Redington Limited (REDINGTON) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Redington (India) Limited Q3 and 9 months FY '20 Earnings Conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Raj Shankar, Managing Director of Redington (India) Limited. Thank you, and over to you, sir.

Thank you. Good evening to one and all for joining us on the earnings call presentation for Redington for Q3 FY '20. At the outset, even though the industry has gone through a rough patch, both in India as well as overseas, I'm pleased to share with you that for the quarter, our revenue at a consolidated level grew by 17%, our EBITDA grew by 8% and our profit after tax grew by 7%. This is in spite of a setback that we had in the ProConnect business, where we had to take a knock-on effect of about IND 20 crores, which I will explain a little later in the call. And also... [Technical Difficulty]

Ladies and gentleman, the line for the management dropped. Ladies and gentleman, thank you for patiently waiting. We have the management connected. Sir, you may go ahead.

Thank you. I'm sorry for the call dropped out, so we have rejoined. So as I was saying, we grew for the quarter 17% by revenue, 8% by EBITDA and 7% profit after tax. This is in spite of taking about INR 20 crores impact on account of ProConnect, which I will explain to you shortly, has also led to an additional INR 36 crores on account of a tax that impacted us in Saudi Arabia. Now if we -- therefore, for a brief moment, exclude this as a one-off, it appears there is some call echo. I'm not sure I am audible.

It will go from here to here [indiscernible].

Sir, you are audible.

Okay. Okay. Because I'm hearing my own echo, I wasn't quite sure if [ that affected you.] So if we, for a brief moment, exclude the ProConnect impact out of the equation, we would have grown our EBITDA by 20%, and the profit after tax by 35%. This is in spite of taking a hit of about INR 36 crores on account of Saudi Arabia. So I repeat, again, I'm not sure I'm being very -- because of the call inconsistency, the point I'm making is, we had 2 big events that impacted us in this quarter. One is ProConnect, where we had a INR 20 crores impact; and the other Saudi Arabia, where we had a INR 36 crores impact, totaling INR 56 crores. But if we for a brief moment only exclude ProConnect out of this, our EBITDA growth was 20% and our profit after tax growth was 35% at a consolidated level. Now let me continue with the rest of the points. Now with regard to our India business, I'm extremely pleased to share with you...

[Foreign Language]

[Foreign Language] [Technical Difficulty] Hello? I'm not sure...

Sir, you are audible, you can go ahead.

So basically there are other [drops]. I'm not even sure that all the audience are getting this [ here]. But anyway, I will continue. I'm a little worried that a part of my message is getting lost. I suppose the other part is probably getting left out. But anyway, let me continue. So if we look at -- I'm very pleased to share that as far as the distribution business in India is concerned, for the quarter, our revenue grew by 21% and our EBITDA grew by 15% and the profit after tax by 52%. So this has been another very good quarter as far as the India distribution business is concerned. Likewise, when you look at the overseas markets, I'm again very pleased to share that our revenue grew by 15%. In spite of the market being extremely soft, EBITDA grew by 24% and the profit after tax grew by 27%. So the good news is the distribution business, which is our core business in India, in Middle East, Turkey, Africa, as well as in South Asia, all 3 theaters grew top line, middle line and the bottom line for last quarter. If I therefore briefly look at the 9-month picture, here is how it looks like. At a consolidated level, our revenue grew by 14%, our EBITDA grew by 20%, our profit after tax grew by 17%, and by the way, this is after taking the impact of INR 56 crore, which I already explained on account of ProConnect, on account of the tax issue in Saudi Arabia. And if we break this down in terms of the distribution business in India, the revenue grew by 17%. This is for the 9-month picture. EBITDA grew by 28% and profit after tax grew by 49%. Likewise, we had another solid performance from the overseas, where the revenue grew by 13%, again for 9 months, EBITDA grew by 21% and profit after tax grew by 23%. So this is -- when you look at, from a working capital point of view, which is something that we have been driving quite successfully overseas. I must say with a little bit of happiness that we've managed to, again, consistently bring down the working capital in India. This is now 2 quarters in a row where we have brought down the working capital in India by 22 days, from 61 days, what it was in Q3 last year, to 39 days to what it was in Q3 FY '20. And therefore, when you look at a consolidated level, it was 34 days in -- at the consolidated level in Q3 FY '20, which is -- this was 41 days in Q3 FY '19. And overseas continues to be maintaining their working capital at 30 days, both in Q3 FY '20 as well as in Q3 FY '19. This has led to our growth [ there] Being quite interesting, where for the quarter, our return on capital employed at a consolidated level was 17.5% and the return on equity at 15.2%. Similarly, when you look at the same picture for the 9-month period, the working capital was 38 days as compared to 46 days for Q3 -- for the 9 months of last year. And here, again, there has been a vast improvement in India, from 67 days last year to 43 days for the 9 months of this year. Overseas was 35 last year and 34 days for the current year 9 months. Similarly, when you look at the growth rate for the 9-month period, it was 15.3% at a consolidated level and the return on equity at 13.2%. This is after maintaining a strong financial discipline, where our net debt-to-equity was 0.31 for -- at the consolidated level. In terms of our provisions, our provisions for the quarter at the consolidated level towards stock obsolescence was 6 bps. And just for last year, it was -- we had an add-back, we had a reversal of provision. And with regards to provision towards bad and doubtful debt, it was 12 bps at a consolidated level, which was the same number from the previous year. So if you look at the 9-month picture, the provision towards stock obsolescence was 5 bps for the current year, which was 9 bps for the previous year. The provisions towards bad and [ doubtful ] debt likewise has improved to 11 bps in the current year, as [ gauged ] 17 bps the previous year. Now let's take a brief moment to give you a little color on how the product categories have done. If you look at IT as a vertical, it has grown at 5% for the quarter and 7% for the first 9 months. Mobility registered a very strong growth of 38% for quarter and 26% for the 9 months. And likewise for services, 9% growth for Q3 and 10% growth for 9 months. Now when you break this down further, I'm pleased to share with you that the enterprise business has grown at the consolidated level. The IT consumer business has also grown at the consolidated level, both in India and overseas. Likewise, when you look at the 9-month picture, the IT enterprise business has also registered a growth at the consolidated level and also in the consumer business. Mobility, again, has registered a significant growth, both in India as well as overseas, both for the quarter as well as for the first 9 months. Now let me take a brief moment to explain to you what happened at ProConnect. So while the business continues to be on a good stead where we have grown our top line marginally, our biggest issue has been our investment that we made in a company in an asset in East of India, which even though for the first 2 years was according to the business plan, we didn't realize that the owner of the invested company had highly leveraged themselves and put them in a serious financial crisis, which we are a little oblivious to until recently. We had, as a part of our business, given trade advance, which accumulated and was not settled in good time. And because we wanted to be prudent in our accounting, we had to have took a INR 20 crores provisions towards the trade advance as an [ excisement ]. But I must tell you, all efforts are underway to make sure that this trade advance is indeed collected. And while that is happening, in any case, we thought as a matter of good prudent accounting practice, we should make this provision for INR 20 crores. This certainly has put a [ spanner ] in the works. While overall, the logistics industry itself has gone through a rough patch in the last 2 quarters, where most of the contracts that we are now signing with our customers is coming at lesser price and, hence, a decline in margin. But notwithstanding that, I think ProConnect has continued to make sure that we are able to keep the momentum and the customer service intact. But this particular episode, in terms of our investment in East, has completely fractured the performance. We are hopeful that we should be able to resolve this without any significant impact going forward, but it's likely to take another quarter or 2 for us to completely come out of this. We have also taken sufficient measures in terms of booking a completely new team, with a change in the leadership team as well. We have reinforced people with domain expertise. And we are hopeful that with this new team in place, and with our renewed focus, we should be able to get the business back on its wheels in the next couple of quarters. Outside of this, there is only one challenge that we have had for last quarter or for the first 9 months. This is to do with the cash flow. At the consolidated level for the first 9 months, we had a negative cash flow of INR 300 crores, essentially with India throwing up cash of INR 92 crores, i.e. positive free cash flow, whereas overseas had a negative cash flow of INR 392 crores. I just wish to draw your attention to the fact that since our growth for the first 9 months has been north of 14%, therefore, even though the working capital has improved significantly, both in India as well as overseas and at the consolidated level. Because of the high growth, therefore the amount of working capital in value terms has gone up, which has led to the -- this particular negative cash flow. I also want to mention to you briefly that also on account of the dividend, the interim dividend that we have paid also led to this particular free cash flow being negative at the consolidated level. But we are hopeful that as we continue to keep our focus on the working capital, the way we have done in India and overseas, as long as this continues, for the full year, we should still be able to generate positive free cash flow. I will take a pause here, with -- and then look forward to taking your questions.

[Operator Instructions] The first question is from the line of Pranav Kshatriya from Edelweiss.

My first question is regarding ProConnect. We understand that there are relevant issues with the subsidiary. And you did talk about a slowdown in logistics, but can you actually give color on what exactly is causing such a drastic slowdown on the revenue side? Because we were under an impression that because e-commerce is one of the largest sector, and which is still seeing a good growth despite slowdown, the growth in distribution cannot be to an extent which is a lot lower than maybe normal GDP growth also? So what exactly is going wrong there? And with regards to margin, if I look at -- even if I adjust for that INR 20 crores provision in the EBITDA, and if I look at EBITDA stands at INR 5 crores versus INR 16 crores in the last quarter. So there is some disposition of cost also, which has happened. If you can throw some light on what exactly is happening there? That's the first question. And second question is regarding working capital. In this quarter, in the past quarter, you were roughly INR 500 crores positive cash on working capital. This quarter, it's -- for 9 months, it's negative [ INR 60 ] crores. So currently, around INR 1,100 crores change in working capital in this quarter alone has happened. What exactly is leading that, because working capital days does not really indicate such a drastic swing? That's the second question. And last question on Saudi tax. Can you please explain what exactly is the reason for such a high tax? And what is the possibility of this reoccurring in the future?

Okay. So I'll take it in reverse order. I'll take the last one first. See, as far as Saudi Arabia is concerned, it's rather unfortunate that on certain product categories, there were some taxes which was arbitrarily levied by the tax authorities. Now we have taken a written opinion from one of the Big 4 with regards to any tax applicability on this product category, and very clear, they told by the written opinion that there was no tax applicable. So we continued to do the business. But then we did receive from the tax authorities a claim or another, which was of a much higher magnitude than what we could finally negotiate and settle. So this is something that is not unique only to Redington. Some of the of the other companies dealing with the same product category are also subject to this problem, but we seem to be one of the only ones, despite the fact that we have a substantial business in Saudi Arabia, that was the visibility of Redington in that market is of a much higher order compared to others, and therefore, we have been the first ones to have got impacted. But this is something that would also impact other companies. To your question where it is likely to continue the way forward, now the very fact that some of these things at the moment appears to us as very arbitrary, we are also trying to take a very clear opinion from the tax authorities to make sure that we have absolute and abundant clarity so that at least in the way forward, we will know definitively one way or the other, so that this can be factored in terms of our commercial transactions with the customer. To your point about the ProConnect, just want to mention a couple of things. The point here is, if for a moment, we look at the business without the company in East, where we made an investment a little more than 2.5 years ago, our growth in revenue is 40%. Our growth in EBITDA is 27%. So the first point that I want to therefore share with you is that, yes, our business outside of this particular industry company is still on a good stead when you look at a 9-month picture. So that's the first point that I want to submit to you. Don't read -- over-read into what has happened in this last quarter, I almost believe it's an aberration. And [indiscernible] and now we have so much to see how we can recover this, but as a matter of prudent accounting practice, we have gone ahead and made the provision. So that is part of the answer. With regard to your question on free cash flow, I will request Krishnan to respond to that question. Over to you.

Yes. So probably for the full 9 months, the free cash flow is at minus INR 300 crores. As Raj mentioned, in this period, we have paid the final dividend in the month of July, and there was an interim dividend in the month of December. That is still close to about INR 200 crores. So if you eliminate that part from our business aspect, it is still at about minus INR 100 crores. And this has happened because of the growth that was there, there has been, I mean, good growth in terms of revenue. As Raj explained in terms of working capital, we have reduced the working capital in India, and in overseas, whatever was the lower working capital that we had continued for a reasonable period of time. So working capital is very -- and it is mainly on account of the growth. So there is no need to have any big worry. And we are confident by end of the year, even this should get [indiscernible].

Sorry, Krishnan, to press on this, my question is only regarding the change in working capital. In FY '20 number was [ INR 414 ] crores positive from working capital -- I mean, cash from working capital. And 9-month number is negative INR 660 crores. So that means that roughly more than INR 1,150 crores has been investment in working capital in Q3 FY '20 alone. But the number, if I look at the -- from working capital days does not [ reach different odd percent.] So just want to understand where this INR 1,100 crores is largely going? Is it international? Is it India, receivable, inventory?

See, this INR 600 crores minus that you are talking about for 9 months, actually, now it is INR 300 crores. We are taking the base where we had done a factoring of about INR 300 crores. That is more a balance sheet-related factoring. So what sort of numbers that we do from a cash flow perspective are from the working capital. So it is truly the business number. So in the -- I mean, the [IAB], It is INR 300 crores negative, which as I said, is contributed on one hand by the dividend payout of INR 200 crores and on the business, about INR 100 crores. This is for 9 months. For the quarter, yes, we had in the first half, a huge cash [ INR 15,000 ] crores that during the quarter of Q3 has become, as you see, minus INR 300 crores for 9 months. So this is because of higher working capital utilization in Q3. This isn't Q2. Because in September, we had huge sales on -- I mean on account of various reasons, because of which the working capital was much lower, but was not something that can be taken as a steady-state working capital. So again, you cannot just look at Q3, see it for 9 months. And that's something that we could be able to get that corrected, if you take it for the full year out of '19 and '20.

[Operator Instructions] The next question is from the line of Nagraj Chandrasekar from Laburnum Capital.

A few questions on the Auroma impairment. So obviously, when we make acquisitions, over time, we learn how different businesses work and we learn what our ability is to properly underwrite these businesses. So based on your experience over here, have you done any reflection or any rethinking around the capital allocation strategy? Should we maybe be placing greater reliance on an organic strategy, we are a little more choosy in terms of when we acquire? Just curious to see how this episode has potentially affected the way we think about capital allocation going forward?

So you make a great point, and let me tell you, for the last almost 2 months, we have been grappling with really taking a relook at our capital allocation policy. In fact, at this unfortunate time, even in today's board meeting, went in terms of discussing some of these aspects. So is that a learning on our [indiscernible] we have made? The answer is absolutely yes. I also must confess that probably we got a little carried away, and I'm not ashamed to say that, with regard to the growth opportunity in the logistics space, that while we felt was a compelling reason for us to make the investment in East, because they are very underrepresented, and there are some marquee customers that we wanted to acquire, so therefore, we made that investment. But then in hind sight, I guess we could have done it or structured it or executed it very differently. So to answer your question, there is a complete rethink in terms of our capital allocation, point number one. Point number two, going forward, it's now -- therefore, we are going to be extremely good coverage with regard to M&A, but it is just that we will have a completely solid view into really what works, as well as defining a well-crafted strategy before we make any of these investments, rather than Q3 changed or drive growth, which is where we kind of came to this particular investment. So thank you for asking the question. And let me give you the reassurance that we are spending a tremendous amount of time in trying to make sure that we have a very solid covenant capital allocation policy.

Thank you for that very candid answer and really appreciate the honesty. All companies, all great companies, go through ups and downs, and we get lots of things right, and we get some things wrong. But I think a good management is one that owns up to missteps and takes corrective action. So really appreciate the honesty and candor that you've displayed.

Thank you once again.

The next question is from the line of Riddhesh Gandhi from Discovery Capital.

Congratulations on the numbers. So just a few quick questions on this -- on ProConnect, even excluding this write-off which we've taken, the numbers and the growth and the profitability isn't as per what we've historically been able to do. Could you throw some color on that? And if we -- and if we think this is transitory or if we will see this for the near term or longer-term potential implications?

So we see this as a temporary aberration. But it would take 1, maximum 2 quarters for us to completely put this issue behind us. The reason I say that is a tremendous amount of management bandwidth was invested in lots of negotiations, making alternate arrangements, getting a completely new management team in place and completely redirecting this whole business process, business model, all of this has taken a toll. And in the meantime, some of our core business, we also got distracted. So we are now trying to rethink through this whole thing in terms of where and how we must take this business forward. We, in fact, even have plans to complete dedicated strategy meeting only for ProConnect. To better answer your question, give us another couple of quarters. We do have great plans. We do strongly believe that logistics business for Redington is something that is something that we want to invest, we want to scale, and we do believe that we have built capability, but there's a lot more that we can do, as we must do. So it is not an area where we are going to defocus. It's an area we are going to double dip, but it will take us a couple of quarters for us to get the house in order.

And the other question was, look, our growth, both in India and offshore, has been extremely attractive and good. But I just wanted to understand, is this driven actually primarily in new logos that we've been able to attain? Or is it also driven by the industry is growing at how much and how much are we growing at? And is there consolidation happening among distributors or is it just [door to door]? I mean -- so I wanted to understand if we can kind of continue to expect to see growth on these lines? Or how much is steady-state growth would actually be?

So if I have to probably give you a little bit of color, so the new logos would have contributed to about 15% to maximum 20% of the growth. Increase in market share of the existing brands would have probably contributed and taking the number out of my head, and not be very precise, but trying to give you a sort of a broad indication, that would be in the vicinity of about 40%, 45%. And there is a balance of about 20%, 25%, which will essentially come out of either new markets or in terms of new market -- go-to-market segments that we would have approached. For instance, there are certain brands for which retail has not been in the past very strong. But that, for the last 1, 2 quarters, have scaled up quite nicely, et cetera. So the summary is new logos would have added about 15%, 20%; a big portion comes out of gain in market share; and there's another 20%, 35% that would come out of market geo expansion, as also in terms of getting and scaling up the go-to-market segments.

Got it, understood. And if you, typically speaking, in Q4 ends up being our strongest quarter, are we still seeing that in terms of this year, in terms of your [ profit goals]?

The short answer would be yes, but I'm also sort of tempted to say that, look, there is this very unfortunate global crisis called the coronavirus, which -- and since China happens to be the factory to the world and also for technology products, I do expect for some kind of shipment delays or write-down in terms of the production quantities for some of the suppliers. So the jury is out, and I only hope that if this issue gets resolved and things come back to normal, we should still see a good Q4. Otherwise, we'll have to wait and see how the coronavirus issue unfolds.

Got it. And sir, the last question was actually in view of the coronavirus, effectively, do we have inventories, for how long do we have? And if you could give us some visibility on that in terms of -- the percentage of revenue maybe being produced in China and what the implications could be and how much inventory we are holding?

It would be -- I think it was 1%. Let me give you first one statistics. Now when you look at our inventory days for the quarter, we had 28 days. So that means we have less than 1 month of sales in terms of inventory, right? So that's point number one. This is at a consolidated level. So do we have enough inventory to ride over if the problem prolongs to more than 30 days? The answer is no. The second point is that if you take India, for instance. 75%, maybe stretching to 80%, of all the shipments happen in Indian rupees. So that means all the global technology vendors, they import the product and they sell to us in Indian rupees. And therefore, we are not directly impacted in terms of having to source the finished product from China. At the same time, we therefore, are billed by the vendors directly. To that extent, we have to look to them to be able to plan the inventory. There is little in our hands. But whatever I'm saying in terms of -- if you ask me, since today, has there been any shipment delays? At the moment, I would say, very less, but if the problem was to persist, then I would like to believe then that there would be some shipment delays, and there would be production that would get curtailed and all of that. So that, we'll have to see how the coronavirus plays out. So I'm sorry I'm not able to give you a very precise answer.

[Operator Instructions] The next question is from the line of Nitin Padmanabhan from Investec.