Netweb Technologies India Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Record quarter, margin mix shift: Revenue and operating income hit all-time highs, with operating income up +74.8% QoQ, while gross margin compressed to 21.8% from 25.7% a year ago as the AI systems mix surged.
• AI systems went vertical: AI systems and workstation revenue grew 340% YoY, moving from ~7% to ~10% of the business, and management sees a path to 15-16% as government and enterprise workloads adopt GPU computing.
• The NVIDIA partnership is now concrete: NVIDIA’s number-three executive publicly named Netweb as its Make in India manufacturing partner; commercial launch of Grace Hopper-based servers is targeted by June 2024.[10-11]
• Order book gives near-term visibility: A confirmed order book of ₹339 crore plus an L1 pipeline of ~₹300 crore underpins confidence that Q4 will be strong, though management declined to treat the L1 portion as booked.
• What to watch next quarter: Whether the Grace Hopper commercial launch stays on schedule, gross margin stabilisation toward the 25-26% target, and conversion of the ₹300 crore L1 pipeline into confirmed orders.

AI Systems & the NVIDIA Manufacturing Bet

• 340% growth, 15-year foundation: AI systems revenue grew 340% YoY, moving from ~7% to ~10% of the business; management has been designing GPU-optimised hardware and tuned software stacks since 2010, a capability now converting into commercial scale.
• NVIDIA partnership scope: Netweb will manufacture the Grace CPU Superchip and GS200 Grace Copper Superchip MGX server designs, building more than 10 server variations under the tie-up. NVIDIA’s Shankar Trivedi publicly named Netweb as the Make in India manufacturing partner at Vibrant Gujarat.[10-11]
• Commercial timeline: Prototyping is complete, sampling is expected in March, and the commercial product rollout is planned before the end of Q1 FY25, by June 2024.
• GPU design ambitions stay opaque: When asked about entering GPU and server architecture design, a higher-margin activity than manufacturing, management declined to confirm or deny any plans, calling the topic confidential.
• Supply-side bottlenecks acknowledged but not sized: Management conceded a global GPU supply crisis exists but pivoted to its OEM relationships and enterprise focus, without quantifying the bottleneck’s impact on its own pipeline.

Sanjay Lodha: "Basically, if you would have heard Mr. Shankar Trivedi, number three person in NVIDIA, speaking at Vibrant Gujarat. Basically, he very clearly categorically mentioned NetWeb is their Make in India manufacturing partner." [10-11]

Margin Profile & the Mix Shift

• Gross margin compressed on product mix: Gross margin fell from 25.7% in Q3 FY23 to 21.8% in Q3 FY24, driven by the higher share of AI systems revenue; management argues margins in high-end compute are lumpy quarter-to-quarter and should be judged annually, where 9M FY24 gross margin was 25.4%.
• Stabilisation target: Management expects gross margin to stabilise at 25-26% in the near term.
• EBITDA margin followed gross profit down: Operating EBITDA margin was 13.5% versus 17.4% a year ago, with the entire decline attributed to the gross profit reduction.
• FY24 EBITDA guidance held at 13-14%: No improvement is expected this financial year; FY25 is guided at 14-15%.
• SMT line is strategic, not margin-driven: Bringing the SMT line in-house will have minimal margin impact. The real drivers are access to capability for complex 16-to-24-layer PCBs that third parties lack, and reluctance to share proprietary designs externally.

Order Book & Revenue Visibility

• Confirmed order book of ₹339 crore plus an L1 pipeline of approximately ₹300 crore gives management confidence that Q4 will be strong, with many new order closures expected in the period.
• Management drew a hard line on L1: When an analyst asked whether the combined ₹620 crore could be treated as order book, management declined, stating only confirmed orders count; the ₹300 crore L1 portion is expected to convert anytime.
• ISRO supercomputer win: A prestigious end-to-end supercomputer order from Vikram Sarabhai Space Centre, valued at approximately ₹150 crore, is fully in the order book and represents the largest system for the Department of Space.
• Revenue guidance of ₹600 crore plus for FY24, based on a 30-40% CAGR; FY25 guidance will be provided in the March quarter call.
• Growth ambition: Management intends to maintain at least a 30-40% CAGR going forward and expressed confidence in reaching ₹2,200-2,400 crore in turnover without needing external funds.[16-17]

Sanjay Lodha: "my commercial launch should happen by June 24."

Customer & Vertical Mix

• Repeat rate drop is a denominator effect: Customer repeat rate fell from 90% in FY23 to 58% in 9M FY24, driven entirely by a single large new customer, a premium cybersecurity body with an order of approximately ₹117-124 crore, which skewed the ratio; year-on-year numbers remain healthy.
• Government-to-enterprise shift underway: Management expects the current 50-50 government-enterprise split to shift toward 60% enterprise, 40% government over 2-3 years, but not beyond that ratio, as government spending on high-end computing is also rising.
• Government pays faster: Government customers, including high-end educational institutions, research bodies, the Indian Air Force, CDAC and CDOT, pay faster than enterprise customers; the company has never had a bad debt.
• PSU banks are the private cloud opportunity: Private sector banks are already on private cloud; the larger greenfield opportunity lies with public sector banks now initiating bids for private cloud adoption, where Netweb has already won one PSU bank order.
• Oil and gas vertical opening: Netweb is working closely with ONGC and has already migrated seismic applications for Crane Energy in India; it is collaborating with ISVs to port applications onto its machines.

Balance Sheet & Working Capital

• Cash conversion cycle compressed sharply: The cycle improved from 108 days to 77 days, driven by a 27-day reduction in receivables and a 7-day increase in payables, slightly offset by a 2-day inventory increase.
• Net cash position strengthened: Net debt moved from negative ₹0.03 crore to negative ₹18.27 crore, reflecting a significantly improved net cash position.
• PLI 2.0 economics: The company migrated from PLI 1.0 to PLI 2.0, relinquishing its FY23 claim under the old scheme. An investment of approximately ₹20 crore already made this year is expected to cover all seven years of PLI 2.0 obligations, with most manufactured products covered under the scheme.
• Localisation paced for incentive maximisation: The company is ahead on localisation but will time milestones to the policy calendar, with one localisation this year and another in April/May, to maximise incentive capture.

Strategic Optionality

• Government supercomputing hub: The proposed ₹10,000 crore government supercomputing hub is viewed as a significant tailwind; Netweb is well-positioned given the government’s mandate for fully Make in India products. Management declined to guess a timeline.
• 5G O-RAN progressing toward production: The R&D team is working on a completely Make in India 5G O-RAN stack and has achieved some success, but is still working toward production grade; the company may manufacture radios if required. The offering integrates with cloud, where Netweb is already implementing 5G clouds for global telcos, and with AI at the edge.
• Cyber-secure hardened systems: Recent cyber attacks on foreign OEMs have opened a significant opportunity for cyber-secure, hardened high-end computing systems, though no timeline was given.
• Acquisition appetite is conditional: If idle funds accumulate, management will explore acquisition possibilities or partnerships to leverage capabilities, but no active search is underway.

Sanjay Lodha: "I will like to be muted at this point of time, because this is something very confidential, which I will not like to disclose. I neither like to accept it nor like to deny it."

Guidance & Commitments

Key Metrics