Sterlite Technologies Limited (532374) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to STL Q3 FY '22 Earnings Conference Call. I am Pankaj Dhawan, Head Investor Relations at STL. To take us through the quarter 3 results and to answer your queries, we have with us Mr. Ankit Agarwal, Managing Director, STL; and Mr. Mihir Modi, CFO, STL. [Operator Instructions] Please note that this call is being recorded. You can download a copy of the presentation from our website at www.stl.tech. Before we proceed with the call, I would like to add that some elements of today's presentation may be forward-looking in nature and must be viewed in relation to the risks pertaining to the business. The safe harbor clause indicated in the presentation also applies to this conference call. For opening remarks, I now hand over the call to Mr. Ankit Agarwal. Over to you, Ankit.

Thank you, Pankaj. Good day to everyone. Thank you for joining us for our quarter 3 FY '22 earnings conference call. I hope you and your families are safe, especially during this COVID wave, and I wish you all the best for the current year. At a macro level, the overall digital infrastructure industry is well poised for rapid and sustained growth. We see 4 key themes playing out network creators, including governments are investing heavily in creating the digital infrastructure. 5G FTTH and ORAN are clearly growing at a rapid pace. As a result, demand for optical networking is on a sustained growth path. And hence, we're seeing massive fiber deployments across the globe. While in India, a strong fiber deployment is expected to start in FY '23 on the back of revival of Telco CapEx and the revamp of BharatNet programs through the TPP mode. We shall talk about each of these in the following slides. Network creators and governments are investing heavily in digital infrastructure, and we can see various instances of the same. Just to quote a few, AT&T is investing in multiyear connectivity with Santa communications to massively ramp up its fiber across 25 states. Deutsche Telekom is investing in targeting 2 million FTTH connections in FY '22 in the year '22 after adding 1.2 million connections in 2021. The telcos in U.S. are investing to nearly double the fiber footprint between now and 2027. Telefónica in Germany is investing almost EUR 4 billion to connect 50% of the population with 5G. Meta, which was erstwhile Facebook, plans to increase its CapEx to $31.5 billion in 2022, up from $19 billion, and that will have massive investments on the optic fiber and the data center buildout as well. Data center investments in India are expected to touch $4.6 billion between now and FY and -- 2025. On the government side also, various incentives and programs are now being announced. Italy government recently has announced EUR 4 billion to connect a further 6.2 million people with fiber and 5G. It's a big program in the U.S. in terms of the investment of affordable connectivity program, is $14.2 billion successor program to the emergency broadband benefit, which will help almost 9 million people afford Internet access during the pandemic. And even countries in Africa, like the Rwanda government, has borrowed $100 million from Asia Infrastructure Development Bank to fund broadband and digitized public services. Coming more specifically to the U.S. In the U.S., the various federal and state subsidies, including the Rural Digital Opportunity Fund, RDOF, American Rescue Plan Act and the Infrastructure and Jobs Act are going to provide $100 billion in federal stimulus for broadband programs over the next 5 to 7 years. As a result of that, the industry will see 5 to 6x increase in federal stimulus over 2020 and various estimates back 2022 ending at approximately $24 billion. Combined, along with the telecom service provider CapEx, this is the best CapEx environment in the U.S. since 2001. These CapEx investments are powering deployment in 5G, FTTX as well as ORAN technologies. 5G is clearly the fastest-growing technology in the world today. As for Juniper research, global revenue from 5G services will exceed $600 billion in just 5 years from now. And in 2021, the revenue from 5G services is already expected to reach $73 billion, an increase of 250% year-on-year from the $20 billion in 2020. The number of subscriptions has also increased -- expected to increase to $2.6 billion -- 2.6 billion people by 2026. FTTH is becoming all pervasive and fibers connecting every home business, small cell and data center. As we just shared, Italian broadband operators are investing heavily and they plan to spend $11 billion (sic) [ EUR 11 billion ] over next 10 years and plan to connect nearly 24 million households, up from 13 million households currently. Another example is Altice USA is planning to spend close to $1.8 billion in CapEx on FTTH. As we see clearly, fiber to the home or building is set to cement its position as a leading fixed broadband technology as well also in the APAC market. In taking over and forward, we're very excited to share this recent partnership amongst the 5 leading Middle East operators, Etisalat, STC, Zain, Mobily & Du, which came together to sign an MoU to support open RAN deployment. This is a very positive step forward for the Middle East. In Europe, major European telecom operators like Deutsche Telekom, Orange and others are committed to ORAN. Recently, Germany announced EUR 300 million in funding to develop and test ORAN technology. Similarly, the U.K. government has announced new initiatives to accelerate the deployment of ORAN in the country. In India, Airtel has already committed to ORAN by supporting a number of innovative and disruptive partners, and we're very excited to be partners to all of these initiatives. Looking at the fiber market, as fiber is the backbone for all of these networks that we've talked about, communication service providers as well as hyperscalers are aggressively investing in fiber for their networks. As for CRU, which is a leading industry body, the OFC demand is expected to reach 634 million fiber kilometers by 2026 from 500 million in 2021. In the year 2022, the OFC demand is set to grow by almost 8.6% to 544 million fiber kilometers. All the global markets are showing healthy demand. Europe and North America, in particular, which are key markets for us are likely to grow at around 6.5% to 6.8%, respectively. This is a very, very interesting slide, which talks about how the network will be built out over the current decade as well as the next decade. If you see the cumulative fiber count across the globe, till 2020 was about 5.6 billion fiber kilometers. This is expected to go up to 12 billion fiber kilometers in 2030, which means that current decade, we'll see 6.4 billion fiber kilometers being deployed and making it by far the biggest and the best decade. Going forward also, we further see another 7 billion will need to be deployed between 2030 and 2040. And clearly, with the next-gen technologies like 6G, that will further require extremely intense fiber network. We continue to see a very massive fiber deployment, which has been planned across the globe, including in India. In India, we will break out both the public as well as the private sector. On the India public side, the union cabinet has approved BharatNet under the PPP model in 17 states to cover about 360,000 villages. The government has committed to provide around INR 20,000 crores as a viability gap funding and the private partnerships -- private partners has bring in an equity investment of CapEx, operations and maintenance of the network. The project is bundled in 9 packages and each corresponding to 1 or more telecom circles. The participation in tenders is likely to happen in Q4 '22. So in this current quarter, and we expect this to have a tremendous need for deployment of fiber for the coming couple of years. On the India Private side, increase in profitability of the Indian telcos has led to a CapEx divide. Telco is expected to deploy approximately 200,000 cable kilometers in FY '23 to strengthen the fiber backbone to enable the 5G and strengthen 4G and FTTX. Just to reiterate, 5G will require 100% of your wireless points to be connected on fiber, and hence, a very large cumulative network will need to be built out a fresh fiber network which we need to wait out to augment the capacity and latency requirements for 5G. In North America, rural broadband telecom CapEx is driving the fiber deployment. As we shared earlier, operators like AT&T and Verizon and many others like Zayo are deploying massive amounts of fiber, and we'll continue to do so for the next 5 to 10 years. Across Europe, 200 million homes are expected to be connected into full fiber by 2026. And we're seeing some very interesting new ISPs like Hyperoptic, community fiber and Netomnia connecting anywhere between 3 million homes to 1 million homes between now and the next 3 to 4 weeks. Looking at all of these 4 key themes, we can confidently reiterate that we're in a multiyear network-based cycle across the globe. The 3 investment cycles that I touched on, 5G, FTTX and citizen network built out by the governments have coincided and they expect it to continue for the next 7 to 10-year timeframe. With the favorable industry tailwinds, our growth strategy is on track. In the following section, we will talk about this in detail. As discussed earlier, we have 3 focused levers for growth: first, grow the optical business; second, globalize system integration and scale up further in India, and three, build a strong wireless solutions business. As you would recall, we had grown our total addressable market to $40 billion and each of our 3 growth levers that I touched on were aimed at increasing our market share in this $40 billion TAM. And this is delivering the desired results. While the optical interconnect and U.K. services have reached the commercial orders and execution stage, in the wireless business we have already reached the pilot order stage and we still believe we will start building orders for field trials and larger deployments on the wireless side. Let's talk in detail about each of these developments. On the optical networking business, we have secured orders close to INR 300 crores in quarter 3 from the North American market. This is extremely exciting as we're well-positioned for growth in this market. As communicated earlier, we are also investing in our fiber cable facility, a state-of-the-art fiber cable facility in South Carolina, which shall commence operations by Q2 FY '23. As the manufacturing facility becomes operational, it shall help us get access to Tier 1 telecom operators in the region. And so we're further well-positioned to grow our presence in the North American region and grow our revenues accordingly. In this quarter, we have also won multiyear orders worth about INR 700 crores for a proprietary Opticonn offering. These new orders further validate our strategy of the Opticonn solution. If you look at this slide, very proud to share. As you can see on the left side, the Opticonn solution and optical interconnect is actually run completely by women. And this is something that we're very proud of in the state-of-the-art facility in India. Some of the product portfolio and solutions, you can see on the right-hand side, in terms of some of our connectorized systems as well as our drop cables and our terminals, which provide extremely fast and efficient end-to-end solutions for service providers to connect homes at a rapid pace and at a very low cost. Our confidence with respect to growing multifold stems from this slide. Through Optotec acquisition, we are able to increase our attach rate to 14%. And -- but we also see that we have a large runway ahead of us to increase the 2-year attach rate to the level of the industry, which is at 100%. In quarter 3 FY '22, our tax rate increased from 18% to 14%. And we're confident that in the coming years, we will move forward towards the 100% rate. Coming to our second growth lever to globalize system integration. We are ramping up our execution to convert order book to revenue. We have successfully completed the business integration with Clearcomm. We have now combined -- we now have a combined employees in the more than 150 employees and more than 20-plus partners on board. In addition to that, we have started a unique initiative on resource augmentation. Through our STL Academy, we have sent our first batch of almost 50 trained telecom engineers to the U.K. We shall continue to further send batches to improve the supply situation in U.K. and grow our business. We are confident to increase the U.K. contribution to almost 25% of our global business services in the medium term. Our project execution is on track and tending towards Indian private players as well as global projects. Amongst the Indian public projects, Mahanet is now complete and T-Fiber, Telangana Fiber is 44% complete, including all packages. On the Indian private side, fiber rollout for a large Indian telco is 83% complete for Phase 1, and the second phase is yes to start. Coming to the U.K. fiber to the home rollout for U.K. and all projects combined is 2%. We see a tremendous runway ahead. And in the data center connectivity projects through our IDS business, in this quarter we have completed 49 projects and are currently working on 13 projects across Europe. In the wireless business, our product development is on track. On the back of efforts by engineers, we have close to 100 patents on our name by now. We have announced general availability for PFTTX, which is our programmable FTTX solution as well as Garuda, our unique 5G small cell. We are targeting general availability of our 5G radio units and RIC, which is our radio intelligent controller in the next financial year. In terms of customer engagement on the wireless side, we continue to engage with our customers globally. We have secured pilot orders for Garuda of 5G networks. We are also building the organization capability in areas of telco cloud software and radio hardware and software with more than 300 sellers at this moment. I'm very excited to say that the new leadership at the helm of each of our businesses have turbocharged the strategy execution. These leaders are industry veterans who have built multimillion dollar businesses in the past, nurtured customer relationships and behold an exciting vision of the future. We have Paul Atkinson, who's leading the optical business. He is an industry veteran has led $3.2 billion business at Prysmian. He has a strong expertise in the optical space and deep connects with customers and policymakers across U.K., Europe and Australia. We have Pravin Cherian, who has joined us as CEO of the global business -- services business. In the past, he has delivered close to $600 million of services revenue and built and led 7,000 strong delivery organization. He is well connected with private enterprises, both in India and across South Asia. On the software business, Raman Venkatraman has joined us as CEO. He has led more than 1 billion plus all industry verticals with specific focus on high-tech services and with 20,000 strong global delivery organization. He has deep connects with enterprise customers, technology providers and OEMs across the U.K., U.S. and Europe. And lastly, on the wireless side, Chris Rice is leading this business. Prior to STL, he had led the AT&T pivot to software-defined networking, SDN, and led a team of 10,000-plus as part of AT&T. He has deep relationships with telecom operators, cloud companies, open source communities, wireless associations and the U.S. semiconductor ecosystem. With the focused strategy and experienced leadership, we have a win-win combination for the future. We shall now discuss our financial performance for the quarter. I'll now hand over to Mihir to discuss the financials. Mihir, over to you.

Hello. Good day, everybody. I'll take you through the financials, as we've been doing earlier as well. So if we can move to the next chart, starting with the order book. Our order book is growing on a quarter-on-quarter basis. Order book for this quarter ending December FY '22 stands at INR 117 billion. The spread between the remaining 3 months, next fiscal and beyond is approximately INR 13 billion, INR 43 billion and INR 61 billion, as you see pretty much the proportions that we see short term versus the beyond years as we've always seen. Our order book is also now very well diversified across our customer segments. We also have a significant O&M order book, which is at 21%, which shall start to yield revenues from FY '23 onwards. The revenue mix is shifting to customer segments by design and geographies of our choice as we increase our share in the telco segment. In terms of geography, clearly, we're increasing our share in EMEA and North America markets for -- absolutely as per the focus that we have on those markets. In terms of notable wins, I would like to share that we've won multimillion-dollar deals, multiyear contracts with large telcos in Europe as well. We've also won new orders in the North American market for the OFC business, the optical fiber cable business. We won a new order in the FTTH Mantra area in the U.K. market. And last but not the least, we've won a pilot order for Garuda of a small cell for the 5G networks. So while this quarter, we have reported a negative INR 35 crore EBITDA, INR 0.35 billion, our revenue mix to start with, I'll come back to the EBITDA but our revenue mix continues to have a sustainable momentum. There have been onetime impacts on the revenue as well as on EBITDA. But if we adjust for that, we have a fairly stable revenue with growth over last year. There's some slight softening that we saw in our services business, and I'm happy to talk about that as we go into the Q&A. But overall, we have growth versus previous year, and we expect the Q-on-Q growth to continue even next quarter onwards and thereabout further ahead. On the EBITDA side, while our notes did mention some onetime provisions. So therefore, the EBITDA this quarter is not representative of the underlying business performance of this quarter. After adjusting for the EBITDA, there has been slight softening there as well on -- primarily because of 2 reasons. One is the system integration or the services business, project mix, the contract mix that we've executed by choice this time. And the second is we've made some investments as we expand our services business in the European market, U.K., in particular, to start with. What -- I'd be happy to get into the details of this further as we get into the Q&A section. Before that, I will finish the rest of the presentation. So these are -- this is abridged version of our reported financials, INR 13.56 billion of revenue at a reported EBITDA, mind you again, because of the provisions, negative EBITDA, our depreciation has come a little high at INR 0.9 billion. This is largely on account of the purchase price allocation and the 12-month depreciation cumulatively that we took for the purchase price allocation that we did for our acquisition that we made about a year back. So the -- so it will come back to normalized levels to what we saw pretty much similar to Q2 of this year. Our last but not the least, our net debt is stable. I'd want to say -- compared to a Q2 level, I'd like to say that as we are keenly focused on our FY '23 end objective of getting to a net debt to EBITDA -- net debt-to-equity ratio of 0.5, we are mindful of the need to invest as well, and we will balance that out. Having said that, objective remains at a net debt-to-equity ratio of 0.5 by the quarter -- last quarter of FY '23. So overall, we are committed to deliver our financial objectives that we've set for ourselves and shared with you all a run rate of INR 100 billion per annum by the quarter 4 of next fiscal. Net debt-to-equity ratio of under 0.5 and an ROCE of more than 20%. Let's go to the next part. I think there's a business opportunity and then there is a financial translation of that. But what's equally important for us is our focus on the environment, sustainability, et cetera. We have announced our commitment to become a carbon-neutral company by 2030. Recently at the COP 26 summit nations discussed the importance of the urgent climate action and everyone is committed to reducing emissions and limiting the annual temperature rise to 1.5 degrees. According to the estimates, the Internet and such supporting network components account for 3.5% to 4% of global greenhouse emissions. And as a global technology company, STL aims, we aim towards creating digital networks that are green and sustainable. So we will continue to aggressively invest in becoming a carbon-neutral company through these various energy efficiency initiatives. I think we have committed ourselves to a net 0 emissions by 2030. We are also committed as we've been talking and doing in the past on our ESG initiatives and targets. I think to be -- the focus reflects in a way that we've designed and implemented our ESG agenda. For example, we've diverted 139,000 MT waste from land -- away from landfills. We've reduced emissions of 7,500 tonnes of carbon dioxide equivalent through various initiatives on the green side and plants, et cetera. We are saving plastic through innovative packaging. So on and so forth, we are recycling and reusing water in our manufacturing facilities. Until now, we have impacted 2 million-plus lives and have won 70 ESG awards, including 15 global awards in that category. So overall, our focus remains to be socially responsible corporate citizen. Our purpose remains to impact lives through not just our core business, but through the various other initiatives in sustainability and ESG and general space. In summary, I think our growth strategy is -- has started to deliver results. I think we have now started to accelerate in -- as Ankit also called turbo charge the strategy execution with the new leadership team that is at the helm, the optical networking business is continuing to become stronger through our presence in the U.S. market and particularly within that the optical interconnect business that we are focusing on and we continue to win large orders around the world, including U.S. and Europe. In the services business, we are ramping up capabilities for execution in the U.K. We've already spoken about some big order wins there in the global business services space, particularly in the U.K., and you will see some of that capability building impact even this quarter in our margins because we certainly want to make sure that we invest enough to be able to address the great opportunities that lie ahead of us in the industry in this space as well. So we are preparing for a massive rollout across the globe, starting with U.K. and other. In the wireless business, we've announced the general availability of a 5G small cell and FTTH products, the macro 5G macro radio unit and RIC shall be ready soon enough by the next fiscal. So overall, I think all our strategy going in the right -- turning out and panning out in the right way, execution has started to take effect, business are panning out pretty much in line with what we have been expecting and forecasting and we do expect that our quarter-on-quarter growth will continue from next quarter onwards. And we remain committed to our FY '23 targets that we have shared with all of you.

So with this -- I think -- sorry, so we've come to the end of our opening commentary, and we can move to the Q&A now.

[Operator Instructions] And the first question is from the line of Pranav Kshatriya.

My first question is regarding this, the provisions what you talked about. What exactly is this provision in the top line? And what are the provisions which are coming in the cost line. If you can just elaborate that, that will be useful?

Sure. Sure, Pranav. So the -- I'll talk about it as a bunch of provisions and then talk about what's the top line and the bottom line. So essentially, these relate to certain old projects in the services space that we had undertaken. And based on certain developments, we thought it prudent to provide for those why we continue to pursue the recovery of those provisions. The split between why certain part was top line and certain other part was middle line resulting in an overall bottom line impact was largely an accounting technicality, which we discussed that the provision was taken on certain items where the -- with the auditor's advice and with the right accounting methodology. We chose to reverse part of the top line and part of it was taken as a cost in the middle line depending on the nature of that line item within that project.

Can you quantify those, please? I mean how much is the top line provision? And how much is the cost provision?

Sure. Sure. So Pranav, we've -- our notes call out INR 48 crore as a top line provision. There is an additional approximately INR 15 crore on the top line, which were -- because it was not material. It was not mentioned specifically in the notes, but I'm sharing that with you. And then there is the middle line, which is called out at INR 115 crore. Overall, this adds up to about INR 180 crore and then there is -- like in the top line, there is an uncalled out number of INR 15 crore that I shared, there is an uncalled out small number in the middle line. Overall, the total bottom line impact of the one-off provisions is slightly north of INR 200 crores.

Okay. And I mean can you tell us the nature of these provisions in the sense? I mean, you did allude that these were some of the old services project. I mean, are there projects, what is the status of these projects because of which these provisions are necessitated?

So the -- we are towards the end of -- so this is concentrated in a couple of very few, maybe just a couple of projects, and we are pretty much at the end of those. And from a collection standpoint, we took a prudent call to make sure that while we pursue the collection, we will take these provisions in our books.

Okay. And because there is impact on the revenue and the profitability because of this, can you talk about the profitability and the revenue growth for each of the section in the sense of how the growth has been for the product and the services business and relatively their profitability?

Sure, sure. So Pranav, the products business has been stable and growing versus the previous quarter. The margin has also been pretty much in line with what we expected and what we saw in the last quarter or so. There has been a minor impact of freight increases in the product side of the business, and we're watching that very closely in terms of how we can mitigate that or deal with it as we go into the next quarter. So product side has been very stable. On the services side, while there has been these provisions, there is also some softening because of the mix, the project mix or the contract mix choice that we made and the shift that we are seeing. So there are kind of minor couple of impacts, couple of reasons of impact, which has softened the underlying operating margin other than the provisions in the services business because of the choice of certain lower-margin contracts that we get as we shift. We expect that with U.K. kicking in or our international service business is kicking in, we will get back on our sustainable margins, probably after maybe another quarter or so of such softening may exist in the service business, but we expect to pick that back up again in the quarter or 2.

We'll take the next question from the line of Neerav Dalal.

Just wanted to harp on the weakness in the revenue and the margins. If you could just break out to us what would have been the revenues and the EBITDA for the U.K. business? And secondly, in terms of what is the investment for the quarter in the access solutions? This will be my first question.

Sure. So Neerav, the U.K. business is currently a small of our total revenue. So it's relatively small yet. It is picking up slowly. Having said that, there are -- obviously, we've built capabilities upfront. And therefore, the margin on the U.K. business would obviously be negative, and that's the softening that is affecting the whole services business that I spoke about. Relating to Access Solutions, we have spent approximately INR 35 crores to INR 40 crores on the Access Solutions business this quarter.

The Access Solution, I guess, remains -- the investment in the access solutions remains flattish, right, over the last, say, 3 to 4 quarters. I believe we've been investing about INR 35 crores, INR 40 crores?

That's why it's slightly increasing, Neerav.

Okay. And in terms of the U.K. business, if you could -- it would be great if we get an understanding in terms of how the underlying business is doing and how the new businesses are doing, so that we can gauge the margin performance going ahead and we see in terms of how the numbers will move going I guess that will be a good disclosure that we can get.

So Neerav, let me address that and then if Ankit has anything further to add, I'll request him to do that. So we've been talking about early team kind of margins for our services business as a whole. Now the India part of that, it was essentially India only. The India part of that is the contract mix that we are seeing is kind of moving down to a low double-digit or a high single-digit margin. Having said that, the U.K. piece that we are seeing now pan out. And mind you barring the initial capability build, which comes as a fixed cost. I mean I'll just keep that aside for a moment. We see -- eventually on a sustainable basis, we see high-teen kind of margins in U.K. part of the business. So blended will come down to -- back to the numbers that we're talking about, which is about low teens for blended India plus U.K. business on the services side. Let me go one step further. And therefore, that's a service business blended margin. And when we -- when we add the products margin, we will -- we are likely to be back at the -- around 17% or 16% to 18% blended STL level margins that we've been talking about.

And when do you see this number come, second half FY '23 or before that?

Hopefully before that, but let's assume second half FY '23 for now, I don't want to overcome it.

I'll just add one thing that's also happening, Neerav and it's very interesting in the U.K. part. It's also now more and more similar customers where we are providing cable interconnect as well as the services. So that's becoming a very, very interesting both relationship and partnership with some of these. So as we scale up, we are already pretty strong on the first 2. And as we scale up our services presence in the U.K., I think it will be very interesting that more and more of our both Opticonn as well as services offering will be going to the same customers as an end-to-end. So that's something that we do expect to scale up. We have about 150 people that we have said currently in terms of current U.K. strength and also 20 partners. So that will -- there's certainly no shortage of demand and say, interest from the customers, it's more how fast we can scale up, bring their training and capability to the market and then execute on those orders.

Just one last question in terms of the international business. If you see the international business, for the quarter the share of revenue has come down to about 51%. We were at about 58%, 56% in the last couple of quarters. So we've seen a 15% decline in revenues in the international business, what would you ascribe this to? And then how should one then look at this in the coming quarters?

So it's a prioritization at this stage in terms of the choices of certain contracts that we've made and that's the reason for it. If I look at our order book and the mix of international in the order book, that continues to improve as well. So I don't take this quarter as a representative of the underlying trend that we see increasing international mix -- in the revenue mix.

Yes. Pretty -- I'd say, very confident of this focused approach we've talked about, particularly Europe and North America, that we will continue to build on. And also with the manufacturing sites coming up in both U.S. and U.K. over the next 6 months. I think that will further accelerate our growth in those markets.

We'll take the next question from the line of Mr. Mukul Garg.

So Mihir, I just wanted to start with if you can go to Slide 27, you have bar charts about revenue and EBITDA ex of provision. Can you just help us with the numbers, which this bar referred to? The light green one.

Yes. So the -- so I'll break this down into 2 parts. One is what is called out in the notes to our financials that were published. And then there are some smaller amounts, which were not material to call out, but I will share that with you. So what is called out on the left side revenue bar was about INR 48 crore of onetime on the revenue side. And there is another roughly INR 15 crore that was not specifically called out, but I'm sharing that with you. On the EBITDA side, there is -- so rather, let me call it the middle line. There was INR 115 crore that was called out. So if I add the INR 115 crore that was called out, the INR 48 crore that is called out, plus the INR 15 crore that I mentioned, that's about INR 180 crore. And therefore, there is another amount which -- which is not called out in the middle line, roughly adding up to north of INR 200 crore of EBITDA hit overall.

So just to kind of revisit that you are trying to say that your revenue during Q3 ex of provision, were INR 14 crore, INR 18 crore and your EBITDA was INR 128 crore. Is that the right way to look at it?

Those are representative numbers of the nonprovision numbers, yes.

Right. So first, on the margin side, your margin ex of the provision this quarter was 9%. That's like Steve did from what was their last quarter at 17%, while we understand the real impact of the services business mix change. Can you just help us walk us through the margin delta during the quarter?

Sure. So probably, if I do the numbers with you, the margin comes to around 12%. So if I adjust INR 200 crore from the INR 35 crore, that's about INR 165 crore, on a INR 1,400-odd crore is 12%. But more directionally, let me share with you, I think we can tie out the numbers one-on-one later on. But there have been 2 large drivers of the margin softening. I think one is some new investments, not new investments, but the investments that we have to make ahead of time in an our services business and a little bit in the software business that we've added people, and that is driving roughly 2% -- 2% to 2.5% of our margin dilution versus last quarter. And then there is an impact of the contract mix choices that we made because of which also the revenue has been lower, if you notice, compared to last quarter, again, on the services side, and we've lost some EBITDA, again, a couple of percentage points on account of that. So that's broadly the bridge from what I call the roughly 12% to 17% bridge.

Sure. And in terms of -- if you look at our visibility till last quarter, we were kind of still guiding for EBITDA margin of 17%, while I understand like there would be some intra-quarter contract with choices, but the investment visibility would be quite high by the end of last quarter, 3 months back. So what really led to the meaningful delta in profitability during last few months?

So Mukul, I'll -- what I'd say is that we've always said that our sustainable margin is in that range of around 17%, right? We've always said that we may make -- our R&D investments may move up 1%, 2%. And therefore, we've never guided on a quarter-to-quarter basis, you'd appreciate that. So I maintain that our "guidance" that we speak about, which is very clear about FY '23, last quarter remains. Our expectation of the sustainable EBITDA margin absolutely remains. I'd humbly submit that there will be quarter-on-quarter movements that specifically because we're not guiding quarters, we may not talk about it in detail to the last rupee. But I want to reiterate, I think we are -- the underlying business remains healthy. we are committed through the FY '23 numbers. We are running to achieve it, and we expect that we will.

And also to reiterate I think on the connectivity business, the optic business, I think as we continue to sell both the cables and the interconnect solutions, we actually are pretty confident of our margins. And as we've been sharing on the interconnect margins are actually even better than the cables. So that's something that we're confident of the run rate of the interconnect that we showed on the side, that's clearly moving quite well quarter-on-quarter. And more and more of our long-term contracts with the customers will be of a cable and interconnect together. So that's one part that gives us comfort and confidence. And I think the second part is as we pivot -- make these 2 pivots, we're doing it consciously, 1 from the government sector to private sector in India. And second is a pivot from just India to India and U.K. And so as we stabilize our operations in the U.K., we do expect healthy margins from that business as well. Again, as I repeat for U.K., the constraint on services is not order book, it's constrained by execution, speed and capability, which we are ramping up with every month.

Sure. The other question was on the provision. I just wanted to understand it a bit better. The press release mentioned that there were 2 items which were final settlement with the customer. While you were indicating that these guys, you still have the option to kind of recover the payment. So was that a delay in payment from their side because of which your auditor asked you to take a provision? Or was there a dispute in quantifying the value with the customer, which resulted in the provision? And then there was -- and I think there is another additional INR 116 crores relating to ongoing projects. Are these the final value of what is the exposure, which is there with the customer outstanding right now? Or do you think there might be some pending payment where there might be some further provision which might come up?

So I think you asked 2 different questions, and I'll try and address both. I think 1 is -- this was -- the provisions that we've taken are largely on account of being prudent based on the time these are older projects. And therefore, we've reached -- certain parts are relating to our engagement and the developments in that regard. And therefore, we've taken the provision to be on the prudent side. If it were a final amount that we -- was not collectible, we would have written it off. This is not a write-off. This is a provision to be on the prudent side. So that's something that I want to share with you. The second is from an ongoing basis. So if you see also the note is there is a certain 3-month number, and then there is a certain 9-month number on 1 of the items. So these smaller numbers, every company, including us, we do take -- we make those assessments and we keep taking provisions as we go along. This time, the number was large and therefore, we felt it appropriate to call it out. Based on what we see today, we do not expect such significant provisions as far as we can see. You'll appreciate, and I want to be completely candid here, you will appreciate that it's impossible to guarantee 100%. But I'm very, very confident that, that based on our assessment, we don't expect any major such items, at least as far as I can see today.

Sure. And if I may just ask one more question on the geographical revenue breakup this quarter. Mihir, you highlighted that there was some prioritization of business which inserted an international revenue share coming down. Was that more about the time line in India-based orders? Or -- was there -- you are trying to shift away from some particular global region and resulted in this? If you can just help us understand what...

No, I think you -- the answer was in your question. I think it was a timing issue and therefore, the delivery schedule, et cetera, we kind of managed it that way. And that's the reason this time the India number was slightly higher. I think structurally, and that is represented in our open order book change as well. We are clearly increasing the percentage of our non-India, mind you, as India on its own continues to grow. In the mix, the non-India percentages are moving up as evident in the order book. probably Mukul, a few -- more than one unique item in this quarter is for us to talk about. But underlying is the direction that we've always spoken about.

We'll take the next question from the line of Mr. Suryanarayanan Manian.

Am I audible?

Yes, you are.

Mihir, I know you've explained this, but it's still sounding a little cryptic whatever we've said about the provisions. So when you're saying that there is an additional provision of INR 48 crores. And on top of that, you've said INR 115 crore provision. So is that additive? So do we have to think that this quarter, the total provision is INR 115 crore plus INR 48 crore?

That's right, because the INR 48 crore is a top line provision where -- and the INR 115 crore called out in the financials is a middle-line provision. So both of them will fall down to the bottom line.

Okay. By middle line, you mean at the EBITDA level?

Costs, yes the other yes, in the costs. And the EBITDA will be lower by addition of both.

And is this related to one client or a group of clients, public sector, private sector? Would you be able to say any details?

So this is a couple of projects, old projects in the services side. Large projects is as far as I will be able to share and the reason for not being able to share is we're considering or rather making efforts to collect it. And therefore, I wouldn't want to go out and identify a particular project or more. But these are services side, old and large projects.

Okay. And you're saying that this is also an ongoing project. So it's not a completed project, but it's also an ongoing project that you identified?

No. I said this is pretty much towards the end or completed projects. So this is -- collections are ongoing as per the contractual terms.

Okay. And how would this affect your receivables from this project? I mean, is that then likely to go down? Or how should we think about that?

Look, so I think the way to -- the way I see it is that this is a risk assessment, which I, as a finance head found it prudent to factor it into the P&L, while the teams will continue to make efforts to collect it. So therefore, my receivables remain there, I've just provided that it gives something part of it does not come or whole of it does not come -- all of the provided amount does not come, then we are protected and there is no surprise at a certain point in time. So the receivable remains there. This is a provision against it. If we collect it well and good, we'll have a pleasant surprise or a positive surprise, and that's the objective.

Okay, okay. And in terms of recourse, is this a legal recourse or it's more of a engagement with the client to try and follow up on this?

It's both actually. The way it works is you engage with the clients and you parallelly continue to exercise your rights. So it's a combination of both.

Okay. And from the client's perspective, the reason there is a gap is because they think the milestones are different. I mean where is the gap?

Yes. So it boils down to what I conceptually shared with you, boils down to interpretation of certain clauses of the -- of how the contract is built. And like I said, we're still hopeful of convincing them. But I just included that we should make sure that we provide for it.

And lastly, would you be able to share what percentage of the value of the project is this write-off amount -- not write-off, provisions, sorry.

Yes, negligible. I think it's not even a percentage if I -- take it between 0% to 1.5%.

We'll take the next question from the line of Mr. Ashish Jalan.

I just wanted to ask with regard to your services business, specifically in the public sector in India. What would be the total amount receivable and the unbilled revenue, the gross amount, if you can, on an aggregate basis, call out that number and over what period will this be collected.

Sorry, I missed the last part, but I understood what you're asking. The unbilled amount has come down over the last couple of quarters. Right now, it stands at approximately about INR 900 crore. That's the approximate range in which that amount is sitting. We don't -- from a receivables standpoint, we don't really call out the public versus private. But it is a well-balanced number across public and private in the -- on the receivables side that you say would have seen at the end of September balance sheet and that you will see at the end of March as well.

So given that most of these projects have been completed except the [indiscernible] which is an ongoing project. So what time frame do we expect to collect all these receivables as well as unbilled revenue, by when do we expect to collect them?

Yes. So let me first share with you what keeps it stuck -- and then I'll share with you the time frame, which we expect while I can't commit to that given it's government engagement, but let me share with you why is -- does that unbilled remain? Sometimes, a contract structure and not sometimes in some of our specific cases, it is, the contract structure is such that when there is a 100% delivery, which means multiple nodes and multiple hundreds of nodes that are to be delivered, that is the trigger for some last or high chunk of the billing that you can do. Now when it comes to such complex contracts and particularly with government agencies, et cetera, it so happens that out of a few hundred nodes, there is, say, x number of single-digit nodes or 10, 15 nodes, you are not able to complete for whatever reason, and therefore, are technicalities, the billing stops. And that's the reason we have unbilled of this nature. Now to be able to share with your second part of your question is, when do we expect that to collect all of that? I think the efforts are on. I would not want to hazard a commitment at this stage, but I see those as very billable and recoverable or else we would have, we would have provided for it. So there are exclusive focused teams doing only that. And I don't want to come out with a time frame, which is not fully under my control. So I hope you appreciate that, Ashish.

Sure. Sure. And one last question is we are pivoting more towards the private sector in the domestic business. So what is the prime reason? Is it more of these payment-related issues with the state and the central authorities? Or is it to do with the margin and the attractiveness of the business itself?

No, look, I think the -- in India, obviously, the private sector has more -- is more stable. The government contracts are we are constrained by some of the terms of the tender. And there is only a certain amount of influence that's possible on that. So therefore, the broader shift to the private or the international market is a part of the plan. Having said that, it's not that we will not do government contracts. It's just that we want to make sure that the mix is right and therefore, the tilt towards private and international. Ankit, is that a fair comment?

Yes. I think also I would add, there is at least in our experience and conversation, there's always a focused effort in terms of moving towards the best-in-class technologies. And I think that's also something that is better aligned with us in terms of what networks get built out with the latest solutions. So I think that's one part. And I think generally, the agility that we see in the private sector, both in but to take decisions to move forward and to aggressively invest at a fast pace. I think those are some of the -- that is some of the things we experienced in those conversations.

We'll take the next question from the line of Nilesh.

Yes. Just a follow-up on that. In terms of if you can just provide some split in terms of how much of this provision was made out of the unbilled and out of the receivables, if that is possible?

No. So we've not looked at it that way, Nilesh, I think billed and not billed is not really the criteria. It's just overall, our ability or other the risk that we perceive on certain couple of these is how we've taken the provision. Like I said, we've not written off so. Also there is no mapping of those lines.

Right, right. But since you mentioned that this is project completed or near completion. Is it fair to assume that all of this is already billed, right? And hence, it's a provision. Where I'm just confused to get clarity as to how the revenue item got reversed. So potentially, it was unbilled and hence reversed. Is that the understanding correct or am I missing something?

Yes. accounting-wise, that does play a role in that as well. So your interpretation is correct, Nilesh.

Understood. Got it. That's clear. And second thing on the receivables. Could you -- you highlighted unbilled today now it's approximately INR 900 crores. Would you be able to share the receivable number?

So because we don't publish the balance sheet at the end of this quarter, but let me just give you a color on it. It's pretty much in -- it's slightly improved or to flattish in compared to our September end numbers that we published.

Understood. Right. And just one last thing. Are there any other projects, clients which you are reviewing on similar lines, just to get us a sense of how much is old/new. How much is and similar kind of -- I mean, anything else which is there under pipeline, which potentially against [indiscernible] or is this done? Just some color on this, what excess you're doing? That would be helpful.

So we've reviewed this as we do pretty regularly. And at this stage, based on this review and the numbers that we've taken, I do not foresee any large need for provisions based on our risk assessment. So in fact, let me add very quickly in the same breath that the -- even within this, we've not written it off, and I -- it's a conscious effort by the team to make sure that this is not lost yet. So to answer your question, simple words, as far as I can see, very confident, I don't see any further such numbers coming up.

Right, right. And sir, sorry, one more thing. On your -- you mentioned about the goodwill purchase allocation restatement of where the goodwill has declined and which has gone into -- I mean the differential amount has gone into the residual hard tangible assets or something, which is why the depreciation is going up. Is that what you were saying? Is that right understanding?

No. So the assets were held without getting allocated line by line, and therefore, depreciation could not be charged on it. Now that we've done the PPA, the bunch of assets that needed depreciation for the full period of last 12 months has come together in this quarter as a hit. So that's the reason it is showing up. It will -- from the next quarter onwards, obviously it will be a hit even on those assets pertaining only to that quarter. So it's a backlog of the last 12 months on our acquisition assets.

We'll take the next question from the line of Tejas Sheth.

Yes. On the opening remarks, you mentioned that the India service business would be higher single-digit margin business. And then we have these issues pertaining to recoveries, why do such kind of business only. I mean, going ahead as well, considering the margin profile is low and then we have a lot of capital and bandwidth allocation, and then there's a huge recovery issue in this public service business, just your thoughts on that.

Let me again go first, and then Ankit will -- request you to chip in if you have anything to add. So Tejas, I think these are -- the recovery issues, I'll put them in 2 categories. I think one is like we've shared in the past, there are contract structure issues because of which some of the recoveries tend to be delayed. I think we have started to fix that in our future contracts and future tenders. And wherever the tender is not favorable, we've refrained from bidding on those, that also ties up with the conscious shift towards the private and international businesses. So that's the way we see it, see it's not a 0, 1 game. It's not binary that we see it. There are projects which do not have the pain, and that is what we want to focus on. Having said that, what we see as provisions in this quarter, like I was mentioning to one of the earlier questions, it's approximately 1.5% -- about 1%, I would say, of the project value. And therefore, I wouldn't call it unrecoverable, even assuming, let's say, it does not come, I would not want to paint the picture. So I appreciate your question saying look, it's a difficult business. It's high single-digit to 10% kind of range. But we want to be careful in what we do and not call it a binary -- not need a binary decision.

No, my question was on the product side, you have so much of opportunity which you highlight during our presentation. And this opportunity takes away -- I mean, the service side of the opportunity takes away so much of your bandwidth and even the capital allocation resulting to much lower return ratios. Wouldn't it be prudent to focus on the much more product and lucrative side of the industry rather than going towards this side?

Yes. I'll -- so I think Tejas, I think is something that the way we think about it, there's 2, 3 elements to it. I think the intent has always been to focus on certain large key accounts, both in India and globally and become a larger part of their wallet share, become more relevant to these customers. And that's been the intent that today, whether it's wired or wireless in the near future, we've become their largest partner through our portfolio of products as well as on the system indication. That's exactly where we're driving with certain large private accounts in India and also now increasingly in the U.K. with our large customers on the product side. We're also finding solutions for them on the services part, and hopefully soon on the wireless. So that's been the intent that if we want to focus on a few large accounts and have a larger wallet share with them. So that's the underlying principle. I think one element we have to also be conscious of is on the fiber cable and connectivity. Yes, very positive tailwinds. We have a very strong brand globally, which we are continuing to grow in our large accounts. But we also have to be conscious that it's extremely capital intensive in terms of CapEx and you really want to make sure that you had strong customer orders in advance, so that once the facilities come up, they are always running at say 80%, 90% at a minimum. So that's something that we continue to evaluate. We have already announced investment of almost 9 million fiber kilometers additional cable, which will take us to probably top 3 in global leadership. So we're not reducing our investments on the cable side. On top of that, optical interconnect continues to grow. We believe that with our learnings certainly in the last 4, 5 years of the services, we are making these 2 conscious pivots, one on the private sector in India. And again, on private sector, we are looking at the full stack of wire today and also wireless probably in the future as well as then we look at the U.K. market where there is both strong profitability and our focus is on building a strong execution. So that's the current thought process. I fully respect your views, and we will continue to evaluate this shift that we're doing.

Okay. On the INR 10,000 crores of revenue guidance, how much you see coming from service side?

We see approximately between 35% and 40% to come from services and very little from about -- so we've spoken about 5% from our wireless business, Access Solutions, and the largest jump from -- clearly from the products business.

Yes. Okay. Okay. And just Mihir, on your comment on this 1% of the project value, so INR 115 crores plus additional INR 20 crores at the EBITDA level, so INR 135 crores. And typically, we make 11% margin. So that would be broadly, I mean, around INR 1,300 crore worth of projects where this value write-off would be right, if senior...

These are -- yes. These are -- some of these are old projects, which cumulative over the last few years.

Ladies and gentlemen, due to paucity of time, we'll only take a couple of more questions. So the next question we'll take from the line of Mr. Sunny Ghoshath.

I would like to understand basically when we are guiding about INR 10,000 crores exit run rate for FY '23, basically for the -- on an annualized basis, we may look at about, say, INR 7,500 crores to INR 8,000 crores around that number of top line. But if we look at the order book for FY '23, basically the order book spread in terms of the current order book, it's only about INR 4,300 crores. So if you can help me understand basically, is there any part of the revenue which comes or gets booked outside of the order book, what is generally the quarterly run rate for that kind of revenue? And what gives us the visibility incrementally to be confident about this INR 3,000 crores, INR 4,000 crores of incremental revenue over the current order book for FY '23?

So if I take the last part maybe, Mihir, and then make a split. So Sunny, good question. I think the certainly, from an order book perspective and then order book to billing, we are continuing to see one at a macro level that we shared of very, very large investments by our current customer base across India, Europe and U.S., which are our focus markets. So we're continuing to see very strong demand both on our products, as well as I shared increasingly on our services. We've also, as I said, we've been investing heavily on building our wireless portfolio. We have a team of about 300. So we continue to believe that as we move from lab trial to field trial and then to large-scale deployment, that should also start generating our top line for us. So I think from the market perspective, we certainly see an acceleration -- We've continued to build very strong teams, both at CEO level and at regional levels on sales and technical. And that gives us a lot of comfort that there are some strong essentially bids that are coming up, other tenders that are coming up. which we will be able to continue to bid and win and continue to grow -- use that new order books to also execute and build the revenues. That's the macro thought process. And one element of that is also our product portfolio, which we've clearly seen very positive response from the market, and that gives us also confidence that our right to win is as strong as it's ever been.

Thanks, Ankit. So to specifically address, Sunny, your question on the numbers. So let me share with you. Number one is that where we stand today vis-a-vis FY '23, as we get closer, we will keep building our order book as we get closer. So we -- that's point one. But a broader point is that pretty much every quarter, we have anything between 15%, sometimes 20%, sometimes even higher than that, what we call is book and bill revenues, which means the order comes in that quarter, and we execute it and therefore, book the revenues in that quarter itself. Therefore, if you -- if I -- before I go to FY '23, if you look at Q4 of FY '22, we expect, obviously, a certain book and bill in that quarter also. And therefore, there will be 2 impacts on the FY '23 number if I have to share. One, as we get closer into the year, we will have a little more order book build and as we go quarter-on-quarter, we will keep building the order book. And from the start of any quarter, we will have pretty much about 15% to 20% roughly, sometimes higher proportion of our revenues coming from book and bill. So that's the comfort that we are deriving in addition to what Ankit said in terms of just the market being what it is.

Right. And I have my second question is around the margin bid. So basically, we also need about optic fiber prices strengthening, and we're being fully integrated. Do you see that benefiting our product margins going forward? And basically, your guidance of say 17% to 18% odd margins for H2 FY '23, do they factor in any improvement driven by the optic fiber price improvement? Or this is assuming status scope optic fiber prices?

So I think market, I would say that, yes, we do see that market is firm and positive. As we've been sharing, both in previous discussions and currently, we have -- our focus has been on securing long-term contracts. A large portion of how we sell our fiber is through cable and now through cable and interconnect together as a solution, ultimately leading to savings on cost per home pass for our customers. So that's been the go-to-market strategy for us. And it's been successful certainly in the last quarter, as we shared almost INR 700 crores of orders in such kind of solutions. So that's the area we're moving towards. And we believe this solution offering will help us ultimately secure the right kind of orders as well as with the right margin. So that's the direction we are broadly going. We do believe that also as our capacities come on stream on cable, that will also have a good impact both on our top line and bottom line for these facilities. One element that we do have to be mindful of is that we have seen certain raw material cost increases as well as container and shipping cost increases. And as you can appreciate, we have increased our sales to both Europe and U.S. markets. So especially the shipping elements, shipping costs are one part that we are closely watching and looking at how do we mitigate those cost increases.

We'll take the last question from the line of Mr. Krunal Shah.

A question on the fiber side. How are you seeing the prices move for the China mobile tender on the fiber and cable side? That is one. Secondly, I'd like to know the quarterly volumes per fiber business in Q3.

Sure. So basically, what I would like to say at a macro level is China is very categorically talked about global -- being a global leader in 5G and also 6G, as a result of which they have rapidly deployed 5G close to probably north of 400 million subscribers already and 1.2 million base stations just for 5G because they want to almost triple by 2025. So we believe this will be a sustained investment in China by all the 3 large operators towards 5G and linked to that, then the fiber optic investment. So I think that's a positive sign from the market side. And as we said, we also see positive demand in Europe, U.S. and of course, with BharatNet and other opportunities with like 5G, we also think that the Indian market should start growing from here. Linked to all of this, we have seen prices firm up. I don't think they are going to grow meaningfully higher like we saw in certain periods in the past. We are, as I said, much more rather than looking at the monthly price shifts, et cetera, we are much too consciously looking at our solutions to our customers. And that's something that we are very confident of. And through that, our margin improvements should happen. In terms of volumes, Mihir, if you want to share that?

Sorry, I -- the voice went away when the volume question as asked. Krunal, can I request you to repeat that part, please?

Yes. I wanted to know the quarterly volume run rate for fiber business.

So for the fiber business, for the fiber, we are at a volume capacity utilization of about 75% to 80%. And on the cable side, we are close to 8 million. Does that answer your question, Krunal?

Yes, it does.

So with this, we come to the end of our Q3 earnings call. I now request Ankit to make the closing remarks.

So I'd like to thank everyone for the time to attend this call today. I really appreciate all your questions. As we shared during the call, we're extremely excited about the opportunities across our business verticals globally as well as in India. We have an extremely strong leadership team that has now come in place and will drive the growth across the business units. We continue to invest in R&D at around 3.5% to 4%. And we believe this is critical for our technology leadership going forward. We're also committed to our sustainability efforts and very proud that we have now committed towards net zero carbon mission by 2030 and zero waste landfill across our global manufacturing. We're excited with our operations growing -- further growing in the markets of U.S. and U.K. and also that we're very proud of building India's probably first full 5G stack, which we believe we can take to customers in India and globally. We are, of course, available. Our teams are available to answer any further questions. And lastly, I wish you and your family all the best for the current year, and please be safe.

Thank you.

Thank you, everyone.