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With the OFC industry facing strong tailwinds, STL focus is on improving margins

Strong investment momentum is continuing in 5G, fiber-to-the-home, fiber-to-the-x, datacenter and citizen network deployments. 5G is becoming the fastest growing technology in the world today. Telecom operators are expected to invest more than USD 500 billion in 5G from 2022 to 2025.

Data center deployments are also increasing. Data center CapEx is set to actually increase from USD 263 billion globally to USD 377 billion by 2026. Particularly in India, the data center investments are expected to surpass over USD 20 billion by 2025.

On the Citizen Network side, the US, for example is investing USD 97 billion in broadband through multiple programs like RDOF, BEAD, Middle Mile programs etc. Similarly, U.K., Germany, France, Austria are countries where cumulatively about USD 8 billion, USD 14 billion, USD 24 billion, and USD 2 billion respectively under various programs are being utilized to build digital programs to connect the unconnected. The Indian government is looking to move forward on the Phase III of BharatNet to connect all the villages and over USD 10 billion is expected to be invested.

The Optical Interconnect demand in the global market, excluding China is also expected to grow from USD 7.5 billion in 2021 to close to USD 10 billion by 2025.

The global OFC demand is expected to reach 624 million fiber kilometers by 2025 from 534 million fiber kilometers in 2022.

In India, 5G deployments are picking up pace. The two telcos, Bharti Airtel and RJio are rolling a 3,500 sites per week cumulatively.

Telecom operators are expected to invest between USD 18 billion to USD 22 billion and non-spectrum CapEx between now and 2025. This includes between USD 1.5 billion to USD 2 billion for fiber rollout specifically in the next two to three years and preparation of the 5G.

Tower connectivity is expected to grow from 30 percent to 70 percent and significant fiber will also be required. In terms of cable kilometers, telcos are expected to deploy more than 2 lakh cable kilometers in the next 18 to 24 months.

STL strategy. With favorable industry tailwinds, STL strategy is straightforward and includes two levers. Focus on growing the optical business and consolidating the services business.

The optical fiber cable business has been consistently gaining market share. In nine months FY’23, the manufacturer had an estimated 12 percent market share globally.

Commercial production has started in its optical fiber facility in China in Q3 FY23. In the US, commercial production is expected to start in the current quarter, Q4 FY23.

The Optical Interconnect attach rate has increased from 3 percent in FY21 to 10 percent in the nine months of FY23. The company plans to reach the attach rate to 40 percent by Q4 FY25.

On the Services business, STL’s focus is on cash and profitability rather than chasing revenue growth. The company is focused on building a profitable order book by picking up projects in the Indian private segment. In the Services revenue split, revenue from India private has increased from 31 percent in FY22 to 42 percent in nine months FY23.

Product execution is on track, be it BharatNet, fiber rollout for Indian telco or fiber rollout for private operators in UK.

The company’s priority in terms of capital allocation is investments in the optical business. This includes optical fiber cable capacity expansion, Optical Interconnect expansion and new product development. Margins and working capital cycle in the Optical Business have improved.

Financials continue to improve. Order backlog at end of Q3 FY’23 increased to Rs 12,054 crores. Revenue mix is shifting to customer segment and geographies of choice. The share in telco segment is steadily increasing. In terms of geographies, market share in America and Europe is going up.

Q3 FY23 revenue grew 12 percent QoQ to Rs 1,882 crores. EBITDA from continued operation went up by 8 percent on quarter-on-quarter basis to Rs 252 crores.

Moving forward, STL aims to reduce its debt. The debt has peaked and, going forward, the effort is to ensure progressive reduction over a period of time.

Based on Earnings Call on January 27, 2023.

CT Bureau

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