Netweb Technologies India Ltd Q1 FY2025 Concall Summary

Key Takeaways

• AI share doubled, revenue surged 150%: Operating revenue hit ₹149.3 crore, with AI systems revenue growing 146% YoY and its share of the mix rising from ~7% to 14.6%.
• Margins improved but expansion is deferred: Operating EBITDA margin reached 13.4%, up from the prior year, but management expects only ~50 bps of expansion next year as the new SMT facility’s costs are already in the P&L while its benefits lag.
• The order book is deep but lumpy: A ₹419 crore order book and a ₹150 crore Vikram Sarabhai Space Centre order set for execution in the next two quarters underpin the 30-35% growth guide, though Q1 is always the softest quarter.
• The National AI Mission is a large, unbooked tailwind: The ₹5,000 crore government compute hardware buy (10,000 to 25,000 GPUs) is still in the RFP stage, and none of it is in the current order book.
• What to watch next quarter: The pace of conversion of L1 orders into the order book, the first revenue contribution from the new network switch, and any initial RFQ activity from the National AI Mission.

AI Systems: The Growth Engine

• Revenue mix shift: AI systems revenue grew 146% YoY, moving from ~7% to 14.6% of operating revenue, driven by GPU-based server solutions using NVIDIA, Intel and AMD chips.
• Product roadmap is NVIDIA-aligned: Development of servers based on the NVIDIA Grace Superchip under MGX architecture is in progress, with an ARM-based architecture product almost ready and launching very soon. Management has insight on NVIDIA’s roadmap 12-18 months in advance.
• AI workstation customers: Customers for AI workstations overlap with existing HPC customers and also include new, unique accounts, creating both cross-sell and new-logo opportunities.
• Gross margins are uniform: Gross margins are broadly the same across all products, with slightly higher margins on services offset by slightly lower margins on servers and storage systems.

Lodha: "we have been guiding very well that 30% to 35% of CAGR growth. We will still like to maintain our guidance on that."

Order Book & Execution

• Order book composition: The ₹419 crore order book represents orders already received. L1 orders (won but purchase orders not yet received) typically convert into the order book within two to three months. The pipeline lasts around 18 months with a 50% to 60% conversion rate.
• Vikram Sarabhai Space Centre order: The ₹150 crore order from Q3/Q4 FY24 will be executed and visible in revenue over the next two quarters.
• Execution cycle: Normal execution cycle is 20 to 24 weeks, which, combined with Q1 being the softest quarter, means H1 contributes only one-third of annual revenue while H2 contributes two-thirds.
• Cash conversion cycle elevated by growth: The cash conversion cycle improved from 159 days to 129 days but remains elevated because fast growth creates a larger debtor base each quarter. Management calls this a transitionary phase typical of growth.

Sancheti: "that's just a transitionary phase because of the fast pace of growth, a typical problem of growth."

National AI Mission & Government Opportunity

• Opportunity size: The government has allocated ₹5,000 crores for purchasing compute hardware, targeting 10,000 to 25,000 GPUs, with the spend to occur over three years. The purchase will not be a one-time event.
• Timing: The government is still in the RFP stage. Cabinet approval is already in place, and rollout is expected within a few months, starting this year.
• Not yet in the order book: The current ₹419 crore order book does not include anything from the National AI Mission.
• Netweb’s positioning: Management argues Netweb is uniquely placed with hardware designed and manufactured in India, its own cloud stack, and cloud deployment services, supported by a strong product line and experience.
• Working capital question deferred: When asked if working capital for the large project could be stretched, management said it did not think so but deferred a definitive answer until RFQs are released.

New Facilities & Products

• Faridabad SMT facility: The new state-of-the-art SMT facility was inaugurated in May 2024 and is already in production, ahead of the original FY25 timeline. Within the next 3-4 months it will be further optimized and enter complete production.
• Cost-benefit lag: The cost of the new facility is already in the P&L, but the benefit will come in the next quarter or two. Margins will improve a little then, but no improvement is seen for the next two quarters.
• Network switch: The network switch has been developed and started selling by the end of last quarter, with revenues coming in this quarter.
• 5G ORAN: Still under development, with an indicative timeline around Q4, though management is trying to accelerate it.
• New server launches: Intel Sapphire Rapids and AMD Genova-based high-end computing servers were launched in the last quarter.

Lodha: "Please understand, we are not box pushers actually. Just adding a factory will not increase numbers for us. It is more about capabilities actually."

Exports & New Verticals

• Middle East sales effort: Sales effort in the Middle East has already started, and management expects good revenue from exports within one or two quarters. Traction is a mix of all three segments: private cloud and HCI seeing a lot of attraction, then AI, then HPC.
• Oil & gas sector: Actively engaged with government PSUs like ONGC, where ‘Make in India’ policy is helping break barriers previously created by international ISV tie-ups. Generating significant revenue from this stream will take time, but progress is good. [17-18]
• Geopolitical risk dismissed: Management sees geopolitical tensions as not a point of worry because 98-99% of the market is domestic and the company is not dependent on exports yet.

Lodha: "I personally feel geopolitical tensions are not a point of worry for us as such."

Margins & Cash Flows

• Margin improvement deferred: From the current ~13.4% operating EBITDA margin, management expects around 50 bps of expansion next year from volume growth and higher operating leverage, with a 1% improvement over two years. No immediate improvement this year.
• Q1 cash flow seasonality: Q1 is always the softest quarter; net cash and free cash flows from operations are always negative. Most expenditures are capex, and the first 1-1.5 months have hardly any invoicing. Management says to look at full-year FCF rather than this quarter.
• Full-year FCF target: Targeting at least 30% of free cash flows to EBITDA during the year.
• IPO proceeds: All remaining ₹97 crores of IPO proceeds will be utilized in the coming quarters, with building construction underway at full force.
• PLI eligibility: The company is eligible for both IT hardware and telecom PLI schemes and will be claiming in both.

Guidance & Commitments

Key Metrics