Sterlite Technologies Ltd Management Discussions

Optical Fibre: At the core of Digital Future

November 30, 2022: OpenAI released an early demo of ChatGPT.

The world has not looked back since. The past couple of years have seen tectonic shifts in our march towards digitalisation, and its ripple effects are seen across sectors, from telecom, education, healthcare, manufacturing, logistics, e-commerce, etc. In recent years, we have seen the rise of AI/ML, loT, VR, AR, and cloud computing. This has marked a new age of digital transformation characterised by unprecedented opportunities for innovation, efficiency gains, and societal advancement.

Artificial Intelligence and Machine Learning aren?t just buzzwords anymore

The successful launch and quick adoption of ChatGPT and its counterparts like DALL-E, BARD, Gemini, etc., are a testament to how buzzwords like AI and ML are actively influencing todays advancements. McKinseys research indicates that GenAI applications could add up to $4.4 trillion to the global economy—annually. Indeed, it would not be an exaggeration to state that, within the next few years, any entity within the technology, media, and telecommunications sectors that is not integrated with AI will be rendered obsolete or ineffective.

IoT gathering pace

The recent years have led to a notable surge in the adoption of IoT-based solutions across various sectors, including home automation, supply chain management, smart cities, Industry 4.0, and consumer electronics such as smart wearables. According to the Ericsson Mobility Report (November 2023), broadband IoT (4G/5G) is expected to connect the largest share of cellular IoT devices through 2029.

Virtual Reality is a real part of everyday life

In 2023, virtual reality (VR) continued its trajectory towards mainstream adoption, fuelled by significant advancements in hardware, software, and content. Statista reveals that the global VR Hardware market is forecasted to achieve a revenue of $11.4 billion by 2024 end, and grow at a CAGR of 9.97% from 2024 to 2028, resulting in a projected market volume of $16.7 billion by 2028.

Cloudification and edge computing are witnessing an explosive surge

With technology adoption and new use cases emerging rapidly, demand for network and computing infrastructure with ample capacity, low latency, agility, and resilience is intensifying. Initially focused on consumer applications, cloudification now extends to underlying networks, exemplified by cloud-native 5G platforms. Described as the banner year for the cloud market, multiple research reports say that

the global cloud computing market is estimated to be at $2,495.2 billion by 2032, growing at a CAGR of 17.8% from 2024 to 2032.

Network leisure activities such as online gaming and video consumption continue to grow rapidly

The global online gaming industry has seen a significant surge in popularity, especially in countries such as South Korea, China, and the United States. Reports indicate that by 2027, the worldwide user count is expected to reach 1.2 billion, with anticipated revenues of $28 billion in 2024, growing at a CAGR of 5.2% from 2024 to 2027, with volumes estimated at $33 billion by 2027. We have seen how videos become the preferred mode of accessing information. Projections indicate that by 2025, videos will constitute 82% of all consumer internet traffic. This shift in consumer behaviour has driven new levels of automation, optimisation, and personalisation.

So much data; what lies beneath it? These technologies need to ride on the most competent networks

With our hunger for the digital possibilities offered by AI, loT, and smart devices, the spotlight is now on the underlying network infrastructure. Earlier, the networks were operating in the background, but now, each fibre cut in our adjoining areas rings loudly for us. Now, we know that what we want from technology cannot be achieved without changing the game for networks. The name of the game is fiberisation, and we need more and more of it.

Earlier, fibre was limited to the data centres powering the network. Slowly, it made its way to the national long-distance networks and then moved further into the metro and our transport networks. Now, the talk of fibre reaching homes and enterprises is also commonplace, although much remains to be achieved in this regard. So, after our homes and premises, what is the next frontier for fibre? Well, fibre to the room and devices is not very far off.

In the more immediate timeframe, fibre will penetrate deep into wireless, data centres, and private networks and reach the vast majority of the worlds population through digital connectivity programs.

Reflecting on FY24

Last year was challenging for the Optical Industry as we navigated inventory digestion, CAPEX revisions, and slowed deployments by industry players due to high inflation, interest rates, and labour constraints. Despite a turbulent market, we recorded a strong revenue of 75,478 crore in FY24.

In line with our previous commitment to strengthen our balance sheet, we continued our concerted efforts on cash generation and net debt reduction. In FY24, we divested our holdings in MB Manshaan for ~€6 million and operationally reduced our Net Debt by 7323 crore. We explored options for a fund-raise over the last year and successfully completed a QIP of 71000 crore in April 2024 with several top-tier funds investing in us!

In our Optical Networking Business (ONB), we have broken ground with marquee clients like Archtop, Windstream, and Lumos, amongst others. In FY24, we also largely completed our CAPEX cycle with the operationalisation of our greenfield optical fibre cable manufacturing facility in Lugoff, South Carolina, a fully BABA- compliant state-of-the-art facility to serve our US customers from their home ground.

We maintained ~ an 8% market share in the global ex-China optical fibre cable market amidst a challenging environment in which previous inventory accumulated with customers and distributors impacted fresh production and sales. We made major strides on the Optical Connectivity by securing large orders in the North American region.

Within the organisation, we used this year to optimise our cost structure to become more efficient and deliver better returns from future operations. We continue to look at new markets, new product development and co-create these products with our key customers to increase our Optical Connectivity business and its attach rate.

All these steps position us well to move forward in our journey to become one of the top 3 Optical Networking companies globally.

In our Global Services Business (GSB), we focused efforts on improving opportunity qualification, execution, and project mix. These efforts started showing results during FY24.

We closely worked with leading Indian telecom players to deploy fibre-dense networks for 5G in India. By the years end, we were able to break even our UK operations.

We are on course to demerge GSB. This demerger will unlock value and unconstrained growth for the businesses.

With a vision to be one of the top IT services companies, we launched STL Digital, focusing on engineering digital experiences for customers across verticals including telecom, technology, manufacturing and healthcare. Over the last year, we scaled up the business and created a strong global customer base.

We are building the World?s Digital Backbone

Our task is cut out for us. The alignment of global needs with STLs vision in Optical Networking, Global Services and STL Digital offers a promising opportunity. Collectively, we must connect the unconnected across the world, fiberise and modernise networks and deploy them fast. 5G, FTTx, and beyond, optical, and digital solutions will continue driving digitalisation into the future.

With in-house expertise in glass science, material science, precision manufacturing, a big-picture understanding of network architectures and deployment, and a vision to become one of the top three optical solutions companies globally, we have developed Glass to Gigabit capability.

This depicts how, over the years, we have brought complete control and predictability across the digital connectivity value chain—from manufacturing our own glass preform to producing Optical Fibre to Optical Fibre cable and now Optical Connectivity products.

Our manufacturing facilities employ Indias top talent, 300+ researchers and engineers who, with continuous innovation, conceptualise and develop Optical products for our key global customers, including data centre operators and telecom service providers in the US, UK, Europe, India and MEA.

Strategic priorities for FY25

We continue to drive our 3 businesses with an eye on profitable, long-term, sustainable growth. As we enter FY25, our strategy will be to:

Grow Optical Networking Business

We shall continue to grow the optical business by increasing Optical Fibre cable market share and connectivity attach rate, driving cost leadership.

Consolidate Global Services Business

Our objective will be to consolidate the Global Services business in our preferred customer segments. We will continue to prioritise on building capability for value-added services, focus on project mix to improve profitability & work towards the successful demerger of this business.

Build Digital Businesss

We shall continue to build and scale digital business through focused investments on new technologies and domain capabilities, especially in the areas of cloud, data security, and product engineering while keeping the emphasis intact on profitability.

Each of these three businesses, with its own focused strategy and leadership, will form the basis of STL?s growth in the coming years.

Eyeing long-term sustained growth in the Optical Networking business

Network creators completely understand that networks of the future will have to be developed with a vision to support use cases like AI/ML, loT, 5G, etc. They need to be reliable, efficient and agile. This has led to a significant increase in investment in fibre-dense wireless and broadband networks. With an ambition to become the top 3 global optical company, we have also been innovating and investing in the development of Optical solutions that can provide a backbone for future digital networks.

According to CRU, Global OFC demand is forecasted to increase at a CAGR of 4.4% between 2023 and 2028. This global growth projection bakes in flattish China OFC demand, suggesting much healthier Global OFC demand growth ex-China.

During the past couple of years, both public and private players have made investments and deployed fibre networks across the world. Let us explore the pivotal roles that optical fibre will play in these sweeping global trends:

Optical Fibre : The backbone of AI data centres

Now it is palpably clear that AI will deeply touch every aspect of our lives. But all of this action starts at the data centres where GPU-based AI servers are setting new benchmarks for fibre densification in the data centres. Data centre interconnects will need nearly 5-7X more fibre to process the workloads generated by the usage of large language models, which are at the heart of artifical intelligence. While we marvel at the numerous AI applications that we access through text and voice prompts, they will continue to be powered by the dense and intricate optical fibre interconnects in the data centre. The scale of AI- led data centre fibre densification is massive.

According to CBRE, Data Centre space in the US grew by 26% last year, with a record amount under construction. Hyper scalers like AWS, Meta, Alphabet, and Microsoft have reiterated their commitment to DC space as evidenced by their CAPEX plans.

Meanwhile, investments are surging in India and the MEA region too. Indias DC industry is experiencing continuous growth due to rapid digitalisation, improved tech infrastructure, and the adoption of advanced technologies such as 5G, AI, blockchain, and cloud computing. Indias DC capacity doubled from 2020 to 2023, reaching ~880 MW by the first half of CY23 and projected at ~1,048 MW by year-end.

Optical fibre: The enabler of the true 5G experience

Tower fiberisation is crucial to encapsulate the benefits of 5G fully. Currently, established 5G markets such as the United States and China have achieved tower penetration of 80-90%, while India has set a noble target of 70% as it matures as a 5G leader.

According to Ericsson Mobility Report, 5G mobile subscriptions are to exceed 5.3 billion in 2029 from ~1.9 billion at the end of 2023. Around the world, about 280 service providers have now launched commercial 5G services, and more than 40 have deployed or launched 5G standalone (SA). As 5G deployments continue to expand, tower fiberisation will become the cornerstone of delivering an optimal 5G experience.

Optical fibre - the bedrock for FTTH

In 2023, despite a year marked by high inflation and interest rates, the number of U.S. homes with FTTH access grew by 13% to 78 million, with ~69 million unique homes passed, clearly exhibiting strong fibre demand. With public and private investments flowing in, market analysts project 78% more homes passed in the next 5 years compared to the previous half-decade.

Europe FTTH holds huge promise, led by Germany and the UK, with fiberisation finding its way into government policies and private discourse. Project Gigabit in the UK, Tres Hau Debit in France, and BVMI in Germany have poured in billions of dollars to enable FTTH connections.

India FTTH presents huge demand potential:

The most populous country today, India has a huge scope for growth in fibre per capita and no. of homes passed backed by incremental growth due to 5G.

Optical fibre - the blue-eyed boy for public & private investments

Looking ahead, substantial private and public investments are anticipated in the fiberisation of 5G towers, small cells, and FTTH to enhance fibre penetration globally. Governments are committed to connecting unconnected citizens through fibre-based broadband via national initiatives such as:

US:

• Rural Digital Opportunity Fund (RDOF) at $20 billion

• Broadband Equity, Access, and Deployment (BEAD) at $42.5 billion

• Several other programs including the Mid mile program, totalling up to $97 billion in govt funds

Europe:

• UK - Project Gigabit at ?5 billion

• Germany - BMVDs Gigabitstrategie with €12 billion

• France - Tres Haut Debit with ~€14 billion

• Italy - Italia 1 Giga with ~€49 billion

• Austria - Symmetric Gigabit with €2 billion

India:

• BharatNet phase 3 with 765,000 crore

Over the past couple of years, fibre assets have grown to become some of the most popular among private equity and institutional investors seeking stable, long-term cash flows. This is exemplified by:

• BlackRocks fibre JV with AT&T - Gigapower

• Northleaf Capitals pledged $500 million investment in Tilman Fiberco

• KKR, Zayo, Apollo Global, Searchlight Capital Partners, and Macquarie Infrastructure Partners have all aggressively invested in this space

Optical Networking Business

Well positioned to win on the back of our capability

With a stellar pedigree spanning over three decades, we aim to be one of the Top three Optical players in the world.

In 2024, we have undertaken specific decisions to enable this vision.

Gaining market share in our focus markets

Our strategic focus remains on fostering long-term partnerships with US, Europe, and India customers, particularly for their 5G and FTTH deployments. Last year, these efforts resulted in a global market share of ~8% (excluding China). In Europe and the UK, we strengthened existing relationships and established partnerships with new clients, In India, we collaborated with leading telecom companies for nationwide fibre deployments, securing substantial contracts.

Increasing optical connectivity attach rate

Following the acquisition of Optotec Italy in FY21, we entered the passive Optical Connectivity market and reported consistent growth thereafter. Our growth is quantified by the attach rate, representing the percentage of Optical Connectivity product revenues bundled with optical fibre cable revenues. As of the conclusion of FY24, our attach rate has reached 13%. This lays a strong foundation for us to offer integrated optical solutions to our customers globally.

Disproportionately focusing on developing "Industry First" solutions -

As partners and problem solvers for our key customers, we focus on R&D and product innovation as a way of working. Last year, we made some breakthrough innovations in the Optical space:

Minification of fibre

We introduced slim fibre 180-micron and then the world?s thinnest fibre 160-micron, allowing for increased fibre strand capacity and improved density within fibre cables.

4X capacity

India?s first Multicore fibre with 4X transmission capacity per fibre, within the same diameter.

De-skilling field labour

Our purpose-engineered Optical Connectivity solutions like Opto-blaze and Opto-bolt cut through installation time, de-skilling field labour, saving cost and time.

Sustainable manufacturing

We became the ‘first in the world? to launch a range of externally certified Eco-labelled methodology products.

As we move forward, we will continue to increase utilisation and sweat assets in the short term and grow Optical Connectivity in the medium term. With these priorities clearly outlined for the Optical Networking business, we are confident of gaining further momentum and getting closer to attaining global leadership in this business.

Global Services Business

Capitalising on network creation and transformation cycle

With network deployment advancing at a breakneck speed, building and managing networks and IT infrastructure will be the cornerstone of digital transformation.

On one hand, fiberisation of towers and small cells is crucial for the true 5G experience. On the other hand, connecting underserved areas with fibre-based broadband has become a clear mandate for almost all the countries in the world. These factors make fibre deployment the single largest priority for digitisation. By fiscal 2025, the National Broadband Mission targets to fiberise 70% of India?s base transceiver station (BTS), ideal for the efficient 5G services. However, with fiberisation at ~38% in India as of October 2023, a huge amount of fibre deployment is required nationally to meet this target. The government envisages fiberisation to be increased up to 5 million km by FY25 while targeting 1.5 million tower fiberisation.

In 2023, the Cabinet approved an outlay of ?1,39,000 crore for BharatNet, the government of India?s project for last-mile connectivity across 6.4 lakh villages in the country. This outlay is significantly bigger than phase-1 and 2 combined funds of ?42,070 crore. The BharatNet program and recent tender for ?65,000 crore for BharatNet Phase 3 is expected to substantially increase the size of Indias fibre roll-out services market. In addition to fibre roll-out prospects, we are actively pursuing system integration opportunities arising from diverse government departments, public sector enterprises, and defence sectors.

We can clearly see that the fiberisation space is not constrained by intent or capital; it is now hinged on fast and high-quality deployments. In a highly fragmented fibre roll-out services market, the presence of pan-India players like us with significant technological capabilities and project management experience can add great value for telecom operators.

In the UK market, we continue our partnership with tier-1 telcos and alt-nets to deploy fibre to the premises networks.

Global Services Demerger: To unlock the future growth potential of this business, STL?s Board of Directors approved the demerger of the Global Services business into a separate legal entity on a going concern basis. The successful completion of this demerger will create an industry-leading business that will drive large-scale network and IT infrastructure projects with sharp customer focus and agility. The shareholding of STL and the new entity will mirror each other, and the new entity will be publicly listed.

STL Digital

Well-poised to scale the business and progress towards breaking even

The constantly evolving global IT sector plays a crucial role in our interconnected world. Organisations across sectors are leveraging technology to enhance their operations, customer experiences, and business models. Product engineering, advanced AI and analytics, increasing focus on digital services across sectors, accelerated IT adoption in emerging economies (to enhance productivity, foster innovation and drive economic growth), surge in Edge and Quantum Computing, and increasing focus on sustainability are the key trends driving the need for IT services globally.

In FY23, the export earnings of Indian IT service providers increased 11% Y-o-Y to ~$111 billion, driven by companies focusing on front-to-back digitisation. Moreover, enterprises use data analytics, AI and ML for mass personalisation to differentiate themselves. This has led to the migration of consumers towards digital platforms, providing further support for the industrys expansion.

CRISIL MI&A expects IT services export revenue to log a CAGR of 6% to 7% between FY23 and FY28, led by cloud services, robotic process automation (RPA), and AI, along with offer differentiation. This is expected to provide an opportunity for Indian IT players to collaborate with product-based companies.

We are excited to share that over the last 12-15 months, we have built a strong core leadership team of 50+ people and a delivery team of 900+ consultants. We have opened a delivery centre in Bengaluru, multiple offices in India, the US, and the UK, and two customer experience labs.

We have acquired 25 global customers and delivered revenue of ?298 crore in FY24, with an open order book of more than ?650 crore at the end of Q4 FY24.

Beginning of STL 2.0

FY24 had its challenges, but we were resilient in actioning our priorities on Customer, Cost, and Cash, thereby delivering a robust revenue of ?5,478 crore amid strong headwinds. We also reported a diversified open order book of ?10,290 crore spread across all three business segments. This is a reflection of our focused efforts on R&D and innovation over the years.

In FY25, we shall continue our pursuit of successful business opportunities based on the tenets of deep customer engagement, product innovation, and sustainability. We are committed to increasing our market share in the US, Europe, and India, with an eye on healthy revenue and EBITDA growth while driving strong profitability ratios.

As we start the new fiscal year, the hallmarks of our growth strategy will be based on prioritising customer-centricity, technological innovation, and sustainability. With exceptional leadership and a global pool of talent, we are steadfastly advancing towards our goal of being among the top three optical players globally. We are putting our efforts into achieving our goals, all the while living our Purpose of Transforming Billions of Lives by Connecting the World.