HFCL Limited (HFCL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 FY '22 Earnings Conference Call of HFCL Limited hosted by ICICI Securities. On the call, we have with us today Mr. Mahendra Nahata, Promoter and Managing Director; Mr. V.R. Jain, Chief Financial Officer; Mr. Manoj Baid, Company Secretary; and Mr. Amit Agarwal, Head, Investor Relations. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management for their opening remarks. Thank you, and over to you.

Hello, yes. Ladies and gentlemen, good morning, and greetings for the festive season. Thank you for making it to HFCL's earnings call for the second quarter and half year of financial year '22. So quarter 2 of financial year '22 results, press release and investor presentations are available on the website of the company and stock exchanges. Rapid vaccinations and responsible social conduct are repairing to health in the pandemic. I wish and hope that the country and the world is way past the worst. It is important still to keep the visual up while we usher into more stable and prosperous future henceforth. For HFCL, our resilience an uncompromised focus on profitable growth, capability ramp up, innovation and expansion of product portfolio as well as manufacturing capacity, which serves well going forward. Our drive to analogize technology-led enterprise that innovates and manufactures for the world is deepening at the right time. Digital connectivity and data security would be the twin foundations of the post-COVID world, dense fiberization, high-speed data transmission and secure transmission network would feature among the fastest-growing economic themes right through this decade and right across the globe. HFCL finds itself in the right place to actively participate in this abundant growth opportunities to maximize stakeholder's value. Going by various global estimates, India is well on course to analogize one of the fastest-growing major economy from the next fiscal year of 2022, '23. I hold a firm conviction on assumed decade turning out to the India's decade. Opportunity landscape is brimming with better prospects and we are entering into the golden phase of sustained economic growth. HFCL's opportunity landscape appears even much brighter. BharatNet Phase 2 explosive FTTH demand growth, additional 4G spectrum allocations to telcos, 5 megahertz 4G spectrum approval to Indian Railways and subsequent rollout of 5G, realized scheme for telecom and networking products, government's initiative in securing indigenously developed defense products backed by Atmanirbhar Bharat and Make in India program are all going to propel HFCL into its next orbit in the coming quarters. The Bharat Broadband Network Limited has invited this for implementations in PPP mode to roll out high-speed broadband services in the rural areas across 16 states. This network is projected to have demand of approximately 12 lakh kilometers of fiber optic cables, comprising of both overhead and underground cables. This massive demand of fiber optic cable, coupled with the demand of associated transport and excess equipment, like WiFi and optical access equipment presents tremendous business opportunity for the company, both in equipment and project segment. Currently, India has a fiber-based network spending across 28 lakh fiber kilometers, as against our targets set up by the National Broadband Mission deployed as much as 50 lakh kilometers of cable by 2024. Decent allocation of additional spectrum for 4G wireless services to telco will benefit HFCL with added demand for fiberoptic cable and also turnkey projects. Union Cabinet approving a 5 megahertz 4G spectrum for Indian Railways in the month of June 2021. This is another smooth opportunity for us, a project targeted to be completed in 5 years and estimated the cost over INR 25,000 crores. The project entails to provide secure voice video as the data communication services for operational safety and security applications for the national transporters network. The 4G long-term evolution specific system to railways will be used for modernizing, signaling and ensuring pain production while also maintaining constant communication between loco pilots and guards. We see a huge opportunity from this modernization campaign of the Indian Railways. As you all know, trial spectrum for 5G has already been allotted to the telecom operators. Auction for commercial use of 5G spectrum is expected to happen in the beginning of 2022. Rollout of 5G networks will result in massive increase in demand of hydropic cable in addition to the related radio access network and other required equipment. This again presents an excellent market opportunity for the company. The company will be present in a large number of Equipment and Services segment required for 5G networks. 5G network implementation presents a very attractive opportunity for the company both in domestic and international markets. We are one of the largest capacities of manufacturing fiber optic cables, which will see huge upsets in demand and 5G networks are implemented. We have started development of 5G radio access networks, both for macro cells and small cells, which will be required in very large numbers. We are in process of developing transport network equipment like routers and controlled cord gateways, which are also required for 5G networks in large capacity. In order to capitalize these opportunities, it is imperative for HFCL to keep pace with capacity and capability buildup. We have made significant strides towards advancement of technological and R&D capabilities and ramped up our manufacturing capacities across our optical fiber and cable business. Upon completion of our ongoing CapEx, existing capacities of optical fiber, optical fiber cable and FTTH cables have increased by 20% to 25% and new capacity also -- would also add new types of cables like micro ducts, micro module, advanced driven cable amongst others. Our newly commissioned R&D center in Bengaluru is shaping up well. This is our dedicated R&D center of 5G products and WiFi products. Hence we remain committed to steadily invest in R&D capabilities, innovate and remain nimble to capture the opportunities ahead. The PLI scheme has been introduced at the most appropriate time. The scheme will go a long way to make our country -- global health for telecom innovation. HFCL first wholly owned subsidiary, HFCL Technologies Limited has also submitted its application under PLI scheme. To continue to consciously evolve our revenue mix towards enhanced share of margin-accretive products and capital efficient projects. As of 30th September 2021, Our consolidated order book stood at INR 5,822 crores. New orders for fiber optic cables and equipment are being instilled regularly by the company. Last week, we have received order worth of INR 287.96 crores from RailTel Corporation of India to set up a secured network for Indian Air Force. The Board of Directors of your company has approved fundraising of up to INR 750 crores on 1st September 2021, which was also approved by the shareholders at the Annual General Meeting held on 30th September 2021. We are happy to share that Infomerics Valuation And Rating Private Limited, RBI and SEBI registered credit rating agency. I have signed A rating and with a stable outlook for long-term and A1 for short-term banking facilities for the company. Existing credit ratings by clear rating stands at A- for long-term bank facilities and A2 for short-term bank facilities. The Board has approved the allotment of 49,34,300 equity shares, having face value of INR 1 each to HFCL Employee Trust on 15th July 2021 for implementing the benefits of HFCL Employees Long Term Incentive Plan 2017 in lieu of the vested east of granted to the eligible employees of the company. Friends, let me now brief you on key performance metrics for the quarter and the half year. Revenue for quarter 2 of financial year '22 stood at INR 1,122.05 crores as compared to INR 1,054.32 crores in quarter 2 of FY '21, thus recording a year-on-year growth of 6.42%. EBITDA for the quarter stood at INR 173.20 crores as compared to INR 137.47 crores in quarter 2 of FY '21. EBITDA margin increased by 240 basis points and strength at 15.44% for quarter 2 of financial year '22. For quarter 2 of financial year '22, profit after tax rose to INR 85.94 crores as compared to INR 53.32 crores for quarter 2 of financial year '21, recording a growth of 61.18%. Flight margin also improved by 260 basis points to 7.66% in quarter 2 financial year '22 as compared to 5.06% in quarter 2, FY '21. For the half year ended on 30th September 2021, the company reported consolidated revenue of INR 2,328.92 crores as against INR 1,754.10 crores in September 2020. EBITDA of INR 360.74 crores as against INR 220 crores in September 2020. Profit before tax in this half year stood at INR 239.29 crores as against INR 104.60 crores in the half year ended in September 2020. And profit after tax stood at INR 176.63 crores as against only INR 74.60 crores in half year ended in September 2020. Segmented revenue for telecom products during the quarter under review stood at INR 503.92 crores as compared to INR 278.86 crores in the quarter 2 of financial year '21, which is a significant decrease from revenue of production. We expect revenue from production business to continue this uptrend. Our performance reflects sustained growth and strengthening our value proposition that we have achieved over the last few years. Looking ahead, our constant focus on innovation steady expansion of our product bookings shift to margin-accretive product mix, alignment of our offering with emerging and future market opportunities, deepening of our market engagement in export geographies added contributions from our under development capacity and pursuit of new products and opportunities by our recently constituted dedicated 5G division shall keep fueling our journey towards sustained growth and profitability. Hence, we remain focused to achieve the targets we have set for next few years and remain confident on our growth momentum ahead. Thank you once again for your keen participation and wish you good health. With this, I conclude my opening remarks and open the floor for Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Hardik from ET Now.

My questions were pertaining to services as a whole. We have seen the contribution from services absolutely has gone down in this quarter from roughly INR 750 crores in the last quarter and the last year of the same quarter to about INR 600-odd crores this time. So of course, the product contribution in the total revenue also has gone up as we had guided in the previous quarter's con call. But when do we see absolute growth also in services going forward? And is it directly linked to the 5G rollout? And so how do we go ahead from here on the services front?

Thank you for the question, Hardik. Basically, as I've stated in my previous calls, our focus is in growth of revenue by product, not as much by services. Reason being services payments are little elongated and that puts stress on working capital. So our strategy is to increase revenue by products and which you have seen constantly. If you look at the whole year ended on 31st March 2021, the product revenue was 27% and services revenue was 73%. Now it is 45% for products, 55% of services, which has been my sort of assurance to all of you that we will reach to 45%, 55% in the current year, and we are on course to maintaining that. Now services revenue, of course, I'm not saying no to services revenue as the payments are in time. So for example, BharatNet comes in PPP mode and it is implemented by reputed operators or companies where the payments are good or 5G implementation starts where services are required and high-end value-added services acquired. These are no averse to that. We would definitely go for tax. But my key consideration in that would be that it should not be linked to some performance by the customer, and then it is linked to a milestone, which is dependent on customer performance. And if the customer performance is delayed, then my revenue and my payment is delayed. I don't want to go into that kind of a situation. If it is a simple services revenue not linked to any customer-related milestone, we would be very happy to do that, and we are not averse to increasing revenue from services if that happens.

Okay. So this quarter, we did about INR 600-odd crores in services. So are we likely to go back to INR 750 crores, INR 800 crores per quarter kind of service revenue or this is a one-off...

I don't predict that, Hardik at this point of time. But yes, we would like to maintain the balance at 45% for products and 55% for services at this point of time. But yes, if the good services contracts are available, we are not averse to that.

Okay. So on the product front, I had a couple of questions pertaining to our facility coming up for optic fiber and fiber to the home. When are we likely to see production coming on stream and realizing revenues on the fact?

Yes, I think you are talking about the expansion of capacities because capacities are already there. And fiber, for example, we are producing 8 million fiber kilometer per annum, which is slated to go up to 10 million. And this should happen within this financial year, before March, it would start, it is already under implementation, machine orders have been placed. Now the delivery work and all that are going to start pretty soon. And before end of this financial year, maybe further or so will be starting production from the enhanced 2 million additional capacity. In terms of cable, part of that facility has already been commenced. It is under production and the completion would happen maybe another 2 months' time frame. It will be completely under production. And we have targeted our revenues also from that facility in which we will be able to achieve. So it is partially complete production is on -- already on completion would be another couple of months' time.

Okay. Sir, my last question on the product front. Could you throw some light on the software-defined radio and ground surveillance radar for us, the opportunity is huge, but how soon do we feel that, okay, this will realize into a certain amount of revenues or the time line for that?

Look, in our revenue targets of the next financial year, we have not included any revenue from SDR or ground surveillance radar, because SDR development is going to be finished sometime mid of the next year, sometimes mid of the next financial year, I would say something like August, September time frame. And then it would go through the qualification process of Army, which as you know, takes a pretty long time. So we are not looking at any revenue from software-defined radio or radar in the next financial year. We'll be looking for revenue from them in the year next, which is '23, '24 or '22, '23.

Will you be able to quantify the kind of revenue we might get in '23, '24 from these two?

It is very difficult to predict that kind of revenue. But because the demand is very significant. Demand is very significant. I think we should be able to get reasonably good revenue and should be somewhere in 3 figures with exact number. I'm not able to say at this point of time. It would depend upon kind of tenders come from Army time frame they take in finalizing those tenders. I would not predict, but 1 thing I can say SDR that is software defined radio, it is a huge opportunity majority part of Indian armed forces network is going to be shifted to SDR because of its high technology, high encryption and less vulnerability to intrusion these qualities. The demand is going to be massive in the next 5, 6 years. So we expect to get a reasonable market share out of that. And it is our own development. It is Indian design, Indian developed, it is Indian manufacture it is going to be. And that's a way the requirement of Army and we are 1 of the shortlisted companies. So I have very high expectations from this product, which is under development.

And so the same thing with optoelectronics as well for the Army?

For army, we are not doing any optoelectronics. This is -- okay, you are talking about night-vision devices, electro optic devices.

Night vision devices.

Okay. I got confused, sorry. Electro optics, we have already started some small orders are under process of being received by us. It's not very big, but still it's a good beginning. More tenders we have participated and those tenders are under evaluation. In fact, 1 of the tender, which is reasonably large when we are submitting samples by I think another week or 10 days. We are submitting samples for the final evaluation by Army, couple of more tenders we have participated where samples will be submitted soon. A number of more tenders are in process where we will be participating. So optoelectronics, night-vision devices, yes, that process has already started. And for manufacturing this, we are going to build up a facility in Hyderabad, which I have already informed to all my shareholders in past. And land for that facility has already been allotted and possibly construction activities will start in another 2 weeks' time. Construction activity will start and it is expected that, that facility would cost us INR 40 crores to INR 50 crores and it is going for 2 things: 1 for optoelectronics and second for electronic fusing. In future, we might add more products out there.

The next question is from the line of Shivam Saxena from ICICI Bank Limited.

My question is on the -- what is your view on OS optical fiber prices? What are they currently? And what is your view? It is going to -- because it's a global commodity. So what is your view on global optical fiber prices? And what are the prices right now?

Look, in our quarter 2, I can give you a number. It was average procurement price was about INR 267 per kilometer. Okay? Now it is considerable...

Sir, in case you can give in dollar for SKM, if you can give?

Dollars I can't give you $267 (sic) [ INR 267 ] you can divide by INR 75, dollar will be keeps on changing. I take the price which is reaching to my factory. But anything I can divide to see this is factory reaching price. So we have to divide by that duty and all that.

Roughly, I think we have $2.5 I think, $2.5?

It's more than that only.

Yes, I think, $3, $4 -- $3.5 for SKM.

So it's at INR 267, okay?

Okay.

Now it is increasing. This is an increasing trend. I would say now this would go up more than INR 300. Right now, it is $3.5. If you take it, I think you have to do the multiplication. But this INR 267, which is a cost right now, I expect it to go up to INR 300 very, very soon because large tender has come up in China, which is going to be opened up on 14th of this month 140 million fiber kilometer, 140 million fiber kilometers. So I think there will be upswing in the trend of the fiber prices. And it may settle around something like INR 330 to INR 350. This is I'm talking inclusive of all duties and everything delivered in my factory.

Okay. And what has been the all-time high of this fiber prices?

No, this is not all time high, all-time high is...

What has been all time high?

$8 or $9 all-time high has been much higher.

Okay. So you don't see going to debt level, right?

No, no, not at all. Not at all. I think INR 350 is the maximum it would settle.

[Operator Instructions] The next question is from the line of Neerav Dalal from Maybank Kim Eng Securities.

A few questions from my end. One is now that we are seeing the telecom products business pick up, what would be our exports, say, in the first half of this year. I think last year, they were at about INR 200 crores. So what would be the exports? That is my first question. And of the order book, is it possible to split it between telecom products and turnkey projects. And if we could also share what has been the Y-o-Y increase in the 2 numbers?

Okay. In terms of export, Neerav, this first half of this current year our export is INR 171 crores. First half of the last year, it was only INR 63 crores, INR 63 crores has become INR 171 crores. Now the full year, last year, it was INR 201 crores and now this year, in half year, itself INR 171 crores. So we expect to reach to at least INR 300 crores in the current year, at least INR 300 crores, which we should be able to reach. And the target -- I have defined 2 targets for the company, very important. One, increased revenue from products and homegrown products, which are designed by us, developed by us and manufactured by us, which will give higher margins. Second, exports. So new products, new geographies. These are the -- this is the mantra in my company now. To increase export, we are taking several steps, and these have shown results. For example, INR 200 crores will become INR 300 crores this year. For the team, I have set a much higher targets for the next year. I have set a target of INR 500 crores for the team for the next year the introduction of new products and maybe a much higher targets in the years to come. Now targets are set, but we have to take appropriate steps to make sure that those targets are achieved. What are we doing in that respect? One, as I pod previously, we have pointed people to -- in different countries to sell our products France, Germany, England, Middle East. We are employing now more people to sell -- these are the fiber optic cables. Now we are employing people to sell telecom products because technologies are completely different, so you need different kind of people. So we have already shortlisted 2 people selling our products in Europe and a couple of other countries, Middle East and Africa. So we are strengthening our sales force for selling products even before the products, most of the products are yet to come in the products at line. They would come gradually from now to another 1 year. But we are already strengthening our sales force, creating our sales team all over the world wide people or by agents or by distributors who would be selling our products and these people who are being recruited, some of them are specialized in distribution network through distributors and agents. So that's what we are doing right now to increase our export sales. So 1 is innovation, new products. Number two, not only sales in India, but sales worldwide. And both the things, as I had committed to shareholders, number of times. One, my revenue from products would increase, which you have seen, it has increased. Second, my revenue from export would increase, which is increasing. So our strategy, which we have decided, we are on the right path to implement that strategy. In terms of order book from you see product and services. The product order book would be -- let me tell you 1 thing. Sorry, product orders are never received in bulk. They are received in a constant fashion. They are kept on being received all the time. The fiber optic cable, some times you see INR 50 crores order, INR 30 crores order, INR 60 crores, those are the kind of orders we receive. In turnkey contracts, you receive orders a single large order, so you would find there would always be a contradiction in terms of revenue and order book in terms of products and services, the service orders are received in large quantity at one go, product orders are kept on being received, small pieces 1 after another. So currently, the order book for products would be about 15% to 17% and rest would be the services. But that doesn't mean the revenue would be in that percentage. Revenue, we would be -- we are expecting to maintain a 45%, 55% ratio, which we have done in this quarter.

Sir, just on the exports now. So if I were to look at of your INR 800 crores, INR 900 crores of revenues now already INR 171 crores is exports. What -- is there a regional mix that broad regional mix that you can share. And what are the -- and the other part is all of these exports would be optical, right? And the -- and what would be your ASP on the cable side in these orders? A broad number would be fine?

What would be our USP.

No, no. The average selling price.

Oh, ASP, average selling price. Okay. Okay. So first of all, in terms of breakup of revenue. It is about INR 147 crores from optical fiber cable and it is mostly centered on Europe and Middle East. Europe and Middle East these will be a larger contributors to our export of optical fiber cable, okay? And the rest is revenue, about INR 24 crores, INR 25 crores would be from railways, railway projects, which we are implementing in Mauritius and Bangladesh. So these would be the 2 revenue breakups of products and services -- telecom products as well as this optical fiber cable. Now realization in terms of per fiber kilometer, I would say it would be around INR 1,100 per fiber kilometer approximately. So I don't have the right number at this moment, but it would be somewhere around INR 1,100 per fiber kilometer, would be the average realization from export revenue for cable.

Okay. So that is about $14.5, $15, so that is good.

Yes, whatever it comes to INR 1,100.

Yes. Okay. And it would be correct to assume that, obviously, exports would have a better margin than domestic products?

I can't generalize that. Some of the domestic market products have also good margins, some of the domestic sales. But yes, generally, you can say export would a bit better, generally, on an average.

Got that. And secondly, in terms of what is the status in terms of the PLI scheme? And in terms of fund raise, what is the time period you're looking at for the fund rates?

Look, as far as PLI scheme is concerned, we are informed by DOP officially that tomorrow -- no 14th, Minister is going to inaugurate that scheme by announcing the names and all that. Since we have been informing officially to be present there, I'm sure we must be 1 of them to be recipient of the PLI scheme, I mean officially has to be present there. So I'm sure there must be some good reasons for us to be present there. So that is one. As far as the fundraising is concerned, the Board has approved, shareholders have approved, but we are looking at various options, the options and timings. Whenever we finalize that, we will be coming back to you.

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

Sir, question is capital work in progress a part if you could explain sir, what is it editable and how much more is it going to inflate?

Saketji, there was some noise when you were speaking. Can you repeat your question?

So what I'll do there sir, I'll come in the queue, sir. There is some noise there. I ask the moderator to just send me 2, 3 [Foreign Language]

[Foreign Language]

[Foreign Language] That I cannot be thinking. I'll come in the queue.

The next question is from the line of Sudesh Kumar from HFCL Limited.

Hello?

Go ahead sir, you are audible.

Hello? Hello? Yes. In the last con call, you have said that the chip and semiconductor shortages will be resolved by our Qualcomm partner? Has that been done?

Sudesh, can you repeat it? Your voice was very kind of sounding hallow, I can't understand your question.

Yes, sure. In the last con call, you have said that the semiconductor and chip shortages related to the product has been -- will be solved in this quarter, has that been solved?

Okay. Okay. Okay. No, no, no. The semiconductor shortage worldwide still continues. It has not been sorted out, worldwide, everybody is suffering from that problem as much as us. In the current quarter, which is under review, the product revenue could have been higher, had it not been that the global shortage of chipsets, which is hampering increase in revenue from products like WiFi and this radio as was also the switches. So unfortunately, the shortage continues, and I don't think it will be resolved at least for another 3 to 6 months.

Okay. And the balanced pledge quantity by when can we see that?

All other banks have approved except one, the other bank -- this 1 bank was to have a meeting on this last week, which could not happen. I hope they will be having this meeting next 8 to 10 days. So let us wait for that.

Okay. And 1 more last question. Since the product revenue has increased, but margin quarter 1 and quarter 2 is less? Any reason?

There may be a small variation. There is small variations because of different turnkey projects may have a different kind of revenue mix and different profitability. So it's a very slight variation, which can always happen from quarter-to-quarter.

The next question is from the line of Yash Sarda from Daiwa Capital.

Hello, am I audible?

Yes. Yes.

Yes.

So my question is regarding the new facility, you earlier mentioned that the construction is set to begin in 2 weeks. So what is the time line you're looking at for the completion of the facility?

I would have seen -- yes, please go ahead.

Yes. And what is the peak revenue which you are expecting from the new facility once at full utilization capacity, maybe say, 90% to 95%?

Look, this facility construction is going to start in about a couple of weeks. I think it would be about 8 to 9 months it will take to complete this facility. And still this is a different product facility. I won't really say that how much revenue we can get, that will be a little bit of a forward-looking statement. But yes, defense products, electroptic, software-defined radio. We believe that looking at the demand of those equipment, which is very reasonably good demand, we will be able to get a reasonable market share and return on equity or return on capital and investment revenue compared to investment would be significantly good.

The next question is from the line of Shivam Saxena from ICICI Bank.

2 questions. One, what are the -- whether the margins are better in services or in products? One is this. And the another is, are you competing in exports with the Chinese competitors like Huawei and ZTE for these -- achieving the products? Are you competing with them? And Tejas in Indian company?

Look, first of all, margin in terms of revenue in products and services, generally, I would say, product revenue margin will be better generally. But then there are some service contracts, margin could be good also. In some cases, generally, yes, product margin would be better, particularly when you have own design and more manufactured products. There is generally, I would say, that statement, I would like, number one. Number two, in terms of exports, as I said, our export predominantly has been optical fiber cable in the last quarter or the half year. And in optical fiber cable, there is no Huawei or ZTE. They don't do optical fiber cable. They are mostly in the equipment business. Equipment business, we are right now supplying in India. Export, as I said, we are creating export infrastructure, and we will start exploring on those products in the next few months' time frame. So at that time, we would compete with them, but I don't have a problem. The products which we are going to manufacture or we are manufacturing like WiFi or unlicensed band radios and the products which you are going to manufacture router, switches 5G small cells, large cells, there are a huge market, billions of dollars, billions of dollars. So even if there is Huawei, ZTE or any other company, the required market share, which we are expecting for ourselves, it should be pretty easy to get. And we would have cost competitive. For example, in fiber optic cable, thought there may not be Huawei or ZTE, but there are other large Chinese companies, YOFC, Hengtong, ZTT, Fiberhome. Those companies are there, and we are effectively competing against them wherever we are sometimes you lose, sometimes you win. But we are able to compete, and we are able to get our business. As you have seen, we have increased our business. So we would be able to compete effectively

So within products, how much proportion of the revenue you expect from OFC and how much from other equipment going forward, 1 to 2 years down the line. If you -- what is your target?

3 years, down the line. 3 years down the line, I would say, because 1 has to give a market development time frame also. It will be probably, I would say, 60-40 from cable and products, something like 60-40, this may change to 50-50 also, but maybe 60-40.

The next question is from the line of Deepak Mehta, an Individual Investor.

Hello? Sir, my question is around the 5G strategy. If you can throw some light, what's the recent development in this quarter, sir?

Look, 5G, our strategy is simple. We want to develop equipment, which are required for 5G network, which includes, as I said, 5G small cells, which are under development, 5G small cells, indoor and outdoor growth aggregation. Then 5G macro cell, which is also under development for different capacity 8x8, 16x16, which would be followed by 32x32, when I say all this, this refers to RF chain, how many RF chains 1 radio has. So 1 is the radio access network for 5G. Second, your new cord controlled gateway that's sort of a small routers than the large routers, switches. They are all 5G-related products, which will be required in large quantity in the 5G network. So we are designing those equipments by ourselves. And we will be selling not only India but worldwide export market, also for which we have already started our market development activities. Now our development would coincide with the launch of 5G networks in India. So first, you have to sell in your country, then you sell worldwide because you have improved yourself in your country first. So which we would be doing in India, and then we'll be selling worldwide also. So that is our strategy for our 5G business develop products in time to be able to catch up with the market in India and then sell worldwide.

Okay. So sir, I wanted to ask about the R&D. So how you are hiring the right talent and how is the direction of R&D and when you can see significant delivery from the R&D investment. So that was the main reason for asking the questions?

Look, if you have to succeed, you have to innovate, unless you know it is -- this is what is the mantra of success in technology business. We are innovating constantly in two areas cable and telecom products both. For cable also R&D is important. So what we are doing is recruiting some talent internationally also, we have got excellent expertise in development of new kind of cables, which are more for export market. So we are recruiting people for that. We have already shortlisted the person for that, very highly experienced person. So we will be bringing on board very soon. Then, of course, the same point of time, whatever new products we developed in cable, we have a matching machinery here to produce those products, which will also be doing. On the other hand, R&D would be equipment. Equipment as I have told many number of times, we have 3 pronged approach: one, our own R&D facilities, which is Bangalore and also Gurugram in -- near Delhi. Then we have a partnership R&D, where not partnership contract R&Ds by companies which are specializing in contract R&D. We have given contracts to them where we have a joint teams, our team, their team working on development of products for us whereas IPR will belong to us. It's a contract development. IPR will belong to us and then my team will take it over and keep on doing -- developing that product, making it better and better from a cost perspective, future perspective, it will continue. Then the third way is we have taken equity in companies who are designing products for us, like software-defined radio. That equity has taken 50% equity in a company called BigCat Wireless in Chennai. That is developing software-defined radio for us. So 3 pronged approach, own R&D facilities, contract R&D with other joint teams working. Third, we have equity in companies who are designing products for us. This is a 3-pronged approach we have taken. Now recruitment of people, yes, we are finding talent. It's bit difficult to find talent in R&D than the normal production lines and normal functional areas. But yes, we are still able to find good people, which is a mixture of very experienced people, experienced people and freshers, we are taking a lot of freshers also. Recently we have hired 30 -- almost 30 freshers in our Bangalore R&D center, and they are being trained appropriately by experienced people, and they would come up good. They're coming out good. So this is how we are looking at R&D and increasing our R&D facility and people.

The next question is from the line of Ayan Sharma, an Individual Investor.

I just want to know when we are shifting our focus some service to products, what is the market size we are targeting? And what will be the margin in that area?

Market size of products, once they're marketing not only in India but worldwide, it's billions and billions of dollars because 4G networks are getting expanded, fiber-to-home networks are getting created. 5G networks are coming like a huge number of networks are coming up in 5G. So market opportunity in overall cable and equipment area, which we are looking at efficient billions of dollars. There is no -- in terms of market. So on your question is how many countries you go in select those countries go in and build up destiny marketing infrastructure there, sales infrastructure there and sell it because you can't be selling in 180 countries. We will be selling probably 10 or 15 countries with that marketing infrastructure, sales infrastructure, after sales and services sector and get your revenue and which we should be able to do comfortably.

And sir, what about like when we are coming with 5G products and we are targeting local market and international market for the 5G products, what kind of pricing power to be enjoying that. And what would be the market price for this product?

What is your -- what sort of marketing power, that was your question? What did you say?

I said, like what kind of the pricing power we would be having for the 5G products in the local market as well as in international markets. And what is the margin?

Look, I think pricing power, the question is, we are doing our own design and doing the latest design based on the latest component. So we believe in terms of pricing, we should be competitive with others, we should be competitive with other people. There's no doubt about that. And then, of course, our PLI scheme and those incentives, which are being given by government adds to our competitiveness, no doubt about that. So innovative designs, low GM cost, low overheads being a company located in India and manufacturing in India or overheads are low, PLI scheme would benefit us to 5% to 6% of revenue, which is what the PLIs we are going to receive. This all would make us competitive. And we want to be as competitive as anybody else, it's our own design or own manufacturing based on latest technology, latest companies, there is no doubt that we will be very competitive. In terms of price, again, I said size of the market is billions of dollars. There is no depth of the market. It's only how many countries you can sell with what kind of depth in your sales in sales infrastructure and your upper infrastructure. So market opportunities, the kind of sales we are targeting numbers would be 0.00 some percent of the overall market size.

The next question is from the line of Ankit Pande from Quant Money Managers.

Sir, could you talk a little bit about your trade receivables, a good INR 400 crore improvement since March. So could you talk about BSNL and other maybe other 3 projects. We had a recent commencement in metros in Uttar Pradesh for a couple of cities. So could you just talk about that?

Yes, Ankit. Thanks a lot. If you look at our trade receivables, it has gone down. In the Q1 of financial year '21, this current financial year, I received about INR 3,053 crores. Now it has become INR 2,664 crore, INR 2,664 crores. There is a reduction of about INR 350 crores or so. In the current month and the next month, these two months, we are expecting to receive about INR 400 crores more from different customers as to some receivables. INR 400-plus crores, I would say INR 400-plus crores. So next quarter, you will see the further decrease in the receivables, from our various customers. Major portion of receivables is from the defense contracts, which I've been mentioning that those are turnkey contracts, and we are milestone-based payments are there and milestones completion got delayed because of problems by a noncompletion of infrastructure by customers, not because of us. And as a result of that, revenue got delayed and also whenever revenues, we supplied goods, but infrastructure not being complete. Our payment were not received. But that situation is now -- we started -- gone into the situation where their infrastructure also getting completed because now they are also realizing that they need this kind of network very fast. So though it has gone down by INR 300 crores. I think it will -- we'll be receiving payments or some other INR 400 crores from these projects in the next month a current month, and it will further go down. So the situation is improving, and it will keep on improving further. By March year-end, you will find it has improved further considerably. Cash flows of the companies have also eased out free cash flows are becoming better, and it will keep on coming better quarter-to-quarter.

Okay. Amongst -- so this extra INR 400 crores that we are supposed to receive. Is that all coming from projects? Or is some of that also from the products?

This INR 400 crore, I talked for the projects only. So that is not the entire revenue. Cable business and all that revenue is completely separate. This particular INR 400 crores I talked, it is from the projects.

And I noticed that with this INR 400 crore reduction. Our payables have also reduced by a good INR 350 crores. So that kind of proportion will continue? Or do we expect to net a lot more this time?

It will go in tandem. There will be increased cash flow. But yes, receivable will -- money will be received and would be paid to the creditors also. Free cash flows would also be there.

Okay. Okay. Okay. Probably in that proportion where we have to pay down about INR 300 crores.

Absolutely, absolutely. So this would ease out our balance sheet quite a bit in terms of higher receivables from the customers' higher money realized and paid to the creditors also.

Okay. That's really good to hear. And in our order book, you mentioned that in the 20% would be from projects so far. Amongst the remaining, how much is government order book? And how much is export order book, if you could give from excluding projects.

Of the order book, 20% is from product -- sorry, I said about 15% is from products and 85% is our project. Product revenue, one should not get misled because of 15% and 85% because product orders keep -- being kept on either a small bits and pieces all the time, you need shows on an almost daily basis. So product revenue would be around 45%, whereas order book is only 15% because they kept on being received, small pieces every day. Now coming to the breakup of order book in terms of, I would say, domestic order would be about INR 5,750 crores. Export orders would be around INR 100 crores right now. Again, export order at is only for products that kept on being received in small projects. And total export current year would be around INR 300 crores as it is INR 200 crores last year. In terms of different projects which we have order book, about INR 2,500 crores is from Jio, about INR 1,000 -- sorry, INR 2,500 crores is from defense, INR 1,000 crores is from about Jio, then you have various orders for railways and telecom projects and all that. So total order book is about INR 5,822 crores. In terms of further breakup, government and nongovernment of INR 5,822 crores, 46% is from government, INR 3,157 crores is non-government.

Okay. Okay. That was very helpful. And just on that, do you think the Jio sort of on the book or the pace of their orders? And do you -- would you like to put a little bit of color on it? Do you think it is as expectations? Or do you think it's faster than expected given the recent change in that?

It is an expectation. If I tell you the current order book, about 21% of my order book is from Jio and 79% is nonJio and is expected to continue in the same manner.

The next question is from the line of Vishnu K.G. from JM Financial Service.

So there's a small clarification. So when you say that you have engaged people in Europe and Middle East for sale of products, are there more like third-party organizations who would act as resellers to our products?

No, we have our own people also. We have our own people, and there are resellers also. So our own people will talk to the operators directly and also manage the resellers also. They are distributors of course, and there are our own people also.

Okay, sir. So should it be fair to assume that we would have a like a 50%-50% kind of mix between resellers and products, at least in the near to medium term till we...

Not necessarily, we can't put a figure like that because it keeps on being changed. If we receive a large order from an operator, this percentage will change. So if you receive more order of the distributor it's percentage will change. Right now, we cannot put a percentage to that.

Sure, sir. Just a small follow-up though. So I mean, is it fair to assume that the margin profile in our direct selling would be slightly higher than the reseller?

No, no. I don't say that. It can again vary from customer to customer, order to order and situation to situation, what kind of competition and what kind of cable, it can always change. We cannot generalize that.

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

[Foreign Language] Thank you for giving me the second chance. Sir, firstly, when you were -- it is really very heartening that the receivables have come down. Sir, if you could give us the breakup between the receivables, which are older than 60 days and lower than 60 days of the total mix or in any proportion which you have?

I don't have that break up right now. Right now, I don't have breakup. But if you send me your e-mail address, I can send you that reply. Right now, I don't have that break up, of course.

Okay. I was just looking at the aging part. And now, sir, secondly, towards the order book part, sir, how much is towards the operation and maintenance proportion, sir? And when is that going to kick into the number, sir?

It is already kicking in small bits and pieces. Of the total INR 5,822 crores, I think operate this would be about INR 1,500 crores to the O&M and rest will be the orders.

And sir, for this quarter and for the 6 months, what should be the breakup from the OEM out of the total revenue, which we have booked? And it is clubbed under which segment?

In the current year, I can say it would be about INR 100 crores of O&M revenue would be in the current year.

For the entire year, sir?

For entire year.

Entire year. Sir, when will that be a bulky figure, [Foreign Language] INR 1,500 crores total position [Foreign Language]. So when will that warranty period get over and the OEM will start?

Year '24, '25, that would be the year where we are expecting the O&M revenue of INR 300 crores plus, INR 350 crores about.

Okay. Okay, sir. Currently, sir, what are the industry's challenges? And what are the challenges for HFCL, sir, which you are adhering to. And what steps are you taking to mitigate the same, sir?

Look, industry challenges, of course. Any industry always have some challenges, which is industry when I talk of industry, I'm talking from the operators perspective, they have ROW issues, they have spectrum issues. They have various government litigation issues, which are the part of the business and which continue all the while. From the manufacturers, like us, issues would be semiconductor issue right now with the short supply of semiconductors there are issues with the operators in terms of their rollout, ROW, those challenges, we have crossed the phase. But those challenges, we keep on mitigating those are day-to-day issues. Now semiconductors, it just happened all of a sudden, all over the world. We can hardly do anything much to mitigate that. That the worldwide supply has to improve, then only that would be mitigated. But all the time, what we do, whoever are our suppliers, we keep on pushing them, keep on pushing them every now and then to supply more to us, supply more to us. But they get that kind of push from everybody. So this semiconductor supply that worldwide that has to improve, then only that would get mitigated. Otherwise, normal challenges issues of maintenance of quality, timely supply, logistics, we keep on investing and we keep on mitigating those challenges. Now in terms of innovation, of course, that always remains a major challenge that you have to be at par with technology. So as I say, fiber optic cable, they are innovating, we have recruited even international people, were in process of recruitment of them to have a higher ability to innovate new kind of cable designs. Similarly, we are tying up with R&D houses, international R&D houses, to design our products, telecom products, simultaneously we are creating our own R&D team, highly qualified people. And of course, the newcomers also to design new kind of products. So we have to keep on facing that challenge of innovation. But you mitigate that challenge by having their own R&D resources as well as partnership with internationally acclaimed R&D houses to design your products.

On the raw material availability and the integration part, how much is sir, in-house now? And what would be the proportion going forward? And sir, 1 more part is on the finance part, finance cost part. That has increased sir. So what should be the absolute number we should look forward? And thirdly, to it is the lower revenue quarter-on-quarter, sir, what would attribute to the lower revenue when our plants are running at the optimum levels. If you take the June quarter and the September? Yes.

But our revenue is not lower quarter-to-quarter. The revenue in the last -- this quarter and the last quarter is almost the same. There is no reduction in revenue strategy.

Sir, it was INR 1,100 crores for the June 21, and it is INR 1,000 crores for September 21. So there is a reduction.

It is a small reduction. That happens because of the seasonal impacts. This is a rainy season, as you know rains were very heavy. The turnkey work execution could not happen in many other places because of the heavy rains particularly in North India, then the semiconductor shortage, that also contributed a small amount to the decrease in revenue, but there is no significant decrease in revenue, is a very low decrease in revenue and which is all seasonal minor impacts. In terms of interest cost, it will kept on -- it will keep on going down, it has already started coming down. It already coming down for the year. This quarter, it is INR 10 crores lower than the last quarter. It will further come down because the decrease in receivables, our borrowing will go down. And in fact, 1 of the things that I forgot to mention in my opening remarks, our borrowing has gone down considerably. In the June quarter, in the last quarter, previous quarter, quarter 1, our total borrowing was INR 895 crores, year ending March 31, 2021, it was INR 920 crores. Today, now in the current quarter ended our borrowing is only INR 683 crores. So there is a considerable reduction in borrowings versus the INR 300 crore reduction in borrowing. That trend may continue also because of the increased receivables. Interest cost is supposed to go down with a decrease in borrowing and also more efficient fund management and better negotiation with the banks in future, borrowing may go down. So borrowing has gone down as well as interest cost has gone down.

Right. Sir, I was just referring to the number...

It is very, very important plus the INR 300 crores reduction in borrowing in the current quarter.

Right. Sir, what I was referring to the number of September 20 at INR 80 crores and September 21 first half at INR 90 crores. So there is a INR 10 increase over the year when the receivables have also gone down, our cash flows have improved but still the absolute numbers are up by INR 10 crores. I stand corrected. So on -- for a year as a whole, sir, last year, it was INR 175 crores the finance cost. And we have already done INR 90 crores -- paid INR 90 crores for the first half. So the second half with this improvement in cash flows that is -- that -- we can look forward for a number lower than INR 175 crores.

Yes. Definitely Saketji it will be lower by, say, INR 15 crores, INR 20 crores as compared to previous financial year as a year as a whole.

Sorry to interrupt you, Mr. Saket, I'll request you to come back in the question queue for a follow-up question. The next question is from the line of Guru from Wood Group.

Hello? Can you hear me?

Yes, please go ahead.

I guess, you are audible, you may go ahead sir.

Congratulations for posting wonderful figures. And I have a couple of questions. First is regarding the satellite broadband, the Internet which is in trend these days and some of the Indian telcos also have shown interest in that. So will it pose any risk to the OFC business? Or I mean, how about that? And second question is BharatNet PPP model. So when can we expect our revenue from that?

Look, satellite broadband is being talked about it is a good proposition to have, but it is not going to impact fiber optic cable because satellite broadband would be available only to a limited number of people. For example, Starlink, has announced that in India, they will take only 200,000 subscribers because satellites have only a finite amount of bandwidth, which they can give and it is mostly targeted to grow inaccessible areas where there's no terrestrial connectivity available. And it's going to be costlier also. So satellite broadband does not cause any threat to terrestrial communication, which includes fiber optic cable also. It will not have any threat on that because the number of subscribers all put together would not even cross 1 million or so. So it does not cause any threat, any significant or any insignificant threat also. So that was your question, what was your second question?

Regarding the BharatNet.

BharatNet, sorry -- BharatNet PPP, they've extended the date twice because there has been some discussion on viability gap funding whether this is the right number or the number looks to be increased or whatever. So that is under discussion. So I think -- it will take at least 6 months before BharatNet PPP model is finalized and awarded to people. I think it is still 6 months. And then only in the revenue, we can look at the next financial year only.

Okay. And my last question is regarding the BSNL 4G, I heard that, I mean, HFCL along with some partner could not continue with that. So some -- I mean, view on that please?

It's not a question of we could not continue. We have -- we thought that we would be going ahead for 4G for BharatNet, and we have applied for that validation. It's still not that we have said that we will not be doing. We have sought this core from CDOT. CDOT has said that we will be able to give you the indigenous score only after December. So we are waiting for that to happen. And whenever that happens, we will go back to BSNL and ask for a trial. And that has been case with us, L&T and Tech Mahindra, all 3 of us. Only TCS is continuing, but that also with a limited functionality. They are also not able to meet the entire specification, which we saw yesterday in 1 of the newspaper reports, radios are not to the specification. So we instead of going ahead with the less specification or limited specification, we decided that we should wait and go back to them and our products have the full specification complete.

The next question is from line of Dharmesh Kant from AARD Ventures.

Sir, congratulations on a very good set of numbers. Sir, can you throw some light on the amount of money which you are raising around INR 750 crores. What are the areas in which it will be applied to?

Look, as I said, shareholders and the Board has given approval for raising up to INR 750 crores. But right now, we have not finalized how much is to be raised when it used to be raised, whenever we finalize how much and when, we'll come back to you with the applications also.

Okay. Okay, sir. Got it. Sir, last thing, in the con call, you have given a guidance of around 15% to 20% of the revenue growth. So are we sticking to that for this financial year, FY '22? Or there's some?

No, no, we are sticking to that. There should be around 15% or so revenue growth in the company in the current financial year. We are sticking to that absolutely, it is for the 6 months results. INR 1,700 crores, we have been able to do INR 2,200 crores.

Right. And sir, margins are likely to stick around I mean, operating margins of 15.5%?

The margins of what we have done in the first 2 quarters, we will continue. And there shouldn't be any problem in continuing that kind of margin incentive profitability in the next 2 quarters also.

Dharmesh, do you have any follow up question?

No, I'm done with. Thank you so much.

The next question is from the line of Abhijit Mitra from ICICI Securities.

So my question is on CapEx. On the first half, I could see that including intangibles, it could spend around INR 70 crores. What is your full year CapEx guidance? And which are the key projects that you'll be spending on this year?

Until now, we have announced that we would be doing our INR 210 crores of CapEx in the current financial year. And of course, as I've told you, our shareholders have approved further fundraising. But if you decide the fundraising and depending upon amount and when there may be change in these plans, depending upon the fundraising, whenever it happens and whenever we decide to go, depending on various options we are being, this would definitely has a possibility of change. But right now, it is INR 210 crores in the whole year.

Okay. Okay. Got it. So the existing INR 210 crores would be mainly to increase optical fiber, FTTH cable and the fiber capacity.

Yes, it is optical fiber, optical fiber cable and the defense manufacturing.

And the defense manufacturing. And then R&D CapEx is included in that, that R&D CapEx, whatever you expected for?

R&D CapEx is not included in that, that is separate to this.

Thank you very much. Ladies and gentlemen, we'll take that as the last question. I will now hand the conference over to the management for closing comments.

Well, thank you very much to all of you for being on this call. And as I have been saying that we decided two strategies for the company, which is new products, new geographies. We are continuing very steady fastly on that. We decided that we would be going into margin-accretive products and services. We are on course to do that. we thought of increasing our exports. We are on course to do that. We thought of going for new products, innovation, we are on course of doing that. So whatever strategies we have decided for the company, we are on course and absolutely steady fastly going in that course and which would continue for the next few years, which would see your company having better revenues and better profitability in products which you will be able to sell worldwide and our projections in terms of financials, which I have been giving in terms of possibilities of revenues and profitability on account of the strategies we have adopted, we are on course of maintaining that. I'm sure that with the growth in market opportunity, which is very, very important, with the market opportunities which are there in front of the company, we expect the future operations of the company, and also the profitability to maintain this trajectory of growth which we are having at this point of time. Thank you very much to all of you. Thanks a lot.

Thank you very much. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.

Thank you.