Tejas Networks Limited (TEJASNET) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tejas Networks Q2 FY '21 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. Thank you, and over to you, sir.

Thank you, Asha. Good evening, everyone. On behalf of Axis Capital, I welcome all the participants to the conference call. Today, we have with us Mr. Sanjay Nayak, CEO and Managing Director of the company; Mr. Arnob Roy, COO and Whole Time Director; Mr. Venkatesh Gadiyar, CFO of the company; and Dr. Kumar N. Sivarajan, Chief Technology Officer of the company. They will start with overview of the company's performance for Q2 FY '21, and then we can switch over to Q&A. Thank you, and over to you, sir.

Thank you, Santosh. This is Sanjay Nayak, CEO and Managing Director of the company, along with my colleagues here. Good evening, everybody. We had put together the earnings call presentation on our website as along with the press release. So I hope you had a chance to look at it or download because I would actually be following that presentation. So let me start off with the first slide, which is the Q2 FY '21 key updates. So in terms of the financial update, our net revenues, which is net of component sales and other stuff, is INR 106.8 crores, which on a quarter-on-quarter basis from the last year is 25.5% above last year. Our profit after tax was INR 4.5 crores compared to a loss of INR 4.4 crores in the corresponding quarter in the previous year. Our collections have improved, and our operating cash flow was INR 45 crores positive for second quarter. And accordingly, our cash and cash equivalents increased by INR 27 crores to INR 299 crores. We continue to have good business wins, and our order book has increased from INR 593 crores to INR 599 crores. In addition -- these are the orders in hand. In addition, we've also won -- we are L1 in a few tenders, which are not yet in the order book. In addition to the total business, our International revenues was 34% of the total in second quarter. And if you look at it on an integrated basis for the first half, which is how we look at it, it was 42% of the total for the first half. And that meant a year-on-year growth of around 64% for the first half. In terms of how the quarter went, there were some amount of push-outs in terms of revenues because some of the customers were not ready because of the logistics and rollout, which used to take the inventory from us. But by and large, things will start getting normal from Q3 onwards is what we believe. In terms of a quick headline summary from the sales side among the 3 segments. So the India Government segment, we split it into 2. So the critical infrastructure, which is oil, gas, power, railways, metros, defense, that is going strong. We not only had good order inflow, but we wired a lot of tender wins as well. In BSNL and the BharatNet project, while are announced, they are still delayed. So that part of the business is still very slow. On the India Private side, we have been winning new applications in the form of Fiber-to-the-Home deployment on our xPON product family, xPON with GPON, and GPON which is the next-generation PON. So we've been selected and now received purchase orders from the top 2 Tier 1 operators in the country who have a pan-India rollout. And in addition, we are also starting to see traction with regional internet service providers who are also offering now Fiber-to-the-Home services to their customers. So I think that part of the business seems to be picking up nicely. I would -- as I said, in the India Private sector, in particular, Q1 was very, very slow. Q2 started to pick up in terms of the rollout. And correspondingly, we do believe that in the second half of the year, the revenue flow from these customers should accelerate. On the International side, which has been a focus area for the company, Africa and Southeast Asia is showing pretty good growth. North America was very slow. It was very slow in Q1. Q2 had marginal improvement, but not much. And again, I will talk about how we see the outlook in the second half, which seems to be showing positive signs. We had 4 new international customer wins, 2 in Southeast -- 2 in Africa, Middle East and 2 in North America. The North American customers are, of course, small. What we found out in the International segment is that from the existing customers, we are starting to get a lot more orders, and the growth that you're seeing is primarily from the existing customers. The new customer acquisition because of delays in proof of concept, field trial, lab trial and the general decision-making because of the COVID is taking a little bit more time. But we have made very significant progress across geographies in the new customer acquisition side as well. And we expect that as the year progresses, we should be able to announce and see more new customer wins, which will give us a stronger revenue base on the International side going forward. So overall, I would say Q1 was a slow quarter. Q2, we have seen some pickup. Although it could have been better if we were able to execute a lot more business that we have in hand. And Q3 and Q4, we expect to pick up pace and get into -- closer to the normal rhythm. Also turning profitable from an overall angle and increasing our operating cash flow as well as the cash position gives us good confidence that as the year progresses, we should be showing a better financial performance in all dimensions. At this point, I will now request Venkatesh Gadiyar, our CFO, to take us through the next few slides on the financials, after which, again, I will come back on the more detailed sales and business update. Venkatesh.

Yes. Thank you, Sanjay. The financial update. Q2 revenues -- Q2 net revenues were INR 106.8 crores. We saw a year-on-year increase of 25.5 percentage increase. And on an EBITDA level, we have almost breakeven in this quarter. And PBT includes a INR 5 crore of interest on IT refund. And as a result, the total PBT as well as PAT for the quarter was INR 4.5 crores; and on a half yearly basis, our revenues were INR 184.2 crores with a PAT loss of INR 5.2 crores. Operating costs were under control. And almost after 4 quarters, we returned to the profitability in this quarter. And our EPS is INR 0.49 for quarter 2. Key financial indicators. The net worth has been improved to INR 1,082 crores. Inventory was down from INR 238 crores to INR 233 crores, and we expect to consume this large part of the inventory over the next 2 quarters or so in this financial year and decrease by INR 5 crores in this quarter itself. Similarly, trade receivables, on absolute terms, it was reduced to INR 425 crores to -- in Q2, and we collected about INR 135 crores in this quarter despite of lots of challenges of COVID and all. And in terms of BharatNet collections on the BSNL front, continued delays happened. And in Q2, we have collected INR 5.63 crores. On an H1 basis, we have collected around INR 18.36 crores from BSNL BharatNet front. Then on the working capital was decreased by INR 27 crores in Q2 with a combination of the inventory and the trade receivables continue to -- one is the usage of the inventory, and we continue to get our collections on time, which has improved our working capital. And the cash flows from the operations for the quarter was INR 45 crores, and the free cash flows for the quarter was INR 24 crores. And as a result of all these things, we have improved our cash position by INR 27 crores in Q2, and we are a debt free company, continue to be a debt free. And our cash and cash equivalent as of September 30 was INR 299 crores, and we expect this cash position to improve on a quarterly basis in this financial year.

Okay. Thank you, Venkatesh. I'm on the next slide, which is the revenue by segments. So if you see the chart on the left-hand side, for the full year FY '20, we had the INR 380 crores of revenues, which was split between 33% being International, 52% India Private and 15% India Government, out of which most of it was critical infrastructure, which was 13%. For the first half of the year, because it's good to combine Q1 plus Q2, and when we go to 9 months, we will again do a 9-month versus the last year comparison, the split-up is around 42% is International at INR 77 crores on an absolute basis, India Private is at 42% at INR 78 crores, and the India Government is at 16%, which is INR 29 crores; out of which majority, again, is critical infrastructure. So if you really see the run rate business, as we call it, between the International and India Private, it was around 84% of the total in the first half. And while the International revenues have improved on a first half basis, we also continue to see, on a full year basis also, the international revenues will continue to grow at a good pace and should contribute healthily on the overall basis for the full year. Coming to the next slide in terms of the 3 segments. Let's start off with the Government segment. So what's happening in that? So on the BSNL and BBNL, while the Prime Minister did announce that they plan to have in every Indian village, which is 650,000 villages in the country, will be connected on BharatNet over the next 1,000 days. So that's a very positive sign. However, on the ground in terms of the actual execution of the project will be some time, and it will not have any revenue impact for us in this financial year in any material way. There was a tender for BharatNet GPON, expansion tender of the earlier kind. We are L1 in that tender against all the competitors. That is, again, an order which we will close in this quarter, and of course, the execution will be dependent on how our previous collections from BSNL materialize. The 4G project of BSNL, which has also been talked about a lot because they are planning to have a nationwide 4G network. So there will be 2 tenders -- 2 kind of equipment that they will need to procure. One is the wireless base stations, the LTE base stations as they call it, for which a lot of system integrators -- large global system integrators from India are participating or planning to participate. We have an LTE product, which we have been developing over the last few years, and we do plan to partner with some of those system integrators in bidding for that project. So this is not us bidding, but those larger system integrators will be the front on the wireless side, which is a new product for us. On the optical side, which is our existing product, which is where we have a fairly significant track record of success, which will also be required because the network has to be expanded and for which you need to increase the capacity and take fiber to all the base stations, those tenders will come. And of course, we are very well positioned, especially with all the geopolitical issues and vendors from certain countries not being allowed to bid in government contracts. And all the new PMA -- the preference to Make in India policy, which are in play. So net-net, these are good positive signs, and we expect that BSNL fundraising plan and all the other things will head them in the right direction. And once they come out with those projects, we should be looking at some business from those projects as well. But we don't think -- none of any of that will have any revenue impact in this financial year. The Critical Infrastructure segment, which is not one big project, but there are lots of little projects, where the communication equipment is a small part of the entire thing, whether it's a smart city or a defense project or a power, rail, oil and all that, so we've been doing extremely well in that segment. And as those networks are getting modernized, the electricity network, the railway network, the power network, the other communication networks, the amount of telecom equipment which is required is continuing to increase. So for this part of the business, we work with system integrators in the front so that we do not have to worry about the payment and other challenges of these kind of SI projects. And we have had a very good success, and we continue to win a lot of business in this segment, and this has been a good -- it's almost becoming a run rate business for us in the current year, like the last year, and we hope to increase revenues in this segment quite healthily in the second half of the year. On the private accounts, the macro level, post COVID, with all the work from home and the need for wireline broadband services has significantly increased. If you read any report, whether from TRAI, from Nascom or from even the operators own calls, one of the fastest-growing segment and possibly the larger profitable segment is the broadband infrastructure on fiber to people's home. Those things are very good for us because we are almost in all the networks in the country, and we should be seeing good business. But the actual rollout, unfortunately, hasn't picked up pace in Q2. Q1 was, of course, nonexistent, no new networks have been rolled out. The pace did not pick up in Q2. In the net -- by the operators that we've been selected and for which we have got the annual purchase orders, again, we are finishing off the field and lab trials and all those stuff and getting integrated in their systems. So we do expect that Q3 will also kind of be soft in terms of getting orders. But Q4 onwards, we should start seeing a good healthy run rate business. They have shared their plans in terms of what business will come to us, and that looks very encouraging. In addition, a lot of regional ISPs, and we're very surprised that many regional ISPs are actually rolling out fiber today to tens of thousands of homes per month and on FTTS, the fiber services, which has again been a very profitable services. Because these were traditional cable operators who have now mapped into bandwidth providers. And we, again, are working with them, and I think we see -- this is another nice area, which is coming up for us. In addition, our DWDM and OTN equipment has been selected for metro capacity expansion as well as point of interconnect in some of the Tier 1 networks, and we are starting to see, again, a business pickup on that segment. So overall, I would say, India Private, a lot of good wins, a lot of new selections. The actual orders, which we could revenue in the first half has not been as good. Q3 will be better, but Q4 is when we'll start to see a good ramp-up in terms of run rate. The last bullet which I wanted to highlight is the government's focus on Aatmanirbhar Bharat, especially because of all the geopolitical uncertainties, is resulting in a very favorable environment for us, especially what is happening is even the operators in India have started actually stating their intent of creating an Indian ecosystem of products, which are -- or the equipment which will be used in their 4G and 5G networks in the future. We are, again, being the leading equipment company, having a track record of working with all the major operators in the country for the last 20 years. We have a lot of credibility and a lot of existing products. So for example, for the wireline products, we almost have everything that is needed for a 5G network, so I'm sure we'll be a part of all the ecosystem that will get created in the country. But in addition, in the wireless segment also, some of the technology that we are developing and some of the progress we are making, we believe that as Indian ecosystems evolve, no matter in which ecosystem, whether under system integrators or under operators, we will have an important and a large role to play, which we are, of course, excited about as well. Business from the -- that part of the business, which is the Indian ecosystem of 4G, 5G, led by system integrators or operators will possibly result in revenues from next year onwards. But our objective this year is to be a part of those -- such ecosystems going forward. On the International business side, Africa and Middle East have been doing very well. So we're getting a lot of repeat orders from existing customers who are seeing a significant increase in their bandwidth. Our largest customer in Africa, for example, is providing bandwidth to the data centers of Microsoft, Amazon, Google and the others. And we are seeing very significant uptake of equipment from them in the first half, and we already have a very strong forecast for second half as well. WDM, which is the technology to create high-capacity networks, is what is giving us a lot of traction. And in addition, our converged access solution, which is Fiber-to-the-Home plus wireless on the same product, is also seeing interesting traction for many customers and countries in the region. So we -- in addition, we have been working at a late stage. Technically, we have been qualified. We are at the final stages of commercial negotiations with some other larger operation -- larger operators and deals in Africa, which we hope will result into revenues or at least in the orders in Q3. South and Southeast Asia, again, we have already seen a good growth compared to last year. And again, a lot of repeat business and existing customers are expanding their networks with us. And we'll continue to see that good trend in the second half as well, in addition to new engagements for new customers that we expect to again close into new business. North America is something which has been very, very slow. The business in Q2 continues to be slow because the new customer win is getting delayed. So we -- while we are in the labs, we are doing a lot of trials, et cetera, those things are taking time to convert. In Mexico, we believe that in the second half of the year, we should start getting some larger wins in new applications and in some larger operators. And similarly, in U.S., our focus has been smaller customers, which is Tier 2 and Tier 3 operators. Earlier, we have been working with a few channel partners. We have expanded more channel partners, so that our reach is faster and some of these channel partners are having access as well as incumbency in many of these customers. So riding on their existing relationships and coverage, we expect that in the second half of the year, we should start seeing some good wins, some of which will be in revenues for the current year and some of which should be for building a revenue base for the future years. The fourth thing I wanted to mention, which is new, which we have not talked about in the previous conversations is that we had consciously decided not to address Europe. And the reason for that, U.S. was a very fragmented market. And in addition, the companies from China had a very strong market share in that region in terms of the success. But because of the new geopolitical issues, many operators are motivated to diversify their supplier base. In fact, we feel that there's a clear opportunity, which has been established because some space has been vacated, and we have plans to start coverage starting from U.K. and then expand to Europe. We already found a senior sales leader who would be on board very soon, and then we should be able to start -- kick starting into a few beachhead customers in U.K. to begin with and then expanding into Europe. The third thing which is very interesting for us in Europe is that we have a very good product market fit. So for instance, surprisingly, in Europe, while wireline connectivity is very high, every home in Europe has a connection, but that's mostly copper. The fiber penetration in the U.S. (sic) [ Europe ] at home is still very low in most of the countries, ranging anywhere between 10% to 15%. So our XPON product, the GPON products, which we have won in India for BharatNet and then subsequently for all the Tier 1 operators in the country, that has a very good fit in terms of the customer demand in Europe. So a combination of market opportunity vacated by the geopolitical issues and a very good product market fit, we think that Europe is a good opportunity opening up for us. And we have started to make some sales investment, and we'll continue to report the progress on this territory as the year progresses. Going to the next slide. Where are we winning? So really, there are 4 segments of customer applications where we see success because our product portfolio, while is very rich and broad, we can't be the best in everything. But whenever there's a need for a home or office broadband on fiber, I think this is something which we do very well. Similarly, metro capacity expansion. So if there's a need to cost effectively upgrade the bandwidth in metro networks, again, we do very well. Critical infrastructure, we absolutely think we are among the best in the world, and we are again expanding our relationships outside of India for the critical infrastructure with some of the global players. And for 5G-ready mobile backhaul, as and when the network starts evolving in India and the markets where we have presence, we feel that our current transport products can be upgraded for that as well. Of course, we've been winning a lot of awards for our products, which gives us a good sense. The next slide is really -- the next 3 slides actually, I wanted to kind of cover a broader theme that the R&D investments that we are making. So what is it doing for our business in terms of either creating new market opportunities or new revenue streams or increasing the competitiveness of our products? So if you really see, there are 3 segments of a network in which our products are used. We started off with in the metro aggregation, which is a central piece, which used to be the main thing for us 5 years back. Over the last 3, 4 years, we have added the broadband access portfolio, which is the GPON, which is Fiber-to-the-Home and BharatNet was the anchor customer; then the enterprise data services, which led into the smart cities and the other stuff; and then, of course, the investments we have been making in wireless for fixed wireless access, which was on LTE. So that was the second thing which we added. The logical progression from the aggregation was in the metro core which was WDM technology, which we had before. Earlier, we were doing 100-gig. Now we are doing 400-gig and 600-gig, which is absolute state-of-the-art. So what I can say with a good amount of conviction that today we have products which are pretty much state-of-the-art in each of the 3 segments we are competing. And that is the reason now we are able to make headway into Tier 1 customers and Tier 1 applications in India as well as outside. In terms of our R&D spending, we continue to believe that for a company like ours, which is a technology company, we really do believe that R&D is our strength and we need to make sure that we make the right kind of investments. And we're ranked among the top 3 R&D spenders as a percentage of revenues among all the listed companies in India and almost half of our team is in the R&D group. And clearly, the software-defined hardware approach, which we've been talking about is becoming more and more prominent. So if you read all the news about 5G ecosystem, there's a lot of discussion about how networks are getting virtualized, how software is playing a more dominant role compared to hardware, and this is something which has been our DNA from the day 1. Going to the next slide, I just wanted to look 2 examples of how our product portfolio has evolved and how it has opened up new opportunities. So TJ1400 series of products. If you see in FY '18, we were only focusing on the package transport technology, which was for mobile backhaul and metro optical aggregation, which was a addressable market of around $3 billion. Then we added on top of it the GPON, which is the Fiber-to-the-Home capabilities on the same product, and that got us into BharatNet, which was really -- as well as the public Wi-Fi railway projects, which we won, which was a good way because that product could be now enhanced for the rural applications for fiber broadband as well as some other things and the market size increased to around $5 billion. Subsequently, in the same product, we have now added more capabilities on the Fiber-to-the-Home, including the next-generation for passive optical network, which allows you up to 10 gigabits of capacity, which is the state-of-the-art. And this allows triple play: voice, video, data and all kinds of things. And now this product is ready for all the Tier 1 customers and anybody who wants to do a world-class fiber rollout and provide any services, we are able to do that. So this is how the product has evolved. And that increases our addressable market by another $1 billion. Now coming to the last part. This year, we have now added wireless capabilities as well as the IP/MPLS capabilities. Now what that means is the wireless capabilities are now leveraging us for any wireless network -- wireless access network for 4G and the same can be upgraded to 5G in the future. And the IP/MPLS technology, which has come in -- earlier we used to have a technology called MPLS/TP, that allows us to build really a pure-play packet network for 5G transport or for critical infrastructure where a lot of the IP/MPLS features are needed. So that's why some of the wins in the utility sector are coming from that. So this gives you a good sense of how each of the investments we have been adding stacks up to additional revenue streams as well as makes our product more competitive and almost state-of-the-art in the segment that we compete with. And we can say with a strong amount of conviction that any FTTS deal in the world, if we get a fair opportunity, we should be able to get selected on technical -- technology grounds. And of course, after that, we still have to win it based on the customer relationship. But from a technology point of view, we feel very comfortable saying that Fiber-to-the-Home deployments, we have as good and as state-of-the-art product as anybody else in the world today. The next slide is a similar view for the core product, which is our backbone product, which goes into the metro. Again, we started off with 10 gigabits of per channel capacity, which was the product which we had in FY '18. Then we upgraded the technology to 100 gig. And one of the applications which we found out was Alien Channel, which basically meant that on an existing network, so suppose there's a Bombay to Delhi network of company A and 100 nodes of someone's equipment is deployed, we have the technology that just by deploying 1 node of Tejas in Delhi and 1 in Bombay, we could actually upgrade that network and without touching or wasting the infrastructure of a competitor that would have been invested. And especially in the context of worldwide drive for a lot of the customers to diversify their supply chain vendors from a particular country to others, this technology is giving us a lot of dividends. What we have done in addition is now upgraded the same technology from 100 gig to 200 gig. And now in this year, we've already gone to 600 gig, which is the best and the highest capacity anybody can carry in the world. So we are, again, state-of-the-art over there. And we do believe that when we are competing with many Tier 1 of our customers now, we are getting new opportunities to become an alternate vendor to what they have in their existing portfolio. So this is just an example of how that R&D investments are making us more competitive. And now we are more in the method there, once we can have more sales channels, especially on the international side, we can actually start seeing growth in revenues as the next few quarters will show us going forward. Just to summarize the last slide, and after which, we will open up for Q&A. So Q2 was, in a way, a turning point, where we saw growth in revenues and return to profitability. Our order book, which is a good sign of continuous wins and -- has increased to INR 599 crores in terms of orders in hand. And in addition, we also have new application wins, which are expected to increase our market share in existing customers, both in India as well as International. They have not yet shown in terms of new revenues or businesses. But as the year progresses, we should start seeing the benefit of those. New customers is in international, especially, have taken time. The last 6 months were a challenge for a variety of reasons, which I'm sure you're all aware of. But we do expect that all the work we have done in the past 6 months and before should start giving us more new wins in the second half of the year. And clearly, there's a positive tailwind in the form of geopolitical issues, which is forcing customers to rethink their supply strategy and introduce new suppliers like ourselves. We are well positioned for Aatmanirbhar Bharat and leveraging our Make in India strength. And as more Indian ecosystems start evolving and not just but for the world, we should hopefully be a part of those and gain from that. And clearly, we do have the right balance sheet. Cash-wise, we are continuing to show a better position in terms of cash. Some of the older receivables are starting to come back. Of course, the BSNL receivable continues to be a challenge. We are doing everything in our control to get that going. And we are assured that, hopefully, before March, things should come back to normal. And as we said, independent of BSNL, we expect our financial performance to continue to improve during the subsequent quarters. So that's really where I will pause. And maybe we'll now open up the floor for questions, and we like to make this as an interactive session and address your questions and concerns. Thank you.

[Operator Instructions] The first question is from the line of [ Mukul Garg ] from Motilal Oswal Financial Services.

Since I just wanted to start with the operating loss, which we reported this quarter. Now if I look at the inventory, it remains flat compared to previous quarter. And this is a very meaningful impact on gross margin also because of the higher inventory or the higher cost of sales. So I'm just trying to understand because if we go back to the previous commentary, you guys have a fair bit of inventory into the system, and that should have probably covered some of this increased revenues. So what is basically the stumbling block because of which inventory remains constant and because of high inventory and high cost of sales, the margins [indiscernible]?

So [ Mukul ], first question, in terms of the inventory, we did consume a lot of inventory during the quarter from the existing stock. But what also happens is depending on the actual -- so for example, it went down from INR 252 crores, which was end of March, we are down to INR 233 crores as of today. So if you really see we have consumed around INR 20 crores. But the opportunity because our revenue base in Q1, Q2 has been low, we've not been able to consume adequate inventory from the existing stock. However, going forward, and we have mapped out our customer demand in Q3 as well as Q4. We have a high degree of confidence and comfort that the inventory levels on an absolute basis, while our revenues will continue to increase quarter-on-quarter, inventory level will continue to come down. On a quarterly basis, what happens is you will always have a little bit of a balancing of inventory, number one. Plus what also happened is that inventory, which we may have ordered in the previous quarter would have been delivered to us, which we have not been able to use. And then the last part, which I mentioned that there was a little bit of a push out of some of the customers. So inventory could have gone down, which didn't go down in Q2. But as Q3 progresses, we should be able to see that. So net answer is inventory will reduce quarter-on-quarter as we saw -- see in the next 2, 3 quarters, and particularly as the revenue increases. And second question you had was about the margin. So margins is actually a little bit of a function of the particular customer profile in that quarter. So in Q1, for example, International was a much higher percentage of the total revenue. So as a result, the margin was slightly higher. In Q2, International relatively was lower. And as a result, for the first half, if you take as a total aggregate basis, our gross margin as ballpark in line with what our normal trend has been.

Understood. The second question was on -- you mentioned the push out this quarter as well. Now you had similar push out in Q1 also. So if you can quantify the relative impact and how much of Q1 push out came into Q2 revenues? And how much of business in Q2 has been pushed out to Q3?

So first of all, some of the things just so that -- some of the -- especially on some international customers, where some countries had more severe lockdowns and other restrictions in terms of foreign currency, et cetera, we saw that what was pushed out in Q1 also got pushed out in Q2, not the full amount, but some amount. And some new stuff comes in, which we were -- I mean, these are just last week kind of things where someone was supposed to travel and could not, so he could not do the acceptance testing. So I think from Q1 to Q1 -- Q2, we had around INR 30 crores push out. I would say Q2, again, we would have a number similar to that, which would have got pushed out. It may not be the exact same orders, but relatively, some amount of stuff would have come in and gone out. As I said, between Q3 and Q4, we should be able to stabilize a lot of that because most of the customers are now at a point where they are opening up their doors, they are able to set people. And we also started a new concept of a remote factory acceptance test. So that physically people don't have to visit us. They can actually -- we have set up a video room with all the cameras and all the remote control, so that they can actually do that. Some customers have agreed to do that. Some still believe that they need to physically be here. So that's what I would put it.

Got it. Just one -- I'll squeeze a last question in. Is there a margin impact which you guys might have to face when you're working with system integrators or partners in U.S.? Because that is obviously a top line which you are creating on top of your business. So is it possible that, that might lead to a bit of a bleeding on some profitability?

Not really. And I'll tell you why. In fact, if you recall, in the past, we used to do -- in fact, we've done a lot of business in the U.S. in the past, but that was through the OEM route, where we used to supply at our standard margins to the OEM. But because the selling price in U.S. and even Europe to some extent is significantly higher than what it is in India for the exact same equipment, the 2 combined margins did not have an adverse impact on our business. So in that sense, I don't see that just because we're going to have a channel-led sales, to some extent, not that we still have to have the end customer engagement, we will see a margin dilution to the -- on an overall basis. So I still expect that our margin trend will be in line with the past. And we don't see this as a long-term trend. I mean, one-off, of course, in any particular quarter for a customer, it may be up or down. But on a normalized basis, we don't see that.

Next question is from the line of Hardik Jain from ISJ Securities Private Limited.

So order book is around INR 600 crores, can you break it up for us in between government, private and exports?

So yes. So I think if I were to say the total order book, around INR 60 crores is around International. Around INR 410 crores to INR 415 crores is Government and around INR 125 crores is our order book from the Private customers. As I said, around -- so the way our order book would work is that the International and the Private customers, a large portion of that doesn't stay in the order book for long, except for certain kind of service contracts, which have a long duration. However, the government contracts, which are multiyear projects which will take time to get executed and some of the longer-term service contracts have a larger order book. So around -- on an average basis, around 32%, 33% of the order book, which we have would be potentially for revenue in the second half of this year.

Okay. And sir, now you once mentioned that there were minor gaps in the product features, especially for North American markets, and we are trying to fill up those gaps. So where are we from that perspective, any update?

So the way you saw in my R&D commentary, it will never be a situation there we will have a product which is all the features that every specific customer will need. So the way it is working out is that we always have a few lead customers with whom we are in a larger scale deal in the discussions. And for that lead customer, those -- whatever are the missing features, we would complete first. And then -- so that once that is done for that customer, it automatically becomes applicable for many others. So I think as far as North America is concerned, for a few products, a few sets of things we already are there. We are, as I said, in an advanced stage of lab trials with 1 large customer. And with that -- this is again for 1 application, which is something that we expect to make some good progress in the current quarter. So ballpark, I would say, at a macro level in the product, we are almost there for all the features that are required, not only in North America, but for Europe because that's another market that we're looking at. And of course, India, because one thing I must tell you is that once you're working with the top operators in India, their requirement of the product are as good as anybody else. They're no different in terms of feature sets, et cetera. The use cases sometimes differ in a country, and that is what requires us to do a little bit more of what should I say, customization for that particular customer's needs. But I would say, from a technology angle or a state-of-the-art or a maturity of the product, we have a good set to go ahead and start selling. And so the features are not coming in the way -- in a significant way at this point in time.

Right. Sir, you mentioned in your commentary that you've got some initial purchase orders from a large private player. And you also said that Q3 could be subdued, but going forward -- because they have shared their rollout plans with you, going forward the opportunity looks big. So can you quantify how big the opportunity can be?

It's very difficult to put it into business numbers, but I would give you another way to quantify that. So if you see the latest TRAI report also in India, I think give and take, 1 million customers, for example, you are still talking of 5 million to 6 million customers who have FTTX connection in their home. I mean, even if you round it up to maximum 10 million customers. The stated target of different operators is anywhere to go from 10 million India base to 100 million base for India over the next 3 years. So the rollout plan is assuming we are clearly not the only supplier in those networks, we will be having either 1 or maybe, in some cases, probably 2 competitors with whom we will be splitting or whose market share we'll potentially be taking away. So it's a function of how much market share we are able to take away from them and how much business we are able to get out of them. And then per customer cost of the equipment that we sell could come anywhere between $20 to $30 per customer. So if you say that if they have to add 10 million customers, that much amount of money is what will go into the CapEx, and then some portion of that will come to us. So I would say a good way to look at from the way we are thinking is that in this quarter, if we can get into their operational systems, their rollout systems, et cetera, et cetera, with the initial supplies and make sure that we become a credible vendor, then they have a significant motivation as well as desire to give us a good chunk of their business. So probably a good time to rethink, this would be after we've got the first set of rollouts going on our products in a big way and then we'll get a good idea of the run rate thing, which we will, of course, share with you as well.

[Operator Instructions] The next question is from the line of Vijay Bhayani from Samyag Financial Consultants.

Congratulations, sir, for a very promising quarter. And it gives a lot of hope about the turnaround. Now I have 2 sets of questions. First set of question is regarding the trade receivables. On your annual report, it says that you have receivables of about INR 409 crores against sales of INR 380 crores for FY '20. I guess this is mostly about BSNL, but I still like to get some view regarding this and what...

Sorry to interrupt. Vijay sir, we're not able to hear you clearly. Your voice is not clear.

Okay. Okay. Now is it clear?

Yes.

Sir, would you like me to repeat my question or you got it?

No, we heard your question to the point you said that on the receivable side, you had -- that's where we lost you. So do you want the breakup of whatever current receivable is and from which customers?

Yes. Basically, I'm just time to understand that as against the total sales of INR 380 crores in FY '20, our receivables as of 31st March was INR 409 crores. So is it regarding the BSNL accumulated for over the couple of years or is it something else also included in there as well?

Okay. So Venkatesh will dig out the receivable data, but let me tell you one thing. Of course all our receivables, the one which has been causing us a little bit of a delay. So first of all, receivables under 2 categories. One is due, which is customers should pay us and they have not yet paid up for a variety of reasons, which could be their own financial situation like you mentioned in the case of BSNL. And the other could be, we may have given payment terms of a longer duration, in which case, it is not yet due. So I think if you were to look at the receivable situation on -- since last 2 quarters and maybe ending this quarter, Venkatesh, can you say how the receivable are moving, number one? And out of that, how much of it is more than 180 days due, which we have reported in the numbers, which is consisting primarily of the PSU account and primarily of BSNL as well? So maybe Venkatesh can just say how the receivable has been moving.

Yes. So as of March 31, 2020, our receivable was INR 456 crores, then it came down in Q1, about INR 436 crores. Now we are at INR 425 crores. Out of INR 425 crores, the BSNL receivable total outstanding was INR 175 crores. That means remaining is INR 251 crores, right?

Right.

Yes. So we have been collecting a lot from other customers as well despite COVID challenges. And that is how our -- the debtors were coming down. And on a steady-state basis, which is in the next 2 or 3 quarters, I think our steady-state receivable is around 140 to 145 days of our revenues, which is what we were about 1.5 years back, and -- 1.5 years, 2 years back, and I think we expect to get to that level in the next 3 quarters, 2 to 3 quarters or so.

Sir, actually, I would like to understand do you expect to recover the full amount? Or is there any amount which you think we will have to write off finally? Actually, how much amount do we expect to recover and within what period of time because that will straightaway add to your cash flows, right?

Yes, yes. So first of all, by the way, we do have a provisioning policy, where if a receivable does not come for a fixed period of time, we start either taking a credit loss or start provisioning in case we see a doubtful debt. The receivable, which is on the books as of today is actually fully recoverable. And except for BSNL, which I said, we expect to see some progress in this quarter because late last quarter, they also were able to raise a sovereign-backed bond from the market of INR 8,500 crores, which they have now used to pay off all their earlier high-interest debt. So from all the conversations we've had with them, we believe that starting from this quarter, we should start to see meaningful recovery from BSNL. We've been seeing INR 5 crores, INR 15 crores kind of thing coming down. So I don't think any of the receivables that we have is of any doubtful in nature. Secondly, our -- as I said, in the next 2 to 3 quarters, we should be able to get all the sticky receivables into our system, adding to our cash, so that we come back to our 145 days of receivable cycle on the steady state. Secondly, as you rightly pointed out, and which is what is the commentary I think Venkatesh had given earlier, is that as every quarter goes by, as we saw in Q2, our receivable will -- our collection will improve and the receivable will start showing a downward trend. The inventory consumption, which is where our cash is also now currently blocked, will also get decongested. So we should be -- if we're going to do a larger revenue, we're going to be consuming a larger part of the inventory. So the incremental money going into inventory will also not be there. So the combination of lesser investment in inventory and more revenues and collecting of the older dues should increase our cash position, say, for example, we already have INR 300 crores right now compared to INR 270 crores last quarter, and we expect that the cash position will continue to improve every single quarter going forward. To the point that in another 2 to 3 quarters, pretty much, we should be on line in terms of what our steady-state business was.

[Operator Instructions] The next question is from the line of [ Shantanu Mantri ] from MK Ventures.

Sir, finally, very good to hear that you're confident now that the private Indian opportunity, we are getting to see some traction. So earlier, somebody already asked you about if you could quantify it, and you said that this, say, 90 million customers in 3 years and $1.20 to $1.30 per customer. So suppose if we cash $1.20 per customer, so how much part of that would be where we will be participating?

So that is -- the $1.20 is what I mentioned is what we will get. So customer acquisition costs will be, of course, larger. What I said -- so there are 3 pieces of -- so let's take, if you spend $1, let's say, INR 100 in getting a fiber connection to someone's home, let's say, operator spends INR 100 to get to someone's home, there are 3 places -- there are 4 places actually he spends money. Number one is laying the dark fiber from the switch location to the building and then inside the house which is cost one. Second cost is the customer device that he puts inside your home, the modem as we used to call it in the layman's term, right? And then the third part is the head-end which is going to be at the switch near BUS, which will be sending the bandwidth or connected to the modem. And then the fourth part is the operating cost of sending the labor and doing all the stuff. So where we come into the picture, which is what I mentioned on an amortized basis around $20 per customer is the head-end cost where we are there. And in some cases, we are also supplying the customer premise equipment, which is ours. In some of larger operators, they buy the customer premise equipment directly or they manufacture their own because like someone is going to manufacture their own smartphones, they even want to manufacture their own home devices, which are going to be very high-volume and high value. So when I mentioned the $20 is a blended this because many smaller operators, they buy both the sites from us. So that's where they take. So this is the market that we could get.

Got it. So sir, if I'm just doing the math, this is like it comes out to be a huge number. And say, in the next 3 years, and you mentioned that you'll be having around another 2 competitors. So I'm sure you must be having some idea. Say, what percentage you feel like if everything goes as per plan and we get a -- if there are 3 people totally working for this entire project for the next 3 years, and we get our fair share. So say, FY '22 -- we'll leave out this year. Say, from FY '22, what number would you conservatively say that we can get in the private segment?

I think it's a large number, as you have done the back-of-the-envelope calculation. It's really, at this stage, I would say, rather than putting any number on the table today because at this stage, we are kind of at the early stage of engagement/deployment with the customer. So as I again said, in another maybe in -- by the time we get to Q4, we would have got a -- of course, we've got -- I mean, we hear from them that we plan to give you X,Y percentage. But I would like to comment on that once you see it. So hopefully, as I said, by the time, as you rightly said that this year will be to make sure that all the processes systems are done, Q4 actually starts seeing orders of that kind. And that would give us a good confidence in terms of a recurring business that could come from just that application alone for FY '22, and even FY '23 because I believe the large-scale rollouts that have been talked about will take some time.

Due to time constraints, we take last question from the line of Riddhima Chandak from Roha Asset Managers.

So basically, my first question is regarding that, do we have presence in China? And if yes, like what is the -- is there any import substitution on the telecom products there?

So good question. We have no sales presence in China. We have not -- we don't sell in China. We don't want to sell to China. That's not been a focus area because of variety of reasons. The second part of your question is that on our sourcing side, do we have a dependency on the Chinese ecosystem? Like, any other electronics company in the world, we do buy certain, what I call, is low-cost components from there. But over the last 6 months, our supply chain team has found alternates to all of those or almost all of those which are needed, and we have non-Chinese sources available. So for example, if there is a requirement to have equipment which has no element from a Chinese supply chain, we are already on that path and there. And all the Class A components, which are the major chips are all from the U.S. or Taiwan or Korea or Japan, and of course, the logic is created by ourselves own, so we really own the intellectual property for a lot of the stuff that goes into the chips. So really we have no dependency of any significant brand with China anymore. In fact, by the way, just Arnob corrected me, for some different customers in India, today we actually supply them 100% non-Chinese equipment already, just for information.

Okay. Okay. And you said that there will be a plan by the different telecom operators -- by 3 major telecom operators that is Airtel, Vodafone and Jio, then the market size for the FTTH will increase to the $5 billion, right? So in this, I just wonder that how much CapEx in the next 3 years? Is there any public information, how much CapEx incurred by these 3 operators? And how much we...

Yes. As I mentioned, to the answer to the earlier question, I think we have some back-of-the-envelope calculations around what it takes to invest per subscriber basis. Depending on the rollout plans, they will actually set aside certain amount of CapEx for the FTTX services as well. So I don't think anybody has publicly announced what they're going to spend on the FTTX networks in the next 3 years. While number wise, people have said that I want to go from 10 million customers to, say, a 50 million or 100 million customers over the next 3 years as a country or as an operator. So I think that's really where one would want to estimate that.

Okay. Okay. And can you -- as 33 -- as 42% of our revenue coming from the international player as of now, so can you name some international customers?

Yes. So we have large customers in every region. So among our existing customers, for example, in Africa, we have a customer called WIOCC, which is West Indian Ocean Carrier of Carriers, which is one of the largest wholesale bandwidth provider in Africa. In Southeast Asia, we have SACOFA which is the carrier of carriers in Malaysia. I'm just giving you examples of those. In Mexico, we have customers called Totalplay, which is one of the largest triple play service providers in Mexico. These are I'm just giving you names which have been publicly announced. There are many others which we have not announced, and we continue to announce as we get permissions from them as well.

I would now like to hand the conference over to the management for any closing comments.

No, thank you. I think it's been a good interactive session. And as I mentioned in my summary earlier that the way we see the business is, we had a good opportunity to start building quarter-by-quarter in terms of new customer wins, getting a lot more market share from existing customers, ensuring that our products really become as competitive as they need to be to win business, both in India and internationally. And of course, the fourth objective was to make sure that cash-wise, we are good. So I would say in all those four dimensions, we have made good progress in Q2. We could have made better for sure. But I truly believe that in Q3 and Q4 as the year progresses, we should start seeing more outcomes of all the efforts we've been putting. The opportunity is clearly there, as you all know, based on all the macro factors happening, the bandwidth increasing. I can tell you that the R&D team and the products that we have are really getting very competitive. And it's a question for us to now really execute and win from a sales angle, more opportunity, especially on the international side because in India, we have a very good coverage. And as those things happen, we should see a better company performance in the following quarters and the following years as well. So thank you again, and we really would continue to communicate with all of you as time goes by.

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