Sterlite Technologies Limited — Q1 FY25 earnings call

Call held 30 Jul 2024

Management summary

Sterlite Technologies reported sequential improvement in Q1 FY25, driven by a focus on cost optimization and strategic growth areas. Consolidated revenue and EBITDA margins improved QoQ, and the company achieved a record optical connectivity attach rate. Management expressed bullishness on long-term demand from AI, 5G, and FTTx, particularly highlighting the data center segment as a significant future opportunity, while actively working to reduce fixed costs and improve factory utilization.

Highlights

  • Consolidated Q1 FY25 Revenue stood at ₹1,218 crores, showing quarter-on-quarter improvement.

  • Consolidated Q1 FY25 EBITDA was ₹93 crores, with an EBITDA margin of 7.6%.

  • Optical Networking Business (ONB) revenue was ₹810 crores with a 10.9% EBITDA margin.

  • Achieved highest-ever optical connectivity attach rate of 23% during the quarter.

  • Net debt reduced by ₹769 crores from FY24.

  • Open order book stands at ₹9,883 crores at the end of Q1 FY25.

  • Targeting 25% of revenue from data center suite of products in the medium term.

  • Demerger of global services business progressing, with NCLT approval expected in 3-4 months.

Concerns

  • Low factory utilization impacting Optical Networking Business (ONB) margins.

Key financials

  1. Consolidated Revenue ₹1,218 Cr
  2. Consolidated EBITDA ₹93 Cr
  3. Consolidated EBITDA Margin 7.6%
  4. After Tax Losses ₹47 Cr
  5. Net Debt Reduction ₹769 Cr
  6. Open Order Book ₹9,883 Cr

What they filed

Q1 FY27: revenue up 87.4%, net profit up 1870.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue1,074 998 1,052 1,019 1,034 −4%1,257 +26%1,441 +37%1,910 +87%
EBITDA117 106 125 132 129 +10%120 +13%195 +56%385 +192%
Net profit-14 -24 -40 10 4 +129%-17 +29%59 +248%197 +1870%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of Revenue
₹1,236 Cr Total
  • Optical Networking Business ₹810 Cr 65.5%
  • Global Services Business ₹355 Cr 28.7%
  • STL Digital Business ₹71 Cr 5.7%

Guidance & targets

ESG

  • Net Zero Emission ESG · by 2030 · High confidence by 2030
    On the ESG front, we are committed to our goal of being net zero emission organization by 2030.

    — Ankit Agarwal, MD, STL

Volume

  • Optical Fiber Cable Volumes Volume · by 2028 · High confidence 662 million fiber kilometers

    From 536 million fiber kilometers today

    the optical fiber cable volumes is expected to go up to 662 million fiber kilometers by 2028, up from 536 million fiber kilometers in 2023.

    — Ankit Agarwal, MD, STL

Revenue

  • Data Center Suite Products Revenue Share Revenue · medium term · High confidence 25%
    approximately 25% of our revenue should come from our data center suite of products in the medium term.

    — Ankit Agarwal, MD, STL

Market Growth

  • North American Optical Cable Demand CAGR Market Growth · till 2028 · High confidence 13%
    CRU has projected that the North American optical cable demand is expected to grow at approximately 13% CAGR till 2028.

    — Ankit Agarwal, MD, STL

  • India FTTx Installations CAGR Market Growth · 2023 and 2028 · High confidence 26%
    India is expected to lead the global growth in FTTx installations, with 26% CAGR expected between 2023 and 2028.

    — Ankit Agarwal, MD, STL

  • India Fiberized Mobile Sites Market Growth · by 2029 · High confidence 63%

    From 38% today

    the average fiberized mobile sites of towers in India stands 38% in 2024 which is expected to increase to 63% by 2029.

    — Ankit Agarwal, MD, STL

  • Europe FTTx Passes Growth Market Growth · next five years · High confidence 4%
    Europe FTTx passes is expected to grow by 4% at least for the next five years.

    — Ankit Agarwal, MD, STL

  • North America Data Center Capacity CAGR Market Growth · 2024 and 2029 · High confidence more than 10%
    data center capacity in North America projected to grow by more than 10% CAGR between 2024 and 2029.

    — Ankit Agarwal, MD, STL

  • Europe Data Center Capacity CAGR Market Growth · 2027 · High confidence 8.5%
    Europe is expected to grow at 8.5% CAGR in 2027.

    — Ankit Agarwal, MD, STL

  • India Data Center Capacity Market Growth · now and 2028 · High confidence more than triple
    In India, the existing data center capacity is expected to more than triple between now and 2028.

    — Ankit Agarwal, MD, STL

Growth

  • Digital Business Growth Growth · this current financial year · Medium confidence at least 5-7%
    we see 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 5-7% kind of growth in the digital business.

    — Tushar Shroff, CFO, STL

Cost

  • Fixed Cost Reduction Cost · sustainable basis · High confidence 4-5%
    we are targeting to reduce fixed costs, at least to the extent of 4-5% on sustainable basis.

    — Tushar Shroff, CFO, STL

Market Outlook

  • US Market Pick Up Market Outlook · next 1-2 quarters · Medium confidence next 1-2 quarters
    we expect US to pick up in next 1-2 quarters, that is what because the inventory levels are going down and as we see that US starts picking up, there are two advantages to it.

    — Tushar Shroff, CFO, STL

Margin

  • ONB EBITDA Margins at High Utilization Margin · when utilization is 75-80% · High confidence 20% plus
    we are confident that structurally, this is a business that we can operate at 20% EBITDA margins.

    — Ankit Agarwal, MD, STL

Profitability

  • Digital Business EBITDA Breakeven Profitability · by year end · Medium confidence by year end
    Yes, for the digital business, yes that is directionally that we have also spoken about and now with Naveen coming on leadership, that's what he's driving as well.

    — Ankit Agarwal, MD, STL

Market context

  • Global Demand Growth (excluding China) Market Growth · 2023 to 2028 · High confidence 7.1% annual growth
    projects healthy 4.3% annual growth in global demand and a strong 7.1% growth in annual demand from 2023 to 2028 if we exclude China.

    — Ankit Agarwal, MD, STL

  • Global Services EBITDA Margin Margin · this financial year · Medium confidence 8-10%
    steady state margin that we are expecting is in the range of 8-10% EBITDA margin, that is what we are targeting for this particular financial year.

    — Tushar Shroff, CFO, STL

Risks & concerns

  • Low factory utilization impacting Optical Networking Business (ONB) margins.

    high

    Current factory utilization is below 50%, leading to lower EBITDA margins in ONB, but expected to improve with demand pickup.

    Management acknowledged

  • High inventory levels in US/Europe impacting demand.

    medium

    Inventory levels in the US and to a lesser extent Europe/UK have been high, but are now coming down, expected to normalize in 1-2 quarters.

    Management acknowledged

  • Anti-dumping duty by European Commission on Indian fiber optic cable products.

    medium

    Provisional anti-dumping duty is in place, but management is confident in its case and its Italian facility to serve European customers.

    Analyst acknowledged

  • Increase in freight costs due to global events (e.g., Red Sea impact).

    medium

    Freight costs increased by 2-3% in Q1 FY25, partly due to the Red Sea impact and changes in freight mix; company is working on cost optimization.

    Analyst acknowledged

  • IT industry slowdown impacting STL Digital business revenue.

    medium

    STL Digital saw a QoQ revenue decline due to the broader IT sector slowdown, though management expects 5-7% growth for the full year.

    Management acknowledged

Areas of evasion (2)

  • Specific volume details for optical cable
  • Exact capacity numbers for Italian facility

Q&A highlights

3 direct
Demand trend for core business (excluding interconnect) and outlook on interconnect business after attach rate increase. Direct
I would say principally we remain positive about the demand. We do see the inventory levels coming down, and certainly between next one to two quarters, this should result in improved demand for our optical cable products. On the connectivity part, principally I want to reiterate that we do endeavor to sell our cables and connectivity together as a solution.

Clarifies management's positive outlook on overall demand, expected inventory digestion timeline, and strategic focus on selling integrated cable and connectivity solutions.

Asked by Nikhil Choudhary

Potential delay in BEAD program due to political situation in the US. Direct
In terms of the BEAD project, definitely there is a 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, that probably got pushed out by 3-4 months or so.

Addresses concerns about a major US government funding program, confirming no political impact but a slight delay in its market effect, providing clarity on a key demand driver.

Asked by Balasubramaniam

Reasons for the collapse of margins since the 2018-2019 peak. Direct
Currently, our factory utilizations are lower, they are sub 50% and as the volumes pick up, especially in Europe and US and maybe to some extent more in India we are confident that structurally, this is a business that we can operate at 20% EBITDA margins.

Provides a clear explanation for the margin decline (low factory utilization) and reiterates confidence in achieving historical high margins once utilization improves with market recovery.

Asked by Rohan Patel

3 min read 7 chapters

Detailed narrative

Q1 FY25 Financial Performance Overview

Sterlite Technologies reported a quarter of sequential improvement in Q1 FY25, with consolidated revenue reaching ₹1,218 crores. The company's consolidated EBITDA stood at ₹93 crores, translating to an EBITDA margin of 7.6%. Despite these improvements, the company reported after-tax losses of ₹47 crores. A notable financial achievement was the reduction of net debt by ₹769 crores from FY24, and the open order book remained strong at ₹9,883 crores at the quarter's end.

Optical Networking Business (ONB) & Market Outlook

The Optical Networking Business generated ₹810 crores in revenue, achieving an EBITDA margin of 10.9%. While cable volumes were flattish QoQ, the connectivity segment saw positive growth, leading to a record optical connectivity attach rate of 23%. Management acknowledged a 7% global decline in OFC consumption in 2023 but projected a robust recovery, with optical fiber cable volumes expected to grow from 536 million fiber kilometers in 2023 to 662 million by 2028.

Global Services & STL Digital Business Performance

The Global Services business contributed ₹355 crores to revenue, with an EBITDA margin of 6.9%, driven by a focus on value-added services and project mix. The STL Digital business recorded ₹71 crores in revenue, showing year-on-year growth despite a quarter-on-quarter decline attributed to the broader IT industry slowdown. This segment reported an EBITDA loss of ₹17 crores, which is trending downwards on a year-on-year basis.

Strategic Focus Areas & Demerger Update

Sterlite Tech's strategic priorities include expanding OFC market share, increasing optical connectivity attach rates, and rapidly developing a data center product portfolio, aiming for 25% of total revenue from this segment in the medium term. The demerger of the global services business is progressing as planned, having received 99.98% approval from equity shareholders and 100% from secured and unsecured creditors. Final NCLT approval is anticipated within the next three to four months, with the resulting company expected to be listed by year-end.

Cost Optimization & Margin Improvement

The company is committed to aggressive cost optimization, targeting a 4-5% reduction in fixed costs on a sustainable basis across all business units. Management explained that current lower ONB margins are primarily due to factory utilization being below 50%. They expressed strong confidence in achieving 20%+ EBITDA margins for the optical business once utilization rates recover to 75-80%, which is expected as demand picks up in key markets like the US and Europe over the next 1-2 quarters.

AI & Data Center Opportunity

AI and machine learning are identified as transformative forces driving significant demand for data center connectivity. Management highlighted that AI data centers are estimated to require up to 18 times higher fiber content compared to traditional CPU-based data centers. This presents a massive opportunity, with North American data center capacity projected to grow at over 10% CAGR between 2024 and 2029, and India's capacity expected to more than triple by 2028.

Market Demand Drivers & Government Projects

Beyond AI, global demand is bolstered by 5G network expansion and FTTx deployments, with India's FTTx installations projected to grow at a 26% CAGR between 2023 and 2028. Government-funded projects, such as the BEAD project in the US and BharatNet in India, are expected to further stimulate demand. While the BEAD project's impact on cable requirements is slightly delayed by 3-4 months, it is bipartisan and not expected to be affected by political situations.

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