Tejas Networks Limited (TEJASNET) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Tejas Networks Limited Q3 FY '22 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bhupendra Tiwary from ICICI Securities. Thank you, and over to you, Mr. Tiwary.

Good evening, everyone. On behalf of ICICI Securities, we thank the management of Tejas Networks for giving us this opportunity, for Q3 FY '22 results conference call. From the management, we have Mr. Sanjay Nayak, who's CEO and MD; Mr. Arnob Roy, COO and Whole-time Director; Mr. Venkatesh Gadiyar, who is CFO; and Dr. Kumar Sivarajan, who's CTO. So without much ado, I'll give it to the management, post which, we'll take the question and answer. Over to you, Sanjay.

Thank you, and welcome, everybody, to Tejas Networks call. I hope everybody is safe. We have published our results and also put the presentation on our website. So I hope, you had a chance to download it or, you can take a look at it right now. We will be walking through the presentation. I'm on Slide #1, which is the key updates. In terms of the Q3 financials, our net revenue for the Q3 was INR 107 crores, it was a year-on-year decrease of 17%. And because of the low revenues, we had a PAT loss of INR 24.3 crores versus a PAT of INR 9.2 crores in Q3 FY '21 for the corresponding period, and our cash and cash equivalents are at INR 1,175 crores, and we have no debt. I just wanted to make sure that I clarify that while our top line was lower, and we'll go into the reasons for that, we have not lost any revenues, and we have not lost any customers or business. And whatever revenue mix we had in Q3, we expect that it will be shipped out to our customers in the correspondingly upcoming quarters, including Q4. In terms of the sales update, we had one of the best booking in terms of new business wins and our momentum of wins is very, very strong. So we won business worth INR 311 crores. And as a result, our order book has increased to INR 986 crores, which is an all-time high. So in that sense, the business momentum is very, very strong. We're also happy to announce that we have been approved as a trusted source for telecom products by the government of India. And on an overall basis, we do see that the government has a very strong intent to promote domestic manufacturing, and we clearly would be looking at all the different policies and the mechanics that they are setting up to take advantage of the situation. I'm sure you've been reading in the papers and we talked about it in our earlier call as well, that for our 4G equipment, the radio access network or base stations or radios, as we do -- as we call it, is undergoing proof of concept for BSNL 4G network via our system integration partner. That trial has been going on for a few months and is progressing well. We do expect over the next few weeks, this trial should be closed, subsequent to which the commercial conversation would start. But so far, I think all the different requirements in terms of high watt radios and so many other things which are required in software, we have been able to deliver and demonstrate in the field to BSNL and rest of the ecosystem. On the supply chain side, Q3 revenue shortfall was primarily because we had customer order. We had lots of customers order, in fact, and we could not complete -- ship complete systems due to specific component shortages. There were a few critical suppliers, which we're planning to pull in the inventory, but we could not pull in that inventory. And we ended up in a very tricky situation where we built the rest of the system, but because of the few cards, which had all these components which were required, did not come in product it came to like, we build a whole car but some of the tires we're missing to reconcile the entire car. So I think, this is a problem that we face. And we hope that going forward, at least we'll have more cooling. But on an overall basis, from whatever we've heard in the industry process, till the end of this calendar year, there will be supply chain constraints which could have some volatility into the revenue. Of course, we've been taking advanced purchase orders, we've been taking inventory actions. But at the same time, even the suppliers sometimes have de-commits, or they are not able to pull into the time, which is basically covering some of the shortages of revenue that we had. In terms of one other event that we approved in our Board meeting today, we have confirmed the appointment of 2 nominee directors from Panatone Investment, which is a subsidiary of Tata Sons. Both of them are industrial luminaries, and we are very, very happy and delighted to have them on our Board. The first person who will be joining our Board is Mr. N. Ganapathy Subramaniam, who is the COO and Board member of Tata Consultancy Services. And the second one is Mr. Amur S. Lakshminarayanan, and who is the CEO and Managing Director of Tata Communication Limited. Both of these gentlemen really bring top quality, operational and first-hand experience of taking smaller companies which are of our size and to bring into multibillion-dollar enterprises around the world. They not only have domain knowledge in telecom, but they have a lot of strategic as well as hands on operational experience, and we are very confident that with them joining our Board, we'll also accelerate the synergies with other Tata Group companies and realize the larger vision that we set out as a part of the partnership that we have with Tata Sons now. The next few slides, I will ask the CFO, Venkatesh Gadiyar to go over it. After which, again, I'll come back on the sales and the overall business again.

Thank you, Sanjay. We are on our Q3 and 9 months financial slides. Net revenue for Q3 was INR 107.1 crore for a decline of around 17.1 percentage. And EBIT loss of INR 48.5 crores for the quarter and PBT loss of INR 32.9 crores and PAT loss of INR 24.3 crores for the quarter. And also, EPS loss of INR 2.13. And similarly, for the 9 months, our revenues were INR 424.1 crores, we saw a year-on-year, the revenue grew by 35.4 percentage and the EBIT loss of INR 47.2 crores and the PBT loss of INR 21.2 crores and PAT loss of INR 13.1 crores and our EPS of negative INR 1.29. Let me talk about -- the revenue has been declined because of some of the revenues have been deferred as Sanjay explained enough about the component shortages and all. And we have not lost any customers or any of the customers on that front. And secondly, on the gross margin front, the gross margins, in terms because of the blend of the India and international. International was a lower percentage of the total revenue when compared to Q2. And secondly, the gross margins are under pressure because of the higher component costs also. And these margins will be under pressure in the near term or because of the -- we need to execute some of the existing contracts. And wherever it's a new order, we are trying to adjust those prices wherever it is possible in the future contract. Third, on the OpEx front, more or less, we have maintained our cost side. And we have been slightly increasing our investment in the R&D, especially spending on -- for our new programs -- on the new programs. And finally, the profitability has been impacted because of we had provided [ FVPL ] of around INR 13 crores during this quarter, provisioned higher due to the -- some of the PSU payments have got delayed in this quarter. And to the next slide, key financial indicators. There is a cash outflow of INR 4 crores in Q3. And the net worth was down because of the loss that we had in the current quarter. Yes, inventory has gone up from INR 226 crores to INR 271 crores. And basically, it is increased since we could not ship the complete -- ship it on time or complete the balance system to fulfill the customers' order due to the critical component shortages. The trade receivable in the absolute terms have been reduced to INR 358 crores from INR 414 crores. And we collected about INR 182 crores in Q2. And on the update on the BSNL, the payments from BSNL continue to come, but it's in a slow pace. On the net working capital, it was reduced by INR 7 crores. Somehow improved cash flow from operations, which has resulted in reduction in the working capital. And from the cash position, which was down by INR 20 crores in this quarter. The cash position, as of 31st of December, reduced to INR 1,175 crores. We continue to be a debt-free company, and of course, we have a very strong balance sheet of having said from the cash in our wallet, which will help us in terms of executing the plan to invest in the long-term growth strategy. Sanjay, I think, I'll hand over to you.

Thank you. I'm on the next slide, which is the 9-month FY '22 sales update. As we have been reporting in the past, we look at integrated view rather than a quarter-by-quarter view. So if I look at the -- on the left-hand side, the pie chart is the total revenues of last financial year, broken across the 3 categories, which is India government, India Private and International. And on the right-hand side, the chart is -- the corresponding numbers of revenues for the same 3 segments for the current financial year. So out of the INR 424 crores of revenues for the 9 months, INR 181 crores is coming from India Private, INR 179 crores is coming from International and INR 64 crores is coming from the India government business, out of which 9% is critical infrastructure and 6% is from the BSNL and BBNL. And if you see the run rate business, which is in the India Private plus International, contributed to around 85% of total for the 9 months of the current financial year, which for the 9 months of last financial year, represents around 33% year-on-year growth. Within the 3 categories on the revenue side, India government, as I said, it was 21% of Q3 revenues. And on a year-on-year basis, if we take a 9-month aggregate, it's around 52.8% growth. During this quarter, we won a lot of orders in the critical infrastructure segment, and we have now built a very healthy backlog, as well as there was a lot more orders, which we expect to come during the current quarter as well in terms of new business that we've win from this segment. On the India Private, this has been the fastest growing, at least, as far as we are concerned in terms of the backlog this year in terms of new order wins. So India Private was 47% of our Q3 revenues, representing a year-on-year growth of 18.3% for the 9 months. But from a backlog perspective, as I said, we have a very strong order inflow from our sell to customers in India. And this, again, had one of the highest backlog in order wins for this quarter. On the International side, revenues were 32% for Q3 and year-on-year growth of 51.9% for the 9 months. We have again won 5 new customers, all the smaller customers in different geographies. If I look at it from a total angle, the backlog, as I said, is around INR 986 crores. And from the backlog that we have when we started this quarter, we believe around 50% of that can potentially be revenued in the current as well as the next quarter, provided we are able to secure the inventories for which, of course, we have taken inventory actions in the past, but we still need to make sure that all the components do arrive in time and we are able to ship them out. So in that sense, I would say, the business health is good. Of course, Q3 was not so good in terms of revenue, but we do expect that between the -- coming in the next quarter, we should be able to make up for the backlog that we have and the loss of revenues that we've seen so far. Going to the next slide, which is just a recap of the product slide. I just wanted to kind of, again, highlight that now, we have 2 product portfolios, which are of significant size -- can be a significant size. They're not yet of the significant size. Majority of our current revenues, of course, come from wireline products, which is optical transmission, which is the backbone products, whether it is high-capacity metro or WDM and networks for long haul, or even in the access networks in the cities. And then, we also have a strong portfolio of broadband access products, which is Fiber-to-the-Home or GPON, as you call it. And in addition, we have secured Ethernet Switches which go into the networks of video surveillance, in safe city, in smart cities as well as now, some of the contracts we have recently won. So our networking in the banking sector, for example, banks when they build networks, again, require a lot of Ethernet Switches. And in the last quarter, we've also won some large metro for this kind as well. On the wireless product side, earlier on, we had fixed wireless for which we had a few customers internationally. And we have been working on the full mobility, which is a full-fledged base station like you have today for any 4G network. And we've been doing trials of that, as I mentioned earlier, in the BSNL network. This required us to build our own radios of different wattages, different bands, and the kind of networking protocol, which we've successfully done. It also required us to interoperate with the core and interoperate with the existing equipment, which is a large quantity of equipment deployed as a part of the entire end-to-end solution, which again, is being proven as a part of the BSNL 4G PUC, which has been going on. So we feel confident that with the investment that we have made, both wireline and wireless portfolio can potentially result into a good business success in the times to come and really lining up our investment in line for that. So currently, we have 4G now wireless. Naturally, the next operation, at some point in time soon, will also to be -- to accelerate our journey towards 5G, and in line with what the networks around the world are evolving, although 4G will still have a lot of deployments and a lot of business for many years to come. So overall, I would say, in the technology side, the investments are on. We are continuing to stay invested and actually increase the investments as Venkatesh said. And in the coming time, we will see -- we will be further accelerating our investment so that we can complete our product portfolio and get larger pieces of the customers' network spend. Going to the last slide, and I'll summarize so that we can give more time for question and answers. You can see the Q3 revenue was weak, because we could not fulfill customer orders because of component shortages. And as I said, we didn't lose customers and whatever we lost in Q3, hopefully, we'll be making up in the subsequent quarter starting from Q4. And the way our business is set up is that we really need a minimum threshold of revenues to stay profitable, because our expenses are mostly manpower, which are almost fixed. So as our revenues will pick up, which we expect them to, our profitability should return as well. And from a business momentum, new customer wins, both in India and internationally, we have been doing quite well. And as a result, as I mentioned, our order book has increased quite significantly. We continue to take action to address the semiconductor shortages, but despite our best efforts, we did have some not so positive surprises last quarter, when some of the components, which we are planning to pull in, did not come in time. So we do see that volatility may take for some time. But from our side, we are taking everything that we can to secure more components in time to be able to have more consistent revenue predictability. In terms of our Board, after the investment of Tata Sons, appointment of N. G. Subramaniam and Lakshmi from TCS has been a fantastic thing for us, and we really look forward to their guidance, as well as the coordinations and synergies across the Tata Group companies as we take the company from where we are to where we would like it to be. And from a cash position perspective, we have a fairly strong balance sheet, and we are working on plans to invest for long-term growth, both organically and inorganically. And as we make more progress on those initiatives, we will be sharing those ideas with you. But overall, we are definitely not so excited about what happened in Q3, but it was, and I think, that was not so much in our control. But at the same time, the business momentum is good. And from a team and the Board and everybody in the company, we are very confident that the way things are panning out, we should be able to regain our revenue and business momentum, not just for the near term but also for the long term. This is really where I would pause, and I would then open it up for questions. And between myself, Venkatesh, Arnob and Kumar, we'll be happy to answer any questions that people have. So open the floor for questions, please.

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

Hi, Sanjay. So I just wanted to understand the discussions which we had last quarter in Q2, the commentary was that you have taken inventory actions, which should help kind of tighter over the shortage for Q3 and Q4. What is disrupting the flow for you, despite the orders already in place? And what was the revenue impact which you had, because of this inventory shortage? And finally, as part of -- now that you are part of Tata Group, do you think there can be some support which you can kind of lean on, to kind of move yourself up from a supplier reference point of view?

Thanks, Mukul. First of all, a good question that we had orders in hand, and to honest, we were also is expecting a lot more revenues for the quarter. But the way it worked out for us, and just to put into perspective, in any of our products, we have more than 1,000 components of different kinds that go in. And if I were to take Class A components, it will be around 150. So what happens is, even if you are able to secure 95% or 98% of those components. There are even 2 or 3 suppliers who decommit or are not able to provide the quantity that they have committed to provide earlier. It can have a cascading effect in almost all the shipments or significantly the large amount of shipments that we had. So really, when we give the Q2 commentary, we have placed orders, we had assurances, and I won't say, it commitment, because right now, the way the supply in the world works is everybody saying, okay, I'll try my best to make it happen. But in that sense, we had a churn, and since we had placed orders well in time, we were confident that we should be able to put in. But some of the -- as I said, some few critical suppliers, I would say that we were able to pull in a lot of material, and that's why actually inventory went up. But unfortunately, the balancing inventory could not be completed, we basically had a shortfall in revenues. And that is why, when I said that it couldn't happen in the quarter boundary, but as we progress in this quarter, we should be able to see a better pulling up the material. So that's what really happened. The second part, which you mentioned, is actually right. As of Tata Group, there is a lot more of semiconductor buy that happens across the Tata Motors ourselves and maybe other group companies. And in fact, one of the things which I mentioned about synergies is that the buying power of -- that we have now available to us, collectively, is much more than what Tejas was able to do. And one of the things we realized in Q3 is that when push comes to shove, some of the suppliers, possibly, did not prioritize us as high as they prioritize some of the larger customers. So as a result of that, we came at the wrong end of the stick, but we do believe that with the synergies of the group, which we absolutely have started to explore and will continue to do much more aggressively in the next few weeks, we should hopefully get a better outcome. But that's something that, as I said, we'll be working on. And even having the 2 directors from the Tata side on our Board also allows us to work much more closely and be able to achieve exactly the kind of thing that we mentioned.

Sure. And another, probably, a corollary question to this is, you mentioned that there is definitely a lack of visibility for the rest of 2022. Do you think we have any options to do some work around or some other equipments, which exclude these critical equipment to tie the near-term shortage, given that the restaurant supply and inventory is there, which you can utilize, while this listing get sorted? Anything like that if you will play, which you can kind of do for the near term?

So first of all, let me also clarify that when I said that the supply chain constraints will continue during the rest of the 2022, it doesn't mean that we are not going to get supplies or there will be a lot of decommit. I just felt that, given the demand supply gap, there could be, sometimes, negative surprises, if I were to put it more specifically. So what we are doing is very, really -- I mean, I must say, in a way, overcompensating in terms of the planning. So because that's the only way we can be assured. As far as the second point which you mentioned, if there are some critical suppliers where we have a very high degree of risk, for instance, as you said, is there a way to work around that? So the way to think of it, and it goes under the conversation that I just said a few minutes back, which is the Class A components, which are, let's say, higher cost and higher complexity components, which are one of its kind, are very difficult to design out and replace in a board or in a card over a short period of time. However, Class B and C components, definitely, there is an opportunity to have a like-to-like replacement. So instead of component from vendor A, we can do vendor B, which is not only what we already do, but we can do that much more aggressively in terms of planning. And one of the things, by the way, I did not specifically mention that even Class B and C components, some of these things, which are generic components, have also started to have a lead time increase that we saw in Q3 and may even continue in this financial year. So I would just say that the whole situation on the component, when I said volatile, it just means that 100% predictability, if you just plan for that, is not going to be there. So either we over-plan, or we have alternate plans in terms of Class B and C components, or if there's a Class A component, which you really see a serious risk for the supplier, doesn't give us a very good amount of confidence. We may have to take aggressive inventory aggressive actions to -- to do some R&D and in a short period of time, find some alternate. But those are all things which we are looking. Last part, I also want to mention, is that we also have inventory, which is in our hands. So in that sense, as long as we can balance the remaining inventory, the problem in that sense is limited to that -- to the level that we don't -- we have short for those things. So all in all, I would say that this is a situation that -- we just have to carefully navigate. And probably, one specific thing which could help us is using a larger muscle to work with the component suppliers.

Sure. One clarification. Your order book continues to increase quite handsomely. Do you think there are any clauses in any of these either public sector or private orders, which can lead to some liability in case of nondelivery due to component shortage?

So far, nothing. And I would not take the risk that we will not have that for the next 6 months or 1 year. So the way as of now, nothing has happened, no order has been canceled. But again, from our point of view, we -- the good news is that most customers understand the current situation, so it's not just you need to pay this, it is probably across the industry. But there's a much larger appreciation of the problem. However, as you rightly said, if there's a PSU customer or a customer where there's a hard constraints in terms of timeline and deliveries, we definitely look at that as a priority and make sure that liquidated damages or cancellation risk does not come up on us. So far, we've been able to manage it fine. We track all of the situation very closely. And as I said, I mean, it's something that we didn't have a very good situation in Q3, but a lot of that stuff should come back as we go forward, and we should be able to manage the situation effectively. So I would say, at the macro level, I don't see that as any significant risk at the current point in time, based on our product we have. And the one other thing is, the larger order book was also a function, because customers are also now realizing that placing last minute order doesn't serve them any benefits. So we have been motivating them to give us more visibility, which helps us with better planning, get the better visibility. So all in all, I think there's a deeper working relationship as we saw in the case of India Private, where we saw a significant uptick in order because the customers are appreciating the fact that we have to work in a partnership mode to really secure the inventory. And it's not a Tejas alone problem, but a larger industry problem.

The next question is from the line of Pranav Kshatriya from Edelweiss Financial Service.

Hi. My first question is regarding the investments what you talked about in the R&D. If I look at the gross employee gross of the company, that is around INR 50 crores to INR 53 crores per quarter, which is around INR 210-odd crores for the year, which is not very different to what we saw last year, which was around INR 183-odd crores. So can you quantify how much higher investment is actually going in this, and if you can give some color on number of employees added to the R&D or something like that, that would be useful? And in that context, if you can also highlight, what are the areas in which would you be investing more optical products. Of course, Tejas is very strong, but the specific product with respect to the wireless where you're seeing more opportunities?

Sure. So I would say, the numbers' part, I'll ask Venkatesh to exactly highlight how much more we are doing. But we have to think about that we really just had 1 quarter, which is October, November, December, in terms of uptick in terms of increasing the TAC on the R&D investment. So on an annualized basis, then when we look further that will increase. And many of our R&D expenses also, some of it goes into capital work in progress, some of it gets capitalized. So in that sense, the [ KP ] for R&D, which you look at it from a number of -- and the R&D expenses in this case will not just be manpower, but lot of prototype. For example, just to give you an example, if you look at the POC that we are doing for BSNL right now, it's actually a full-fledged network of 4G in 2 cities in Punjab, right, which is a lot of base stations. We're actually investing into a lot in prototypes and inventory as well, which again, I would say, account into the R&D investment. So in that sense, I would say the R&D investments are definitely increasing. We've had the net accounting, because I don't have the exact number of hand. But the second thing I wanted to mention -- so that's one part, that the rate of investment has picked up in Q3, and it will continue to happen in Q4. And the whole game plan is that part of the relationship that we have with Tata was that we have to take a step back to run 10 sets forward. So one of the first things we have to do is we have to create really a very strong portfolio of products, which is expanding from just wireline to wireless. And even within both wireline and wireless, we really have to come to what I would call state-of-the-art in terms of everything that we do, because that's what we have to compete again. So that's step one. The step 2 is also to build a global sales engine, because once we're able to build this product, of course, got to find a way to sell not just in India but internationally. And as you can see in India, some of the very large product -- projects are now becoming accessible to us because of -- our larger partnership, which otherwise are not. That's the second part. Now, the third part is which areas we'll be investing. So first, in optical and wireline, I would say the investments will be incremental because we've invested over so many years. On the wireless side is where I would say, we would see a significantly larger jump in investments for 2 reasons. One is for the 4G solution itself. We are really, I would say, trying to step up and do -- build a 4G system, which is as good as anybody else in the world as produce, right? And to be able to do that, it requires a lot of resources, both in hardware and software, which we have started to step up. And the proof of concept that we are doing in BSNL. And a good example that in a very short period of time, we have been able to step up to be played and deliver. Coming back to the areas where we'll be investing. So clearly, in terms of larger sale investments. Wireless will be one area, both in 4G as well as in 5G, because it is going to be in wireless, you just have to not do what is current or state-of-the-art, which is what is still selling, which is 4G. But a lot of network in 5G are getting built out. And this is not a 1-year build cycle. 5G build cycle will probably go for the next 5 years. So in the next 12 to 18 months, if you are able to catch all the action in terms of the big markets and big opportunities that we have, and there are many different application case -- use cases of 5G. So we do believe that in the wireless side, both for 4G and 5G, we would be stepping up the investments in the times to come, and part of what I mentioned is a large bullet in my summary slide was that we are working on some very active plans. A lot of things are in work. And as soon as we start putting them into concrete shape, we will definitely be sharing it with all the investors as well.

Sanjay, small follow-up on that. If I look at the employee cost, because R&D, all said and done, a lot of investment, at least the headcount addition will happen and hence, the employee cost will increase. How should we see this for, let's say, FY '23 or '24 considering that, that may go up significantly? And or I guess, can see us that would product by telecom tends to be a long cycle sales. And that's why typically, what we have seen historically is the revenue coming up, it takes time. So would it be fair to say that revenue for this would be like to be a south compared to the investment what you're doing today?

Not really. And I will say that, because some of the wireless investments that we are making, or have been making proactively could potentially result into significant revenues as early as next financial year. And of course, going forward as well. So the way we are balancing the investments, and I would say, in terms of the larger investments for next financial year and the year after, I would say that we would come out with that plan in terms of sharing the larger investment plan and the payback plan, I would say, sometimes it's later this quarter or sometime this quarter, I would say. As far as the current outlook is concerned, we are mindful of the fact that there are large revenue opportunities, which could occur in the next financial year itself, number one. Number two, the backlog that we are building for optical, and we expect that even in Q4, we see a reasonably healthy order into pipeline. So we would start -- we would be starting next financial year with a pretty good order book, if I were to say. So the combination of what time it will take us for us to ramp up the R&D investment along with how much revenue potential could be available next fiscal year itself, because some of the larger projects we're working on could be for revenue for a material part next financial year itself. And then, of course, and you're right, that some of the investments on 5G that we'll make, for instance, over the next 12 to 18 months, they will result in our revenue year or maybe next financial year or the 2 years after. So we are kind of timing all our investments accordingly. Naturally, there is a little bit of visibility that will get more clear as this quarter progresses. But hopefully, by the end of this quarter, when we look at the order book as well as the investment profile, we should have a much better clarity. And we are trying to make sure that both short and long-term objectives are reasonably balanced based on the situation that we have today.

The next question is from the end of Kaushik [ Renuka ] from DCPL.

Last Con Call, Mr. Sanjay, you had talked about sharing some long-term plans after the open of about [ Ovum ]. So that never materialized. Can you throw some light as to when that will happen?

Yes. Good question. I was hoping that someone would ask because that was something we had planned to do. I would say that a lot of work in progress, a lot of progress we have made. We are not yet at a point where everything is put together that we can share. But as I said, sometime during this quarter, we do expect to do that. Part of 2 directors from Tata joining are both today was also to make sure that all of those plans, initial, kind of get crystallized at the Board level. So between the Board, the management and the entire company, we are all aligned. So as we've taken the first steps today in terms of inducting our 2 board members from the Tata side, we have been working and we will continue to accelerate all the work we've been doing so that the long-term strategic plan could be shared with a larger group as and when we are able to complete it. So I would say, yes, it was something that we had planned to do last quarter. For a variety of reasons, it could not be completed, and we do hope that in this quarter, we should be able to complete that and share with you.

Okay. And any -- throw some light on the PLI scheme as to how you are intending to go about it?

So the PLI scheme, our application was approved. We had a specific commitment which we have made for capital investment for the current financial year. We believe we are on track that we will cross that threshold. And once we cross that threshold, the incremental revenues that we will get for this financial year based on the base year of FY '19, I think -- '19, '20, we should be able to get 6% of that as the PLI incentive. So we do believe that we should be able to avail the PLI incentive in this year, because we will meet the criteria of the minimum capital investment and the incremental revenues as well. So yes, based on how strong the Q4 is, the quantum of PLI potentially would be determined for us. But that's around a 6% for first year. And all our products [indiscernible] by the way.

And Mr. Sanjay, if I remember correctly, last Con Call, you had mentioned that your business model is such that with very minimal investments, you can have a turnover of thousands of crores of rupees as far as this PLI is concerned. So is my understanding correct?

That is correct because what PLI requires is capital investments, right?

Okay.

And our business model is an asset-light model. So our capital investments will always be -- not in proportion to the revenue because as a product company, we outsource our manufacturing to say, EMS companies. We, of course, have our own factory for what we do, the portion of the manufacturing that we do in-house. The PLI also covers capital investment in the form of prototypes or some of the other capital items that we incur on our books. So the -- why I mentioned that is in a asset-light model, as long as we need the capital investment threshold that we have committed on the PLI scheme, even if our revenues were significantly higher, we should be able to get the PLI incentive out of it. So that was exactly the reason that -- I mean, if we are able to get, for example, a large-ish revenue next financial year based on some of the things that we're working on, there's a good degree of possibility that we should be able to claim the incentive on all the incremental sales there because of the low base that we had in '19, '20.

Okay. And I believe, the addressable market for your products is somewhere around $150 billion, is that correct?

Okay. So let me clarify it, so that -- I don't want to say a very big number. But the way to think of the entire telecom equipment industry, which is the carrier equipment industry, it's close to about $100 billion. But if you take that, about 30% of that would be China, which we do not address at all, then there would be a lot of markets where incumbents, which are not really open to us because; A, we will not be in those markets; and B, in those markets, there could be customers who have long-term contracts with some of the suppliers to the RFP cycle in which we can potentially participate, would be different. So as a result, although the addressable market is wireline, wireless and all the -- some of the other stuff has been very, very large. From our point of view, the real addressable market is probably lower, maybe around 15% to 20% of the total. But I'm assuming with the Tata is coming onboard, and we are getting access to larger customers in different geographies, and with the product expansion that I mentioned in the form of wireless products, both 4G and going forward in 5G, we will have a much larger addressable portfolio. So to me, the question for us is that the market opportunity is very large. Other than China, there is a need for, "independent stack," of trusted telecom products, which we believe we should be able to step up and fill like we are doing in India and potentially in other markets. It will take a little bit of time, maybe a year or 2 for us to get all our apps together in terms of getting the products right, getting the market actions right. And if you are able -- and that is where we're going to be investing, and if you're able to get that done, then we really would start to see the benefits of the large addressable market that is available for our kind of company. And that is really the direction in which we would like the company to take. Of course, we have near-term challenges. We'll always have a short-term quarterly issue. Sometimes, which is not be too our liking, but we are definitely not bearing away from our long-term vision. And this is why what we did with Tata's and their own interest in this whole business stands firm.

The next question is from the line of Samir Rachh from Nippon India Asset Management.

Yes, 2 questions. One, would you be booking any [ PLI ] revenue in the next quarter? And if yes, what course for the [indiscernible]?

[indiscernible]

Sorry. Is it better now? My voice?

Yes, it is better now. It is better now.

I just wanted to understand, what kind of [ PLI ] incentives you'll be looking in the current financial year that is say within the next quarters? That's question number one. And secondly, just want to understand what is the order pipeline? And like this quarter, you had like, you got orders of around INR 258 crores, but in the order pipeline -- future order pipeline is significantly large enough? And can this order booking be scale meaningfully in the next quarter?

Okay. So the first question is how much PLI incentive we expect to get in Q4? So the way -- we do a little bit of a conservative accounting in our company [indiscernible] government incentives, we only recorded in our books after we initially received the cash. So depending on after we close Q4, we will, of course, be immediately applying to the government for the payout of PLI. They have a mechanism that they can pay 85% of the PLI incentive on unaudited financial basis, subject to approval. So it is by the April board meeting or April results announcement, we are able to physically get the cash, then we will account it into our Q4 results. But as I said, it will be for the first year, a 6% of the incremental revenue. And I think our base year revenue was INR 320 crores or INR 340 crores. So our base year revenue was INR 340 crores any revenue north of -- sorry, how much?

INR 380 crores.

INR 380 crores, okay. So any revenue north of INR 380 crores that we do in this financial year would qualify for around 6% on the PLI incentives. So that's part one. Your second question was the order book, so as i said, the order book for Q3 was INR 311 crores, so -- and the best performing in terms of new order inflow for this quarter was India Private followed by International and then India government. For Q4, we do feel that there are a lot of tenders which we have either won or are in the process of winning with a large thing tenders from the critical infrastructure segment like power and rail and others. And they will contribute reasonably healthy, assuming those orders coming to crucial state. So they will become a good pipeline for next financial year. And as I mentioned earlier, that out of the order book that we have, INR 986 crores today, if we are able to secure inventory, around 50% of that which is orders in hand, we should be able to revenue between Q4 and Q1. So in that sense, we have good visibility of execution. We have a reasonably decent visibility of new order inflows. Clearly, the only challenge facing is making sure, the sales orders on component supplier, and we just need to make sure that get able to pull in inventory in time and send it out for revenues. Because, in fact, I must tell you that there are also in a situation that if we can complete some of these orders quickly, there's potential repeat business, which is waiting from the customers that we have run rate contract. So in that sense, we have as much a motivation to pull in more inventory and do the revenues faster. But I mean, we are where we are because of some of the challenges in the overall supply situation of components.

Thank you. The next question is from the line of [ Navin Botha ] from [indiscernible] Research.

Yes. Thank you very much for the opportunity and congratulations for the new boarding that is luminaries, as you said, from the Tata Group. And also, congratulations on the all-time high order book, which we think should bode well in the coming periods. Sir, my first question is regarding the PLI scheme taking from the last question. In Tejas Network, we have committed for INR 111 crore investment under the scheme in the next 4 years. And in Akashastha, which is a 100% subsidiary of Panatone Finvest has committed for a INR 593 crore investment in the PLI scheme, and they have also been approved. So I would like you to kindly throw more light on the synergies and all these things. How do you see the relationship with Akashastha being a new company created just before the Tata's association with Tejas. So if you can throw more light on this, it will be quite useful for all the investors, sir?

Yes. Of course, I cannot speak for Akashastha because it's a separate company, and you should really talk to the Akashastha and Tata people about it. As far as Tejas is concerned, you're absolutely right. INR 111 crores is the commitment we had made over 4 years. So first year commitment comes to around INR 23 crores or something that we said. And that is why I mentioned that, that is the threshold we expect to cross this year. In line with the question that I had answered earlier, for I think 2 questions back, the good news for us is that as long as we meet the threshold commitment this year, even if our revenues are much higher, we can take full advantage of the PLI. So to me, the way to look at PLI from our side, even just purely from a Tejas side, is so long as we are able to make the annual capital commitment, every single -- really boils down to how much more revenue can we generate. If we are able to generate a good business and good revenue, which is what I think partly, for example, our current order book is showing. And we hope that by the end of this quarter, if it's some of the larger projects that we are working on do, [indiscernible] to the next stage, we should be having a much better revenue visibility for next year. But nonetheless, even without that, we do see that if we are able to get our handle on the supply chain situation, we do see a good business pipeline scaling up. I also talked about the synergies with the Tata Group company. One particular example is in India, where TCS is sustaining the large BSNL project. But our endeavor and efforts are on to leverage other geographies internationally, where our wireline as well as the products which are ready today and are shipping are could be potentially sold as a part of a larger solution. Some of those things are work in progress, and we don't have anything concrete to report at this stage. But definitely, that is the direction which we are moving. So that we find a way to sell a lot more of the current products in different geographies, and at the same time, continue to invest into newer products which expand the market. We will use India as a large market to begin with, and then kind of expand that same thing into other international territories as we would have done for the optical. So I would say, that's a broad strategy and from a PLI angle, we seem to be good on our own in terms of self-sufficiency. One other thing I would like to highlight also that the PLI scheme for telecom that the government had announced had INR 11,000 crore outlay, out of which, the approvals have been done only for INR 7,000 crores. So there's still about INR 4,000 crores of PLI incentives, which is, "yet unclaimed," as of now, based on the investment proposals that people have given. So we do believe that if we are able to, over the next 2 to 3 years, get the business momentum and acceleration that we expect to get, we should be able to benefit from that scheme in a more substantial way than currently envisage.

Okay. So we look forward to more clarity about Tata sustain all business because that is 5x more than our investment commitment. So as you said that during this quarter it may be possible to have a special con call for the region and all the future plants. So we look forward to Akashastha issue and all these things in that call. And second question is regarding the semiconductor PLI scheme. Are we planning or are we thinking about those areas along with the Tata's or we will be -- if any discussion something there with the Tata's, that we will be going forward in this area and the Tejas network?

So I would say, it's a bit early to specifically comment on that, but because a lot of the details of that scheme in terms of operationalizing are yet to be out. But one thing is there that the broader and which is related to the comment I mentioned earlier that we do believe that the government of India intent and support for domestic manufacturing is continuing to grow. So what -- if you really see the PLI scheme for the semiconductor components, it has 2 elements: there's semiconductor component and there's a design element as well. For Saas-based or system design. So we basically do a lot of design. So the broader intent of the government is that, don't -- not only do they want to manufacturing within the country for electronics and telecom, but they also want high value addition domestically, which is a lot more design content. And we do address that part of the equation quite well, because really, we have high valuation because all the designs are done in the country or the IPR is rated by us. And that is the direction which we're going. Again, as I said, over a period of time, there will be more synergies that will be derived with other group companies, the clarity on which we do not have at this stage, but it is something that we would definitely would like to flow going forward. So in that sense, once the details of the semiconductor and the design-related scheme come in, we would definitely be trying to see if there's a merit for us to look into those as well.

Thank you, and look forward to the special con call, which you plan to hold during this quarter or maybe next quarter.

The next question is from the line of Tejas Sheth from Nippon India Mutual Fund.

Hi, Sanjay. On this execution on the order side, is there also any loss of the orders which would have come because of the slow execution which you're doing?

No. So we've not lost any order. In that sense, and in fact, if you see our financials, there is no liquidity damages or anything of that kind either. So in one sense, yes, there is -- which I mentioned like at upfront, that whatever business we could not execute in Q3, we expect to execute in this quarter and going forward. The other point is on the positive effect. If we have -- if we are able to execute the orders in hand at a much faster rate, because we have 1 great contracts with many of our customers, and they need a lot of equipment of the kind that we have. We can potentially get more business, right? So it's more like a positive incentive we have, if you're able to close out the current orders quickly, which is what we would love to do but are constrained from the supply side.

What I mean is would our order book be more than, let's say, INR 1,500 crores, it would have been more than INR 1,500 crores if we had executed it in last 2 quarters?

I would say that's a difficult one to predict because it's a hypothetical situation. But all I can say is that in -- the order book continues to be good, and we need to execute well. Because if you don't execute well, of course, customers are going to be unhappy with us, right?

Yes, exactly.

First of all is to make sure that the orders that we have in hand get executed quickly. We keep a close communication with our customers to make sure that if we are missing on something, they understand why and what we're doing. We try to, by the way, manage the situation to that path. It's a requirement to each of the customers are certified. But this is exactly what is happening across the scene. Now our suppliers also are having a limited number of components and they try to round drop in between us and others and many more. And sometimes, we get what we need and sometimes we're not getting what we need. So I hope, again, as I said, that as the year progresses, the supply situation should ease because there has been announcement that up to 30% increase in semiconductor capacity being planned in the current fiscal, the capital adjustment was submitted last year by chip manufacturers. They will take some time. There was a lot of double booking and double ordering that people have done for components because of the shortage, which should again hopefully play out. But all is said and done, I would say we are taking a very cautious approach because Q3 was a bit of a surprise for us. We had expected much better, but it will happen. I would say, we are -- we can close watch on the customers, making sure that the order book continues to stay healthy, and we don't lose customers because of lack of supplies.

The next question is from the line of Anup Lal from Dalmia Securities.

My first question leads to the gross profit margins. So can we -- what are -- do you think that, that stress will continue? And the second question is there is a sudden steep pricing provisions for credit loss? So could you explain on it?

Yes. So let me explain the first one. And then the second one, the ECL thing [indiscernible] listing. On the first one, by the way, while we had a drop in gross margin in this quarter, part of it is because usually, we have a much healthier blend of international shipments compared to domestic where the margins are better. So that would have naturally caused the margins up. Secondly, in this particular quarter, we did have to take a spot action for buying and some of the suppliers have also increased the prices. And these are contracts of the past, so we cannot go in this on other side that we have committed to it was like a double whammy in the Tejas. There will be margin pressure. Some of it, as Venkatesh mentioned earlier, we are passing it to our customers in the form of whenever we are getting into new contracts or renewing a new rate contract. And many of the cases, we have successfully been able to increase the prices, but that will take effect in future. So when I say margin pressure will be there, because it's an interplay between the India and International revenue mix, it's interplay between older contracts, which we have to [indiscernible] at the old price and the new contracts that we are signing. And the fact that suppliers have increased cost, and that's a industry-wide phenomena, if you see any company, they are unfortunately being forced to pass those prices [indiscernible] to the customers. So how all of these 3 interplays over the next 1 or 2 quarters, is a little bit dynamic. It is -- I mean, of course, things will obviously be better than what we saw in Q3. But precisely, I have to say that we will return to the profitable gross margin level of what is our steady state of around 39%, 40%, I think it will take a couple of quarters to do a wait and watch. The second question about we provisioned higher for the estimated credit loss ECL, maybe Venkatesh can throw a little bit of light on that?

Yes. On the ECL front, as I mentioned, on the collection front, I said we did very well. In terms of the collection, we collected about INR 182 crores. And I mentioned, about some of the collections had come -- continue to come, but it was coming at a very low pace. And what happens is every quarter, the revenue -- the receivables gets hedged out to the next bucket, right? They build upon that we had to make the provision. That's the reason we had to take this tick of about INR 13 crores of higher ECL, right, in this quarter. That is particularly due to some of the PSU payments, which have got delayed, which particularly a significant portion of the thing is on account of the BSNL delay.

Maybe you can take one last question since we are almost out of time.

We'll take the last question from the line of Sunny Gosar from MK Ventures.

Basically, if you can -- I would like to understand what's the scope of the BSNL 4G tender? Basically, in terms of if this order is to materialize, what is the revenue opportunity for us? And basically, when -- what is the timeline, so we should look for these orders?

So first of all, let me outline the steps on that. Number one is that proof of concept, which is going on, has to complete. At this point in time, there is only one indigenous stack, which is completing the proof of concept, none of the other stacks came up to the level that we are today. That activity it should get completed over the next a few weeks. It's been going on for about 4 months plus, but a lot of testing, a lot of things have happened, but formally, it has to close and that is part one. After that, the commercial process will start. The intent of BSNL is to rollout this network in the next financial year, and maybe it may be lower -- materially over the next financial year, and we will be still over to the following financial year as well. In terms of the size of the thing, I would not want to point out the number, but anywhere between 57,000 sites to 100,000 sites is what they want to cover. And that, if you are able to -- I mean, there's a lot of it before that, of course. But if all of that happened, it could mean a few thousand crores of revenues for us.

Right, right. And basically, there were some news articles seem about November, which mentioned that TCS has violated some of the submission. So has that issue all being sorted out or basically, what the stage on that?

I would say that, as far as we are concerned, that the whole thing that there's a lot of stuff that comes out in the newspapers and it's not fair for us to comment on that. We have been working with the customers. We have been following the process to the T. Whatever hardware, whatever capacity, equipment, radios, [indiscernible], different bands, different kinds of software features, capacity, capabilities, whatever is in be asked by the customer, we have been patiently demonstrating and delivering and completing their checklist. So that process is on. It would not be fair for me to comment on the exact status of it because it is really [indiscernible] of the customer. But all I can say is that we believe that we have the technological strength and the capability to deliver. We have done it in the past and have never let any customer down. So we feel that as the process goes further, those things should fall in place. But again, there are a lot of [indiscernible] which have to be completed by a customer and as a customer is their prerogative to finally take the call. But from our side, we have been able to step up to the slate and deliver many of the things which sometimes get, what should I say, forward it is the press for whatever reason, let me put it this way.

Right. And if I could just squeeze in one last question. Basically, we saw almost 10 percentage point drop in gross margin in Q3 versus Q2. So one of the reasons highlighted is obviously the lower mix of export business. But if you can basically give some color in terms of as -- assuming the business mix normalizes over the next few quarters, do we get back to this 45% to 50% gross margin rate or does the pressure of input costs still continue to weigh on our gross margin for a few coming quarters?

I would say they would -- so as I said, there are 2 reasons. One is the product; one is the International India mix. And of course, there's also a subset within that product mix. And then the third thing is there is a cost increase, but as I mentioned earlier, which also has put some pressure. The question is how much of that we are able to pass to our customers? In the new contracts, we are able to pass it in the older contracts just we have to honor what we have. So I would still say that the next couple of quarters, if we got to be cautious, there will be a certain amount of margin pressure. If you do better than that, we'll see. But it's a situation because our leverage is the suppliers at this stage in terms of cost reduction and all that we see normally get, is a little bit less because right now, the focus is more on deliveries. And they have options to supply to people who are willing to pay premium, who are willing to pay expedite fees, who are willing to pay whatever other charges beyond the normal prices. So for us it's first to secure the orders, we keep the customers happy, if you have to sacrifice a small amount of margin in that -- therein so be it. But this is, as I said, I mean all of these things are phenomena, which will settle down in a couple of quarters. And then, if you are able to hold the prices with our customers, then we should be okay to stabilize on the margin. I don't see any fundamental reason that over the medium term, we will not get back to the margin that we were in the past. [indiscernible] it is a little bit difficult to predict precisely that there will be margin pressure, but how much we are able to manage is something that we've actually seen.

Okay. Thanks for the detailed answers and good luck for the coming times and look forward to hearing from you on the long-term strategy.

Certainly. Thank you.

Thank you very much. I now hand the conference over to the management for closing comments.

Thank you, everybody. I really appreciate the questions, which pretty [indiscernible] to all aspects of our business. In summary, I would say that the business momentum is good, order inflow is good. Q3 is definitely was not something that we expected in terms of revenues and margins. But as things go by, we should be able to recover and build up the momentum. That's more on the current business side. The strategic investments from Tata and the Board of Directors that we have now got from Tata side will help us synergize better, help us think much bigger, help us execute much better, bigger, because these are guys who are built really global scale businesses and working closely with them would be very exciting for us. And we are really doing all of this to make sure that in the medium to long term, we create a sustainable engine for a very high growth. And that's one through -- that is something that we've been working on closely. And we are confident that with the cash in hand, with the business momentum, we should be able to tie the short-term challenges of supply chain and so on. But at the same time, we're able to expand our product portfolio, build a better sales engine and build partnerships in a strategic way with both within the group and outside to be able to really realize the vision of accelerating and creating a top-tier global telecom equipment company on an end-to-end basis from India. So that's something which we are excited about. And we will all be working as best as we can to manage the situation. Some of it is not in our control. But as time goes by, hopefully, things will start getting more predictable from the point of view of revenues and profitability. So thank you again, and stay safe, and we'll again talk to you during the quarter.

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