of a legacy fiber. This leading-edge innovation from STL's optical design solution guarantees best-in-class data transfer, negligible data loss even with very high-fiber bands and compatibility with all the fibers, which are in use today. We have increased our new product revenue to total product revenue to -- from about 10% in FY '16 to 19% in year-to-date FY '20. And we shall continue to work in this direction and keep coming with new products to improve our realizations as well as margins.

Leveraging on our strength of most integrated manufacturing and supply chain, we also started Project Junoon in January of 2019 to focus on the overall cost structure in optical fiber. And we have found a cross-functional team to work on the cost-reduction possibilities across raw material, manufacturing as well as fixed costs. In the raw material costs, we've used the levers of yield improvement; renegotiation with existing vendors, alternate vendors; as well as in-house process improvements. In the manufacturing cost reduction, we have looked at areas like consumables as well as power load optimization. And in the fixed cost area, we have reorganized ourselves in a lean and agile organization. We have been able to achieve very significant good results so far. And we -- going forward, also, there are several projects to further do cost rationalization as we continue to move forward.

So in the current quarter, the connectivity solutions business, the absolute EBITDA has been affected on the back of both lower volume as well as some lower realizations in the optical fiber business. In the -- globally, what we are also seeing some plants starting to get mothballed and capacities shutting down. If further capacities shut down, we believe it will help in price stabilization. In the short term, we expect that the -- this business unit's absolute EBITDA will improve on the back -- both of incremental volume as well as cost reduction, which we are continually doing. And in the medium term, we shall continue our work on new products strengthening as well as increasing capacity utilization by entering new markets. We expect that as the overall pricing environment improved on the back of global demand, the Absolute EBITDA will be going up.

Coming to the other business segment, which we have is network services and software. It has been a slowly strategic growth engine for STL. And I wanted to show you a flavor of what it has grown up. This business has grown from about INR 350 crores in FY '16 to almost INR 2,600 crores in -- annualized in the current year, it's just translating 7.5x growth in the last 4 years. And this growth momentum is expected to continue in the future.

So in this context, if you see, we are no more a pure-play fiber player. We have quietly transformed ourselves from a fiber and cable manufacturing company to an end-to-end solution provider. And this business is almost like between 50%, 51% of our total revenues for the quarter and for the year. And apart from the growth, it is enabling STL to become the strategic partner to our customers by providing end-to-end solution from network design to implementation, operation and management. We have also grown our capability from network implementation to complex system integration, and we are continuously adding more and more product offerings.

We also see that the overall total addressable market for network services in India itself can add up to almost $15 billion from the forward segments of telecom companies, citizen networks, cloud as well as the large enterprises. And as we are taking shape, our clear aim is to become a full leader in network services in India, while we will initiate a global place through our data center offering with the acquisition that we had done last quarter in IDS in the U.K.

In terms of providing update on the key projects, the projects that we were doing for Indian Army in J&K, which is called NFS is -- has been completed and is moving to the O&M stage. The project Varun, which is the Indian Navy project, we are almost 65% completed. The MahaNet, which is rolling out the full network in Maharashtra is about 55% completed. And the fiber rollout for telecom company, we have done almost more than 5,500 kilometers for telecom companies in India across west -- mostly Central West and Southern India. We've also had new order wins that we announced of T-Fiber, which is a project to deliver digital infrastructure to 6 million citizens in Telangana. The total value of the project being about INR 1,800 crores, and for which we received the Phase 1 of our product for about INR 1,100 crores. We also got some multimillion dollars contract from Telekom Albania for the digital transformation program. And we are confident that orders shall continue to further flow in Q4 and the growth momentum will continue.

Our key differentiator in network services is a technology-led implementation, and there are several newer technology called Lead 360 that we have deployed with drone surveys, robotics cable blowing, AI bots as well as further accelerating the deployment of smarter networks of tomorrow.

So overall, what we see is that the services business shall clearly expand in 3 vectors. On one side, we will do customer expansion. Till date, most of our revenues, which were coming from enterprise and citizen networks, we are also now increasing our order book as well as revenues from telco and cloud segments. We are doing geographic expansion. We have already expanded in India from 3 states to 8 states. And we are slowly moving to a pan India presence. At the same time, as I said earlier, we are also moving to global markets with the IDS acquisition. And in terms of -- we are also looking at scope expansion. We'll continue to develop our capability to take on further scope to provide end-to-end offerings.

So overall, the business order book has grown from about INR 1,600 crores -- INR 1,700 crores to almost INR 5,000 crores in the current year and is expected to continue to grow up in the current quarter. The interesting part is that the business is also now, as the projects are getting completed, the O&M revenues is becoming a sizable part in terms of providing that visibility. So we have, out of the INR 5,000 crore order book, almost 38% is O&M, which will result in significant revenue stream as well as predictability in the future years.

Also, as we announced last week, we have taken our next steps to strengthen our presence in the wireless segment through an investment in ASOCS. As a part of the overall transaction, we have acquired about 13% stake in the company with Board representation. ASOCS is a new-age technology company. It's a pioneer in virtual radio access network and a provider of fully virtualized base station for enterprise and telco networks. STL and ASOCS will partner in creating newer solutions that will address the rollout of private T networks as well as 5G networks for our enterprise and telco customers. And we'll continue to do such a capability-based investments in the technology areas, which are relevant for networks of the future.

I would also like to just talk about that we've reorganized ourselves to an organization structure that places the customer at its center on an -- in an account-based organization, which will help us to offer both and fulfill power-of-one offering of Sterlite as well as the industry-shaping and customer-specific solutions with presenting us a single face to customers as well as creating lifetime customer value.

Now I'll hand it over to Anupam to discuss the financials.

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [4]

--------------------------------------------------------------------------------

Thanks, Anand, and good evening, everyone. Coming to financials. The first chart shows our continued diversification in terms of customer segments. The second chart shows our order book position at INR 8,535 crores at the end of Q3 FY '20, which is higher than Q2 FY '20. It is further expected to grow up by end of this financial year on the back of expected new orders in Q4 '20. We achieved a revenue of INR 1,200 crore in Q1 -- Q3 FY '20. Starting next quarter, revenue should grow sequentially on the back of strong growth of services business and volume growth in products. Our EBITDA stands at INR 247 crore in the current quarter. At the company level, in the short term, absolute margins shall improve from here.

Correspondingly, net profit adjusted for the provision of exceptional item net of tax stands at INR 91 crore. We have made a provision for an exceptional item to the tune of INR 51 crore, awaiting the acceptance of an application, which we have submitted regarding settlement of legacy excise dispute, and we found this is a good opportunity to settle that matter forever. At the company level, we are confident that the current quarter is lowest in terms of performance, and the company will show higher profit starting from Q4 this year on the back of growth. Our net debt as on 31st December stands at INR 2,078 crore.

In summary, we continue to remain bullish on the company with a strong outlook. On connectivity solutions, 5G has been commercially launched across the globe. The deployment shall pick pace in 2020, which will lead to structural demand growth of OF. Absolute EBITDA shall grow from Q4 (sic) [Q3] on the back of volume gain through new market entry and further cost realization -- cost rationalization and new products strengthening. And the services and software business, the investments by Citizen Networks and enterprise in India to continue, leading to order book growth in Q4 as well. The strong revenue growth in network services expected from the back of customer segments penetration, geographic expansion and scope-of-services expansion and moving towards leadership in India. Investment in technology will also seem to create network for future and still shall continue to invest to acquire new technologies and new capabilities and drive the disruptive trends, shaping the networks of the future.

For your reference, we have also captured an appraised version of our financials. With this, we come to the end of our opening commentary, and we would be open to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We have the first question from the line of Mukul Garg from Haitong Securities.

--------------------------------------------------------------------------------

Mukul Garg, Haitong International Research Limited - Research Analyst [2]

--------------------------------------------------------------------------------

Anupam, to start with, and if you can just help us with the data points, the prices on the fiber and cable side, how they have changed on a Q-o-Q level? What is the utilization on an overall basis? I think Anand mentioned utilization on the incremental capacity. So if you can just help us with the data points.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. So in terms of realization, realization for the quarter has been around $6 on the fiber side. On the cable side, it has been mostly passed through, so about $15 or so.

In terms of the capacity utilization, as we mentioned in our commentary, utilization in the current quarter for the entire 50 million-kilometer capacity was approximately 46%, which was lower than what we had done in the last quarter. On the cable side, we have been able to improve utilization to about 76% in the current quarter, so which is quite good. And in terms of volume, we are looking to improve this further in Q4. Going back to maybe normal level of what we were doing earlier.

--------------------------------------------------------------------------------

Mukul Garg, Haitong International Research Limited - Research Analyst [4]

--------------------------------------------------------------------------------

Got it. So Anupam, just wanted to elaborate a bit more on the gross margin performance, it has been quite commendable despite this price realization reduction. You guys have been able to improve the gross margin. Now my expectation was that maybe the stickiness will be more on the employee -- on the -- material cost and employee cost is something where you guys will be able to optimize a bit better, but it seems that the cost reduction or the margin benefit is kind of coming in on the raw material side rather than the employee cost side. So if you can just help us with the puts and takes there? And what more levers there are in future?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So as we had communicated, Mukul, that when prices started coming down, we have started working on the cost rationalization as we also spoke about in our commentary today Project [Junoon]. And we're happy to share that this has resulted into significant internal cost reduction, primarily in the direct cost side. As we also mentioned, raw material negotiation, internal efficiency improvement and so on and so forth. So those are the things which have given a good amount of benefits, and we continue to leverage further on those things, including developing new systems and processes, which can further improve the cost.

--------------------------------------------------------------------------------

Mukul Garg, Haitong International Research Limited - Research Analyst [6]

--------------------------------------------------------------------------------

Got it. So any possible benefits or possible resonation on the employee cost side or that will continue to remain sticky?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, on the employee cost side, we are not taking any decision. We continue to believe that we have a very good and strong employee base, which we will continue to invest in as we move forward.

--------------------------------------------------------------------------------

Mukul Garg, Haitong International Research Limited - Research Analyst [8]

--------------------------------------------------------------------------------

Understood. The other question was on the CapEx plan for FY '21 and '22. Anand, you mentioned that you are seeing industry mothballing some capacity. So are you guys also pushing back the CapEx plan, especially on the cable side, where the CapEx expansion is planned?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [9]

--------------------------------------------------------------------------------

So in terms of, Mukul, the fiber CapEx is largely complete, as you would know. So there's no question of tapping anything there. In terms of cable, we have seen that we are already midway through the CapEx implementation cycle, and we wouldn't want to hold on to that. We still believe the long-term attractiveness of the industry, particularly for the large players like us, who are not just volume player, but also technology player will continue to be there. And therefore, maybe within the next 9 months, 12 months time, the business fundamentals will come back again. And we don't want to take any short-term measure to defer or cut back on CapEx, which we are doing. So at the same time, we are not looking at any more CapEx beyond what we have already commented.

--------------------------------------------------------------------------------

Mukul Garg, Haitong International Research Limited - Research Analyst [10]

--------------------------------------------------------------------------------

Fair enough. If I may squeeze in one final question. You guys plan to enter new markets, which are 25%. I imagine a big push on that will be U.S. So if you can just share some thoughts on basically what is the plan and the duration over which you will enter? Or would you require to do any acquisitions to kind of get local capacity in the market on the cabling side?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [11]

--------------------------------------------------------------------------------

So that are 2, 3 areas that we are looking deeper into. We are looking at Southeast Asia. We are looking at Middle East, and we are looking at North America. And as we have done in the past, wherever we go, we go deeper. We take some time. We invest in those markets. And so in all these markets, we have started seeing a good degree of traction. Latin America is picking up in terms of volumes that we do. And we are very clear that as we have succeeded over the past in India, in China, in Europe, it's the same methodology that will apply. And North America, you're right, is a market that we are investing in, and we have started seeing some initial successes there as well.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

The next question is from the line of Pranav Kshatriya from Edelweiss Securities.

--------------------------------------------------------------------------------

Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

So I had got dropped off. So my question might have been asked before. So sorry for that. My first question is that, can you just elaborate that how the realization in the industries are moving currently? And vis-à-vis how your realizations are moving? This is in the background that you used to have a lot of fixed-price contract, and hence, that actually was one of the reason why we are expecting that realizations will remain fairly high for you. Is that the case is what I want to know?

And secondly, on the margin side, can you just elaborate how the margins for the services portfolio is emerging? And what are the key variables for tracking margin in that business? So these are my two questions.

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [14]

--------------------------------------------------------------------------------

Sure. So on the fiber part of it, industry is currently in the range of $5 to $6. Our realization is closer to about $6 on the fiber side, largely due to the value-added products that we do. Some of the contracts, as we said at the end of H1 also, while the volume contracts we are retaining, some of the price contracts renegotiation is happening closer to what the pricing structure has been for our customers. And we see that going through. The price fall has stopped. It has come very close to this range of this $6 -- $5 to $6 range, where -- and we are in the higher end of it because -- primarily because of the value-added products that we continue to sell larger than the industry.

In terms of the services business, as we've been maintaining that we are seeing the margins gradually improve as the scale of the business starts improving. So we are seeing margin in this business currently at about 17%. The projects continue to be between 20%, 21%. And as we are seeing scale coming into this business, the fixed-cost rationalization is happening over a wider level. The margin level at a steady stage will be between 15% to 17% of this business and 20% to 22% for the product at an average level, as we have talked about, maybe in that 18% to 20% range.

--------------------------------------------------------------------------------

Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Sure. Sir, one more question is, can you just elaborate a bit on how the demand for China is shaping in 2020? Is China expected to get back to growth trajectory in 2020? Or we should see more like low single-digit kind of a growth from China? Or it can be getting back to 10%, 12%, what it used to do earlier?

And second question is how the demand for the fiber is in India, considering there is a sharp decline? Is -- there is expectation of the state net project to drive growth along with fiberization by the private telcos.

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [16]

--------------------------------------------------------------------------------

Sure. So on China front, at least, we are expecting that it will be a flat year, unless some projects come out and get announced in China. China is very difficult to project and predict because they have extremely large tenders, and the timing of that is a bit -- it cannot be predicted right now. So we -- at least for our assumptions, we are keeping it a flat year.

India, as you rightly said, we'll see whatever the decline has happened, we believe that there'll be a good degree of recovery happening. We're already seeing activity, as we talked about for the Telengana project, the national digital mission. And on a more immediate basis, we are seeing good degree of action and activity coming in from both geo as well as towards -- from Airtel. And more and more for us, the overall value shifting to a end-connectivity products rather than just pure fiber. We are looking at it from a solid complex solutions, which are at -- providing a tower connectivity solution. So we are seeing that good shift in India for us will be definitely recovering in 2020.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

The next question is from the line of Neerav Dalal from Maybank Kim Eng Securities.

--------------------------------------------------------------------------------

Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [18]

--------------------------------------------------------------------------------

And I have a couple of questions. One is, in terms of the volume in the products business, are you seeing a volume decline across geos? Or is there some -- are there some regions where there is flat or a decline? So if you could just comment on your -- the other regions?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [19]

--------------------------------------------------------------------------------

So the volume decline, Neerav, has largely happened in China and India. China about 13%, which was...

--------------------------------------------------------------------------------

Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [20]

--------------------------------------------------------------------------------

For us, we'd be mirroring that?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [21]

--------------------------------------------------------------------------------

So for us, the volume has a -- for a year-on-year basis, it will be flat for us. We are not seeing a volume decline. For Q3, we have seen a degree of decline, which happened essentially due to the end of calendar year. But we believe for the overall year, we will be either flat or slightly positive volume compared to last year.

--------------------------------------------------------------------------------

Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [22]

--------------------------------------------------------------------------------

Great. And my second question is in regards to the services business. Now we've seen Telangana, we've seen Maharashtra. If you could elaborate on which are the other states where you are seeing bidding happening, some information on that?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [23]

--------------------------------------------------------------------------------

There are different states in different stages. There is Tamil Nadu going to happen. There will be Gujarat. There is Haryana. So several of these states are looking at setting up these networks. There is Madhya Pradesh going to happen after -- so we see the most imminent being Tamil Nadu and Gujarat right now than Haryana and MP, and then a few more states after that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And the size of these contracts will be similar to what is in Telangana? Or there would be...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Different. The scopes are different. The way they break the contract is different in terms of region, like, for example, in MP they have broken into 4 regions. And the scope -- what's happening interestingly is every state is looking at it in a very serious manner. And they are -- it's like becoming a contract where part of the money is coming in from BharatNet central project, and part of the money, they are spending their own.

At the same time, what we are seeing in an interesting way is also that the telecom companies, the geos, the Airtels have started also towards spending, towards creating network. So for us, what's happening is, on back of the capabilities and the geographical expertise we are creating in certain geographies, we are able to leverage across multiple. So what we are doing, for instance, for the Navy project, what we are doing for the state project and what we are doing for telco is all getting leveraged in larger manner, geographically.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right. I just -- I have a couple of book-keeping questions. One, what could be the taxes for the full year? Would it be 25%? Or would it be lower than that?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [27]

--------------------------------------------------------------------------------

Neerav, we have already chosen the flat rate of 25%. So it will be that for the current year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Because the third quarter also, your effective tax rate is lower, so I guess wanted to check.

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [29]

--------------------------------------------------------------------------------

Third quarter is also similar, maybe some of the other things should have come, but 25% is the rate, which we have taken.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right, right. And there has been a decline in the depreciation number for this quarter, Q-on-Q. So what should we look at?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [31]

--------------------------------------------------------------------------------

So that should be broadly in line with some of the capitalization, which we have done. So some of the things what we have got corrected there. And I think going forward also, we are looking at the entire capitalization and looking at optimization. So it may be in that range of INR 70 crore, INR 75 crore.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

--------------------------------------------------------------------------------

Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [33]

--------------------------------------------------------------------------------

Sir, I just wanted to know what will be the projects and services revenue executed in 9-month FY '20? And this INR 5,000 crore revenue that we have identified in projects and services within which INR 3,500 crore is services, what will be the execution time line for this sort of backlog?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [34]

--------------------------------------------------------------------------------

The INR 5,000 crore worth of orders that we have about 37% is O&M. So about 63%, which is about INR 3,000 crore, would largely be between 15 to 18 months.

--------------------------------------------------------------------------------

Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [35]

--------------------------------------------------------------------------------

43% is O&M?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

37%.

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [37]

--------------------------------------------------------------------------------

37%.

--------------------------------------------------------------------------------

Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [38]

--------------------------------------------------------------------------------

37%. So about INR 1,600 crore, INR 1,700 crore worth is O&M.

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [39]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [40]

--------------------------------------------------------------------------------

And this execution would be how much a cycle?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [41]

--------------------------------------------------------------------------------

That execution will continue for about 7 years. So this is an accumulation of all the projects that we keep adding up. The O&M will keep increasing as we move forward.

--------------------------------------------------------------------------------

Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [42]

--------------------------------------------------------------------------------

Okay. And how much projects and services revenue would have booked in 9 months FY '20?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [43]

--------------------------------------------------------------------------------

We have done close to about INR 2,000-odd crore, which is roughly about 50% of the total revenue.

--------------------------------------------------------------------------------

Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [44]

--------------------------------------------------------------------------------

Okay. And the other 2 questions are, is there any upward movement in OFC prices now, since the last couple of months?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [45]

--------------------------------------------------------------------------------

Not -- one aspect is a generic product, we are not seeing any movement. But the higher this product, the higher stuff like that. I talked about the TruRibbon. The more value-added products, clearly, we see more margins. And that is a proportion that we are increasing more. That is -- we are catering to data center market, cloud companies. For us, we are shifting the focus more and more towards that new products and new customers segment.

--------------------------------------------------------------------------------

Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [46]

--------------------------------------------------------------------------------

Okay. And can you share the OFC volumes done in 9-month FY '20 versus 9-month FY '19?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [47]

--------------------------------------------------------------------------------

We just talked about that we are currently operating at about 46%, 47%...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

76%.

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [49]

--------------------------------------------------------------------------------

76% for the cable business.

--------------------------------------------------------------------------------

Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [50]

--------------------------------------------------------------------------------

So 0.46 of $50 million. So we're doing -- done about $23 million FKM?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [51]

--------------------------------------------------------------------------------

Yes, that was the Q3 run rate. And as we said, the overall year either will be flat or growing compared to last year.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

The next question is from the line of Alok Deora from Yes Securities.

--------------------------------------------------------------------------------

Alok Deora, Yes Securities (India) Limited, Research Division - Research Analyst [53]

--------------------------------------------------------------------------------

Just a couple of questions. Just the onetime provision, which we have taken in the P&L. So there won't be any further provisions? I mean that was just like for this quarter, it's done. Or how are we placed there?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [54]

--------------------------------------------------------------------------------

Yes, Alok, this is -- under this new scheme launched by the government to settle some of the old legacy issues of excise and service tax related, under which, just for the benefit of all the listeners on this call, we had one major matter outstanding on account of excise duty, where we had qualification, and the matter involved about INR 188 crore. And we found this is a good opportunity to settle that, so we have taken INR 51 crore provision. We have submitted the application. Within 2 weeks, we are expecting the acceptance of that. And with that, we are not expecting any more provision on account of this.

--------------------------------------------------------------------------------

Alok Deora, Yes Securities (India) Limited, Research Division - Research Analyst [55]

--------------------------------------------------------------------------------

Right, right. And we have acquired ASOCS. So what's the consideration we have paid for the 12.8% stake?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [56]

--------------------------------------------------------------------------------

That -- unfortunately, we cannot disclose the number due to confidentiality reasons for the valuation.

--------------------------------------------------------------------------------

Alok Deora, Yes Securities (India) Limited, Research Division - Research Analyst [57]

--------------------------------------------------------------------------------

Okay. And just one last question. So the EBITDA margins, we were still able to maintain on a quarterly basis despite, I believe, the services portion increasing. So how are we looking at our margins going forward in the fourth quarter and even FY '21?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [58]

--------------------------------------------------------------------------------

Yes, largely, it will be in the 18% to 20% range as a mix. As we said, the services will be 15% to 17%. The product will continue to maintain between 22% to 23%. And that's the sort of a range that we are looking for. Quarter-on-quarter, based on the mix between the 2 businesses, it might shift by a percentage point here or there, but that's a range we are looking at.

--------------------------------------------------------------------------------

Alok Deora, Yes Securities (India) Limited, Research Division - Research Analyst [59]

--------------------------------------------------------------------------------

Right. Just one last question if I may. So what's the utilization you mentioned for cables because for fiber, it was around 46%.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

76%.

--------------------------------------------------------------------------------

Alok Deora, Yes Securities (India) Limited, Research Division - Research Analyst [61]

--------------------------------------------------------------------------------

So 76% on capacity of?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [62]

--------------------------------------------------------------------------------

18 million kilometers.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

The next question is from the line of [Saket Kapoor] from Kapoor & Company.

--------------------------------------------------------------------------------

Unidentified Analyst, [64]

--------------------------------------------------------------------------------

Yes. Sir, firstly, if you could give the figure on the receivable front, what are our trade receivables? And particularly from BSNL point, how much is due?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

In terms of receivables, we are having in the line of about 100 days or so. But in terms of BSNL, if you're talking about the overdues, we have some overdues in the beginning -- we had some overdues in the beginning of quarter, particularly from our products business, which are due for more than 6 to 8 months. Fortunately, we have received INR 133 crore in last quarter itself out of total INR 300 crore. So we still have about INR 160 crore pending to be collected from BSNL, which we are expecting over next 6 months, we'll get that.

--------------------------------------------------------------------------------

Unidentified Analyst, [66]

--------------------------------------------------------------------------------

On the net debt level, is it INR 2,078 crore?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [67]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [68]

--------------------------------------------------------------------------------

Okay. So sir, this finance cost, the practical doubling of it is due to the lower utilization, only that we are unable to cover recover the finance part. What has led to this, sir? Our business has not grown in that quantum, but the finance cost has been doubled in the 9 months.

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [69]

--------------------------------------------------------------------------------

The finance cost has doubled largely because of the borrowing has also gone up. One, that we have completed the project, and the payments are happening. And second, of the capitalization of interest, which was happening until last year, that has started come into gain.

--------------------------------------------------------------------------------

Unidentified Analyst, [70]

--------------------------------------------------------------------------------

Sir, the point which we're telling was that for the 9 months, we have been at 46% utilization level for the cable segment?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [71]

--------------------------------------------------------------------------------

For the fiber segment in Q3, it's 46% at 50 million run rate. And in Q3, it's 76%.

--------------------------------------------------------------------------------

Unidentified Analyst, [72]

--------------------------------------------------------------------------------

For the fiber?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [73]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [74]

--------------------------------------------------------------------------------

And for the cable part, sir?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [75]

--------------------------------------------------------------------------------

76% for Q3.

--------------------------------------------------------------------------------

Unidentified Analyst, [76]

--------------------------------------------------------------------------------

For Q3. And sir, how are we -- what is our endeavor for Q1? How much will be closing the year with, average elevation level?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [77]

--------------------------------------------------------------------------------

As we've said, overall, during the year, we will be either growing or flat compared to the previous year.

--------------------------------------------------------------------------------

Operator [78]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from the line of Bhupendra Tiwary from ICICI Securities.

--------------------------------------------------------------------------------

Bhupendra Tiwary, ICICIdirect.com, Research Division - Research Analyst [79]

--------------------------------------------------------------------------------

Basically, I just wanted to understand what is the kind of CapEx that we should build for FY '21? And I just wanted to understand that is this net debt level the peak net debt level? Because I understand that with 50% of the CapEx of the cable left, I think the net cash flow generation should be positive from next year onwards? Am I on the right track?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [80]

--------------------------------------------------------------------------------

So in terms of the CapEx as I said in the -- one of the questions that we are not having any new CapEx planned. And whatever CapEx we have sort of completed and are undergoing that will continue. In terms of the number, current year, we had said roughly about INR 500-plus crore of Capex, so we might be doing under -- less than that. Next year, we'll work out the number, but since we're not committing, the numbers will not be significant in the next quarter -- next year. In terms of net debt, can you come back with your question?

--------------------------------------------------------------------------------

Bhupendra Tiwary, ICICIdirect.com, Research Division - Research Analyst [81]

--------------------------------------------------------------------------------

So I just wanted to understand that since most of the CapEx is done, is it the peak net debt level that we have hit right now? And I think the debt reduction should start?

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [82]

--------------------------------------------------------------------------------

Yes. So we are actually -- we continue to work on debt reduction. From quarter-on-quarter, debt may vary sometimes, but we have stated that our net debt-to-equity will be below 1. And we are really confident that, again, by March, we will be in that range. And even going forward, we are working to bring down the leverage significantly.

--------------------------------------------------------------------------------

Operator [83]

--------------------------------------------------------------------------------

The next question is from the line of Mr. Mihir Manohar from CapGrow.

--------------------------------------------------------------------------------

Mihir Manohar;CapGrow Capital Advisors;Equity Research Analyst, [84]

--------------------------------------------------------------------------------

I just wanted to understand, when is this new capacity of cable, which is roughly 50 million fiber kilometers going to come onstream. So when is the commercial utilization going to start up this capacity?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So that we had said that by June 2020, this capacity will be fully up. In terms of commercial utilization, while we would want to have it as early as possible, but due to current market situation, it may get a bit delayed. So that's how things will pan out. We are expecting market from a volume perspective to revive in the next few quarters. And that would allow us opportunity to scale up utilization. And also as we are moving into new territories, that will also help us get better value -- volume.

--------------------------------------------------------------------------------

Mihir Manohar;CapGrow Capital Advisors;Equity Research Analyst, [86]

--------------------------------------------------------------------------------

Okay. And just to extend, can you share your expected utilization, your target utilization levels for FY '21 for both the divisions, fiber and cable?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

For both -- for both the divisions, we should be between 75% to 80% for FY '21 of the expanded capacities.

--------------------------------------------------------------------------------

Mihir Manohar;CapGrow Capital Advisors;Equity Research Analyst, [88]

--------------------------------------------------------------------------------

Of the expanded capacity?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [90]

--------------------------------------------------------------------------------

The next question is from the line of Subhankar Ojha from SKS Capital & Research.

--------------------------------------------------------------------------------

Subhankar Ojha, SKS Capital & Research Private Limited - Senior Analyst [91]

--------------------------------------------------------------------------------

I wanted to double-check basically if I heard it correctly. So did you say that quarter 4, you are likely to see a sequential growth in revenue?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [92]

--------------------------------------------------------------------------------

Yes, that's right.

--------------------------------------------------------------------------------

Subhankar Ojha, SKS Capital & Research Private Limited - Senior Analyst [93]

--------------------------------------------------------------------------------

And what would be driving that revenue growth in quarter 4?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [94]

--------------------------------------------------------------------------------

One, clearly, we are clearly seeing volume growth happening on the fiber and cable business as compared Q3. And we have significantly more both visibility as well as order book for the services business, which we currently have, the execution of that will drive that.

--------------------------------------------------------------------------------

Subhankar Ojha, SKS Capital & Research Private Limited - Senior Analyst [95]

--------------------------------------------------------------------------------

Okay, great. And what is our 9-month Capex, I think H1, we have done somewhere INR 330 crores. And your guidance is INR 550 crore, I think, for FY '20?

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [96]

--------------------------------------------------------------------------------

Yes, about INR 550 crore would be overall. So we don't have the number exactly.

--------------------------------------------------------------------------------

Anupam Jindal, Sterlite Technologies Limited - Group CFO [97]

--------------------------------------------------------------------------------

So as I just said that we will be actually doing less than INR 550 crore in the current year. I don't have actual number of 9 months, but we'll be well within that.

--------------------------------------------------------------------------------

Operator [98]

--------------------------------------------------------------------------------

We'll take that as the last question. I would now like to hand the conference back to Dr. Anand Agarwal for closing comments.

--------------------------------------------------------------------------------

Anand Gopaldas Agarwal, Sterlite Technologies Limited - Group CEO & Whole-time Director [99]

--------------------------------------------------------------------------------

Yes. I would like to thank you, everyone, for attending the call and for showing great interest in our company. We are overly pretty bullish on the overall segment and the position that the company has in the overall data network segment. I also hope that you were able to address and clarify your queries and comments. For any further questions and discussions, you can feel to contact our IR team, which includes myself and Anupam, and we really look forward to continuing the conversation with you in the future. Thank you, and good evening.

--------------------------------------------------------------------------------

Operator [100]

--------------------------------------------------------------------------------

On behalf of Sterlite Technologies Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.