Tejas Networks Limited (TEJASNET) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Tejas Networks Limited Q3 FY '20 Earnings Conference call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Santosh Sinha from Axis Capital Limited. Thank you, and over to you, sir.

Thank you, Nirav. Good evening, everyone. On behalf of Axis Capital, I welcome all participants to the conference call. Today, we have with us Mr. Sanjay Nayak, COO -- CEO and Managing Director; Mr. Arnob Roy, COO and Whole Time Director; Mr. Venkatesh Gadiyar, CFO; and Dr. Kumar N. Sivarajan, CTO. They will start with overview of the company's performance for Q3 FY '20, and then we can switch to Q&A. Thank you. Thank you, and over to you, sir.

Thank you. Good evening, everybody. This is Sanjay Nayak, along with my colleagues here in Bangalore. So thank you for joining this call. We had uploaded the presentation on the website and published the results in the press release earlier in the day. So I hope you had a chance to look at that. I will be going through the presentation that we had uploaded. So starting from the first slide, the Q3 FY '20 key updates. So as you know, Q3 was a challenging quarter again. And in terms of the financial update, the net revenues, net of taxes and component sales, was INR 85.4 crores. Because of the revenue being small and our expenses in terms of R&D and other fixed costs being high, our profit before tax was a loss of INR 14.8 crores for the quarter. And we also had a deferred tax reversal in Q3 of INR 99 crores, which resulted in a PAT loss of INR 112.1 crores. On the cash side, we have improved collections and our cash position has improved to INR 296 crores, up INR 6 crores from the previous quarter. Other interesting thing was that we had long overdue amounts from BSNL for the Bharatnet project. In Q3, we received INR 41 crores from that amount. And for the whole year -- the first 9 months, we have already received INR 86 crores from that project. So as on date, the balance, which is receivable from Bharatnet project from BSNL, net of the retention amount, is around INR 120 crores and a majority of which we expect to collect during Q4. The order book that we closed as on Q3 is INR 449 crores. Out of this order book, we believe around 25% of the revenues will be for Q4 of this year. In terms of the sales update, we do expect the overall year-on-year revenues to decline quite significantly by the time we finish the financial year. The reason for that is primarily because of this steep decline in the India government business, which, for the first 9 months, had a decline of 86% year-on-year and primarily because of marginal business coming from BSNL, which showed -- and Bharatnet, which showed a decline of 91% year-on-year. The critical infrastructure business, for which we actually have a fairly healthy order book, but from a revenue perspective have seen a decline of 73% for the first 9 months, primarily because many of these projects that we have orders for are being slowed in terms of execution by the government customers. In terms of the run rate business, which is where a lot of the focus is, which is a combination of India private plus international, for the first 9 months it grew by 10% year-on-year basis, out of which India private grew 32% year-on-year for the first 9 months. However we do expect that in Q4, given the overall sectoral situation, the growth will be lower. But at the end, we will still see a reasonable year-on-year growth for the India private segment in this financial year. As far as the international is concerned, this has been a big focus area for the company. So we see a strong momentum. We added 5 new international customers in Q3. While the first 9 months revenue actually showed a decline of 17% on a year-on-year basis, we expect a very strong Q4. And by the time we finish the year, we expect to see a healthy year-on-year growth for the international segment. This is based on the business that we have already won with our customers or some new big customers for which the formal orders are yet to come in our hands, but we expect them to come in the next few weeks. And based on the forecast from them, we should be able to revenue some part of them in this quarter. In addition, we also have run rate customers for whom Q1 -- this is the Q1 for them. And based on their forecast, again, we have a fairly good visibility into our international business. So international overall will, again, show a pretty healthy growth like it showed last year, although the percentage will be smaller than what we had last year. In terms of what are we doing proactively, we continue to strengthen our international sales leadership. We are very happy to say that we've hired a new Vice President of Sales in Africa based in Johannesburg. He is a very senior industry veteran with around 25 years of experience, and he is going to be running Southern, Western and Eastern Africa from Johannesburg. In addition, we also hired a CTO for the U.S. business. This is in addition to the Head of Sales that we had hired in Q2. So we're actually adding a lot more firepower to our international sales team, which we will continue to do even in Q4. On technology and investment side, we continue to believe that we have very competitive products. And the TJ1400UCB, the ultra-converged broadband access equipment, which we launched last year, has been recognized as a top 3 global wireline innovation by a reputed U.S. telecom publication. So technology-wise, we believe that things are heading in the right direction, and we are well poised to take business as customers start to spend. Going to the next slide, which is the revenue by the segments. So on the left hand, you see the pie chart on the annualized basis for the entire revenues of last year. And we believe the annualized comparison is the right comparison because we will see quarter-on-quarter fluctuation. And on the right-hand side, we have given a consolidated view of the first 9 months of revenue for the same segments. So as you can see, the India government, which was 55% of our total revenues last year, has actually shrunk quite significantly. And on a 9-month basis, as I mentioned earlier, it has declined by 86%. That has primarily been the reason for our 9-month decline of revenues, which is around 45% on a year-on-year basis -- 46% on a year-on-year basis. However, the nongovernment business, which is the India private and the international business, which is the run rate business, contributed 84% to the total in the first 9 months and on an absolute basis also grew around 10% for the first 9 months. We expect this part of the business, which is India private plus international, by the time we complete the full year, to have grown by 15% to 20% on a year-on-year basis compared to last year. International, in particular, is showing strong growth momentum. And in actually Q3, although the total revenue base was small, international was more than 50% of our total revenues. And in Q4, again, we do believe that international will be more than 50% of our total revenues, which will be a much larger percentage on an annualized basis. So our expectation is by the time we finish the year from 21% of total, which was what international was last year, we expect international to be north of 40% of our total revenues by the time we finish this fiscal year. Coming to the next few slides on financial update, I would request Venkatesh Gadiyar, our CFO, to walk us through the next few slides. Venkatesh?

Yes. Thank you, Sanjay. Good evening, everyone. It's again a challenging quarter this year -- this quarter, too, in terms of our revenue and profitability. Our net revenues for the quarter was INR 85.4 crore, year-on-year decline of 51.5% . And for a 9-month basis, we saw a decline of 46.5%, and our 9 months revenue was about INR 327.1 crore. Our gross margins were stable for the last 2 quarters, and our operating costs were under control. Significant cost of our operating costs were manpower, which is majority of the costs are in R&D, and which are quasi-fixed in nature. And our operating expenses were lesser compared to Q2 because we had a higher service revenue in Q2. Similarly, we had a higher expenses -- services expenses in Q2. And our depreciation were -- depreciation and the amortization were higher by INR 2 crores during the quarter. Since there was a sharp decline in the revenues have impacted our profitability for the quarter, hence resulted into a PBT loss of INR 15 crores and for the 9 months ended compared to the previous quarter of INR 12 crores. And there was a reversal of deferred tax asset of INR 99 crore on account of the reduced profitability outlook. Let me just explain. We had -- at the beginning of the current fiscal, we had a deferred tax asset of INR 138 crores in the books. This is towards representing the brought-forward income tax depreciation losses and accumulated expenditure potential, 35 (2AB), which translates to the tax benefit to the extent of INR 138 crores that we'll receive in future. During the quarter, as a part of the ongoing review of the deferred tax assets, the carrying amount of the deferred tax assets has been reduced to around INR 98 crores for the quarter since we expect the utilization of the carryforward may take longer than what we have anticipated in earlier period owing to the overall sluggishness in the telecom industry in India in particular. And the unabsorbed depreciation and the accumulated 35 (2AB) expenditure can be carried forward as per the income tax law. We expect to recover this through the future anticipated taxable profits. This accounting is according to Ind AS income taxes, and the company is expected to utilize the carryforward losses based upon our future profitability. Next slide. Key financial indicator. We had generated the cash flow from operation of INR 28 crores. We had collected about INR 200 crores from our trade receivables. Our DSOs have marginally saw the improvement, which was declined from 277 days to 268 days. Excluding BSNL/BBNL, our DSOs have reduced to 170 days from 174 days as of September. Our working capital has been -- was decreased by INR 11 crores on account of the higher collections during the quarter, and we expect to reduce the working capital level by Q4. Inventory also reduced from the level of INR 258 crores to INR 245 crores. Trade receivable in absolute terms, which we saw a decline of more than INR 100 crores -- INR 103 crores. Borrowings of INR 1 crores will get paid in Q4, and we expect to see the company as fully a debt-free company during the March end. And the cash and cash equivalents have been improved by INR 6 crore compared to the Q2 levels, and we expect to improve the cash position at the end of the March.

Okay. Thank you, Venkatesh. Going back to the next slide, which is the international business update. So since international is a big focus area of the company, and this is something which we have been working to diversify our India risk on a broader basis, I would just like to walk you through the 3 geographies where we have been putting a lot of focus. So let's start out with the first one, which is the Africa and Middle East. This is a geography, which this year is growing at the fastest rate, and we are seeing the highest amount of tractions. Really, what has worked for us is that we have been -- a couple of years back, we had just one office in Africa. Then we have basically built up more offices in South, East, West and North Africa. We have put more sales leadership in place now, had a very strong local leader. And all of that is really paying dividends. So essentially what we have done now is that South, West and East Africa is under one senior sales leader and Middle East and North Africa is under another. And as a result, both of these regions are now independently showing a significant amount of growth. The other benefit, which we are seeing in the region is that earlier on, we had a lot of small customers. And now this year onwards, we are seeing many customers who are going to give us more than $1 million per year run rate customer. So the benefit of that is as we continue to get deeper into those customers' accounts, we should see a stronger run rate business going forward in addition to winning a lot more new customers. We have actually technically won in terms of being technically and commercially selected on at least 3 large deals in the region. We expect to get orders from them. Some of them are multimillion dollar multiyear deals. Some of them are, of course, going to get revenued in Q4 itself. And we think that once those deals comes into picture, the entire revenue from this region will continue to show a strong growth. Another aspect of this region is that we are growing our market share in multi-country Tier-1 operators. So we have won a few Tier-1 operators last year. And we start with one opco, but as our success continues to show good traction in that particular opco, we are able to start selling to other opcos. So those are the opportunities which you see. And fundamentally, what's happening in Africa as a market is that there's a significant increase in terms of broadband penetration, which is driving the growth for optical. And the second aspect is that lot of web scale companies are pumping in huge amount of data and bandwidth that they need from Africa. So all the big guys are really doing maximum amount of build outs through our customers in Africa, and that's really been a good long-term growth driver for our business. So I think we are very confident and comfortable of the growth that we have seen in Africa and Middle East region. Coming to the next region, which is Southeast Asia and South Asia. So we are very happy to say that in the last quarter, we won and actually got the PO and actually have executed the PO, which is more than a $1 million PO for a large global operator from Hong Kong. And once we have got that business, we believe that it will open up opportunities for more business in the same operator, which is a -- which is actually a large global operator. So that's another thing which was a good win. Malaysia, we have strong existing customers. And we have -- this is their Q1. So I think we see a very good forecast and pipeline of repeat orders from them. And in terms of new customer wins, in Vietnam and Bangladesh, we have, again, been technically and commercially shortlisted. And we believe that those orders will come in Q4, and that will again create a good momentum for going forward. So again, I would say that Southeast Asia and South Asia is another region where we have been there for a while. It has got to significant revenues, and we continue to see a sustainable growth path in the upcoming times as well. Coming to the last region where we are focusing on is North America. So North America, we have really 2 countries where we have a focus on. We -- in the U.S., we used to have OEM business, which has really come down to marginal levels right now and isn't expected to improve. So we've been focusing on the direct customer base, which is primarily the Tier-2 and Tier-3 operators, which there are a plenty in the U.S. In terms of the strategy for the U.S. market, we believe that we needed to have basically a stronger investment in terms of sales leadership as well as a CTO. So we have basically hired a new CTO, who is a very experienced hand from one of the global competitors of ours from the U.S. And similarly we hired a strong sales guy who was heading the metro business for, again, one of our global companies. So this new team is in place for now more than a quarter. Unfortunately, the deals in the U.S. are taking longer to convert. So the first 9 months revenues are weak. I don't think there's going to be a dramatic improvement in Q4 either. But next year, with the foundation that we have laid this year, we expect to see U.S. starting to deliver revenues for us. Mexico, on the other hand, is an area that we have been doing very good business over the years. We continue to get larger market shares in the operators where we have, and we are in almost all the operators in Mexico. And 9 months revenue we're a little bit behind plan in terms of what we had originally expected. But again, based on the forecast that we have, we think that Q4 will be a strong quarter, and we should be, again -- be able to see a good revenue out of Mexico. So overall U.S. and North America -- sorry, U.S. and Mexico as a total for North America will show a flattish to slightly improved growth compared to previous year, whereas Africa will probably grow the fastest followed by Southeast Asia and then would be the North America. Coming to the India part of the business. So again, let's talk about the 2 parts. The government business is the one which has been not very good for us this year. We hardly got any business from BSNL given the situation that they were in. And Bharatnet, also, the central projects did not really get any funding. So that part of the business really was nonexistent for the most of this year, and we don't expect any business from that coming for the rest of the year. The critical infrastructure business has been a little bit of a negative surprise for us because we have a lot of orders, and we have actually won a lot more business as well. But the execution of these orders from the government side, not from our side, has been very slow, possibly for just the reasons that the enterprises that are supposed to execute these orders are in a bit of a go-slow mode. So this business will have a very strong booking and a backlog as of today and will continue, but the revenues from this sector will be slightly lower than what we originally expected. And one hard approach, which I had mentioned in the previous quarter's call, and we are continuing to take, is that we don't want our money to be locked into these projects by supplying the equipment early and then having to wait for a long period of time before the rest of the installation and commissioning happens and the rest of the money comes. So we are taking a very careful approach that we only ship equipment when the sites are ready and the project is ready to go. So the new business from this sector is good. In addition, for example, we actually had won last financial year Army NFS project, which is quite a sizable amount of revenue potential for us. But while we have completed all the testing and proof of concept and everything else after winning the order with the partner, those orders are still to come to us. And we expect them to come in Q4, but the revenue impact for, again, I will skip to next year. So these were things which we thought originally would be a part of this sector. And net-net, I would say the business in terms of new order wins and the inflow of potential business from this sector is good, but the revenues are getting pushed out this year and will continue to really get executed in the next financial year. In terms of state-led fiber projects, there are 2 projects where we are involved. Kerala, we already got the order from Bharat Electronics. For Telangana project, the T-Fiber, our partners have bid and they have won and they've got the POs, and we are working with them to get the POs for us. But again, I don't think it will have a revenue impact for us in this financial year, and that is another reason we feel that the overall government business this year will be very soft. At a macro level, if I see what is the outlook for this part of the business for us. So at a high level, the government is committed to Digital India and Make in India. And I'm sure you would have read the announcements when the National Broadband Mission was launched about a month back by the minister, where they said that they're going to connect 600,000 villages. And just to give you a sense, only about 120,000 to 130,000 villages have been currently connected on high-speed Internet. So they have a target to really triple or quadruple that number over the next 3 to 4 years, and which will mean a lot more new optical fiber, which will be laid out. And in addition, they've also said that they want to get the fiberized tower to go from 30% to 70%. So I think there will be a spend from the government side on all of these projects except that we don't see any near-term revenue from them as yet. The BSNL/MTNL revival plan, we believe, is on track, and they have to invest into expansion for 4G, which will also require a significant amount of optical transmission infrastructure of the kind that we do. So there are many BSNL projects which are in the play but I don't think they will, again, be into revenue for this year. They will probably be for next financial year in terms of the tenders coming and the executing. So that's on the government side. So quick summary. This year has been a significant decline, pretty much the main reason why our entire year revenues and the 9 months revenues are lower. But going forward, at some stage, business is expected to come back. And we will, of course, be there to leverage the benefits that we can accrue from our position in Make in India. In terms of private accounts, the financial stress on the operators is well known to everybody. And clearly, it has impacted their CapEx in the near term. The good news for us is that we are incumbents in all the operators. And the 2 applications where we are focusing on in terms of winning is Fiber-to-the-Home application with at least 2 out of the 3 operators we are in advanced stage of discussions. And the metro capacity upgrades using the OTN and DWDM technology, which will allow us to increase our wallet share into these accounts. So again, we don't believe that there's going to be any CapEx boost in the near-term because the sectoral situation has to get cleared which we expect will take at least some amount of time. But as and when that happens, at least the part of the network that they will be investing in, we hopefully will have business to get from those operators. So just to come to the next slide, and which is more of a recap of what are we trying to do as a company to really make progress going forward on a sustainable basis because we have seen a little bit of up and down in revenues over the last couple of years? So our stated objective really is that in the medium term, we want to focus and make sure that international is a major part of our revenues. We want international to be more than 50% of the revenues. We are very focused on specific geographies, Africa, Southeast Asia and America, that we talked about. So we'll continue to really, really ensure that we do everything possible in our control in terms of sales investment, in terms of product fit and in terms of management focus to make sure that we reach this target of medium terms in -- of 50% revenues. And as I mentioned earlier in the call, this year itself from 21% of total last year, we will increase north of 40% this year. And even on an absolute basis, the international revenues should show a healthy growth. Second is, we do believe that India as a long-term still has a lot of telecom investments to be made, especially in terms of broadband infrastructure, especially in terms of rural connectivity, especially in terms of many other quality of service, which are not being done because of the low CapEx investments. So there will be a significant amount of CapEx, which will be spent by the operators in India over a period of time. As and when that happens, we believe that we are well leveraged to take advantage of that in addition to the government spending and the Make in India policy, which government has continued to be very serious about. Third thing we are doing is, while our revenue has seen a decline and we see choppiness in the market, as a technology-driven company, as a company, where we believe that customers select us because our products provide them significant value, we do expect that we have to make the right amount of R&D investments to ensure that our products are differentiated. And we have a very rich portfolio that is we continue to expand so that our addressable market, especially as we go international, continue to expand. So I think on the R&D side, yes, it does look like that we have continued to invest aggressively in R&D, but I do believe that from a long-term angle that's the right thing for the company. And the last but not the least, especially this year, our focus has been to make sure that our cash position is strong. So from Q2 -- every quarter during the year, we have improved our cash position. So Q2, we improved. Q3, we improved. And we are very confident that by the time we end Q4, our cash in the bank will be significantly more than what it is today. And basically, with being a debt-free company, we, again, believe that as we are transitioning the business from India to international as we are really trying to transition from a tender-based business to a run rate business, we do need to have a strong financial position, which we already have and will continue to improve. So as such, I feel that as a company, we are well equipped to execute our medium-term strategy of growing our business. And that's something where the management focus is. Now I'll ask Arnob, my colleague, to walk us through the next couple of slides in terms of the macro picture of our business and specifically about the products and how we're addressing those growth drivers. Arnob, please?

Yes. Thanks, Sanjay. So while we experienced short-term challenges in our business, the macro drivers for our business still remain robust. The growth in data traffic and network continues to -- continue to grow exponentially, and is driven by rapid adoption of broadband in homes and enterprises or fiber and over wireless. The rapid proliferation of 4G networks and the early adoption of 5G leading to a lot of densification of towers and fiberization of towers, which are driving growth in metro networks, and the traffic to the cloud continues to increase. The data centers are scaling up rapidly. And the demand for data center connectivity using high capacity connectivity and massively scalable switching solutions, those are all driving the growth and demand in optical transmission technology. The anomaly in the Indian telecom market is short term and driven by a lot of factors that we are all aware of. Our products -- we continue to focus on R&D investment and development of our products. And we are well positioned to leverage the growth and the demand in the optical transmission industry. And our products, focusing on the access, metro and core, are focused on the high-growth segments of the market. And in each of these areas -- in the access, we have clear differentiation in our converged access products; in the core, our -- the multi-terabit disaggregated core switching products; and in the metro, our compact and scalable metro WDM products, which continue to lead our wins in international markets. So just to reiterate our growth strategy. We continue to focus -- in the short term, we continue to focus on the high-growth markets of Southeast Asia, Middle East, Africa and North America. We continue to invest heavily in increase our investments in sales to acquire market share in those high-growth geographies. In India, we want to focus on some of the areas, which are relatively unaffected, the utilities, the critical infrastructure, defense and so on, and wait out for the turnaround in the Indian government and private sector. And continue to invest aggressively in R&D, evolve our products with the newer generation access technologies and scaling up our products with the high speed line interfaces and high speed switching. Sanjay?

Thank you, Arnob. Just to come to the last slide of the presentation, after which we will open for Q&A. So if I were to summarize the key takeaways for the quarter, so it's very clear that due to the sharp decline in our India business, our overall revenues on a year-on-year basis will have a decline. And we may not be profitable because a lot of our costs are manpower denominated, the R&D, SG&A costs. And as a result, if the revenues decline sharply, we see impact on the profitability. And this is really evident from the fact that India government business, which was 55% of last year, has seen a 86% decline in 9 months. And for private, we expect moderate growth in the FY '20. As far as the international business is concerned, which is a main focus area for the company in terms of transitioning from the India concentration to a more diversified customer base, we do expect healthy year-on-year growth in FY '20. Clearly, we'll see a very, very strong booking funnel based on the business wins which we already have, which will result into purchase orders in this quarter, but we'll also see a decent growth in terms of revenues for the current financial year as well. We are on track to achieve our goal of 50% of international business in terms of our total in the medium term. And as I said in Q3 and Q4, we'll pretty much be more international than India in terms of our revenue for this fiscal year. As Arnob mentioned earlier, the macro drivers of business continue to be robust. The data growth, the broadband, the cloud data center and fiberization are all driving optical investments, and the competitive landscape in the world is still favorable. So I don't think there's any new company in the optical transmission equipment, which is coming in. The entry barriers to our business are very high. We are having a very good success in emerging markets, for example, where we have a very good product fit. And we believe that if we can execute well on our sales strategy internationally, we should see significant business growth. In terms of R&D, we continue to invest in R&D to expand our market share and increase competitiveness. We are getting international customer success. The new RFPs that we are winning is against top global players, so that gives us confidence that we do have the right products and the right competitiveness to position to customers. And the last but not the least is very important that our cash position is strong. We have INR 296 crores of cash. No debt at all. We'll further see an improvement in our cash position in Q4 because a lot of the inventory, which is currently with us will significantly be used for during the Q4 revenues. As a result, we should be able to see a much better cash position as well as working capital position by the end of Q4. The fact that BSNL payment, which was stuck or Bharatnet payment, which was stuck for a long time, government has started to release money to BSNL. They released one tranche last quarter. They expect to release more in this coming quarter, and we believe that we should be able to collect a long -- a large majority of those receivables during the current quarter as well. So as a result, I don't see any payment risk in terms of any particular customers per se. So net-net, yes, it's a challenging quarter. We continue to stay focused on our international strategy. We continue to stay focused on R&D. And we believe that with good execution, we should be able to show significantly improved financial performance in the times to come. This year, of course, as we said, for Q4, Q4 will be a much stronger quarter compared to Q2, Q3. But given where we are in terms of the whole year, it will not be able to compensate for the steep decline in the India government business this year. That's really where I would pause for now. And we can now open the floor to the questions.

[Operator Instructions] First question is from the line of Pranav Kshatriya from Edelweiss.

Yes, Pranav. We can hear you.

Sir, just a couple of questions. Firstly, if you look at the revenue growth, it has decelerated very sharply. So going forward, should we assume this as a base or where should we see the revenue growth settling in? So that's my first question. And secondly, if I look at the consolidated financial statement, which is filed on your website, it actually shows that the operating cash flow for 9 month is INR 2 crore with CapEx of roughly INR 77 crore, which gives a negative FCF of almost INR 75 crore. And this is despite around INR 160 crore, which is collected from -- by trade receivables. So just want to understand that is there a disconnect with these numbers with what we're seeing?

So let me answer the first question, and I'll ask Venkatesh to answer the second one. So in terms of we saw a deceleration of growth. So what is the new base to assume? So the way I think we would like to see our business given what we control and what we don't control is that we put the government business as one bucket and the nongovernment business as the second bucket. And nongovernment business contains of India private and the international. So I do believe that the base that we are creating for the nongovernment business this year -- so if you see the first 9 months, the nongovernment business grew by 10%. If I look at the overall year, by the time we finish the year, we expect it should be -- the total growth should be anywhere between 15% to 20% this year. The good news of this part of the business is this will become the base for our revenue growth for next year. So we should be able to grow the nongovernment business on top of this base. So that's one part. As far as the government business is concerned, at least on the utility business, we will have a fairly large backlog, which will get executed next year. Some of the other projects like what we should get is the NFS project and bunch of other Bharatnet state projects and all that. Those will again become into predictable revenue for next year. But the larger ticket revenues for next year from a government business is, of course, subject to the government tenders getting through and all those things. So I would say that the -- I mean, longer term, our objective is to the government business, the tender business, which is lumpy in nature, should kind of become an add-on business, and the baseline business should be such that it sustains our basic growth and in terms of our predictability of revenues. So to be able to put a very -- it's not that we've lost any government business because those tenders haven't happened, but it's just that, that business is deferred. Will it all happen in next fiscal year? It's a bit early to call right now. It is expected, based on all the public announcements by the government in terms of what they're going to do either for Bharatnet or for BSNL. This should happen to a decent degree next year because nothing happened this year. But we would really kind of continue to give commentary on that as we go along. But so the critical infrastructure, while revenues will be short this year, but the booking as well as the overall momentum will still be good, but the BSNL/Bharatnet business is something which will continue to be lumpy, which we'll continue to watch. And Gadiyar, can you maybe talk about the other aspect that Pranav asked?

Yes. Pranav, the cash flow from operations for the half year ended, we had a negative cash flow of INR 26 crore. And during the quarter, we had a cash inflow of INR 28 crores. As you rightly mentioned, on a 9 monthly basis, we have generated about INR 2 crores. And on a free cash flow YTD basis, yes, it was INR 76 crores. Yes.

So I just want to understand. So this is despite INR 160 crore, which is collected by the way of receivable. So this -- currently the business continues to be in a significant FCF negative territory, and that actually is depleting cash at a fairly rapid pace. So I mean do you have any -- should we set a timeline that how much cash burn can happen before we really start generating cash again? Because the trade receivable are like onetime thing. It is kind of asset sitting on your books. But we can't expect that to potentially fund the cash flow, which is the cash flow?

Yes. Yes. It was an exceptional quarter for us. For -- the trade receivables have come down from INR 607 crores to INR 504 crores. That means there's a trade receivable decrease of INR 103 crores, which is nothing but we have collected about INR 200 crores. However, the creditors also decreased from INR 213 crores to INR 116 crores. It's more of a -- we have -- the reason making the payment to the creditors was we have built in the inventory in anticipation of the consumption. However, we could not consume the inventory in Q3. Probably we should be able to consume the inventory in Q4. Then we'll get this improvement in the...

Yes. So Pranav, the short answer to your question is that if we had not built up the excess inventory that we have in anticipation of the Q2 and Q3 revenues, we would not have paid out as much to our suppliers, which we have currently done. So in Q4, because you already have inventory and now we have the orders in hand to execute, we should be able to flush out that inventory, so which will basically free up a lot of cash. And at a macro level, I mean, there's about INR 620 crore -- INR 600-ish crore of revenues once we get that basically on an EBIT basis gets us to a breakeven level. And anything above that starts to make sure that we don't have a cash flow problem. So short answer to your question is I don't think we have any challenges in terms of depleting the cash. I mean, it was an inventory buildup, which happened, which is evident from the INR 120 crores, INR 130 crores of creditors, which have come down, which we expect to not have in a normal situation going forward. So I don't think that we see any challenges in terms of having adequate cash for executing the business. And the concrete evidence of that will be available once we close the Q4 in terms of the cash in hand as well as the rest of the working capital things that we talked about.

Next question is from the line of Sangam Iyer from Consilium.

Sanjay sir, just wanted to reconfirm with you. You mentioned that the India private business at the end of the year should grow at around 15% to 20%, right?

Yes. We think the India private would be around 10% to 15% because we have grown around 32% for the first 9 months. But assuming that the given situation in the Indian private sector is a bit challenging, we will pretty much execute the orders in hand or what we have as a run rate. So 10% to 15%, we see growth for India private. The 15% to 20%, if you look at India private plus international as an aggregate.

So when you look at international, international so far has grown -- is at say around INR 80-odd crores of revenue for the international direct part of it. So from a full year perspective, how should one look at the international business? Could we see a growth or how should one look at it?

No, no. Definitely, we will see a growth. We expect international growth to be anywhere in the range of 30% to 40% on an annualized basis by the time we finish Q4. And the reason for doing that is because, as I mentioned that we already have from the existing customers, this is their Q1. And we already have their forecast, and those orders are in the pipeline. And in Q4 of -- sorry, Q3, which is in Q4 calendar, in the December quarter, we have also won a significant number of deals where techno and commercial, everything has been closed, except that we don't have the physical PO in our hand. But those customers do want a significant part of those equipment to be delivered in this quarter. So based on those 2 factors, we expect a 30% to 40% year-on-year increase on the international revenue for the total year.

So that's international direct business that you're talking here, right?

That is correct.

Okay. And sir, on the -- given that BSNL is muted and as you commented, rightly said that this year we don't expect much, what about the critical business? The first half or the first 9 months have seen close to maybe INR 30 crores of revenues on the critical business. Are we seeing any run rate there, given that there were few orders that came through in Q3 as well? So do we see some uptick happening there? Or do we see the run rate being similar to 70%, 80% decline, like what we are seeing in the BSNL business?

No, no, no. So critical infrastructure is typically a very Q4-dominated business. Because what happens is the oil and gas, power, all of these guys have a budget that they want to expand. So Q4, I mean, a lot of these projects kind of pick up some speed, which, so far, they have not picked up speed. And as we said earlier, we don't want to ship stuff and get stuck with 50%, 60% payment and 40% we are waiting. So we do expect that the Q4, based on the customer timeline -- so in the critical infrastructure business, we don't have to get any orders. All the order is already in our hand, and we have a pretty healthy backlog. I think we have more than -- I think something like INR 190 crores of POs in hand today just for that sector. But the POs only will get shipped out when the customer sites are ready, when the project is ready for takeover, et cetera. So we do expect a uptick in Q4 for the critical infrastructure. So I don't think we'll see a 70%, 80% decline. Probably the decline could be more like around 50% compared to last year because we did, I think, around INR 170 crores in this segment last year. So we'll see some decline, but it will be not as much as it was in the first 9 months.

So basically we are factoring in the 25% execution of the order book in the critical infra?

That is correct. That is correct. And in fact, if some more order comes, you'll see. But I mean, right now, we're just planning very conservatively that we should just worry about orders in hand, things which will definitely get shipped out, et cetera, et cetera.

Sir, just to understand, my last question on the tax part of it. Given that this deferred tax asset, which was adjusted this time around, was it more from a perspective that going -- I still don't understand in terms of the -- was it because of the timeline that the deferred tax asset was adjusted or reduced? Why exactly did this happen?

So I think Venkatesh can give the finance answer. What I understood from the auditors, the way it works is that every quarter one is supposed to review over what period of time you're going to be using your carryforward losses, et cetera, et cetera. And given that the first 9 months, we are in a loss compared to, say, in the previous 9 months whenever this deferred tax asset was capitalized and brought into the book, we basically see a loss. And overall, the commentary for the Q4 as well as the near-term sectoral issues in India, we just want to be cautious. So it was prudent to say that it's a below the line item in terms of P&L. So it was a financial practice that we should, as per the Ind AS, whatever, put that deferred tax reversal at this point in time.

Because -- why I ask this is because if I look at your Q4 commentary, it does appear that we would be more than INR 200 crores, INR 240 crores of revenue, right? So shouldn't that...

You have to look at the full year and the next year in terms of a broader picture. I mean, it's just assessment. We just took a conservative assessment given the sectoral things because predicting anything in India -- Indian telecom sector is a bit challenging. So we just took a conservative call and said, okay, that's -- I mean, it's an asset we have, but that's what we have done. Yes.

So from next year's perspective, can you provide an outlook for the segment?

So broadly, I can just tell how we see things. I kind of mentioned a little bit of each of in the different parts of the conversation earlier, but I can quickly summarize for next year. So the international will continue to grow very robustly. If you see despite -- so booking, as I said, international, last year, if I recollect correctly, we grew international 70% year-on-year on a revenue basis, and probably the booking was maybe around similar. This year, I think we are very confident that the booking rate will be similar to last year. The revenue, depending on the timing of the PO, we are predicting 30% to 40% year-on-year increase. So our belief is that the investments we are making -- and by the way, we have also made offers to few more international sales leaders who will be joining in this quarter. So that when we start the next financial year, they will basically be fully geared up to go. So our belief is that the international revenue growth momentum will still continue because we are still way underpenetrated in terms of the available market -- TAM available in the 3 geographies that I talked about. So that part of the business we are very confident. We have all the data on the table, all the business wins, all the momentum we are seeing. And this is a very solid run rate business. It's not one country. It's not one customer. It's a very broad-based business. So I don't see any hiccups coming in the way for sustaining this growth momentum. So that's one part. India private, I would say, while we have shown good growth this year, it is predicated around 2 things. Number one is that some of the new application that we've been working with in terms of our customers because there are really very few operators left in terms of people who have large CapEx spend, we are, I said, well positioned. They have to give the formal nod to us in terms of which -- I mean, whether we get selected for those new applications. If those things happen subject to this being the area that we are focusing on, which is the Fiber-to-the-Home or fiber-to-the-enterprise as well as the metro bandwidth expansion, we, I think, are well placed. But it is also an issue of the sectoral crisis that we are seeing. But the operators where we have the bigger bets, we don't see that much of a challenge. One particular operator we gather in at least strong is possibly seeing the largest challenge in terms of the financial situation. Coming to the government part, next year, I believe the critical infrastructure will get back to the trajectory based on the backlog we have plus based on the tenders that we are happening this quarter, which will again further add up to the backlog for the next year. So that part of the business, again, I would say, we should see good growth coming in from the current levels. The BSNL/Bharatnet business is the one I would still be cautious. It is early days, I would say, to predict exactly how BSNL will pan out. This is really the first quarter when all their restructuring plan is -- start going to play out. As far as Bharatnet is concerned, if I were just to go simply on the commentary that the minister and the government has made saying how much they want to really triple the connectivity in Bharatnet, they want to do a lot more investment and all the money is available in U.S. So I would say that as of now, we have visibility into at least one very large state project of Bharatnet, which has been approved by the commission. And there, we have a few hundred crore worth of play depending on -- based on the final architecture, which has been published. So that part of the business we seem to have some visibility, but the BSNL as the operator visibility is still not clear. And Bharatnet expansion visibility is not as clear as we would like it to be. I'm hoping that during the quarter, we will get that. And by the time when we come back again in April, we should be able to have a decent amount of conviction as to what part of the India government business will actually come back in next financial year.

Okay. So would it be hazardous to say that critical infra, which de-grew by 50%, can kind of give a growth of around 20% for the next year or given -- based on the current order book or how should one look at that?

Definitely. I think because this year the revenue has declined from last year, the base has become smaller. So -- and given that we already have a pretty healthy order book, we should be comfortable that -- and plus by the way we have not counted INR 50 crore, INR 60 crore order, which is already won for the defense project that we talked about. So that's already in the bucket. So I would say critical infrastructure will grow quite healthily next year. I mean, it's just -- I mean, because all the orders will be with us by the time we finish the financial year.

[Operator Instructions] Next question is from the line of Rakshit Sethi from Share (sic) [ Fair ] Value Capital.

This is Puneet. So...

Sir, sorry to cut you off. You are sounding too distant from the phone.

This is Puneet. My question is regarding interest cost. So basically, we are a debt-free company. But in FY '19, we had INR 17 crore of interest expense. So I wanted to know that what is that pertaining to? Also, in your FY '19 annual report, so basically you have mentioned that aggregate of fund and nonfund-based facilities outstanding as of March '19 is roughly about INR 180 crore. So can you please provide some more comment on that?

Yes. Firstly up on the finance charges that we incur, one is on the -- see, we take the LC or [ BG ] and all these things, right. On that we incur the cost. Second one, we discount the customers' bills and all. Based on that, we have to incur the finance charges. About INR 180 crores of -- as you rightly mentioned, INR 180 crores of the nonfund-based utilization is more towards the utilization of getting the bank guarantees, especially for the government sector customers. And we don't have any utilization of the fund-based facilities.

And what would be the current amount outstanding?

Outstanding would be around in the same lines, maybe INR 170 crores, INR 180 crores.

Next question is from the line of Miten Lathia from HDFC Mutual Fund.

Just one question. On the multi-terabit switching product, where are we in terms of getting our first sales?

Yes. Actually, the multi-terabit product since it is a disaggregated architecture, we sell both the components of the interface chassis, the interface component as well as the switching component independently. So we are -- we have significant interest in the -- with early adoption of the interface chassis. And we are currently in the state of doing POCs, the proof of concepts, with some of the customers. And we expect to have sales in the first quarter of next year, of next financial year. And for the entire switching solution, we are lined up for doing some POCs towards the end of this quarter. And so maybe sometime towards the middle of this year -- this financial year -- the next financial year, we'll have sales of the overall switch.

Next question is from the line of Mukul Garg from Haitong Securities.

I have 4, 5 questions. So please bear with me. Sanjay, first, on the -- you mentioned this year you might see a net loss. Is that number -- will you see a reported loss even excluding the DTA write-off? Or will you be able to kind of break even?

So we believe that at a PBT level we should be around breakeven. But after the INR 99 crores of whatever deferred tax loss we have taken, we will be in the net loss. But at the PBT level, we should be breakeven is our expectation.

And within part of this, what's the sustainable gross margin for you? It has been all over the board, and I can understand partially it is because of the inventory clear off. So is it something we should look at FY '17, '18 levels? Or has that changed?

So just let me break out the gross margin conversation into 2 portions. So our gross margins is one is the material cost, which is the bill of material, which is really the core gross margin in terms of what price we are selling our equipment vis-?-vis what price we are buying the components and building the material. So actually speaking, even in the 9 months, we are very happy to say that our gross margins at the component level are stable. So they have not declined. But what happens is we also add the cost of services as well as the cost of manufacturing, which is basically the manpower costs associated in our manufacturing operation as well as services operation, which is, again, quasi-fixed cost because these are teams in place. So that basically shows the gross margin as a percentage as a slightly lower number. But the good news is that the product gross margins are stable. We have not seen a decline. We are able to hold our price. We are -- we don't have to do any sale at a margin that we don't like. So margin -- at a gross margin level I think we are pretty comfortable. And I don't see any challenges in sustaining that. Our challenge has been that when the top line reduces, the percentage of services cost and the manufacturing manpower cost as a percentage of total dramatically increases. And that basically distorts the gross margin at a product level -- at an aggregate level.

Understood. Now coming on to the growth expectation from Q4, your numbers indicate that the international business will kind of grow upwards of 100% for Q4 on a Y-o-Y basis. Now if you look at the kind of the commentary versus what you've captured in growth over last 2 years, I think, it has been a reasonably highest level from your side. So how confident are you that you will be able to kind of almost double on a Y-o-Y basis the industrial business on -- in Q4?

So as I mentioned earlier, there are really only 2 elements to give us a sense of where the Q4 for international business will be. Number one is that order visibility from the existing customers. So I think that's one part of it. And since we have few large customers who typically place decent-sized orders, so that's one part. Second is in Q3 financial for us this year and in fact we had also mentioned that even a little bit earlier, Q2, that we are working on some deals, which will result into multimillion dollar orders over the years. So I think those orders we expect to close in the next 3 to 4 weeks, I would say, and get it in our hands. So like contracts are being negotiated, and all the stuff is being done. So when those 2 things happen, the number that we have planned for Q4 for international should happen. The good part is that the inventory is already available with us for those orders based on the fact that we'd already built it up for Q2 and Q3. So a typical situation is that in a normal year, we would not take inventory action until we get the order in hand. And that's why the order execution becomes a bit of a challenge in terms of managing the lead times. But in the current year, since we already have inventory in hand or almost all the inventory and not everything for sure, even if the order comes a little bit late in the quarter and if the customer does want deliveries, we would be in a position to supply those. So those are the reasons where both from a order inflow as well as order execution we seem to be in okay situation.

Sorry to kind of pester on this, but given that these discussions, which you are expecting to close, were there for last, I think, 1, 1.5 quarters, in case they kind of get delayed beyond Q4 what would be a bear-case scenario where like what -- would you still grow the international business on a full year basis or will it decline as well?

No, no, no. So international business, even if we don't close -- I'm just saying hypothetically speaking. Even if you don't close any order in terms of the one which we are talking about and we just execute the orders from our current run rate customers based on their forecast, okay, we will still see a growth in the international business. So that part is clear to us. Again, as I said, I mean, the situation that we are talking of in terms of order closures are more like, I would say, we are in the final legs of the whole thing. But of course, until you actually get the physical order in hand, you're not done. But independent of those orders, which are in the process of closure, we do expect the international business to grow this year, and it will not decline.

Got it. And would any risk which you're seeing on the Malaysia customer front, given that there are media reports, which kind of talk about is between the governments in both countries?

No. As late as last Thursday or Friday, a few of our senior management people from Bangalore had visited the Malaysian customer. And we did not see any such concern whatsoever.

Got it. And just finally...

Sorry to cut you off, Mr. Garg. I'll have to ask you to come back for your questions...

Just one final question and then I'll get back, if that is fine?

Go ahead, sir.

Yes. So Sanjay, just on the India private side, it is very clearly visible that Q4 will also be a meaningful decline. If things persist on the AGR issue '21 also kind of get worse off because not the government, but the private business slagged off, any strategy internally on -- if the India private is weak? How to compensate for that?

So I think the bet we are really taking is that India itself -- I mean all said and done, I mean, the AGR issue is haunting the private sector. The government's own spending plans and the revenues is a -- the critical infrastructure part aside because that's more like a shipping of run rate business and just a slowness versus speed of execution. I don't think that's an order inflow issue. Those 2 things are a bit of a concern factor from a macro level in the India scenario for next fiscal year as we rightly pointed out. The strategy really is as hard as we possibly can invest internationally and get things moving. That's really what we are in our control and we are trying to do. So that's why, for example, the South African head is already onboard as in 1st January. Pretty top-notch talent, outstanding relationship at the senior-most levels across all top operators, and the fact that we have momentum we think he can accelerate. U.S., we feel that we needed to add more firepower. We've added. Middle East, we are, again, closed the position. By mid-February, the person should be onboard. For Asia, we are again splitting the territory and getting some more talent onboard. So I think we are doing everything that we can in terms of wherever more sales leadership can be absorbed because that's really what is sustainable. Second thing, which Arnob talked about, is the product fitment with respect to these markets. I think our products -- really if I were to pick out the geographies that we are focusing on, I mean, including the Tier-2, Tier-3 U.S., I think we have a very good product fit. So good product fit, sales investments in play, incumbency in terms of known brand, I mean, those are all the things which we do. So really, that's why to me Q3 and Q4, where international starts become more than 50%, gives us comfort that the base is getting established. And then it's a question of how well we can execute. The guys from Axis, I think you'll need to control the time -- how much time we have. And we are, of course, happy to be there, but if you want to have last couple of questions in case people want to sign off.

For sure, sir. That will be the last question.

Okay.

I'll now hand the conference to the management for closing comments.

Okay. Thank you. Well, just to quickly summarize, Q3 was a challenging quarter. But from a company strategy perspective, we understand the choppiness in the Indian market. And our strategy at the beginning of the year was to really focus on international, which we're continuing to do. We've made some progress. We should see more outcome by the end of Q4. And going forward, that will become a strong base for the company. And really with the diversification of our risk, we feel that we should be able to get more predictable and better quality results in the times to come. That's really where I would stop, and thank you again for being on the call today.

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