Netweb Technologies India Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Revenue doubled, profit surged: Total income rose 2.5x QoQ to ₹148 crore, net profit jumped 197% QoQ to ₹15.1 crore, driven by strong execution and pipeline conversion.
• Order book nearly doubled to ₹217 crore, and the pipeline was replenished after large Q2 wins, setting up a much stronger H2 per management.
• Gross margins dipped to 27% from 31% YoY on mix, but H1 averaged 30%; management expects full-year margins to average over 27%, consistent with IPO commitments.
• Intel partnership and SMT line mark an infrastructure build-out phase: a license to design servers on Intel's next-gen architecture and an in-house SMT line operational by March aim to deepen the manufacturing moat.
• What to watch next quarter: Conversion of the ₹217 crore order book into revenue, the pace of hiring 70 additional people, and any revenue contribution from the newly launched networking switches.

Revenue Growth & Seasonality

• Top-line surge: Revenue from operations grew 96.7% YoY to ₹145 crore, with total income doubling YoY; the quarter benefited from strong execution and robust pipeline conversion.
• H2-weighted business: One-third of business typically comes in H1 and two-thirds in H2, a pattern management expects to hold; confidence is anchored in the order book and replenished pipeline.
• No furlough drag: NetWeb's business model does not experience furlough impact, removing a seasonal headwind common in IT services.
• Other income boost: Higher other income came from IPO funds invested in FDRs, with returns translating into other income that is higher on the H1 side.
• Revenue target: Management is targeting approximately ₹600 crore plus for the full year.

Sanjay Lodha: "Our company cannot be judged on the fact of the order book because order book conversion cycle is quite good. Actually in our case what happens is that between 12 to 16 weeks we are able to close the orders. Okay so basically we are a pipeline driven company."

Order Book & Demand Drivers

• Order book doubled: The order book of ₹217 crore is almost double the previous quarter, and the funnel was replenished after large Q2 wins.
• ISRO and security firm wins: NetWeb is L1 on a very large order from ISRO and has already won an order from one of India's largest security firms, both in the order book.
• PSU bank private cloud: One PSU bank private cloud order has been received, with others in the pipeline; management believes all public sector banks will eventually move to private cloud.
• Airawat deployment: Large deployments such as Airawat have positioned the company in a different league for generative AI opportunities.
• Geopolitical tailwind: Management sees India gaining acceptance for its products and solutions under the current geopolitical situation, with pressure on India rather than other countries.
• Order conversion cycle: Typical conversion cycle is six to nine months; most L1-related orders are anticipated in H2 FY24.

Sanjay Lodha: "Under the current geopolitical situation, I think India has got a better place and basically acceptance of Indian products and solutions is also higher. And since basically, the pressure on India will be there, rather than the other countries."

Product & Technology Roadmap

• Intel license agreement: A transformative license agreement with Intel enables NetWeb to produce high-end computing systems based on Intel's next-generation architecture, covering chipsets like Grand Rapids; NetWeb gets chipset designs and develops architecture for user requirements.
• ARM-based servers: Design work on NVIDIA's ARM-based architecture has started, with end-to-end motherboard design by NetWeb; launch targeted for late Q4 or early Q1 next year, driven by huge demand from data center providers for generative AI workloads.
• Networking switches: Rollout planned by end of Q3, with projected revenue of ₹15–20 crore this year.
• 5G ORAN: Expected by end of FY24; the company showcased a complete Make in India ORAN solution at India Mobile Congress, generating significant interest; FY25 is the main target for cashing the 5G stack.
• SMT line: In-house SMT line is being fast-tracked in leased premises and will be operational by late February or March, though it will not contribute much benefit within the current year.
• New server designs: Servers on Intel, AMD, ARM, and NVIDIA platforms are almost ready to roll out.

Sanjay Lodha: "if you see of the entire server space, around 70% of market is still, they used to be 90%, but at least 70% of the market is still basically based on Intel. So, definitely, once we have a very good latest design roadmap on Intel, that will definitely help us"

Margins & Profitability

• Gross margin dip: GP margin fell to 27% in Q2 from 31% YoY, but H1 FY24 margin improved to 30% from 29.5% in H1 FY23; Q1 had some high-margin orders, and management says the full year should average over 27%.
• EBITDA margin contraction: Operating EBITDA margin contracted 488 bps YoY to 13.3% in Q2, largely due to an ESOP charge of ₹7 crore in the current half versus nil in the prior period; H1 margin declined 231 bps to 13.6%.
• Full-year EBITDA guidance: Management expects EBITDA margins in the 14% to 15% range, supported by operating leverage.
• Gross margin outlook: Margins are expected to remain in the 27–28% range going forward, consistent with commitments made during the IPO.
• Cash conversion improvement: The cash conversion cycle improved to 108 days from 140 days QoQ, driven by lower receivables (59 days) and inventory (73 days), partly offset by reduced creditors (100 days); further improvement to 90–100 days is expected.
• Net debt turned negative: Net debt turned negative ₹0.03 crore versus ₹23.9 crore in Q2 FY23, excluding unutilized IPO proceeds.
• ROE decline: ROE fell from 56.9% to 17.4% due to increased Net Worth from IPO proceeds, but improved 72 bps QoQ on higher PAT.

People & Capacity

• Manpower as the binding constraint: Manpower availability is the major challenge; the company went public primarily to attract talent and is doing everything to attract the right people.
• Hiring plan: Approximately 70 people (a 30% increase) will be hired in H2, with the majority going into sales marketing and R&D, both departments competing for attention.
• IPO as talent magnet: Management cited the IPO listing as a key enabler to attract talent that was previously harder to recruit.

Strategic Initiatives & Policy Tailwinds

• PLI 2.0 migration: The company has been offered a "red carpet" into PLI 2.0, with base year targets unchanged at 2019 and significantly higher incentives than PLI 1.0; the company is fully compliant and ahead of track on localization.
• PLI 2.0 accounting: Claims for this year (2024) will be filed next year (2025), so no PLI credit will appear in the P&L for FY24 due to the migration.
• Export progress: On track; a new unit in a tax exemption zone will facilitate exports, and the company is exploring various markets.
• Patent filings: Some patents have already been filed and are in the approval process.
• Private cloud TAM: Management estimates 70–80% of public sector BFSI banks will convert to private cloud, with four or five RFPs already in the market and more in discussion.

Sanjay Lodha: "all the public sector banks will be going sooner or later on the private cloud, because that is the journey forward. And basically, we are very, very well geared up just to take care of the same"

Guidance & Commitments

Key Metrics