Sterlite Technologies Limited (532374) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the STL Q1 FY '21 Earnings Conference Call. I am Pankaj Dhawan, heading Investor Relations at STL. To take us through the results of this quarter and to answer your questions, we have with us Dr. Anand Agarwal, CEO, STL; and Mr. Anupam Jindal, CFO, STL. All participant lines are in the listen mode --- listen-only mode as of now. There will be an opportunity for you to ask questions post the presentation. Please note that this call is being recorded. You can also download the copy of this presentation from our website at stl.tech. Before we proceed with the call, I would like to add that some elements of today's presentation will be forward-looking in nature and must be viewed in relation to the risk pertaining to the business. The safe harbor clause indicated in the presentation also applies to this call. For opening remarks, I now hand over to Dr. Anand Agarwal. Over to you, sir.

Thank you, Pankaj. Good day, everyone, and thank you for joining us for our Q1 FY '21 results. At STLeScope 2020 that we had earlier this month, we shared a belief that an unprecedented decade of digital network creation has started. We see an unprecedented growth happening in digital networks. With the advent of this digital era, data usage has been growing exponentially, and the global traffic has grown almost 7x in the last 8 years and is expected to grow at a faster rate as we move forward. So that was one of the points that we had talked about in that meet. The another point was the fact that there's a high degree of urgency to build this network. The year 2020 has triggered a race for creating these digital infrastructure investments. The digital service providers, the cloud companies, governments as well as private equity investors across all geographies are investing in creating this new infrastructure. The third point that we had spoken about was the fact that these digital networks, that are getting created, need to reach every one at scale and quality. In terms of scale, these networks need to have many more digital lanes to handle 4 to 5x Internet traffic. And this can be achieved with high-capacity optical fibers complemented with next-generation wireless networks. In terms of reach, these networks need to reach millions of new users covering more digital kilometers that connect every home and enterprise. And thirdly, this network has to have much better quality in terms of superior speeds as well as faster response. This is being done by virtualizing the networks using software over the cloud to manage the network traffic. And the fourth part that we had spoken about was that the new network, the new digital networks will be built in a fundamentally different way. The first part will be these new networks will be built at the edge with large capacity closer to the consumer. Second, that these are going to be converged networks, which is a combination of both seamless wired as well as wireless combination. The third aspect, these networks will be a combination of connectivity, compute and storage. And these networks will be agile and scalable, which means that they shall have disaggregated hardware and software. So we clearly -- with the developments that we have seen over the last few quarters, we are seeing a decade-long network creation cycle, which is starting now and which has been accelerated by the new normal since the beginning of this year. And these new generation digital networks require an integrator, requires a network and a system integrator, who possesses the capability to integrate all these new technologies, a very comprehensive network systems integrator. We have been -- at Sterlite Tech, have been building our capability systematically towards this objective over the last several years. We have been pioneers in optical connectivity over the last 25 years, where we have built in a huge strength from silicon to optical connectivity products on end-to-end capability. Over the last 5-odd years, we have also built in capabilities in wireless as well as software, with the investments that we have done in Elitecore as well as ASOCS, in combination with the ecosystem alliances. And our last 10 years of experience in large-scale system integration with the acquisition of IDS in the data center space, we are ready to converge -- integrate the converged digital network. So we are clearly in a position to be a digital integrator -- a comprehensive network system integrator for these new networks that are getting created. We had also talked about the fact that our road map to the future is built on 5 strategic pillars. One of the first pillar was the technology-led end-to-end solutions, where our capability of technology aligned with our customer approach helps us increase market share by integrating the technologies that we have. The second part of the pillar was key account management towards driving wallet share with our key customers. We are focusing on increasing the overall opportunity funnel and win ratio in the top 20 key accounts across the globe. The third pillar is a very large scale complex integration that we spoke about of these converged wireless, wireline network to deliver total lower cost of ownership and fast time to market for our customers. The fourth pillar is a very strong ecosystem alliances and investments to increase the total addressable CapEx through strategic partnerships. And the fifth pillar being building top talented culture towards driving -- creating our own knowledge base and delivering returns to our shareholders. The current quarter, the Q1, has validated our digital network world view, and we will talk about this. So the first aspect is the fact that -- which we spoke also briefly about is that digital networks are attracting investments at scale. Throughout Q1, we saw telecom operators, cloud companies, large enterprises as well as citizen networks investing heavily in creating digital infrastructure. And they are also able to attract billions of new dollars -- capital into these digital infrastructure. Just to highlight closer to home in India, Jio Platform has raised more than $20 billion from financial and strategic investors, including private equity, sovereign funds as well as large cloud companies like Google and Facebook. We also see the advent of private equity giants in the space of digital infrastructure investments as illustrated by the investment from KKR and EQT. This unprecedented capital raise underscores the attractiveness of the opportunity that we have just highlighted. The second large step that we saw in the current quarter is the fact that 5G has started to roll out worldwide. The spends of telcos on 5G have accelerated and customers are adopting 5G at unprecedented rates. To give you a glimpse of some of the investments, T-Mobile in U.S. has announced to spend almost $60 billion on developing 5G networks over the next 5 years. Chinese telecom companies have announced over $10 billion worth of tenders in the previous quarter. As of May 2020, more than 300 operators across the globe are investing in 5G commercial services. And to give you a sense of rollout till the Q1, 11 operators have launched commercial 5G network till now and total 81 operators in 42 countries are in the period of launching the commercial 5G networks. In terms of subscribers, Deutsche Telekom has reached almost 16 million subscribers, China Mobile and China Telecom have added 22 million subscribers in 1 month, which is June 2020 alone. And that -- so this is now growing at an unprecedented rate, not only with subscribers, but also with use cases, which are both enterprise-oriented as well as government oriented. So that's the second shift that we saw in the current quarter. The third shift, again, closer to India is the scheme, which is the Atmanirbhar Bharat, is now becoming closer to reality. We see that Indian companies are rising up to the occasion and developing indigenous technology. We, at STL, are extremely proud to say that our radio and wireless virtual access solutions are being designed as well as manufactured right in -- here in India by our engineers in collaboration with our strategic partners. The other shift we spoke about and which is happening is that the geopolitical environment that we see globally is offering the opportunity. In terms of the geopolitical environment, it is now clear that both within Europe as well as North America are looking for alternate partners, who can build scaled networks. And this move, which is there, is leading support to our plans, clearly of developing and strengthening new markets outside India. The other trend, which we saw strengthening in Q1 is the fact that open source standards and software-defined networking is getting rapidly adopted. Global telecom majors like British Telecom, AT&T, Verizon, Jio, Airtel, Rakuten are moving to Open Radio Access network. And we are seeing that this shift is happening at a rapid unprecedented level. And most of the major players are investing heavily to adopt next-generation technologies like software-defined networking and network virtualization. And finally, what we saw in the quarter was also that the growth in optical fiber demand is coming back from H2 of 2020. The overall global demand contracted by about 9% in H1 of 2020, while it is expected to grow by 6% in H2 of 2020 as compared to the last year. The total demand outlook for 2020 has been revised upwards by CRU from an estimated 456 million kilometers in April to about 471 million kilometers in July. We saw -- during the month of May and June, we also saw that China Mobile coming up with a large tender, which was almost 119 million kilometers, which was about 13% higher in terms of demand than last year. And in terms of requirement, almost 25% of the total global demand, about 120 million out of 480 million kilometers of global demand. And in terms of pricing, we saw earlier this week that China Mobile tender prices seems to be lower than last year by almost 20% to 25%. We believe that this shall have a negative effect on the profitability of the fiber and cable industry in China. This has been mostly -- the tender has been mostly participated within the Chinese ecosystem. And we think that the current pricing environment will become unsustainable for smaller players in the -- and the industry is going to consolidate, especially within the Chinese ecosystem. And most of this is happening when the geopolitical environment is also such that, that it is difficult for the Chinese supply chain to find its way outside of the Chinese market. As far as STL is concerned, we have clearly demonstrated that we have been able to minimize the impact of any price drop that we saw over the last 5 to 6 quarters, very effectively with our strong focus on technology-led new product development as well as deep engagements with our marquee customers. We are continuing to invest in new technologies to come up with value-added products to differentiate, at the same time continue our strong focus and efforts in lowering the overall cost structures. In terms of strategy, we shall continue to pursue our strategy of offering technology-led end-to-end solutions. And we are already seeing, as I said, this technology and the strategy is bearing results. So over the last 90 days have validated our overall world view. We are continuing to see that digital networks are attracting investments at scale. 5G is now rolling out worldwide in a macro -- at a macro pace. Indigenous technology is now becoming reality with Indian companies developing these for India and to export from India. The overall geopolitical environment currently is offering newer opportunity. Open source and software-defined networking is getting adopted at a very fast pace. And optical fiber demand is poised for growth for the next 5 years. All these developments that we have spoken about, STL is there at the center of these developments. We are very much involved in all of these developments. We are very actively engaged with a large number of customers with a variety of our solutions, from fiber to the home rollout to 5G networks engagements to pan network -- nation network connectivity, from Wi-Fi hardware to software-driven network products, to data center and smart city connectivity, we are working on various varied network use cases globally with marquee customers. And all these engagements, these -- the engagement that we spoke about are with marquee network creators from across the globe. These deep engagements with our customers are for end-to-end solutions. Amongst notable order wins that we had in Q1, we won a multiyear contract for the Opticonn Solution from a leading Middle East telecom player. We got additional orders for fiber rollout towards strengthening the MahaNet project, we are now going deeper in that project. We are continuing to get orders for FTTx MANTRA for a large Southeast Asian telco. And these are extremely strong developments that we saw within the current quarter. And just to provide the context on where we are. Our plant operations, all our manufacturing operations globally are back to pre-COVID production levels, and all of our projects have restarted in various stages. The key projects, our status, the project Varun, which is the Indian Navy project is almost 81% complete, which was at about 78% at the end of Q4. MahaNet project is almost 82% complete. The Telangana fiber project has just started out and it's on track. And a new rollout for a large Indian telco for FTTH has started out with 2% completion. Now I would hand over the call to Anupam to discuss our financial performance.

Thanks, Anand, and good day, everyone. It is very interesting to report that even during the global lockdown caused by COVID-19, our participation funnel continued to grow. We are deeply engaged with multiple customers across network use cases. These are quality engagements with marquee global customers, and we are solving customer challenges using our end-to-end solutions. If you look at the numbers, our open participation funnel has increased from around INR 7,000 crore in the end of March to about INR 10,000 crore at the end of June current year. This is reflecting increasing set of opportunities, which are building for us. This growing participation funnel is also translating into healthy order book. Our order book continues to grow since the last 4 quarters, and our current open order book stands at roughly about INR 10,300 crore. Despite COVID-19, we have generated new orders worth about INR 1,150 crore in the current quarter of Q1 FY '21. The order book spread in the balance 9 months of the current fiscal '21 is about INR 3,200 crore, which can convert into revenue and INR 7,100 crore for FY '22 and beyond. Our order book is well diversified in all of our customer segments. We are also building an O&M order book, which will start to yield a significant revenue from FY '23 onwards. Our revenue mix is balanced across customer segments and geographies. In terms of customer segments, our revenue from telco and cloud segments has increased. In terms of geography, our revenue from outside India, specifically Europe and Middle-East Asia, has gone up, not just in terms of share to the revenue, which stands at 51% for the quarter, but in terms of the absolute value also. The sale outside India was higher than in Q4, reflecting very strong traction from the western market, which have started normalizing faster as we speak. For Q1 of the current fiscal, our revenue is at INR 876 crore, EBITDA at INR 131 crore and PAT at INR 6 crore. The performance for Q1 of current year got negatively impacted due to COVID-19. The execution on the project sides significantly got impacted due to the extended lockdown. Production and delivery was hurt due to logistic challenges and safety and health concerns. Having said that, in the wake of unprecedented challenges, the performance is still very resilient, and Q2 will be a transition quarter, as we align our efforts towards improving performance in the environment of easing lockdown conditions. We would like to state that based on the current visibility on the order book and the engagements, which we are having with our customers, our H2 '21 performance would be better than H2 of the last year. As I stated earlier, we are also expecting fiber demand to grow and project execution speed to increase due to return of normalcy. Our ongoing buyback program demonstrates our confidence in the business. We have spent more than 50% of the amount mandated for the buyback, and we shall complete the remaining buyback by Q2. Our share price has seen 112% increase since the announcement of the buyback. We remain committed to take corporate actions in future that will create value for our shareholders. As stated in our communication earlier this month, we are on track to double our revenue and reduce our net debt-to-equity by half to 0.5x of our equity, to deliver our vision of 2023. In the summary, I would like to say that an unprecedented decade of digital network creation has started. STL has unique capabilities to be a leading digital network integrator. Third one, the last 90 days have validated our digital network world view with investments and the next-gen technology adoption. STL is at the mix -- at the center of these developments, engaging with the marquee global network creators for end-to-end solutions. With a focus on strategic pillars and continued customer engagement, we are on track to deliver the vision of 2023. With this, we come to the end of our opening commentary, and we shall now move to the Q&A.

Ladies and gentlemen, we will be starting Q&A. Please raise hand, and we will take your questions one by one. We will -- so first question we will take from the line of Pranav Kshatriya.

My first question is regarding the comment what Anand made in the opening remark regarding this Chinese demand supply mismatch need not get transmitted into the other parts of the world. So I just want to check that where are the pricing, not for you, but in general for the industry outside China, how it is behaving? And how should one see this in the medium-to-long term? Second question is on your order book. You said that almost INR 32 billion order book is due to be implemented in this remaining 9 months. How -- if there is a possibility that some of these orders can get pushed out into the future demand? And how are you seeing the new revenue? I mean, typically, the run rate revenue, what you have without the order book, et cetera, panning out in this period?

Sure. So Pranav, regarding the pricing of China moving to the other markets, there definitely will be some sort of movement of the pricing; however, the situation we believe is different from what we saw 6 quarters ago or so. In the current scenario, we are seeing that overall global demand is increasing at a global level. We are seeing that geopolitically more and more people would not want any Chinese manufacturers towards supplying them any goods, and we are seeing increasingly that shift happening across the globe. And for us, the shift is happening more and more towards value-added products, towards end-to-end solutions. So any impact on the fiber -- of their optical fiber pricing, becomes minimal for us. You recall that for the whole of last year, we continued to deliver more than 20% EBITDA in spite of what had happened in China at the end of 2018. That's about the pricing. The second aspect about the order book. So this INR 3,200 crores of order book that we have currently, clearly, we do not see any issue of customers delaying any orders. In fact, we are seeing an opposite trend happening where customers are in a sense of urgency towards expedited deliveries of their orders. The only issue could be force majeure issues due to lockdown, et cetera, or containment because of the virus, but we do not see any challenges related to the customers.

We will take the next question from Mr. Neerav Dalal.

I had 3 questions, actually. First is on this China Mobile or the China market, per se. So if we say that there are 8 to 9 players in the world, who have the glass manufacturing capacity, so when the China Mobile tender has come in, so I believe that the supply of glass would be done by these 7-8, 8-9 companies like Japanese, Europe and U.S. So how is the environment in China in terms of the competitive landscape? And when you say that there will be consolidation, what exactly are you trying to say? Because I believe that most of the China production would be in partnership with either Japanese or Europe or U.S. companies. So how should one look at that aspect in terms of the China demand and the China supply? And how long the prices can be lower? That is my first question.

So Neerav, regarding what you're talking about the supply situation in terms of, you said, first of all the supply of glass and the second one was about the consolidation. So you are right, China continues to be a net importer of glass from other markets. It's in form of preforms as well as in the form of glass cubes that they buy from other markets. And from what we understand and believe, and over the last couple of days, we have spoken to several people in China, this is essentially a move wherein the fact that within China a lot of downstream capacity got created. And this -- you would understand this is a tender which China Mobile calls for optical fiber cables. And from that, they derive the optical fiber pricing through a formula. There are 32 people, who actually participated in this tender. This is the largest tender globally, and we believe that a lot of this pricing has been done in a way to somehow get a foothold for -- from tenders for these 32 players. So when we are talking about consolidation, we are talking about consolidation of that downstream industry. On the upstream front, there would still be a supply chain coming in from the other parts of the world. And all of us have seen the performance of the players in China, how they kind of took a nosedive between 2018 to 2019. So that's why we believe these are non-sustainable prices and are more directed towards consolidation within China.

So consolidation in the optical fiber cable manufacturing, is that...

Cable and draw towers, and yes.

Okay. Okay. My second question is, see, in FY '19, the industry had a pricing decline, we would also have a pricing decline. In FY '20, again, the scenario was similar. So is there any data point for us to understand that the -- FY '19, the industry pricing declined by X and we declined by Y, the same way for FY '20. And if we can break up why we had a lower decline than industry if we had any? So that's my second question.

Sure. So as we have talked about earlier, the fact that for us, the overall product business, which we used to see at that point of time was about -- had gone up to 26%, 27%. And in FY '22, it came back to a normalized 22% EBITDA. So for us, the price decline was much lesser compared to anybody else or compared at least to anyone in this part of the world, would be a few of the things. One was the fact that we have -- all the time have long-term orders with our customers. Second is our value-added product proportion is much higher than anyone else. Third is the fact that we sell much more cables. We don't sell bare fiber that much to anyone. We sell -- we used to sell more cables. Now we sell actually more solutions -- end-to-end solutions to our customers, where their fiber becomes a very small part of the overall value bucket. It becomes a very strong part of the technology bucket, but a small part of the value bucket. And that's why if you see our profitability between FY '19 and '20, did not get significantly impacted.

Okay. Got that. And just finally, can you discuss in terms of the Reliance, Sterlite Tech, Tech Mahindra tie-up on next-generation 5G telecom network. So if you could speak on that or...

No, there is no tie-up per se. I think -- you are, I think, referring to a report, which came out in one of the publications. Essentially, the good part is that Jio announced 5G ecosystem based out of India, based on open RAN technology. Tech Mahindra is working on the software stack for that open RAN technology. We are also working on the hardware and software stack. So what we are seeing that the current opportunity of the industry moving to open RAN, 5G being disaggregated in hardware and software. Focus on a non-Chinese producer, focus towards the indigenous technology is making a very good base and an ecosystem for somebody like us or Tech Mahindra to start playing in this ecosystem, which was earlier not there. Two years ago, such an opportunity was not there for anyone like that.

We will take next question from the line of Mukul Garg.

Anand, just a few questions from my side. To start with, again, on the China Mobile tender. While we understand that your business is shifting towards solution from pure products, can you highlight some steps, which you are taking to manage any impact of incremental pricing pressure on the product business in the near term? And are you approaching regulators in India to preempt any risk of fiber dumping from China?

So on the impact that we are taking, Mukul, it's just continued impact of what we have been doing, moving more and more towards full integrated solutions, moving more and more towards that taking -- doing cable sales, moving more towards value-added products and focus -- strong focus on cost structure. That is how between -- what sustained us between '18 to '19, '19 to '20, and we have maintained our margins during that perspective. In terms of the Indian scenario or -- it's -- the Chinese scenario is not going to impact only on India, if at all. In terms of Indian, clearly there are various initiatives which are across the -- with -- on the policy makers. So there is this preferential market access opportunity which is there, because of which Chinese players cannot participate in anything related to the Government of India. There are considerations currently happening on other kinds of methods. Also, there is a reports of safeguard duties, et cetera, which are currently being thought of put in place. So these will -- these are things through which the Indian market will get, kind of, not impacted by if at all if there was any Chinese dumping. But we see a global move more and more towards the next-generation high-technology products. And we'll continue to focus on that end, while continuing to reduce our costs. At the same time, in the short term, as you rightly said, taking any initiatives to prevent any kind of dumping in the markets that we operate in.

Got it. And the second question was more on the Q1. If I look at the numbers, it looks like a large portion of the de-growth was on account of slowdown in your large projects. Can you help reconcile this with the impression that the lockdown, especially the first half of Q1 and the resultant impact on transportation of your products, would have had a meaningful impact? Is this more of a product-led slow decline or a services-led decline? And any sense you can give on inventory movement quarter-over-quarter?

Yes. So in a macro sense, Mukul, we lost about 1 month in our operations -- manufacturing operations at global level, give or take back, and about 2 months on the projects level. So what we see here is about 2 months of manufacturing operations and 1 month on the services front, end-to-end. It didn't happen exactly that, but I'm just giving you sort of a ballpark sort of a thing. Our projects started coming online towards mid of May and actually could get ramped up in June only. Our manufacturing started getting ramped up by mid of April and got ramped up fully by the end of April or early May. Since then, we have been sort of operating at pre-COVID levels. And we are continuing to be pretty bullish on the outlook. And that's why, what Anupam announced, that the H2 of this year, we believe, will be better than H2 of last year, because of the tailwind, because of the conviction, because of the order book that we have.

Got it. And just one clarification on the -- there are multiple media articles on the BSNL 4G tender. What is the opportunity, which is there in front of you? Are you going to participate in it? And what steps you're going to take this time to manage the receivable scenario better than what happened doing BharatNet?

No. So one clearly is the fact that BSNL 4G, we are reviewing whether -- the initial focus is more from a perspective on the capability and our capacity of doing a large macro rollout. And we are in discussion with -- and reviewing that whether we want to get into that and in what capacity. So that is our first thing in terms of our capability to roll out a 4G focus, because our focus has been more and more towards the 5G solution. The good part is that the entire ecosystem, DoT, BSNL and everyone is extremely, extremely forthcoming and positive in terms of having the indigenous technology. In terms of receivables, credit worthiness, cash flow management, we are going to take all precautions in terms of whatever has to be done towards managing that. There aren't any receivables, et cetera, which kind of get stuck. Even in terms of BharatNet, et cetera, we do not have any receivables per se, which have gotten stuck with BSNL or anything. We have a very small amount left with BSNL, which is now -- coming right now.

We will take the next question from Mr. [ Rajat Gupta ].

My first question is how are we participating in digital transformation bought in by Jio? And with this I want to ask that how we are helping Jio if, in anyway, we are?

So Mr. Gupta, Jio, we have multiple engagements and from multiple years. Ever since Jio started rolling out their networks, we have been started off with the supply of products, then we came into rolling out their fiber networks and now the engagement is for their program for fiber to the home, fiber to the enterprise, fiber to kirana, that entire ecosystem, and then there are multiple POCs, et cetera, which we are engaged with them. So clearly, we are an integral part of the Jio transformation that is happening.

Okay. Second question, sir, how are we preparing ourselves against our competitors in this highly competitive environment that we are -- that we can see?

So which particular part you're talking about?

The telecom and optic fiber...

The way we are -- yes, so the telecom and digital is our business only and the way we are positioning, moving more and more towards offering end-to-end solutions, very deep customer engagement, very deep wallet share focus and moving more and more towards network design, network rollout, value-added product sort of solutions, where the competition is of very, very like-minded companies of very high-technology companies. And those competition, we definitely have a way of handling and managing.

So as we like -- as I can see, there is around 7% market share we have globally. So are we seeing any opportunity to increase that?

So our focus clearly is not in increasing vanilla market share. We have set up a capacity of about 50 million kilometers for fiber. So at the current sort of global consumption, it is going to take us to 10%, and that's what we are focused on right now.

And last 1 question. Yes. We are reducing our market -- revenue share in India, so any specific reason for that?

We are not reducing our revenue share. We are growing and Indian -- we do not -- as we have mentioned earlier, we do not look at markets and make strategies according to that. We look more at customers and our readiness for that. And the resultant regional share happen more by as a resultant rather than as a strategy. We look at 20 customers with deep focus with them. And based on quarter-on-quarter, which customers buy more or where the deployments happen more, the quarter-on-quarter numbers slightly shift up or down.

Ladies and gentlemen, I would request you to keep your question to 1, so that we can take questions maximum participants. We'll take the next question from the line of Mr. [ Nishit Shah ].

Sir, I just had a question on the cost side of things. So what are the cost control measures, which are being taken at this point of time to ensure that our margins revert back to the 18% to 20% level going forward? And also the measures which we are taking, what proportion of these cost-cutting measures would stick in the longer run?

So [ Nishit ], I would not look at the Q1 margin of 15% as our representative. The Q1 margin of 15% -- I mean till Q4, we have been delivering of that -- in that 20%-plus range. The Q1 margin is lower just because of the fact that the revenues were lower. And while in a fixed cost perspective, we continue to have those fixed costs which are normal. So for 18% to 20%, we will -- we are well structured. But especially coming to the cost initiative, there are multiple cost initiatives across the company, in terms of supply chain, in terms of product design, in terms of efficiencies. So there are multiple initiatives, which are tracked with a strong program management towards making sure that those costs come down. We also saw a significant amount of costs coming down from Q4 to Q1 just because of these -- some of these realignments on travel, offices, infrastructure. And some of these structurally, we intend to keep it down as we look forward as well.

Okay. Okay. So another question was that as you were talking about that we are turning more into a services company, integration company, so would our margins going forward lean more towards the 18%, 17% side of things? Because generally, the product side of the business had higher margins. So would our margins go down because of that?

[ Nishit ], we are moving more and more towards solutions and not necessarily only services. So the solutions is our combined offering of multiple products that we do, more value addition and fiber, cable, hardware along with -- and radio solution also. And we have stopped looking at things. Everything that we offer is a solution offered to the customers. And we believe that we would be able to maintain margins in the 18% to 20% range.

We will now take the next question from the line of Mr. Harshit Patel.

Sir, I had a couple of questions. The first one would be, sir, you have mentioned about an FTTH rollout project for a large Indian telco, so that -- for which you have done a 2% completion. So could you give us an idea about the size of the project as well as time lines for the completion?

So Harshit, this is north of INR 1,000 crores project. And the time line of completion, a significant amount of it will happen in the current fiscal and a small percentage of it will go to FY '22 as well.

Sure, sir. And sir, next one would be, sir, we have seen a marked improvement in the overall interest cost in the present quarter versus the previous quarter. So sir, would it be because of the softening of interest rates? Or have we actually paid down some of our debt?

Anupam?

Yes, Anand, I'll take that, yes. Yes. In terms of the interest, we have been able to collect last quarter end -- in the month -- in the quarter of March ending, we had collection towards the end of the quarter. And some of the collections were received in early part of the current quarter. So that's where we saw some impact coming in. And then we are also seeing some benefit of mix of borrowing where we are able to have some cost saving on account of interest as well -- interest rate as well.

Sure, sir. That is very helpful. And sir, just the last bit on the bookkeeping one. So sir, what were our capacity utilization levels for both fiber as well as cable [Audio Gap]. That would be all from my side.

So for the overall quarter, Harshit, it was close to 50% -- 47%, 48% for fiber and 70% for cables. But as I said, that's an averaged out number because for almost 1 month, the plants were not operating. If I remove that, then the capacity utilization towards June and July goes up significantly higher.

So sir, this 47%, 48% are we talking on our existing 30 million capacity or the expanded 50 million capacity?

No, 50 million capacity.

We will take now next question from the line of Mr. [ Parijat Garg ].

Sir, I've been sort of -- we've been seeing this transition from products and in our way from what is now a commodity into the solutions business, I think that was a great foresight. Like from several years ago, we've seen this coming, I suppose. I just wanted to know, as we move to the solutions thing, I want to understand what are the investments you think you need to make to address this big TAM that we are seeing. The TAM is growing very quickly. So what sort of investments do you think we need to make on that side, those capabilities? And what are you thinking about in terms of the ROCEs on that investment? I would really like to understand where you see that trajectory going.

As a pilot, what we are doing -- it's a great question. In terms of the investments that we are doing, has been a combination of both organic as well as inorganic. And this we have been doing over the last 4 or 5 years, clearly. Our -- the organic part of our R&D spend, which used to be less than 0.5% of our revenue base, has moved close to almost 2% of our revenue. We spend more than INR 100 crores in R&D annually, organically now. Our patent base has grown up -- has doubled year-on-year from what it was in FY '19 to FY '20. The new patents filed as well as the patent awards. Our inorganic investments that we did, for instance, what we recently did in the ASOCS, we took a small percentage, but got a good amount of foray on the radio side. Just before that, our acquisition of IDS on data center side. All these have been towards widening our portfolio and creating a solution, which becomes more than the sum of parts. The entire perspective is that instead of us responding to an RFQ for fiber or cable or anything like that, we are now actually working very closely with our customer on looking at the entire solution, whether it is fiber-to-the-home solution, whether it is a radio solution, whether it is a data center to data center connection, connectivity solution. All these then become solutions, which we are able to work with our customers, got the newer kind of products, where in the previous calls we have spoken about the Stellar Fiber, we have spoken about the intermittently bonded ribbon products. These are all products that have been devised based on the network requirements. And there, we are working with our customers so much ahead of the RFQ coming in, that the competition, et cetera, starts becoming much, much narrower and smaller and irrelevant [ indisputably ]. And that's what over the last 2 to 3 years, we have been extensively focusing on. We have a very strong CTO organization now, with almost 400 engineers, Masters, PhDs, from across the globe working only on the technology end. So it's a very conscious and focused investments toward us moving higher on the overall system level with our customers.

Just one more point I would add is that, with the end-to-end solution offering, what is happening? The recall value in the minds of customer is becoming very, very high. Because now instead of just offering one product or one particular offering, we are now having the plethora of offerings, which can meet the customers' requirement towards new edge digitization. And that's where, whatever they pick up, if they end up thinking about STL as one of the potential source of solution provider, that is becoming very, very helpful for us to get customer traction.

Sure. But also to understand the ROCE profiles that you think -- I mean right now, of course, you are investing. But in terms of when it stabilizes, where do you see the ROCE profile going? And two, so you did mention competitors. I was assuming, your operator profile is changing from the likes of maybe, Corning or Prysmian, the competition profile will also be changing. So it would be helpful if you could share a few names that one could compare from an economics point of view to see what we can expect?

Sure. It's absolutely -- as a concept, right now, we have not started putting an IRR on R&D investments. It is front looking and we look at the ROI 2 to 3 years down the line. For any inorganic investments that we do, we look at IRR of greater than 20% in same accordance of our line with ROCE of greater than 20% or so. And you're absolutely right that our competition profile is now -- wherever, if we are selling the products part of it, it's clearly -- companies like Corning or Prysmian in Europe, et cetera. And there itself, also the kind of products or the kind of solutions that we are able to bring in, are becoming very, very unique solutions, because you must understand for us, at STL, this is our only business. For most of our customers, this is a part or one of their businesses, and that brings in a huge amount of difference to the customers. And the last point I would just want to add, the -- over the last 90, 100-odd days, because of this situation, we would have interacted with the CXOs of more global telcos and cloud companies than we would have interacted in the last 5 years. So what we are discussing and describing is a clear trend that we are seeing that there is a great validation of our solution approach with our current as well as potential customers.

We will now take the next question from the line of Mr. Alok Deora.

Just 1 -- actually 2 questions I had. One was on the order book. So the order book breakup, which was given, shows that around INR 3,200 crores would be coming in this year. So should we believe that, that would be the number we should be working with? Or it could be slightly higher on that?

So Alok, this is the minimum number, which we have because there is a lot of orders that we also get, which is book and bill during the quarter or during subsequent quarters. So this is a minimum number that we will have.

Okay. Because -- yes, because -- the reason I'm asking is because -- so if we just add up like INR 3,200 crores plus what we did in the first quarter, it comes to around INR 4,000 crores. And so -- because right now, since we are doing more solutions-based business, the order -- even if we win certain orders now, it might not be executable in the second half to the full extent. So -- which was not the case earlier when we were doing more of products. So in that context, I'm asking that this order book is the order book, which will come in FY '21, right?

So I'll just repeat, this is a minimum number. The number is going to be clearly larger than that. And that's why, to clarify, we said that based on our current visibility of both order book as well as things which are in the pipeline, we believe that our H2 of this year will be better than the H1 -- H2 of last year. In the H2 of last year itself, I think we did almost -- if I'm not mistaken, almost INR 2,800 crores to INR 3,000 crores.

Sure. And one question was on the margins. You mentioned that the margins were now -- of course, first quarter was quite challenging. So what is the sustainable margins we are looking at now in the second half, not the second quarter? I mean 1 quarter might still take to sort of normalize. In the second half, what kind of sustainable margin run rate we are now looking at?

We're looking at maintaining our 18% to 20% margin guidance. While we have been operating at the higher end of it, we believe we are going to be in the range of 18% to 20%.

We'll take now the last question from the line of Mr. [ Abhishek Shah ].

Sir, 1 -- I had 2 questions. The first one is, we seem to be very optimistic on the global optical fiber demand with 5G coming in and FTTH. So I'm just taking out -- so on 14 -- on Slide 14, sir, we are assuming a single-digit growth in the optical fiber demand for the next 5 years, especially when we -- so my -- if my understanding is correct, 5G needs at least 3x more cable -- optical fiber cable compared to 4G. And I'm, again, going back to slides of 2016, '17, where we've seen the optical fiber consumption going up by 17% CAGR from calendar year 2005 to 2017. So I mean, are these assumptions really conservative or am I missing out something out here? That's the first one. Sir, second question that I have is, you set a target of INR 10,000 crores turnover by FY '23. What could be the potential obstacles that we could face for us in achieving this target?

So, Abhishek, the first part, you're absolutely right that these estimates, and we have reported what this CRU, which tracks the market comes with. I fully agree with you that the numbers are going to be higher than what they are coming up with. And as we said, they themselves have upped the demand from their April report to the June report, for FY '20 and forward as well. The only caveat I would want to add is that the fiber demand globally at times gets constrained by the deployments that happen. So we -- which you would have seen the highest growth that happened was of 17%, 18% year-on-year. Because at times, it gets just -- even if the demand is there, the deployment speed year-on-year does not go up by 30%, 35%. And that is something which sort of constrains it. But I'm absolutely fully agreeing with you that looking at what 5G is going to require fiber, that looking at -- just by looking at how other operators are doing, what Verizon is deploying, what other operators are looking at, that the total outlook should be better. I mean just to provide a data point, in spite of this COVID scenario in H1, the H1 for North America for '20 was 6% better than H1 in '19. So there's a lot of pent-up demand, which has to start getting released as we start moving forward. As far as the INR 10,000 crores is concerned, Abhishek, clearly -- for us, the clear focus is going to be on executing the strategy. Whatever we have looked at in terms of -- if their -- is the strategy getting validated, the answer is extremely yes. The second aspect, is there capital behind it? The answer is becoming yes, and that is getting really translated by both our funnel as well as our order book. And the focus is going to be us executing this new solutions-based, services-based, value-added, product-based strategy to our customers. And that's what we are focusing more and more on. The fact that we have done it, albeit at a lower base, in the past 3 years also, we have doubled our revenues while maintaining the high return on capital deployed, gives us a high degree of confidence as well as credibility. But at the same time, we will -- we have multiple programs across the company charting out as to how INR 5,000 crores to INR 10,000 crores will happen, which are broken up into customer-wise revenues, into solution-wise revenues, with plan As, plan Bs, plan Cs in place. So trust us, we are going to be looking at it extremely, extremely closely. And if we see any kind of a shift, either positive or negative, we will definitely inform you about it.

So just one small thing. So I think earlier, we were looking -- in the solutions business, we're looking at an addressable market of $75 billion. I think we scaled up that portion. So just trying to understand, has that improved? Or we're working towards even increasing the further potential of that?

Currently, we are, in fact, leaving that $75 billion. So we are not looking at increasing a potential TAM and taking a smaller share. We are looking at a focused TAM and taking a larger share. And that's why we are focused towards 20 key account markets. We -- and this $75 billion we had talked about was by FY '23. So again that, we are looking at from a current TAM of about $30 billion towards reaching $75 billion. What are the solutions that we need to offer to go up the value chain and which are the customers that we need to address, if they are currently not a part of our existing customer base. So we are clearly not in chasing high TAM or high funnel size. We are chasing right customers and right order book and a high winning percentage.

So that is really helpful. It's really impressive how we've come a long way in the last 5 years.

And with this, we come to the end of question-and-answer session. And I now hand it over back to Dr. Anand Agarwal for the closing remarks.

I would just like to thank everyone for attending this call and showing such a great level of interest and insights, and the right questions for our company. And I really hope that we were able to address and clarify your queries and comments. For any further comment, ideas, we would welcome your interaction with our Investor Relations team, which includes myself as well as Anupam, and we really look forward to continuing the conversation with you in the future. Thank you, and good evening.

Thank you.

Thank you. You can disconnect your calls. Viraj, you can disconnect.