Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sterlite Technologies Ltd (BOM:532374, Financial) achieved a highest-ever optical connectivity attach rate of 23%, indicating strong growth in this segment.
- The company has identified AI data centers as a future growth area, aiming for 25% of revenue from this segment in the medium term.
- Significant progress in ESG initiatives, including a commitment to being a net-zero emission organization by 2030 and winning over 100 ESG awards.
- Successful cost optimization measures have led to a quarter-on-quarter improvement in EBITDA margins.
- The company has reduced its net debt by INR 769 crores, showcasing effective financial management.
Negative Points
- Global OFC consumption declined by 7% in 2023, with a 12% decline in North America, impacting overall demand.
- Inventory levels in the U.S. and Europe remain high, affecting factory utilization and leading to lower margins.
- The EBITDA loss for the STL Digital business stands at INR 17 crores, indicating challenges in this segment.
- Freight costs have increased by 2-3%, impacting overall profitability.
- The company faces potential challenges from provisional anti-dumping duties imposed by the European Commission, which could affect its competitive position.
Q & A Highlights
Q: After a long time on Ankit, Tushar, we have seen first Q-on-Q growth. So congratulations on that. But one thing here, the growth looks like is driven by interconnect business, where the attach rate jumped from 11% to 23%. So Ankit, basically, if you remove the interconnect port, the core business was flattish or decline, right? So 2 questions here.
A: Thank you, Nikhil, for your question. So I think you've summarized it quite well. I think as we've been guiding our focus markets continue to be U.S., Europe and India. And as we have said in the past, particularly in the U.S., we had seen -- it's been an interesting situation where on one side, the inventories have been high but the deployment, especially fiber-to-the-home deployments have been very, very strong, in fact, amongst the highest. So when I look at the market demand, that I continue to be very positive about. It's a triple play in terms of demand from the telecom operators, money coming in from private equity players into Tier 1, Tier 2 service providers as well as government-funded projects, some from the past and BEAD, which is expected to start trickling in, in probably Q3, Q4 onwards and then probably more significantly into next calendar year. So from a demand perspective, definitely U.S. and Europe will be our key drivers. I do also expect that in India, there will be continued focus on fiber-to-the-home deployment, fiber to enterprise deployment as well as even when operators are talking about fixed wireless, you will still need a fair bit of fiber connectivity, which will be required up to that last 100 meters, 200 meters. So that's something that we do see. Principally our demand being positive. And then the fourth trigger and all of this will be the data center connectivity. As we just shared in our -- one of our slides, we're actually seeing a very interesting shift from so-called regular data centers to DCs, which are being built for more and more AI capability, which will definitely require much more connectivity between the servers and the racks, et cetera. So I would say principally, we remain positive about the demand. We do see the inventory levels coming down and certainly, between -- I would say, between the next 1 to 2 quarters, this should result in improved demand for our optical cable products. On the connectivity part, see, principally, I want to reiterate that we do endeavor to sell our cable and connectivity together as a solution. That's really where we believe we create value for our customers and then for STL. So that continues to be an endeavor. We are -- we continue to be focusing on our investments in building the technology, building the product portfolio and also the IP. And so I would say that this is something that we'll continue to focus and prioritize but I won't be able to give a specific guidance on connectivity. It will be both a function of how cable also steps up and how we are able to win more orders, both in Europe as well as in the U.S.
Q: Sure. Second and third are smaller question on the other 2 segments. Services saw Q-on-Q jump but the margin dipped more or less in line with expectation, but relatively higher than what we were thinking. So what should be a steady-state margin in services? And in the Digital segment, Ankit, despite of being lower base, our revenue declined high single digit on Q-on-Q basis, while I understand there are challenges in IT industry still such a sharp decline was relatively higher. So those 2 are my final question.
A: So Nikhil, with reference to the service business, steady-state margin that we have been expecting is in the range of 8% to 10%. EBITDA margin of 8% to 10%. That is what we are targeting for this particular financial growth. However, during this particular quarter, because it's a mix of the various orders, which results into the margin. So there is a change in the mix, which has resulted in terms of the impact on the margin for this particular quarter but the -- overall, for the financial year, we are looking at 8% to 10% in terms of sustainable EBITDA margin for this particular business. With respect to the Digital business, yes, this particular quarter because of the last couple of months and a couple of quarters, we have seen that the industry has witnessed slowdown in our IT sector and -- which has also impacted us. But however, we see that this current financial year, we expect to grow this particular business over a period of time. So overall, we are targeting that we should be able to have at least 5% to 7% kind of growth in Digital business. That is what we are expecting.
Q: Congratulations for Q-on-Q improvement. Sir, my first question is regarding this BharatNet Phase III? And how much is addressable market for us out of INR 1.39 lakh crores? And the second question is, like, is there any delay in BEAD program due to political situation in U.S.?
A: So I think on the current RFQ and the opportunity right now from the spend perspective is INR 65,000 crores. And I think it's important to remember that we would address this from 2 or 3 levels. For us, it's an opportunity definitely on the services business in terms of the entire deployment and then the maintenance. The second part would be supply of cables both for our services requirements as well as other partners or players in the project, and then, of course, the fiber itself to various cablers. So this is something, which is an opportunity across the board. I think it's a bit too early for me to share. We are in that phase where next 2, 3 months, I think, where there will be more developments regarding this project. But certainly, I would say there's a strong intent from the government to take this project forward and to make sure that the project is successful. In terms of the BEAD project, I think definitely, there is strong intent. The BEAD project was passed, which was bipartisan. So we don't see or expect any impact or slowdown of the BEAD project, particularly linked to the political situation. I would say that probably versus our own estimate earlier in this financial year to now, we do see that the impact of BEAD ultimately to cable requirements, connectivity requirements has probably got pushed out by 3, 4 months or so.
Q: Got it, sir. Sir, we have won a lot of large deals in U.K. and India. So like what kind of environment levels for inventory reduction on global operator levels? And when we can expect normal cease, whether it's Q3 or Q4?
A: Yes. So as I said, we've been tracking this quite closely with our customers and also with the distributors. I would reiterate that the inventory topic that we've been talking about is largely a phenomenon in the U.S.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
