Sterlite Technologies Limited (532374) Earnings Call Transcript & Summary

Good evening, everyone, and a very warm welcome to STL's Investor event. It is a pleasure to have all of you with us today. Before we begin, I would like to draw your attention to the safe harbor statement. Today's remarks may contain forward-looking statements that are subject to certain risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied. Today, we have an exciting agenda lineup for you. Our Managing Director, Mr. Ankit Agarwal, will first share an update on the evolving industry landscape and share company's strategic priorities. This will be followed by the financial perspective from our group CFO, Mr. Ajay Jhanjhari. With that, let me now invite Ankit to take us through STL's growth road map. Over to you, Ankit.

Good day, everyone. We're very excited to have all of you here. Thank you for taking the time. We're bringing everyone together today because STL has a pivotal movement in his journey. The industry around us is changing. The nature of optical demand is changing, and we believe these changes are opening up a significantly larger opportunity for STL than the 1 we've historically addressed. More importantly, they are reshaping the quality and nature of our revenue opportunities. As demand for optical connectivity is increasingly being driven by multiple structural and secular growth drivers. Our business is becoming less dependent on traditional telecom investment cycles. So today, we would like to take a step back and talk about the nature and scale of this opportunity, why we believe steel is well positioned to capture it. And most importantly, how we see our business and revenue profile going forward into a more structural, diversified and less cyclical growth story. Let's start with the change that is creating this next opportunity for STL. Up until a few years ago, the growth of the optical fiber was driven primarily by 1 thing, connecting people, Demand accelerated through broadband, FTTH, 4G, 5G and large-scale fiber deployment programs such as BharatNet in India and BEAD project in the U.S. STL been part of this journey for decades building the fiber and cable infrastructure that has enabled this connectivity. Our traditional telecom markets remain an important part of STL's business and continued benefit from the ongoing expansion of connectivity. But along this, a new rapidly scaling opportunity is emerging, connecting intelligence. As AI adoption accelerates, connectivity moving deeper inside the data center and closer to the compute. AI data centers can bring together tens of thousands of compute devices, creating significantly higher requirements for bandwidth, fiber [indiscernible] and high-performance connectivity. So for STL, we see 2 important growth engines coming together. The continued expansion of connectivity between people through telecom alongside a rapidly growing need to connect intelligence and compute inside data centers. Together, we are creating multiple growth drivers for optical connectivity. There are now more places where preconnectors required and significantly more optical content required within each of these places. This is a fundamental shift that expanding the opportunity for STL. The shift we just described becomes much more pronounced when you look at the visual on this slide. Traditional cloud data center on the left side was primarily to connect over to users. The network was important, but computing was largely happening between the individual servers. An AI factory is completely different. AI workloads are distributed across thousands of GPUs, which need to be communicated with each other continuously in real time. As a result, the network is no longer simply connecting computers users it's becoming an integral part of the compute system itself. And this visual brings that change to life. The image to the right as presented by Jensen Huang at GTC shows an AI factory. If you look closely, you can see what happens to an ocean of blue running across the racks. This is a fundamental shift as AI clusters scale the bandwidth requirements in rise, connections become significantly denser and optical connected becomes closer and closer to compute. In other words, we are moving from a world where fiber is primarily about connecting people to 1 where fiber is increasingly connecting intelligence. And that is a fundamental new growth opportunity for optical connectivity. As we move closer to the AI data centers, we see 2 distinct layers of opportunity. The first is inside the data center, where increasing compute density is driving dramatic increase in optical content. The second is between data centers, where the scale of wear infrastructure is creating a growth mid for high-bandwidth data center interconnect or DCI. Let's first take a look at what's happening inside the data center. At the rack level, the progression is striking. You can see the change very clearly at the rack level. If you look at the legacy front-end rack, you would typically require 1,000 fibers per rack. As an AI infrastructure evolves, that number increases very dramatically. With [ Hopo ] we're talking about roughly 4,000 fibers per rack with Blackwell that increased around 16,000 fibers per rack. And now with the latest Vera Rubin, we're looking at roughly 64,000 fibers per rack. That is a 64x increase in fiber content per rack in just a few generations of AI infrastructure. And you cannot simply be adding more conventional cables. You need high-density connectivity, you need better ways to manage these thousands of fiber connections and need to deploy -- you need to be able to deploy them as quickly as possible and reliably through a range of preterminated solutions. The second layer of opportunities, what happens between these AI data centers on our campus. As AI clusters scale beyond a single facility with multiple data centers needed to operate as 1 connected infrastructure. And as the connectivity ponent increased faster than the number of data centers themselves. Two data centers acquired on interconnection, 4 requires 6; 6 require 15 and 10 require 45. So every new data center adds not just 1 more endpoint, but multiple new interconnection paths. As AI data center scale, interconnections multiply going far faster than the number of data centers themselves. Coming to India. As AI infrastructure scales globally, we're seeing a significant opportunity emerging in data centers in our home market in India. India currently has approximately 1.5 gigawatt of data center capacity, and this is expected to increase a whopping 10 gigawatts by 2030, implying a 46% CAGR. This growth has been supported by favorable environment policy, including a tax holiday to 2047, and strong power availability across multiple sites in India. India is also sending its connected in structure with 4 submarine cables under commissioning and another 3 already under planning. Against this backdrop, leading hyperscalers are making multibillion-dollar investments in India across cloud, AI and data center infrastructure. For STL, this option is particularly relevant. Our local mining end-to-end manufacturing footprint, engineering capabilities and established ecosystem serve us very well to manage this growth approximately and win speed. Importantly, the largest players driving this build-out are customers that STL already serves globally. We're already supplying to all -- almost all the major hyperscalers, giving us a strong understanding of their requirements and deployment needs. As these customers scale in India, we have an option to extend these global relationships into our home market. What we're seeing today is a significant expansion of the role of optical connector from connecting people and networks to connecting compute intelligence and infrastructure around them. For STL, this is a natural extension of capabilities we built over almost 38 years. We're 1 of the few companies globally with end-to-end vertical integration across the optical value chain. We make our own glass. We manufacture the fiber. We make the cable, build the connectivity solutions all in-house and at scale. This integration has been built over decades, plant by plant, technology by technology with our own IP. This gives STL greater control over quality, innovation, cost and speed of execution and allows us to engineer solutions across the optical stack. Today, the foundation has translated a meaningful global scale. STL has approximately 9% of the global optical fiber market outside China, supported by technology portfolio of over 785 patents and more than 10 advanced manufacturing facilities across key markets. Our global footprint gives us the manufacturing scale and proximity to serve customers across North America, Europe and in India, whereas technology base allows us to continuously extend what we can offer today. Everything we have discussed brings us to a defining moment at STL now. We're operating at structurally expanding optical connectivity market with demand increasing being driven by multiple secular growth drivers across telecom and AI data centers. This is creating a larger, more diversified, increasingly less cyclical opportunity than the market have historically addressed. We have built the capabilities, technologies and global scale to participate in it. And now we see a clear opportunity to translate that foundation into the next phase of STL's growth. Today, we are very proud to announce [ Lakshyam ] STL's growth ambitions for FY '29. Under Lakshya, we're targeting INR 20,000 crores of revenue by FY '29 while building STL into 1 of the largest global players for digital connectivity. Lakshya's ambition to transform the scale and position of STL to build on our strength of our core, stronger economics, deeper customer relationships and a larger role in the world's rapidly expanding digital infrastructure. Lakshya is our road map for the next phase of STL. And today, we begin this June. And there are 4 key drivers behind this growth ambition. The first is expanding of the optical TAM itself, total addressable market. The opportunity for the optical expanding in 2 dimensions. Optical is moving into more parts of business restructure where the optical content within each deployment is also increasing. What was once a relatively small optical layer around the network is becoming a dense mission-critical connectivity layer across the data center, the rack and the broader campus. At the same time, as bandwidth and compute density increase, connectivity is progressively shifting from copper to optical further expanding the optical content within the infrastructure. The second is customer co-development. STL is increasingly working with customers earlier in the design cycle, moving from being a supplier of components to a partner in developing the connectivity architecture. Our teams work closely with customers day in and day out to understand the specific performance, density, deployment and scalability requirements and then engineer solutions around those requirements. This approach is particularly valuable in the AI infrastructure space, where architectures are evolving rapidly and connective requirements are becoming increasingly complex. For STL, earlier engagement -- earlier engagement enables deeper relationships and strong technical integration. More importantly, it positions us to move up the value stream and become embedded in the customer architecture and capture a greater share of the optical connectivity opportunity. The third is our integrated connectivity solutions. As STL moves closer to the customer at the architecture level, our opportunity expands beyond the individual components. By AI, a high-density AI deployment requires integrated connectivity stack of fiber and cable to assemblies, connectors and the systems that bring them all together. Our strategy is to increasingly provide this connectivity as an integrated solution simplifying deployment for customers while allowing STL to capture greater share of the value across the connectivity stack. And finally, but very, very important, technology-led differentiation. We know that the requirements of the optical infrastructure will continue to evolve at a rapid pace. And the solutions that work today may not necessarily be sufficient for tomorrow. That is why STL is investing ahead of the curve. We are developing hollow-core fiber, multicore fiber technologies internally and building capabilities that can address the next generation of requirements from lower latency and for faster transmission. We're also pushing the boundaries over can be manufactured today, including our 13,000 fiber count capability designed to address the rapidly green density requirements of next-generation networks and AI infrastructure. At the same time, we initiated in-house development of co-packaged optics and near package optics as optical connector was progressively from closer to the compute to the chip level. To enable these multiple growth drivers and capture the expanding opportunity ahead, we are now scaling our manufacturing capabilities across the value chain. Let me now hand over to Ajay, our CFO, who will take you through our capacity expansion plans and financial perspective behind our next phase of growth. Over to you, Ajay.

Thank you, Ankit. As Ankit just outlined, STL is entering the next phase of its growth journey. And today, we are translating that opportunity into a clear road map Lakshya. Lakshya set out our ambition for FY '29 across 2 key financial dimensions: 1 is scale and other is profitability. On scale, we are targeting revenue of INR 20,000 crore by financial year 2029 compared with INR 4,750 crores of revenue in FY '26, representing an ambition to grow our business by more than 4x in just 3 years. And equally importantly, this growth will be accompanied by a significant transformation in our profitability from an EBITDA margin of 13.2% in FY '26, we are targeting an EBITDA margin of 27% plus by FY '29 and improvement of more than 1,380 basis points. Together, these targets represent much more than financial aspirations. They reflect our road map to significantly scale STL, strengthen the quality of our earnings and build a larger, more profitable and globally competitive company. What gives us confidence in this trajectory. First, we expect continued growth in our core optical business, supported by an open order book of more than $2 billion, providing strong visibility into the opportunity ahead. Second, we are increasing our participation in higher value and integrated connectivity solutions, allowing us to capture more value from every customer relationship. And finally, the scale we are building will drive operating leverage through better utilization, a richer product mix and a growing contribution from higher value solutions. The results are already visible. Q1 FY '27 marked an important turning point for STL, with our highest ever quarterly revenue EBITDA impact. More importantly, this reflects a broader improvement in our quality of the business with a strong operating base, a healthy order book, providing revenue visibility and a strengthening balance sheet providing the capacity to invest. Let me now turn to how we will support Lakshya with the right capital allocation. Our approach is straightforward. We'll invest behind the opportunities where we see the strongest combination of growth differentiation and longer-term returns. Over the next 3 financial years, we plan to invest approximately INR 1,000 crores annually, expanding our preformed fiber and cable capacities by 50% allowing us to scale with demand visibility. This investment will strengthen the foundation of our business while giving STL the capacity to participate in the next wave of optical demand across telecom, AI data centers and ACI. We are also making targeted investments in downstream connectivity to serve our customers more effectively. Our new greenfield optical connectivity facility in India will enable us to address the rapidly growing demand of data centers and AI infrastructure with higher density, integrated connectivity solutions while we also create massive employment opportunities. Importantly, our capital allocation plan is not only about adding capacity. We will continue to invest in technology ahead of the market, committing approximately 2% of our average annual revenue to innovation. This is already visible in the capabilities we are developing in HollowCore, fiber; multi-core fiber and co-packaged optics. We expect these investments to translate into higher growth, stronger margins and better returns on the capital. This is how we intend to invest behind Lakshya and create sustainable long-term value for our investors and shareholders. We are also -- we have also added a slide on key risk and assumptions. Please feel free to review it at your convenience. With that, let me hand it back to Ankit for closing remarks.

Thank you, Ajay. I just want to share that when the company began making optical fiber in India, several decades back. The question we were asked was whether India need at all, why do we need this? Fiber was something that the world's most advanced economies built. India was -- it was assumed would only just buy from them. We disagreed. And for more than 30 years under the Chairman -- under the vision of our Chairman, Mr. Anil Agarwal, this company has built a fiber backbone that India's digital economy now runs on, designed here, engineered here, manufactured here. I read it because that the question in front of us today has the same shape. The world is building the largest infrastructure program of our generation. It runs on fiber optics. And the assumption once again is that technology at the frontier will come from somewhere else, some other country. and we disagree again. And this time, we're not starting from 0. We have the glass, we have the fiber, we have the cable, we have the connectivity. We have the talent, we have the customers, and we have the balance sheet. We have a market expanding faster than the industry can supply it, and we've just delivered the strongest quarter in our company's history. Lakshya is our ambition for what our position can become. At STL, we're excited about the immense opportunities that lie ahead and proud to be an Indian multinational company, powering the next generation of AI and enabling the generational transformation that will bring. We're proud to do this from India and proud to be Indian. Jai Hind