Sterlite Technologies Limited Q4 & Annual FY14 Results Conference Call

Sterlite Technologies Limited Q4 & Annual FY14 Results Conference Call MANAGEMENT: DR. ANAND AGARWAL DIRECTOR & CEO, STERLITE TECHNOLOGIES LIMITED MR. ANUPAM JINDAL CFO, STERLITE TECHNOLOGIES LIMITED Page 1 of 14

Ladies and Gentlemen Good Day and Welcome to the Sterlite Technologies Limited Q4 & Annual FY14 Results Conference Call. Sterlite Technologies Limited develops and delivers Products, Solution and Infrastructure for Telecom and Power Transmission Networks globally. Sterlite Technologies Limited is among the global leaders in all its business areas of Optical Fiber, Fiber Optic Cables, Power Conductors and HV and EHV Power Cables through its operations in India, China and Brazil. As the most integrated Optical Fiber Company in the world, Sterlite Technologies Limited is also pioneering in the FTTH deployment in the country s Ultra High Speed Broadband Infrastructure. Sterlite Technologies Limited is developing several Transmission Infrastructure Projects spanning over 3,000 Kms across India. As a reminder all participants line will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call please signal an operator by pressing * then 0 on your touchtone phone. Please note that this conference is being recorded. At this time I would like to hand the conference over to Dr. Anand Agarwal CEO Sterlite Technologies. Thank you. And over to you sir. Thank you. Good Afternoon, friends I welcome you to the Sterlite Technologies Q4 FY 14 and for the Full Financial Year Earnings Call. We declared fourthquarter and Annual Results for the fiscal FY 14 today and I hope you had an opportunity to look at them. We closed the year with a good last quarter which was reflective of the improvement in performance of the company after two previous quarters of muted profitability. From a full year perspective though we witnessed degrowth in our revenues primarily on account of Power business, though the profitability showed an increase as compared to the previous year. Both business segments demonstrated expansion of operating margin which resulted in improvement of EBITDA by almost 200 basis points. We will elaborate further on the overall financial performance after we have shared updates on each of the segments. I would now like to take you through the industrial outlook, the financial performance and key highlights for each of the business segments respectively. To start off we ended the quarter with sales of Rs.293 crores for the Telecom segment. Corresponding to this revenue the volume for Optical Fiber were close to 3.5 Million Kms including the China joint venture volumes. This quarter also recorded the highest ever volumes for our Optical Fiber Cable at almost 1.7 Million Kms. With these volumes we are now running at an annual run rate of almost 14 million FKM in our Fiber business. For the full year, we sold almost about 13.8 Million Kms of Optical Fiber and 5.2 Million Kms of Optical Fiber Cables. On the operating performance for this segment for the quarter EBITDA stands at Rs.55 crores Vs Rs. 38 crores last quarter and Rs.43 crores same quarter last year, reflecting a 28% upward shift on year-on-year basis. Annual revenue for the Telecom segment stood at Rs.1,077 crores with an EBITDA at Rs.187 crores translating into 17% EBITDA margin for this segment which we believe is among the best in this industry globally. Page 2 of 14

On the industry front, as per latest market data, the global Optical Fiber demand was close to 270 million Fiber Kms in 2013, modest growth of about 4% over the previous year. The outlook for future remains positive with continued 3G deployments and start of 4G deployments of major operators in many key geographies. Globally, growth in Mobile Broadband Data usage is driving revenue growth and helping to support investment for converged services. China continues to maintain its annual demand of close to 131 million FKM backed by continued investments by all three major operators into the 3G networks. On supply side, we are witnessing a shift from fiber imports to preform and tube imports withdrawing capacities coming up in China. Globally, bare fiber prices have seen some pressures in the last few quarters owing to some fiber inventory buildup in China due to mismatch in supply and demand. Closer to home, as we have mentioned in our last communication, India market has picked up momentum with both private operators like Reliance Jio, Airtel increasing their fiber deployments as well as the government releasing orders for the Ambitious National Optical Fiber Network Project. We have secured largest share of these orders released till date and the deliveries are happening from the current quarter. Now, talking about the developed markets, Southern Europe is witnessing some large scale broadband investments initiative. Countries like Spain are putting up high emphasis of Fiber to the Home where all the four major operators have entered into agreements to build out the Fiber to the Home network. Countries like Germany, Portugal, and Italy are other markets which are showing good amount of traction by operators pursuing FTTH initiative. All these developments augur well for our company with a strong market presence in Europe, China and India. Our joint venture in Brazil will also start operation from Q3 of the current year. We started the year with confirmed order book of Rs.350 crores. Now, moving on to our Power segment we ended the quarter with sales of Rs.331 crores with a volume of conductors of about 18,000 MT. The corresponding volume previous quarter was around 22,925 MT. This sharp drop in volumes in this quarter is primarily due to weak demand at home front, and our conscious focus to pick selective orders with good customers and margins. The EBITDA for this segment was Rs.18 crores for this quarter, and on per unit margin basis the EBITDA/MT comes to about Rs.9,700/tonne. On an annual basis we did revenues close to Rs.1587 crores with an EBITDA of Rs.85 crores, and EBITDA/MT for the full year was about Rs.8,940. Overall volume was about 95,000 MT in the current fiscal Vs about 138,000 last year. Going forward, we are seeing signs of domestic demand revival in the segment with PGCIL ordering picking up by the H2 of the current fiscal. Globally, new opportunities are coming up in US, Africa and Middle East and as a company we are maintaining a strong focus on creating new global accounts and expanding other exports market. We started the year with an order book of almost Rs.2200 crores as compared to about Rs.1600 crores at the start of last fiscal. Page 3 of 14

Now, moving on to the Infrastructure segment, the total CAPEX done for all the Boom projects as at end of March 14 have been close to about Rs.3,500 crores, out of which we have funded about Rs.820 crores and balance is raised as debt against these projects. The first line of East North Interconnect Project was successfully commissioned in the middle of last year and has generated revenues close to about Rs.35 crores in FY 14. The line has consistently been running at more than 99% availability since its commissioning. The company expects to progressively commission other lines of ENICL, BDTCL and JTCL projects, including the substations during the course of FY 15. For the two new projects secured during the last fiscal, that is ERSS and RAPP, the transfer of SPV from PFC has concluded and the financial closure will happen during the current financial year. On the financial performance at standalone level we closed the quarter with revenues of Rs.646 crores and EBITDA of Rs.73 crores. For the full year, we recorded revenues of Rs.2,726 crores with an EBITDA of Rs.271 crores. Our net debt level at the end of FY 14 was Rs.1,064 crores as compared to Rs.873 crores at the end of FY 13. We generated free cash flow from operations of Rs.220 crores and spent about Rs.90 crores in CAPEX this year. After CAPEX we generated free cash flow of about Rs.120 crores. The current open order book for the company stands at Rs.2,550 crores, which is indicative of good business visibility for next year in both our segments. As a company, our global focus continues to increase which is even reflective in our export order book which is close to almost half of the total order book. On the financial performance at consolidated level, we closed the year with revenues of Rs.2,564 crores and an EBITDA of Rs.298 crores with a negative profit after tax of Rs.36 crores. The loss at net level on a consolidated basis is primarily on account of finance cost for our infrastructure business, which is in capital deployment phase. Our interest cost at the standalone level is Rs.95 crores and Rs.180 crores at the consolidated level, and the difference of this interest cost is mostly attributable to the interest charge on infrastructure business. This is a transitory period, and as the project start generating desired revenues in a phased manner, such cost would be borne by the projects. This brings us to the end of the update. To summarize our discussion, for our core business of Telecom and Power products we continue to remain bullish on opportunities for the sector driven by data and energy consumption usage on per capita basis. We are seeing strong demand in the Telecom business in India and seeing indications of revival of capital cycle in the Power sector also in the country. Our CAPEX cycle in core business is significantly over, and we are well positioned to capitalize on these opportunities and demonstrate a healthy growth on bottom-line. Both these businesses are generating free cash flow and will continue to do so. For our Infrastructure business we are working towards speedy commissioning of all our projects. Once commissioned the first three projects should see continued increase in revenues in FY15 and full year of the revenues in FY 16, which will have a positive effect on the consolidated net profit. On the communication front, we persistently make the efforts to share insight from the business and the industry with you on regular basis and will continue doing the same. Now Anupam and I would be glad to take any questions that you may have. Thank you. Page 4 of 14

Thank you very much sir. We will now begin the question-and-answer session. First question is from the line of Sudhakar Prabhu from Span Capital. Please go ahead. I had a couple of questions; my first question is regarding your Telecom segment, what is the progress on execution of a few of the projects which you had won last year especially on the Bharat Broadband Network and the 4G deployments, have the execution started? Sure on the 4G deployments essentially bulk of it is going to Reliance, those have been going for the last three quarters. The BBNL project we won last quarter and the shipment has already started from the current quarter. What is the kind of visibility do you have in this segment in the current year because if I see your order book, order book is around Rs.350 crores in your Telecom segment so which takes care of almost 1 quarter or max 1.5 quarter? That is in the Telecom as we have maintained, the confirmed order book is always in a rolling basis of about a quarter only, and we get more longish contracts but the delivery keep getting confirmed on a quarter-to-quarter basis. So are you on track of achieving 14 million OFC for the current year because in a previous interaction you have been maintaining that you plan to move from 12 to 14 million over next 1 to 2-years so and also more towards Optic Fiber Cable segment. So what is your take on that? 14 million we already achieved in the previous year FY 14. We should be doing better than that in the current year. The OFC I think I believe only 11.5 million right? Optical Fiber is 13.8 Million Kms and Optical Fiber Cable is about 5.2 million. 13.8 Million Kms is including the Chinese JV? Yes. So what is your outlook on this segment in the current year? We should be growing at similar rates which we have grown in the past. How do you see the realization because you mentioned in your opening commentary that there has been slight pricing pressure, so what is your view on that, you think? We believe it will be on an average basis stable and that is what we are seeing the price has been within Rs.(+/-10-15) over the last three quarters and we believe it will continue to operate in a similar zone. Page 5 of 14

And margin should improve from the current level or the fourth quarter margin should be more or less reflection of the next year? At an average level, yes, it all depends on the mix of the Fiber and Cable, as you know the Cable has lower margins than the Fiber on a percentage basis but on absolute basis we make more money. Thank you. Next question is from the line of Parthiv Shah from Tracom Stock Brokers. Please go ahead. Parthiv Shah: I had a question regarding your Infrastructure business; it seems that we were supposed to get done with all the three infrastructure projects by end of March 2014 and there has been delay in two of the projects. So I just want to know what is the maximum worst case time scenario in which now we will be able to complete those two projects? And after all the three projects are done what kind of revenue visibility are we looking from the three Infrastructure projects and what kind of EBITDA margins? Parthiv, these three projects have been total about nine elements of revenue generation and most of them should get commissioned within the current fiscal, one of the elements may go over to June15. That is our clear outlook that mostly all the elements will start doing revenue generation in FY 15. At FY 15, we should do at progressive revenue addition to what we are currently doing, FY 16 should be close to the entire revenue generation which for these three projects is about Rs.570 crores. Parthiv Shah: What kind of EBITDA margins we are looking at from the? These typically would be between 96% to 97%. Parthiv Shah: And sir I had a quick question on the Conductor business. Unfortunately I have been tracking quarter-on-quarter that there has always been a hope that Power Grid or a big customers in India would kind of release orders but Power Grid always in its conference calls says that it has CAPEX plan which runs into thousands of crores and you have not been able to garner even like a Rs.500 crores or Rs.1000 crores worth of an order. So why is every quarter-on-quarter we are seeing an execution delay from Power Grid giving us the orders is it going to any of our competitors or its.? Essentially, there is a structural change what is happening in Power Grid Parthiv, they used to order both the Conductors and the Towers for the project at the same time earlier while Conductors are used more during the latter part of project execution. So they ended up having almost Rs.7,500 crores of Conductors in their capital work-in progress which was not deployed. So over the last full year they started using that. So while you are right on an overall basis their CAPEX cycle continued to be in the Rs.18,000-19,000 crores they used that from their CWIP stock, and there has not been any order that PGCIL gave in the last 7-8-months. We believe for Page 6 of 14

the next 6-months also they will not give any more major orders and that will start only from H2 of the current year, but nevertheless what has happened is that that has provided us opportunities to look at other customers, and our overall order book has built up quite nicely, while we would have a quarter or two of lower volumes, but as we move on in future, the customer base will become more diverse for us. Thank you. Next question is from the line of Chinmay Gandre from KR Choksey. Please go ahead. Sir, in our previous call, regarding China outlook we have been pretty much giving a muted outlook but in the current call in your initial remarks you are being little bit upbeat on China. So how do you see China market has there been any changes that has happened in China in the last 3-months or so because we have now been a little bit positive on China? The one part has been that China is almost 50% of the global demand, and they would continue to remain at these levels. All the three major telcos continue to talk of CAPEX deployments continue to talk of Fiber deployments. The concern was that Will the market go down? But the market will definitely remain at the current level and how it changes in terms of the deployments and requirements we are going to watch, but at least the positive part is that the market is not going to go down from the current levels. In your comments you mentioned like 131 million FKM. So we expect 2014 to be around the similar levels? Yes. For India sir I mean it has been roughly like 8 to 12 million Fiber Kms. So how do you expect 2014 for India as such? India now with the addition of this National Broadband Project as well as the increased deployments which we are seeing from the telcos whoever is spending money on 4G as well as on the 3G side, we believe annually India will add at least 3 Million Kms every year; from last year to this year should be 3 million better. Basically in the Fiber Cable we have been showing good volumes in the last two quarters. So that should continue from here on? We believe so. In terms of your Power Conductors basically we got those export orders, but I mean they are basically expected to be delivered in the 2 nd half, if I am not wrong right? Yeah, they partly will start off from Q2 of the current fiscal and then go on for the next 2 more years. Page 7 of 14

So for FY 15 for Power Conductors what kind of volumes do you see because we have got a backlog, because this time was around 1 lakh tonnes odd? We should be doing better than that; may be closer to 115,000-120,000 tonnes. Like you said PGCIL will be placing orders in the 2 nd half. In Q1 and Q2 do we have decent orders apart from the export orders in our backlog to show volumes something similar to the current levels or may be better than that? As I said Q1 would be continued to be muted, Q2 should be better, and H2 should be much better than H2 of the current year. Sir you mentioned that 13.8 Million Kms of the total production which included China, how much was China in the current year? About 2.3 Million Fiber Kms. What would be our outlook for FY 15 for Telecom Fiber from this 13.8 Million Kms do you expect to scale up to like 16 Million Kms, broadly if you can throw some light on that? Yeah, it would be on that range 15.5-16 Million Kms. That is including China? Yes. And regarding margins, we expect to continue the healthy margins that we posted in Telecom going ahead? Sure, yes. Regarding the Power Conductors, this time the volumes are pretty much on the lower side, EBITDA per tonne was quite good. In the calls you mentioned that when the volumes go down due to lower capacity utilization, it impacts the margins. So how come this quarter we were able to offset that? As I said always, Chinmay, is that we do not look at this business on a quarter-to-quarter basis. On an overall basis we try to maintain while we are in taking the order, while we are executing. And as I mentioned on the call last time we had taken with the lower visibility on order book we had taken a lot of cost cutting measures, so part of them have approved, but I would never want to comment on a quarter-on-quarter shift in EBITDA per tonne. Thank you sir. Next question is from the line of Kamlesh Kotak from Asian Market. Please go ahead. Page 8 of 14

Kamlesh Kotak: Just can you get us the split of revenue in Telecom segment between OF and OFC? That part Kamlesh I do not have it right now. May be if you can contact our IR teams separately? Kamlesh Kotak: Secondly, I wanted to understand opportunity in terms of this government s broadband network last mile connectivity program. How is execution? What is the total opportunity? What is the time line? And some color on the competition if you can share? This essentially is overall close to about 70,000 Kms of Cables which will be deployed across the country, the orders which correctly are being released. The deployment as I said the shipments have started from the current month. So some part of it will be in the current quarter and this goes on for the next 6-7 months in terms of the deployment. The competition typically are all the other cable players in the country and the requirement for such projects is that the fiber that is used is made in the country only. Kamlesh Kotak: Till now how much of the orders we have cumulatively received and how much is cumulatively awarded? We have received I think close to about Rs.450 crores, and our market share I think is close to about 22-23%. I would not have exact number of how much has been awarded, but we have received Rs.400-odd-crores and about 22% is the market share. Kamlesh Kotak: Pace of bidding is on; how you see the pipeline building up for that? It was a one-time project till this execution happens, then there may be a second phase but it will only happen after the execution. Kamlesh Kotak: And when you see that expectation to be second phase to start? We do not know right now; it will only happen after this is executed. Kamlesh Kotak: And the current execution will be by what time line according to our basis? About 7-8 months. Thank you. Next question is from the line of Mahantesh Maralinga from Finquest Securities. Please go ahead. Sir just wanted to know the reasons for the margin expansion in Q4? Essentially, on the Telecom front, it happened just by virtue of us doing almost close to full volumes in both the businesses. And on the Power front like as I explained earlier the cost structures and everything is getting more in line with the current volumes that we have. So it is Page 9 of 14

more getting reflective of the potential of the business and of the capability to get the operating leverage out of the business. But going ahead will the margin profile remain the same in these two segments broadly? Broadly, yes. Just want to know your outlook of the investments at Reliance Jio might be planning for the pan India roll out of this OFCs and all, because the biggest CAPEX contest is going ahead in the 4G network and all, so what might be the investment and how much you might garner in the OFC and OFC? The Telco CAPEX at least on the wireline we are seeing increasing. So the focus which till date had been on the wireless spend. Now most of the telcos are clearly deploying talking about or sending RFQs for Optical Fiber Cable. So as I said the Indian market which was may be 10-11 Million Kms should be higher by 3 Million Kms, so almost like 25% growth year-on-year, and I expect even next year the requirement should grow up by another 3 Million Kms; 17 to 18 Million Kms of market between last year and next year. Including this CAPEX from Reliance Jio, Bharti and all? Yeah. You mentioned that the Infra business revenues would come into flow in this quarter and next quarter going ahead, and the margins would be around 96 to 98%. Infra business, the revenues for one line has already started coming from September of last year and that will continue and during this whole year we will start adding a few more elements, so by Q2, Q3, Q4 of this year we will add some more element, so that is how the revenues will start getting added. So at the net level in FY 15 if we have to factor in the consolidated margins factoring in the Infra business margins of 96-97%, what might be the overall ballpark margins that you are looking at a consolidated basis? We are not giving outlook or the numbers. Assuming that the current Power and the Optical Fiber business maintain the same margins and the Infra business EBITDA margins sticking in from current quarter and going ahead, which is around 96-97%, on a consol basis for FY15 I am not telling it might be the same, broadly how much it might come into, it will be better than the last year, right? The point is this Infrastructure business cannot be looked at from EBITDA margin point of view, it is a capital intensive business, in fact it will be very disorienting to look at only at the Page 10 of 14

EBITDA margin, because these businesses to be looked at on return basis. As Anand has been telling that the lines will start coming on progressive basis, profile of EBITDA margin will keep changing over next three years, but that cannot be the right measure to look at. That is true, but normally when we normalize the consol number, in case if we look at incremental margin gain, so how much it might? We will have to do some of our standalone product business and then we will have to look at the But in case, in your internal model, anything that we can get an idea? EBITDA margin will be a very wrong indicator to look at. I think if you talk to IR team they will be able to help you, understand further. Just wanted to get the idea of the order book, you mentioned about some rolling orders in the Optical business, I did not get what do you mean by that, since only three months horizon and later on the new orders come in and it keeps on rolling or? Actually we have Rs.2550 crores of confirmed order book, out of which Rs.350 crores is in Telecom, and Telecom typically, as I said, you typically have a rate contract which is annual rate contract, get converted into purchase orders based on the visibility for the quarter. So, what we report of Rs.350 crores, out of that is only the visibility for the quarter for the confirmed purchase order which we have in hand. For example, telecom operators might have given a bulk order and for the next quarter they might have told you to just manufacture Rs.350 crores worth of Optical Fiber, right? Yeah, that is correct. And the reason for the interest cost to go up in Q4? Standalone, yes, the overall interest has gone up, because we have partially the borrowings have gone up from the last quarter to this quarter, and second, we have taken some long-term funding which has come at a higher rate than the earlier ones. Just on the export front, if the current trend in case of the rupee appreciating, would you find the exports not so enticing enough or what rate it will be good enough? 60 level is good enough for us even for the export business in Fiber and Fiber Cable. At what level you might not look at export that keenly in case it appreciates? At all level; even at 45 it was good, so definitely at 60 it is good. Page 11 of 14

Thank you. The next question is from the line of Deepak Jain from Allied Capital. Please go ahead. Deepak Jain: You have done CAPEX of Rs.3,500 crores in the Infrastructure segment till now. For the three lines, how much more investment is to be done? The total we have now is the five projects; and the total investment for all five projects will be close to about Rs.5,000 crores. Deepak Jain: For the two projects would be how much and for the three projects would be how much? For the three projects it is in the range of about Rs.4,200-4,300 crores and others are about Rs.700 crores. Deepak Jain: What is the rate of interest of your loans at which you have borrowed in your standalone and consolidated, both? We are getting average of about 10% and at the project level we are getting close to about 11.75%-12%. Deepak Jain: How much of this is foreign borrowings or dollar borrowings? At a standalone level we do have higher credit about Rs.400-500 crores but those are all covered, so they typically come at around 9-9.5%. Deepak Jain: And in the project level? At a project level we do not have significant foreign currency borrowings. Deepak Jain: It is all Indian currency borrowings? Yes. Thank you. The follow up question from the line of Sudhakar Prabhu from Span Capital. Please go ahead. Anupam, just a follow up on the debt; what would be the consolidated debt on the books as of now? It is around Rs.3,900 crores net level. This would include long-term and even the short-term, right? Yes. Page 12 of 14

Anupam, what kind of leverage are you comfortable with, I mean, right now you have Rs.4000 crores of debt, and I understand most of these is on the project level? And when would you start repaying your debt? I am looking at a debt level at standalone level, because as you said, this debt at the project level is recourse to project. So that will start getting repaid from the revenues of the businesses, respective projects when they start coming on line from this year and next year. So, if you look at a standalone level, we are currently looking at not more than 1.2x of network. So, that is the kind of leverage we look at internally that from Sterlite standalone basis how much we can support towards this business and we believe that this should be sufficient to meet the requirement. But, Anupam, even the equity for your projects of Rs.800 crores is borrowed, right? So, just to understand. I am saying that at a standalone level if you look at currently the net debt is Rs.1,064 crores, that includes Rs.820 crores which has gone towards this. From that point of view I am saying; we had committed initially Rs.1,000 crores, these two projects coming in and plus some increase in the cost because of delay and other things, the overall requirement maybe to the tune of Rs.1100 crores plus something from the company. So, from that point of view another Rs.300 crores maybe required which maybe over next 2 years. So, at that level also if I go, I will end up at about Rs.1400 crores at peak and networth of Rs.1200 plus crores it should be close to 1.15 or so. How do you plan to pay this Rs.1800 crores this would be largely from your project cash flow? There are two things; one is from project cash flows, but as you know these are large projects. So what we are looking at is as the project gets completed, we can have further funding available to these projects which can free up the liquidity. Second is strategic or financial investor coming in. These are the options which are available to us. In line with our strategy that we want to complete the project and when get the investor, maybe in next six months to one year period we may have some progress on that part. The major three projects would be operational only by FY16 for the full year. Do you think in FY16 this would be profitable at the net level? Conceptually yes, but as Anand said, we do not discuss on the outlook. Thank you. I would now like to hand the floor to Dr. Anand Agarwal for closing comments. I would again like to thank everyone for attending this call. I hope we were able to address and clarify all your queries and comments. For any further clarifications and discussions you can Page 13 of 14

feel free to contact IR team including myself and Anupam, we would be happy to interact with you and share our plans and insights for the business and the industry, and we hope to continue your association and dialogue in the future. Good Evening. Thank you sir. On behalf of Sterlite Technologies Limited that concludes this conference call. Thank you for joining us. You may now disconnect your lines. Page 14 of 14