HFCL Limited (HFCL) Q4 FY23 Earnings Concall Transcript

HFCL Limited (NSE:HFCL) Q4 FY23 Earnings Concall dated May. 09, 2023.

Corporate Participants:

Mahendra Nahata — Managing Director

Unidentified Speaker —

Analysts:

Balasubramanian — Arihant Capital — Analyst

Jay — KSA Securities — Analyst

Jigar Valia — OHM Group — Analyst

Saral Seth — Indsec Securities & Finance Ltd — Analyst

Sahil Sanghvi — Monarch Networth Capital — Analyst

Hemant Kothari — Enel — Analyst

Rakesh Roy — Omkar Capital — Analyst

Dipesh Sancheti — Manya Finance — Analyst

Hardik Vyas — Economic Times — Analyst

Presentation:

Operator

[abrupt start]

Call hosted by ICICI Securities. [Operator Instructions] [Operator Instructions]

I now hand the conference over to Mr. Mahendra Nahata. Thank you, and over to you, sir.

Mahendra Nahata — Managing Director

Good afternoon, ladies and gentlemen. I’m sorry for the delay, it happened because of some connectivity issues. I’m delighted to welcome you all to HFCL’s Earnings Call for the Fourth Quarter and Financial Year Ended 2023. I trust that you’ve got a chance to review our financial results, press release, and investor presentation, all of which are available on the website of the company and also on the website of stock exchanges.

During financial year 2023, the global economy faced challenging, such as financial market volatility, high inflation, slower growth. However, despite these headwinds, India remains the promising economy and is expected to arise as the fastest growing in the. At telecom industry during financial year 2023 has witnessed significant growth and expansion both in India and globally, with increasing adoption of broadband technologies, including broadband wireless technologies, 5G network rollout, and a growing demand for high-speed data connectivity driving continued innovation investment in the sector.

Indian government has maintained a focus on key priorities such as the nationwide implementation of 5G networks, fiberization as part of BharatNet, and NHAI and also encouraging participation in PLI schemes to promote indigenous design and manufacturing of telecom and networking. These priorities have been filled by the all-around rapid digital transformation and the amplified need of high-speed data, together with the integration of advanced technology such as artificial intelligence, IoT, and machine learning.

PWD predicts that the implementation of 5G technology will add $1.3 trillion to the global GDP and creates an economic impact of $42 billion to the Indian economy by 2030. This backdrop makes us continuing to kick-start the new finance on a positive note. HFCL has been tirelessly working in these transformation areas by designing relevant new technology equipment and thereby also increasing scope of its network services portfolio.

These efforts will result in extension of its addressable market and will also boost its revenue and profitability. FY 2023 as the year of transformation price this year as we continue with several key initiatives to design 5G and various other broadband wireless products. These products included eight macro radio [indecipherable], sell-side routers, two and four gigabit per second point-to-point and point-to-multi-point unlicensed radio, indoor and outdoor small cells, outdoor fixed wireless access, customer premises equipment, and various kind of angulation routers.

All these products are scheduled to be launched during the current financial year and are expected to have huge demand opportunity globally. Launch of these products will bring in higher revenues and profitability to the company in the coming years. Recognizing company’s efforts and initiatives and designing of telecom instruments. Government of India has already sanctioned design in incentive up to INR650 crores to the company.

Furthermore, the company has entered into some crucial technology partnerships with Qualcomm, Microsoft, Wipro, or developing Cutting-Edge 5G product and solution. These partnerships are lifting our company’s R&D capabilities and are also helping to develop and professionalize new products at much faster pace. During the year we also strategically work on our average power expansion into global markets like United States, Europe and Middle East. These are aimed to take a global sale in optical fiber cable, telecom and network products and System Integration Services.

Our continued focus on creating and expanding capacity and tapping new geographies and not only led to an increase in share of product revenue to 56% in FY 2023, as compared to 43% in FY 2022, but has also resulted, the increased share of revenue from private customers to 83% in FY 2023 from 68% in FY 2022. These are two very important achievements.

We are currently operating in over 30 countries with 80-plus clients and building long-term relationships across large and fast-growing markets, for achieving higher export revenue, persistent efforts are being made by the company by appointing employees and engaging agents and distributors in key markets like, France, Germany, England, Poland, Australia, UAE, Turkey, Kenya, United State and several other countries. All these endeavors are significantly increase in our export revenue during FY 2023 to INR817 crores from INR363 crores in FY 2022.

It means the growth of 125% on a year-on-year basis. One of the significant developments in a quarter our collaboration with Microsoft to launch Private 5G Solution for enterprises, our partnership will help us offer highly scalable and rapidly deployable solution for enterprises. We foresee, The Private 5G Networks can offer numerous benefits to the manufacturing sector, including increased productivity, improved efficiency and cost savings and enable enterprises and the Industry 4.0 only.

The company is in process of developing use cases of these areas to offer integrated solutions to enterprises, which will lead to a competitive advantage to the company with improved profit margin. We are proud to share, that HFCL is now the India’s first enterprises enable a deployment of World Broadband Alliance, OpenRoaming access, it’s entire in Wi-Fi portfolio.

Currently, we are working with multiple telecom operators in India and a few other countries to deploy OpenRoaming, and we have plans to scale its reach across the globe and make the most of this, first ever advantage. In quarter four FY 2023, we signed distributing agreements with EPS Global to expand our footprint in global markets such as North and Central America, Europe, Middle East and Africa.

Through this partnership, we are taking new markets for our products and solution, printing for advanced Indoor and Outdoor Wi-Fi six Access Point and commercial industries, which are high-power gigabit PoE injectors and the World’s First Open Source enterprise-grade Wi-Fi seven Access Points from all further [phonetic]. Further HFCL has also sign an exclusive distribution agreement in U.K. leading distributor, Pericom limited to further strengthen its footprint in U.K. and IAL markets.

We’ve also entered into strategic partnership with 6WIND, a leading government tech networking — green tech networking company for optimized sustainable and cost-effective fiber solution based on innovative and market-leading virtual service router and software products. The government of India, at the same time, is doing a commandable job to faster the deployment of 5G networks and rollout of OFC network in the country.

HFCL world is working to capture a larger share of the expanding optical fiber cable market. It is projected to reach a cumulative value of US$250 billion worldwide and US$10 billion in domestic market during the period of financial 2023 to 2028. In ordering to further strengthen the supply chain and improve the profit margin, the company is expanding its optical fiber capacity for existing 10 million fiber kilometers to 25 million kilometers by quarter two of FY ’25.

With this expanded capacity optical fiber, company is expected to generate additional profitability of INR150 crores every year on an annualized basis, considered at prevailing market price vis-a-vis current quarter in-house production of optical fiber. In addition, the company is also in process of pending its optical fiber cable production capacity from 25 million fiber kilometers to 35 million fiber kilometers. This expansion will also lead to a significant increase in revenue and profitability. The company has also created a center for excellence for development of new types of optical fiber cables in its manufacturing facility at Hyderabad.

These new types of cables are expected to further increase company’s revenue for export market. The company’s subsidiary, HTL Limited has also developed technical optical fiber cables required for different process. I also just update you all that the development of various 5G radio active network and transfer is progressing well. And we will be launching 5G fixed wireless Customer Premise Equipment 5G small print 204-gigabits per second point to point to multipoint backlog EDR routers and of various capacities and 88-hour natural during current financial year.

Total addressable market from such products worldwide is expected to be US$550 billion by 2028. Company is in process of setting a facility for the manufacture of these products and targeting a revenue of INR800 crore to INR1,000 crores in FY ’24-’25 compared to only INR130 crores that should be FY ’22-’23 from our existing product portfolio. These products are also eligible for PLI incentives up to INR1,650 crores over a period of four to five years as per approval received by the company from Government of India.

Increase in revenue from this products, which are own designed and loan manufacturer is also lead to higher margin and profitability. This quarter, the fourth quarter of FY ’23 was largely to HFCL billing complete purchase orders. As a result, our order book has grown to more than INR7,000 crores as compared to INR5,300 crores in the same quarter last year. Some of our major wins in the quarter have been contracts of INR283 crores of Gujarat Metro Rail Corporation Limited and INR575 crores from Reliance’s telecommunication.

Let me now brief you on the key performance metrics for 12 months ended on March 23 and also quarter four FY 2023. For the 12 months ended 31st March, 2023, the company reported consolidated revenue of INR4,743 crores as against INR4,727 crores in March 2022. EBITDA was INR664 crores as against INR690 crores in March 2022. Profit before tax of INR430 crores as against INR440 crores in March 2022. So Profit after tax of INR317 crores as in INR326 crores in March 2022. Revenue in quarter four of FY 2023 stood at basically INR1,433 crores as compared to INR1,086 crores in FY 2023 and INR1,183 crores in quarter four FY 2022, with an increase of 21.8% on year-on-year basis.

EBITDA for the quarter stood at INR168 crores as compared to INR194 crores in Q3 of FY 2023 and this was INR150 crores of Q4 FY 2022. EBITDA margin stood at 11.7% for quarter four of FY 2023 as compared to 78.8% of quarter three FY 2023 and it stood at 12.9% at quarter four of 2022. From quarter four FY 2023, profit after tax is INR279 crores as compared to INR102 crores of quarter three FY 2023 and INR68 crores in quarter four FY 2022. PAT margin stood at 5.49% in the quarter under consideration compared to 9.36% of quarter three of FY 2023 and 5.76% in quarter four FY 2022.

Segment revenue for telecom products during the quarter stood at INR650 crores — INR654 crores as compared to INR693 crores in quarter three FY 2023 and INR585 crores in quarter four FY 2022, while margins in quarter end revenue are low compared to previous and [Indecipherable] contracts due to execution of some low-margin contracts in the quarter. Overall margin for FY 2023 however intake despite increase in food cost and supply chain disruption, followed by Russian-Ukraine war and other global economic challenges.

The margin tends to vary in particular quarter due the nature of contracts executed, bidding of propositions, etc. However, overall EBITDA margin ranges between 14% to 15%. With various strategic initiatives set the expansion of capacity, launch of indicated products, continued backward in horizontal integration, investment in R&D and geographical expansion. Operational margins are aimed to be increased by 4% to 5% in two years’ time.

The current growth being witnessed in telecom market, whereby seen optimism and new opportunities. We look for reaching [Phonetic] 2024 and beyond with great optimism. As our strategic initiatives are expected to be build significant growth in revenue and profitability. At the end, I would like to reiterate that we remain focused on our vision to become a leader in our industry.

And with all initiatives being undertaken such as us in huge [Indecipherable] R&D, backward integration, capacity expansion, geographical expansion, developing margin at retaining products.We are confident that these strategic initiatives will position us for long-term success. Our team is dedicated to delivering value to our shareholders, and we will continue over time to achieve our goal.

Thank you once again for your key participation. With this, I conclude my opening remarks and open the floor for question-and-answer session. Thank you very much.

Questions and Answers:

Operator

Thank you very much, sir. We will now begin with the question-and-answer session. [Operator Instructions] Thank you. We take the first question from the line of Mr. Balasubramanian from Arihant Capital. Please go ahead.

Balasubramanian — Arihant Capital — Analyst

Good evening sir. Thank you so much for taking my question. My first question, we are launching around seven to eight 5G products from Q2 FY ’24 to Q1 FY ’25. What would be the telecom revenue share is expected to reach in FY ’25? And in last quarters, telecom products margins are around 19%, we may expect about 20% margins to do these new launches. These are my first question. Thanks.

Mahendra Nahata — Managing Director

As I said that telecom and product revenue it’s targeted to reach INR800 crores to INR1,000 crores in FY ’25 and this significant growth is going to come from new products, which we are launching. As I’ve said in my opening remarks, A number of new products are going to be launched in the current financial year, and we are in advanced stage of that.

So once these products are line, revenue is definitely going to increase multiple times and it is targeted at INR800 crores to INR1,000 crores in FY ’25. And number two, as the margin is concerned, since the products are our own designed and manufactured — it’s certainly a better margin in seven years much better margins than 19%.

Balasubramanian — Arihant Capital — Analyst

Okay, got it sir. Sir, in Q4, FY ’23, turnkey contracts witnessed margins less than 5%, any specific reasons for that?

Mahendra Nahata — Managing Director

Many times contracts are designed in such, or our bidding is not in such a way that in a particular phase, the profitability is higher because payments are received earlier in the sale, and in some sales, the profitability is lower. So it varies margin from EPC and it varies from quarter-on-quarter depending on the type and part of contract executed in a particular quarter. So what happens in this particular quarter, the EPC contracts, which have been executed, the part of that was a lower margin. So you see lower margin in this particular quarter.

It is a bit of an aberration also, but it has happened like that. However, overall EBITDA margins in turnkey project ranges between 8% to 12%. Now with increasing share of revenue from product business, EBITDA margin overall basis are also increasing year-on-year to year and currently, we put 14% to 15%. So margins are now planned to increase further with high-well backward integration and introduction and launch of indigenes products on an overall basis. The 10K margin this particular quarter, it was low because particular type of contract. So — but however, the overall margins are intact, and it will increase in future.

Balasubramanian — Arihant Capital — Analyst

Okay, got it, sir. Sir, on the railway side, recently we won, we got Surat Metro Rail project Phase 1. Like any further tender or projects are lined up? Like how we are comfortable to execution on driving projects? Because nowadays radar projects are more competitive and margins are slightly lower. So what’s your thought process on that, sir?

Mahendra Nahata — Managing Director

So, we’ve got the very positioned in railway communications business in the country in a sense that not only we have executed the contracts in India, but we have executed contracting. Other companies also like Mauritius, Bangladesh. So we will continue to be in this business. And also the margin is vary contract to contract. Yes, it is competitive. But it changes been as good revenue and profitability both.

As far as Surat Metrol contract, these executed as planned, and we are built into many other contracts also different to where metro expansions are coming up or new metro lines are coming up, we have built into the complex. We are confident that we should be able to get more orders. As you know, Kanpur and Agra Metro, we have got direct products, they are already getting executed by us. And similarly, we are working on various other meter contracts, where we expect a reasonably good order position.

Balasubramanian — Arihant Capital — Analyst

Sir, on the margin side, on railway projects, like how the margins are?

Mahendra Nahata — Managing Director

It is something like turnkey to contract on — only problem is the railway project is the revenue comes late. Since that telecom is the last few to be done. And the contracts are awarded when the metro is planned, then civil work is done, electrical work is done, and all kind of these items. Then this telecom business comes up. So it’s not that you got the order and it will be getting executed in one year. It will take three, four, five years to get it executed because the civil work and all that in the metro takes time. So margins are like the turnkey contracts average margins 14%, 15% without doubt, is something like a turnkey contract only.

Balasubramanian — Arihant Capital — Analyst

Okay. Got it, sir. Sir, on the capex side…

Operator

Sorry to interrupt Mr. Balasubramanian, May we request you to join the question queue. As there are multiple participants in the queue.

Balasubramanian — Arihant Capital — Analyst

Yeah. Thank you so much, sir. I’ll come back in the queue.

Mahendra Nahata — Managing Director

Thank you, Mr. Balasubramanian.

Operator

Thank you, sir. We take the next question from the line of Mr. Jay from KSA Securities. Please go ahead, sir.

Jay — KSA Securities — Analyst

Thanks for the opportunity, sir, Sir, I wanted to understand how do you see the global web pocket? And what is the likely impact on the company’s performance going forward?

Mahendra Nahata — Managing Director

Can you repeat your question? I missed few words.

Jay — KSA Securities — Analyst

Right, sir. Sir, actually, I wanted to understand how do you see the global OFC market? And what is the performance is going forward? We increased our export share from 7% to around 17% of revenue mix. So any color you can give on the OFC segment of the global market?

Mahendra Nahata — Managing Director

Yes, I can take it. Look, the one thing which has happened in the global OFC market, particularly after pandemic, this demand of high-speed data has grown and work home culture, even at the end of pandemic has so widely spread that, there is a huge need of data in every home. Subsidies are being given by many countries to have high-speed data availability at every office, every home where it is not there or either the less data is available.

For example, I’ll give you US they announced subsidy of US$61 billion to connect homes over fiber optic cable to connect homes from the fiber optic cable. So these kind of numbers – for fiber optic cable connectivity to homes and offices has increased the demand of fiber optic cable worldwide coupled complied with we mentioned high-speed wireless networks like 5G, for example, some other such as Jio or network will come come in future. So demand of optical fiber cable has increased quite a bit — and it is expected that it will keep on increasing as we hear the current consumption is about 600 million fiber kilometers. It is expected to reach 750 million fiber kilometers in three years timeframe globally.

And similarly, demand in India has also picked up because of large scale implementation of 5G as well as FTPs majorly being done by Reliance Jio the demand has picked up. So globally, there is increase in demand in fiber optic cable. So what HFCL is doing is this case. One, we’re increasing our capacity of 25 million fiber kilometer to 35 million fiber kilometers per annum for fiber optic cable. And for the fiber itself from 10 million fiber kilometer to 24 million fiber kilometers both of these are under progress at this point of time.

Fiber optics — for optical fiber, once you produce such high capacity of fiber, company making additional profit because currently, I’m going by the current data, the current rate difference between or manufacture fiber and the fiber which we got from outside INR100. So once produced an additional 15 million pay a benefit of INR150 crores to the company on every year basis. So demand of optical fiber cable was significantly and company is increasing the capacity to demand from its customers. Now coming to exports what you asked, we have grown our export consistent every year.

Jay — KSA Securities — Analyst

Right. So my second question will be, are you taking any [Technical Issues]

Operator

Ladies and gentlemen, the line for the management is disconnected. Please hold while we reconnect them.

Mahendra Nahata — Managing Director

Hello. [Technical Issues]

Operator

Ladies and gentlemen, we have the line for the management reconnected. Mr. Nahata, you may go ahead, sir.

Mahendra Nahata — Managing Director

Yes. Sorry, I mean US at the moment bank — somehow the lines are well functioning. So anyway — so what I’m saying is that with the increase in demand of optical fiber cable worldwide, — we have taken efficient steps to meet the demand of our customers. Our exports have increased by 125% in the — last financial year, which we delayed that INR837 crores of export. We are targeting the fiber optic cable export itself between INR1,300 crores to INR1,500 crores in the current financial year, which is financial year ’22 ’24.

And — these exports are going to increase further in the next financial year with the export of networking and telecom products we propose to start, which we are believe in the market and manufacturing in the current financial year progressively. So optical fiber cable, good proposition, good opportunity and company is making out good profits from this opportunity and increase in revenue also.

Jay — KSA Securities — Analyst

All right. Thank you, sir.

Operator

Thank you, sir. We’ll take the next question from the line of Mr. Jigar Valia from OHM Group. Please go ahead, sir.

Jigar Valia — OHM Group — Analyst

Yes. Thanks for this opportunity. Just a follow up to the discussion that you’re doing. So it basically any — are you not seeing any recessions, etc, across in markets like Europe, UK maybe some was to affect, I mean, you’re looking at exports to be a little robust only for current year as well as next year.

Mahendra Nahata — Managing Director

Look, I don’t foresee any decision as such, there may be – demand maybe stagnation for some time, stagnation in a sense that if you are selling worldwide demand is 50 million fiber kilometer per month, it may remain 50 million, it will not reach to 60 million in a particular month. But stagnation is not expected. The demand of $600 million, which is there will continue. However, capacities have increased worldwide.

No doubt about that. Capacity will increase because the demand has increased every manufacture increase capacity. But now is an export who is able to get the market share. So what HFCL is targeting to get a market share mini school give the whole worldwide market. So we don’t see any problem in reaching our target of INR1,300 crores to INR1,500 crores in the current financial year, because we have gone into the additional markets in the countries we are operating through our sales people, our own employees or agents. We have increased their number, most with we are working – United States had this moment.

US had a different kind of cable requirement which we have developed. And this year, we expect some significant revenue to come from the United States. So in our case, we are increasing the geographical — we are having geographical expansion and within countries going to more customers. And major markets like US, which we had not entered into till last financial year, we are now entering into those markets. So I don’t foresee any reason to see that we will not be able to meet our target. Like last year, we were able to do more than our target. And I think this year also, we will definitely be able to meet our target.

Jigar Valia — OHM Group — Analyst

So fair to assume that exports can be more than 20% or 25% of the overall going ahead?

Mahendra Nahata — Managing Director

When I say that about INR1,300 crores to INR1,500 crores, yes, it can be around that number. I would not comment on exact 25% or 27% or 22% — but yes, it was around that number. Surely.

Jigar Valia — OHM Group — Analyst

If you can give some perspective with regards to margins in export markets for basic or overall with the increasing the optic fiber capacity. So how should one look at incremental EBITDA or overall margins playing out? I mean directionally or…

Mahendra Nahata — Managing Director

Look, in terms of net margin, net margin from optical fiber cable exports, and to on overall basis, it will vary from contract to contract. But overall basis, 10% should be the number you should take into account for the calculation of margins on exports, overall basis, net margin is about 10%, you can measure.

Jigar Valia — OHM Group — Analyst

Okay. And at an EBITDA level, it would — or it depends on contract or — would it be kind of any different from the domestic business?

Mahendra Nahata — Managing Director

Again, as I said, it depends on contract-to-contract. Sometimes the contract is giving you less margin sometimes more. But, but, but inherently, export margins have been higher than the domestic margins, because domestic — go ahead.

Jigar Valia — OHM Group — Analyst

Working capital cycle for exports would be?

Mahendra Nahata — Managing Director

Generally, the payments are working capital, you can say 90 days payment. Generally, the payments from the customers are 90 days.

Jigar Valia — OHM Group — Analyst

90 days, got it, got it. And sir, last question from my side. Would we be free cash flow positive this year? Or when can…

Mahendra Nahata — Managing Director

I definitely expect that this year, we should be free cash flow positive. Only issue I would like to add is that we have been incurring capex also expansion in fiber optic cable, R&D investment. So those are targeted for long-term growth. So even if we turn our cash flow prices in a particular year, the point is we’re making substantial investment or future growth. And what we have seen, like, for example, whatever investments are being done now are pending in many R&D investments, a lot of R&D investment has been done, which is bringing new products in the current year and this is an additional revenue profitability.

Fiber, for example, as I told you, that we are increasing capacity by $15 million, which would cost us around INR300 crores, around INR300 crores. So — but that will be in and expected to bring in INR150 crores of profit every year because the price difference has been manufactured and domestically, our own produced fiber. So I would not be that much concerned about yes, cash flow positivity because these investments are entire, they are going to bring a long-term profitability to company in a very near future.

Jigar Valia — OHM Group — Analyst

Perfect. Thank you sir.

Operator

[Operator Instructions] we take the next question from the line of Mr. Saral Seth from Indsec Securities & Finance Ltd. Please go ahead.

Saral Seth — Indsec Securities & Finance Ltd — Analyst

Yes. Hi, sir. Thanks for the opportunity and congratulations for a good set of results. So my first question is how company is likely to achieve higher revenue with initiatives taken through its R&D procedures. So I want to understand how R&D is going to play an important role for increasing our revenue.

Mahendra Nahata — Managing Director

Look, I said this is — R&D is going to play most important role in increasing the revenue as well as profitability. We have to understand that. There are two ways you can bring in new for either you have a collaboration with somebody or you design your own products. So if you design your own product as you have higher profitability, and you are not restricted to a particular market, you can sell it anywhere.

So what we have done in our R&D designing a good number of telecom and networking products, which as I said, one line is led by Wi-Fi and VBR kind of equipment. Second is 5G-related equipment and some of the equipment which can be used in both the cases. Now which is kind of only infrastructure, where we have got our own R&D for telecom equipment and products in Bangalore and Delhi. And also, we have partnerships for R&D contracts we have given to companies like Wipro like and companies like VVDN, companies like Capgemini. Those kind of companies where we have given R&D contracts, new products are coming at a faster pace.

Now what is happening with this, these products once they come in, not only we will be able to meet a demand of operators in India, but we will also be able to make the demand operators abroad. We have already started quoting for these products to different operators. So, as I said, what we are expecting, these are rated products will bring in additional revenue of roughly about INR800 crores to INR1,000 crores in the financial year 2025 itself.

And if you see — compare with the current revenue from INR138 crores. So, with the launch of new products, this product which I’m talking about, revenue is got increased significantly and because we our own designed products, currently, they have a higher margin, our profitability will also increase significantly. So this is a very transformational step company has taken in designing this telecom products locally because this will give us higher margins. And more over on the top of it, the PLI incentive driven by government of India attention to us for INR650 crores. All these are going to be adding to the margin of the company.

Moreover second thing what we are doing, R&D is not limited to telecom and messaging product funding. It is the cables also — fiber optic also we are doing a lot of R&D. We have got our R&D center for this in Hyderabad. And also at the [indecipherable] R&D people in US also who are helping with the design various new kind of cables, which are required in the export market. So, with this design and kind of new construction, we’re able to get higher market share in the fiber optic cable market. So, R&D is playing a significant role in increasing revenue and profitability both.

Saral Seth — Indsec Securities & Finance Ltd — Analyst

Understood. Sir, when we say that we are procuring products from our partners like Capgemini, are we paying any royalty to them? Or how is this accounted for sir? Or it’s like–

Mahendra Nahata — Managing Director

These are contracts R&D where one or two cases, we may be paying small royalties, but this is our own IPR. They’re designing for us have given the contract to design the product for us and transfer their design and IPR completely to us. And our own team is totally involved in designing those products with those R&D companies.

Saral Seth — Indsec Securities & Finance Ltd — Analyst

Understood, sir. Sir, you’ve given a good color on the margin, but I want to understand what could be the blended FY 2024 margin outlook? And what steps are we taking to sustain the current profitability level, which has seen a huge increase over the last couple of years?

Mahendra Nahata — Managing Director

Look, we have taken, as I said in my presentation, two very important steps to increase our revenue and profitability both. And I will discuss this four and five steps, which are really transformational steps and need to be understood clearly that these steps which we have taken are positively going to impact working of the company. Now, what are these steps? One, what we thought a strategy of the company, high importation in R&D, design own products, increased revenue from them, and then we’ll bring in more profitability and higher addressable market.

So, bigger market opportunity, higher profitability, increased revenue, which is a product which are explained in detail earlier question. Second step we have taken, increased our revenue from private operators. As you have seen, we are gone to 83% now in our revenue from private operators, which used to be less than 30% few years back is 83% now. Government revenue is only 17%. Third what we have done, increased our revenue from products then the EPC contracts.

What you are seeing this year, revenue from product is almost about 50% to 57%, which used to be much lower than that a couple of years ago. Fourth, what we have said is that we need to increase our exports. So export this year has increased on INR360 crores to INR837 crores, increase of 125% on a year-to-year on basis. And then capacity expansion, including higher backward integration, now fiber — increased by 15 million and that will bring additional profitability of INR150 crores that’s a trick to be — only to the difference in the current prices and increase in cable capacity, which is going to bring in higher revenue and profitability growth.

So these steps, export increase, market size increase, our own products, higher value creation products going to move to the private operators, going more to the products than the EPC contracts. All these are bringing in higher revenue and profitability. And yet it’s sustainable — long-term for the company in terms of increase in revenue and profitability both.

Saral Seth — Indsec Securities & Finance Ltd — Analyst

Sir, can you share your capacity utilization on a blended basis for the quarter and the full year?

Mahendra Nahata — Managing Director

Capacity utilization and fiber optic cable is almost 100%, all our factories are working 24/7.

Saral Seth — Indsec Securities & Finance Ltd — Analyst

Okay, sir. I’ll fall back in queue. Thank you.

Operator

Thank you sir. We’ll take the next question from the line of Mr. Sahil Sanghvi from Monarch Networth Capital. Please go ahead sir.

Sahil Sanghvi — Monarch Networth Capital — Analyst

Thank you for the opportunity and magnesium’s following a very good business plan. Sir, I have mainly two questions. First, you have an order book of INR7,000 crores. Can you just look at how much is product based orders and EPC orders? And also geography export and in publish…?

Mahendra Nahata — Managing Director

One thing I would like to make clear that product revenue, product orders are received on a regular base if not like EPC contract that you receive a EPC contract of INR2,000 crores and that is a limited over five years timeframe. It is the product — it is the — those equity contracts, those orders are of different kind. But when you come to a product order, they are received on a regular basis, like for example, fiber optical to keep on routing order INR60 crores, INR80 crores, INR40 crores, INR30 crores, INR100 crores.

We keep on receiving orders like that, whereas, the orders for this contract, EPC contracts come in bulk. So orders would not reflect the current position. But in terms of order book right now, I would say, just let me get the numbers, in terms of orders, I would say, about 70% orders are of EPC contract, 30% would go into product contracts.

Sahil Sanghvi — Monarch Networth Capital — Analyst

Right, sir. And this product-based order proportion will keep on increasing, right? I mean, once we — next year we launch…

Mahendra Nahata — Managing Director

Yes. This will increase — this will definitely increase because of increased number of products, which are being inducted and also at the same pattern, increase in capacity. But let me tell you one more thing. Think of the revenue, you see suppose you see in reverse, prior based revenue is 58%. So that is a difference I want to talk about that order does not represent real revenue were orders are EPC contract of bulk orders coming at one point of time. Product orders are coming in small — large number of orders, but small quantities. So that’s how you see that

Operator

Right sir. And what would be the export domestic mix over year?

Mahendra Nahata — Managing Director

Export and domestic mix in our — our export has been about 17% of the revenue. 83% has been domestic. Last year, it was 7% and 93%. It is now 17% and 83%. What we are targeting to reach to 25% in the current financial around 25%.

Sahil Sanghvi — Monarch Networth Capital — Analyst

Right. And my second question would be, sir, the margin sort of trajectory that you make in these telecom products, what could that be? I mean, I understand it defers product to product, but what range can we expect for the telecom products?

Mahendra Nahata — Managing Director

It defers from fees, you’re right, because some products which are highly competitive and number of manufacturers are more, but demand is high, the margin is less. So generally, it will vary. Generally, the net margins will be between 15% to 30%, generally.

Sahil Sanghvi — Monarch Networth Capital — Analyst

15% to 30% is the net margin number.

Mahendra Nahata — Managing Director

Net margin

Sahil Sanghvi — Monarch Networth Capital — Analyst

And EBITDA would be, sir, any idea?

Mahendra Nahata — Managing Director

EBITDA could be around, I think, 35% to 40%.

Sahil Sanghvi — Monarch Networth Capital — Analyst

Okay, okay. That’s all from my side.

Mahendra Nahata — Managing Director

Thank you.

Operator

Thank you, sir. We take the next question from the line of Mr. Hemant Kothari from Enel [Phonetic]. Please go ahead.

Hemant Kothari — Enel — Analyst

Congratulation for a good set of numbers. Sir, I wanted to ask, when will the defense product revenue contribution will rise significantly which you’re actually — where we will see…

Mahendra Nahata — Managing Director

Defense, as I’ve said in our last conference call also, it’s a market with a lot of purulent is required. What we are doing — working on various products, which includes electronic fuses, which includes upgradation of BMP 2, which includes night vision sites, all three, four will speak through software-defined radio, these kind of products. But I don’t expect any significant revenue coming in 2023, 2024. I expect revenue starts showing up 2024, 2025.

But when it shows up, it is going to be a highly sustainable because for us to enter into the market, it is going to be difficult for others to enter into the market. What are the products you have gone ahead with? Night vision sites for the small arms, which is for rifles and light machine guns, we have designed ourselves, and with one micron technology where the core has also been designed by us. First time in any company in India would have designed 12 Macron core. And worldwide also not many companies have designed 12 micron core.

So — and we are now going into the next version, we are going to be working on eight micro core. So but that is a part. So this 12 micro core based night vision device, it is already quoted in tenders, we have already participated in tenders and I expect to get some orders in the current year, which will start fulfilling in the current year. So some small revenue may come up from these contracts. But the higher revenue, I expect starting from next financial year only. It’s long term. It is a long time for testing trials kind of things. So night vision, upgradation of BMP 2, all takes time. So, we have to invest money. But finally, the return would come and it will be a long, long term sustainable.

Hemant Kothari — Enel — Analyst

Annual demand from the — like Indian defense industry for this kind of product in number?

Mahendra Nahata — Managing Director

So, I think — I don’t have current number right now. But out of the defense budget of INR250,000 crores, they’re spending about 40% on capital acquisition. So you can easily say INR1,00,000 crore is being spend — INR1,00,000 crores plus is being spent by government of India in acquisition of arms every year. Now the government is all the time saying increase production of these arms and emulations indigenously and there is a huge impetus on that, huge impetus on that.

And which is resulting in increased domestic production and domestic acquisition of the arms. So we are in late entry. But whoever are there in the market, they are having increasing their revenue and that would be in our case also because we have entered late, but the products are coming up. So demand is opportunely huge, and government is now saying produced indigenously. So indigenous demand will go very high, which is good for us.

Hemant Kothari — Enel — Analyst

Thank you. So is it possible we can achieve like INR1,000 crores, INR1,500 crores of turnover from defense product in like, let’s say, next five years annually?

Mahendra Nahata — Managing Director

It would be very difficult to comment like that. But yes, I can say that the opportunity is good, and we can definitely target INR800 crores to INR1,000 crores of revenue in the next four to five years, we can definitely target. It all depends upon how the contracts are finalized. But yes, four to five years, we can definitely target because we have done huge amount of work in defense electronics. So we can definitely target that.

One of the products, we have already started bringing in the market, the radars. We have already designed and bring into the market where customer presentation are being done. But the surveillance radars broader and critical infrastructure protection for short-range, medium-range, long range radars in all three have been developed, designed and developed by higher technology, latest technology radars which are already in the market.

Hemant Kothari — Enel — Analyst

Yes, yes, yes. That’s great if we achieve INR1,000 crore numbers over four years.

Mahendra Nahata — Managing Director

So we definitely can target.

Hemant Kothari — Enel — Analyst

Right, right. Sir, my next question because coming year is the election year for India. So how [Indecipherable] about your EPC and basically the order book side of the business where we can have a large contact getting?

Mahendra Nahata — Managing Director

I don’t think it will be much impact the numbers. This – in future contract you have customer demand base. Private operators are not impacted at all. They would do the contract as they require. Yes, government contracts sometimes are at an increased pace before the — one year before elections because government would like to show the completion of more projects, when the election comes, it’s natural for any government in a state or central government. So yes, that may have some increased award of contracts. But yes, I don’t see any major approval in that.

Hemant Kothari — Enel — Analyst

Okay. Sir, my last question, for FY ’25, what kind of console revenue vision what we are aiming for actually at a company level? So what kind of…

Mahendra Nahata — Managing Director

The INR4700 crore revenue which we achieved in the current financial year, we are definitely aiming for increase in about 15% to 20% definitely it will increase because of the increased capacity and bringing new products 15% to 20% the aim is there, of course.

Hemant Kothari — Enel — Analyst

Okay, sir. Okay. Fair enough. Thank you very much all the rest.

Operator

Thank you, sir. We take the next question from the line of Mr. Rakesh Roy from Omkar Capital. Please go ahead, sir.

Rakesh Roy — Omkar Capital — Analyst

Hi, sir. So my first question is regarding defense, sir, how much margin we are making in defense business?

Mahendra Nahata — Managing Director

Look, you know Rakesh, as I said we have not started making revenue on the defense business. So there’s no question of margin right now.

Rakesh Roy — Omkar Capital — Analyst

Yes, sir. Hello.

Mahendra Nahata — Managing Director

So once the defense business starts and revenue starts incurring, yes, I expect something like 15% margin to net margin to come from this business because this is so difficult to entering entry barriers are so high. Sales, you would make 15% margins in the defense business when the revenue starts coming up.

Rakesh Roy — Omkar Capital — Analyst

Okay. Sir, are we looking any joint venture with any foreign player to bring in new technology for in India?

Mahendra Nahata — Managing Director

No, no. Right now, we are not looking at any of such joint venture. Discussions keep on going on, a number of companies. And these are going on at this point of time. But these are not a sense where I can say that we are believing this or that. Our more emphasis is to develop products indigenously. So that even if you have a small number of products, maybe revenue is less, but your profitability is high. So that’s the way we are working.

Rakesh Roy — Omkar Capital — Analyst

Okay. Sir, in defense business, a different product, we would directly bid to government or we get that order from the other place like this BL or like this one?

Mahendra Nahata — Managing Director

So mostly, we are directly bid into the Army and Air — this kind of contract, not be and all that. There’s a couple of orders have come on turnkey which are true not through some other PSU has got and we got orders from them. Three, agreed the terms and condition. We have got a contract for one of the Air Force networks about INR300 crores which is under execution. But yes, the equipment driven like thermal weapon sites and all that, we have been directly.

Rakesh Roy — Omkar Capital — Analyst

Okay. Sir, thank you so much.

Operator

Thank you. [Operator Instructions] We’ll take the next question from the line of Mr. Balasubramaniam from Arihant Capital. Please go ahead, sir.

Balasubramanian — Arihant Capital — Analyst

Thank you so much for taking my question, again sir. On the balance sheet side, operational buyers credit and supplier credit has increased to INR14 crores to INR168 crores in FY 2023. Could you please share more details in that balance sheet item?

Mahendra Nahata — Managing Director

Balasubramanian, this is a normal business, I mean transition and facilities being offered by the commercial bank. So what happens in some cases, wherever we open bank on their own have a scheme to give us a credit of 60 days or 90 days. That is covered under the supply stat and that is being shown separately in the balance sheet. These deals are against bonding. That will improve separately.

Balasubramanian — Arihant Capital — Analyst

Okay. Got it, sir. Thank you. That’s it from me, sir.

Operator

Thank you, sir. We’ll take the next question from the line of Mr. Dipesh Sancheti from Manya Finance. Please go ahead.

Dipesh Sancheti — Manya Finance — Analyst

Yeah. Am I audible?

Operator

Yes, sir.

Mahendra Nahata — Managing Director

Yes.

Dipesh Sancheti — Manya Finance — Analyst

My first question was actually regarding the antidumping duty. Have we applied to the government for any anti-dumping duty for optical fibers because today on a few of the business channels, there was a flash that there might be an antidumping duty and the companies have applied for anti-dumping duty on optical fibers?

Mahendra Nahata — Managing Director

We are neutral to this. We have not applied. We are neutral to this because our own fiber optic capacity for production of fiber is going up. So if the duty is lower, we have protecting it now, we have no problem. So what has been recommended by commerce needs to the financing – yet to be accepted and finalized. But yes, it has been recommended by government ministry. So we are quite neutral to this because we produce so much of fiber by ourselves.

But even if the duty is there, it is not impacting us. Moreover the important point is that there is no anti-tempering duty on the fiber, which you use for export of cable. If I [Indecipherable] just cable for exports, there is no anti-dumping duty there. So when we are importing fiber lot of it is for exports on it. So we would not be impacted by that either. Domestic market, we are producing fiber to address our domestic customers. So we would be rather [Indecipherable] then being – harmed in anyway. And with our increase in capacity, we have a fiber production.

But the problem would be the smaller players, smaller players who are not producing their own fiber they would have a lot of a problem because they will have to pay a higher price and their competitiveness will be a little lower. So I really don’t support this anti-dumping duty because people should be competitive enough to face competition. I really don’t support, but as a company, we are not impacted.

Dipesh Sancheti — Manya Finance — Analyst

Okay. So — but if there is any anti-dumping duty, it will be beneficial for our company since we are integrated in all terms?

Mahendra Nahata — Managing Director

I’m neutral to that. I’m neutral to that. And ultimately, that — ultimately to beneficial.

Dipesh Sancheti — Manya Finance — Analyst

Ultimately it will be beneficial. Can you tell me – can you again share the number of how much has been recommended by the commerce ministry?

Mahendra Nahata — Managing Director

No. Its — yesterday only it is different from company to company, country to country. So China, where an example is most of the fiber is coming because some of the companies are about INR50 per fiber kilometer in terms of transformation to dollar No, no, or $0.5 sorry, $0.5, $0.5 per kilometer, which should amount to about INR40, INR45, some of them are a little higher, some of them are little lower.

Dipesh Sancheti — Manya Finance — Analyst

Okay. As a percentage-wise, how much is it?

Mahendra Nahata — Managing Director

And if you take a price of fiber as small dollars on average, it would be about 11%, 12%?

Dipesh Sancheti — Manya Finance — Analyst

11%, 12% Okay. And sir, my second question, last one is actually, if you can give us a revenue mix product wise for this quarter or this year?

Mahendra Nahata — Managing Director

No revenue mix — if you ask only for the to look at the revenue mix for the products or you are talking on overall basis?

Dipesh Sancheti — Manya Finance — Analyst

On overall basis, as in how much revenues optical cables has done, how much has the been the product?

Mahendra Nahata — Managing Director

I can tell you. On a consolidated basis, 57% — or 56% of revenue has come from products, 44% from Turnkey. Now if you go to the product itself, real products, 87% has come from optical fiber cable rest has come from other areas.

Dipesh Sancheti — Manya Finance — Analyst

Yes. Okay. And this is set to increase in the coming years?

Mahendra Nahata — Managing Director

Two things are going to happen. One the revenue from other products, telecom and electric for significantly. So overall revenue from fiber optic cable increased, but percentage may go down. Like for example, our optical revenue cable revenue has been INR2,300 crores in last financial year. This was INR1,787 crore in the year before that and maybe INR1,200 crores year before that. So INR1,200, 1,700 and 2,300 crores. This kind of number, it is increasing.

Current year, we are targeting INR2,800 crores. number will increase, but the INR130 crore, INR8 crore of revenue from products, which I mentioned. In two years, INR1,000 crores, INR800 crores, INR1,000 crores. So percentage in table will decline, but overall revenue from cable we will keep on increasing networking products.

Dipesh Sancheti — Manya Finance — Analyst

And from the current order book, what is the — how much is the percentage of order book in optical fibers, as you — INR7,500 crores, yes, INR7,500 crores order book, how much is the optical fibers percentage?

Unidentified Speaker —

It is 10%. It is 10% of the total order book currently. In opti fiber cables, we were running order book. So we keep receiving orders regularly and those are executed.

Mahendra Nahata — Managing Director

Yes. That’s what I said in the beginning. In products, orders keep on coming in small quantities, and they are keeping on being executed. So that is not going to reflect you the percentage of revenue on an overall basis. But yes, orders are there, and it:s keep on coming on a regular basis.

Operator

Thank you, sir. We take the next question, Mr. Hardik Vyas from Economic Times. Please go ahead, sir.

Hardik Vyas — Economic Times — Analyst

Hi, sir. I had a couple of questions. The first one is, you guided that roughly INR5,000 crores of EPC order that we have, so I hope that they are not low margin orders as we saw in the current quarter, less than 5% margin, and they would be of the normal margin kind 8% to 12% margin.

Mahendra Nahata — Managing Director

Hi, sir. I had a couple of questions. The first one is, you guided that roughly INR5,000 crores of EPC order that we have, so I hope that they are not low margin orders as we saw in the current quarter, less than 5% margin, and they would be of the normal margin kind 8% to 12% margin.

Hardik Vyas — Economic Times — Analyst

Okay. So the other question is, sir, what is the idea on OST pricing? Has the prices been gone up because of the demand increasing in the U.S. and world over or the pricing remains more or less the same?

Mahendra Nahata — Managing Director

The prices have gone up a bit. I will tell you the fiber realization per fiber kilometer has been higher. Quarter one of the last financial year, it was about INR1,100 per fiber kilometer for the cable. Now, in the quarter four, we have achieved the number of INR1,234 per fiber kilometer. Now, it does not mean that everybody would have achieved that. It all depends on the mix of the products and how much you’ve exported, how much you have given to the private operators, how much you have sold in the export market. But generally, yes, it has gone up by, let’s say, 10% or so.

Hardik Vyas — Economic Times — Analyst

Okay.

Mahendra Nahata — Managing Director

Which is significant, 10% is very significant.

Hardik Vyas — Economic Times — Analyst

Yes. Sir, my last question is what is our status on 5G products, the contribution is limited as we speak right now, but how execution is likely to pan out over the next six to eight quarters, because a lot of products we are going to introduce in the market in the coming year and the next.

Mahendra Nahata — Managing Director

As I said, — as I said, 5G products are being bought by the company. So on another two months, it will come and start coming one-by-one in the market. So I would say that, you will see the products being in market in next two to three months, Tilter and all that being done by operators and orders are being placed. Orders would start getting executed, 12 of quarter three of the current financial year — quarter three of the current financial year. So, after they start getting included in quarter three, it will continue overall basis for many quarters to come, absolutely. They are going to upgrade it, they are going to get new demand, going to be demand from different other countries, different operators, it is going to be increased every quarter.

Hardik Vyas — Economic Times — Analyst

So this is — for the products are 5G EPC as well, because of operators who also will be, wanting us to give some EPC contacts with them.

Mahendra Nahata — Managing Director

So products are products, many times we operator with due to the contract installation commission included, that is not really EPC. There’s not really EPC that is contract with selling products including installation, and commissioning.

Hardik Vyas — Economic Times — Analyst

Okay. Okay. So from third quarter of this year onwards….

Mahendra Nahata — Managing Director

Yeah we expect if the revenues start coming up. I think operator, now we will take one or two questions more, because it’s already quite a lot of time.

Operator

Yes. Thank you, sir. Ladies and gentlemen, due to time constraint, that was the last question for the day. I would now like to hand the conference over to the management for closing comments. Thank you and over to you, sir.

Mahendra Nahata — Managing Director

Thank you very much to all of you for having patience and listening to the results of the company for financial year ended 2023 and quarter four of 2023 and giving me the time and opportunity to explain you. What the steps company has taken to sustain revenue is not only sustainable but to increase revenue and profitability significantly in future coming years, what the steps company has taken but instead company has taken. I really enjoyed the questions. And I’m sure answers would I have given you would have satisfied the queries which you had. And thank you very much once again for your time for being on the call. Thank you very much.

Operator

[Operator Closing Remarks]