Redington Limited (REDINGTON) Earnings Call Transcript & Summary

Good evening to all those joining from India. And thank you for taking the time to be with us on this earnings call. Q2 for us has been a good quarter. As you would have observed, at the consolidated level, our revenue grew by 12%, EBITDA by 18% and the profit after tax by 35%. So what is very gratifying is in a COVID period, we have managed to deliver our earnings growth being much stronger compared to the revenue growth. Now if you disaggregate this between distribution and services, at a global level, the distribution business grew its profit by 37%, while the revenue growth was 12% and EBITDA growth of 26%. Now as you unpack this between various regions as in India and overseas, both the theaters have shown good set of results. As far as India is concerned, we grew our top line by 8% and our bottom line by 37%. Now our EBITDA grew by 7%, largely on account of the services business, but when you look at India distribution in isolation, our EBITDA grew by 3%, whilst our profit after tax grew by 33%. Now when you look at services, which includes both Ensure as well as ProConnect, you would know that Ensure on the 31st of July, in India, we have divested that asset. And if you, therefore, take only 1 month of Ensure, which is July, and take ProConnect for the full quarter, the revenue de-growth is 13% in India, while the profit after tax has grown by 81%, but I hasten to add here that out of this INR 7.5 crores of profit that we have delivered on the services business in India, about INR 4.5 crores comes out of the capital gains on the sale of Ensure India as an asset. Now when you switch gears and look at overseas, once again, they have delivered very strong set of numbers. The revenue growth in rupee terms is 14%, EBITDA growth of 42% and a profit after tax of 34%. We have a huge tax negative impact on account of the devaluation of Turkish lira. So for the quarter, our effective tax rate was 49%, and all of you would know that the income tax in Turkey is 20%. And for last year, our effective tax rate was 22%. So we've had a serious negative impact on account of tax. Notwithstanding the serious negative impact, the overseas business has still managed to deliver a profit after tax of 34% against a revenue growth of 14%. Once again, implying there is a strong operating leverage. Now the contribution, as you would know, from overseas was 62% by revenue, and similarly on profit after tax. If once again, we look at from an industry vertical or a business vertical, at a consolidated level, the IT business, which is consumer and enterprise put together, grew by 8%. The Mobility business registered a strong growth of 21% for the quarter, and the Services business actually de-grew by 1%. But if for a minute, because there is only 1 month of Ensure India, which is July, as compared with 3 months of last year, if for a minute, we do a like-for-like comparison, which is to look at purely the Services business without Ensure India for last year and this year, the growth is actually 5%. Now as far as India is concerned, I'm really happy to share with you that IT as a vertical grew by 14%. Now it's also important to note that while the PC growth in India was about 11%, we managed to deliver a growth of 14% in India year-on-year. As far as overseas is concerned, our IT grew by 4%, Mobility grew by 36% and Services grew by 15%. So overall, it has been a good quarter, whether you look at it by parameters of revenue growth, EBITDA and profit after tax. And if you look at it by theaters, which is India and overseas, both have done well; though, there has been a stronger growth overseas. And when you look at it by industry vertical or business, which is IT, Mobility and Services, we've also done well for Q2. Now from -- one of the most gratifying part for last quarter is, once again, we have managed to contain the net working capital at 14 days at a consolidated level. Now when you look at the previous year, it was 30 days. So there has been a good, significant improvement of 16 days year-on-year. But here, again, I must mention that this did not come out of getting additional supplier credit, because last year, we had 47 days of payable, which is exactly the same that we had for this year in Q2. However, what has substantially improved is our inventory base, which from 28 days of last year reduced by 9 days to 19 days. Similarly, our credit and collection engine has worked extremely well once again this quarter, where our total DSO was 49 days for last year, which has come down by 7 days to 42 days at a consolidated level. But I also must mention here that when you look at the working capital, again, by theater, India, which was 29 days last year, has managed to bring it down by 15 days to just 14 days of net working capital. Likewise, overseas from 32 days has been brought down to 14 days. Overall, we believe that the hygiene in the business, whether it is about inventory and the quality of inventory, whether it is about our DSO and our collection and overdue receivables has been well under control for this quarter. We managed to deliver free cash flow for the quarter. At a consolidated level, we threw up about INR 182 crores of free cash. Essentially, all of this and more came out of overseas, which delivered a free cash flow of a little shy of INR 500 crores. Now this certainly helped us to improve our return on capital employed, which, of course, looks too good to be true at 42.6% at the consolidated level. Both India and overseas have contributed nicely to ROCE. It was 45% for India, and 41.4% for overseas. Similarly, when you look at return on equity, because of the strong profit growth in India, the return on equity is close to 21% for the quarter. And for overseas is a little shy of 14%. Thereby, at the consolidated level, the return on equity is about a little shy of 16%. We put in a lot of focus on liquidity and cash flow. This, as you know, from March onwards until end of September, we have been extremely focused on making sure that our cash flow and liquidity is absolutely under control. I'm pleased to share with you that at a consolidated level, our gross debt to gross equity is 0.17 and at a net debt to equity, it is negative 0.47. This clearly implies that across, again, all theaters whether it's India, Singapore, South Asia and the META region, we managed to have sufficient cash flow generated. In terms of the inventory and receivable provision, this was, again, a very unique position where we had reversal of inventory provision such that at a consolidated level, it was minus 0.19%. Though I must also confess, when you look at the previous year, it was minus 0.21%. This clearly implies that the aging inventory that we had, we have managed to sell it out and hence, the corresponding provision has got reversed during this quarter. Similarly, with regard to our robustness of the credit and collection, if we look at bad debt provision, it was just 1 bp in the case of India and 3 bps in the case of overseas. Thereby, it was 0.02% of bad debt provision for Q2. This compares with 0.13% for the previous year. Now while there have been a lot of improvements on many aspects, I must mention that as far as ProConnect is concerned, I do remember making this commitment to all of you that we are fixing the issue with regard to ProConnect. We brought about leadership change. We have brought in a new organizational design and structure. We have brought in new processes, controls and systems. This has allowed us to be able to deliver on revenue. We had a 6% de-growth, but we managed to deliver a profit after tax growth of 25%. I must mention here, there has been a significant improvement in terms of our business, our contracts, our margin and so on. So there is an all-around improvement. However, the negative news is that RCS, which is our investment in East, is still under the water. We made a loss of close to INR 2.5 crores. So this INR 3.1 crores of profit that ProConnect made in Q2 is after taking this loss of INR 2.5 crores. But trust me, we are putting all the corrections in place. And I -- once again, I did commit to you that we will turn it around this quarter, which we have in terms of delivering profit. I see this trend to continue as we look at Q3 and Q4, such that when we exit our FY '21, we would have once again put ProConnect back on a growth trajectory, and it will be a nice profitable growth. And therefore, we would have completed all our corrections, consolidations and improvements. As far as Ensure is concerned, I already mentioned to you, in India, we have divested that asset. So we had just 1 month of revenue and profit. And that divestment of the asset gave us about INR 4.4 crores of capital gains. Now when you look at H1, you will be very happy to note that we have delivered growth on every parameter of revenue, EBITDA and profit after tax. If you look at profit after tax, we have grown by 10%, and revenue growth was 2%, and EBITDA growth was 7%. So some of you would recall that we told you that probably by September, the whole situation will start to turn around. I'm happy that in Q2, we managed to turn the ship around. And by H1, we are already in the growth trajectory for the company. I'll not go into all the details, all that I just want to share with you is on -- when you look at half year, and again, when you look at distribution. Distribution -- global distribution grew revenue by 2%, but grew bottom line by an interesting 18% with 14% growth on EBITDA. A big part of this growth and performance came out of overseas, which registered a 5% growth in revenue, but a 17% growth in profit after tax and this is notwithstanding the fact that we had a huge negative impact on account of income tax in Turkey. So if for a minute, you look at EBITDA growth for overseas, it was 29%. As far as India is concerned, we had a degrowth of 3% on the top line for the half year, and degrew bottom line by 1%. So we are almost there in terms of India, once again, starting Q3 and when you look at YTD, it should be a completely different picture. Similarly, with regard to our working capital. Like in Q2, when you look at half year, it is 15 days at a consolidated level compared to 31 days for last year. And again, what is very gratifying is the free cash flow which for half year is INR 2,515 crores, essentially coming out of both India and overseas with almost about 35% or thereabouts coming out of India and about 65% of the free cash flow coming from overseas. Similarly, with regard to our gross debt to equity, which I have already shared with you, it is 0.17 and negative 0.47. ProConnect, however, when you look at it for half year, has de-grown revenue by 18%, largely coming out of Q1, which all of you know, we were significantly impacted. And the profit degrowth -- I mean, unfortunately, we had a loss of INR 1.4 crores, again, largely coming from Q1, but we are more than confident that we will have a stronger performance in H2 for ProConnect such that for the full year, we should be delivering a profit growth. I will probably, at this stage, take a pause and turn it over for any questions from any of you. Thank you.

[Operator Instructions] The first question is from the line of Sanjay Dam from Old Bridge Capital.

Sir, congratulations on a wonderful performance. Congratulations to the entire team. My first question was that inventory, I think we are running on pretty low levels there. So is there any fear of loss of sales? Or are we losing out anywhere on that? And would you like to have a -- typically a higher level of inventory? That is #1. And #2 is that in the last few occasions when you spoke on the earnings call, you mentioned India has been a very important growth driver -- an increasingly important growth driver with Mobility playing a very important role there. So notwithstanding the disruption that happened in the last 6 to 9 months, how do you see this going forward?

Thank you for your question. I'll take the first one, which is to do with inventory days. I think it's a very good observation. You are spot on. While yes, we pride ourselves that the inventory has come down from 28 to 19, first, let me give you the perspective in terms of the way forward. The inventory cannot be at these levels. Inventory, ideally what vendors would expect and what will also put us in the best way to serve our partners, would be in the vicinity of about 4 weeks, which is what we had last year, and which is what it is likely to settle down in the way forward. Now to your question on inventory, whether we are currently losing business and what has given us this unique advantage of being able to contain the inventory at 19 days, there are essentially 2 reasons: one, this year, starting first of April, we have been extremely prudent in terms of our purchases. We will want to buy only if we are confident to sell and sell within 1 week. Otherwise, we are not -- our intention was not to take a risk. So we have been extremely hard and extremely tough and very aggressive with regard to controls on purchases. But as we look at the way forward, as the business and the industry is slowly coming back to normal -- though, we are still some months away, if not a quarter or two away, we have to now once again keep the inventory levels, like I said, at about 4 weeks. Otherwise, we will not be relevant both to the partner and to the vendor. To your other question about India being a strong growth driver in the way forward. You will clearly see that in Q2, India's performance has been particularly strong across all parameters. But once again, just for your understanding, the distribution business grew by 9% on the top line and grew bottom line by 33%. So trust me, you will see quarter-on-quarter that the performance and the contribution of India business, particularly on distribution, will start to really look up. So we stand by our earlier messaging that India, we clearly see a higher potential and a higher growth opportunity. You would also recall that historically, India's working capital was always much higher. If for a minute, I jog your memory. So last year, it was 29 days of working capital, which in itself is low, whereas in the previous periods, it used to be north of 40 and 45 days. The fact that we have brought it to 29 last year, and now we have brought it to 14. Now while I do understand and I have mentioned this in the past, that this is not sustainable, but the point I'm only trying to impress upon you is that we are completely conscious and working very hard towards making sure that our working capital is under check and control, and you are seeing an improvement. So we are on a growth with regard to top line, and we are winning market share in the marketplace. Our profit after tax is growing much faster than the top line, so there is operating leverage. If you look at our OpEx, even that is coming down, when you adjust it for one-off expenses. And if you look at our working capital and free cash flow, on all these parameters, there has been a marked improvement compared to what it was. And we are confident that in the way forward, you will continue to see strong set of numbers coming from India.

The next question is from the line of Pavan Ahluwalia from Laburnum Capital.

Just a question on some of the comments you made around inventory. I think part of this, based on your response to the previous question, has to do with product mix, right? So if IT enterprise grows more slowly than everything else, there's generally less working capital stock. On the other hand, you've clearly made some changes, improvements, et cetera, in how you manage working capital. So 2 things. One is if you break it down by geography and segment, let's say, IT enterprise, consumer IT and Mobility India, IT enterprise, consumer IT and Mobility overseas. Within each of these segments, has there been an improvement in working capital days? Where has the biggest improvement happened and what did you do to make that improvement happen? Because you guys normally run a very lean and efficient operation, which is good, but it also means it's very hard to find places where you can improve. So it's been a well running company for a very long time. So just be good to get some color on what changes you were able to put in place on top of an already well-run operation to improve working capital further in the relevant segments?

Pavan, as always, a great set of question and good observation. So here is what happened, both in India and overseas. If I have to put it right on the top, I would put in India, the Mobility business did exceptionally well with regard to working capital management. And this working capital management, you should see it not only from the inventory lenses, you should also see it from credit and collection. So there have been some very interesting structures that we have put in place, which allows us to be able to contain our DSO far less than what we used to have at the cost, one. Two, even on inventory, where in the past, we used to be hovering around 4 weeks, I can tell you that we have managed to cut it down quite a bit. So in summary, Mobility business has been a great opportunity for us to manage working capital better. Second, IT consumer in India. Trust me when I say that our purchases and from the time the stock lands, we look at stock turns, we look at cash-to-cash conversion cycle. IT consumer, as you can rightly imagine, turned out to be an absolute treat for us. We made good revenue. We made decent margin and the products sold at terrific velocity. So oftentimes, we were faced with the situation of not having inventory rather than having more or excess inventory. So the IT consumer has done well. Though in the same breath, I must tell you, the print part of the business and the consumables that has supplied part of the business was certainly a little slow. So to that extent, we had to slow down in terms of our investment with regard to capital investment in the print and supplies part of the business. But the IT consumer part of the business, largely driven by PCs, we could manage the working capital very well, deliver growth and also delivered decent margins. Now with regard to enterprise, for whatever we managed to sell in this last 6 months, I must tell you, I feel extremely good about how we have managed our working capital; though, as compared to mobility and as compared to consumer IT, it tends to be much higher for reasons that you know. But the way to look at this business, which we manage successfully is, to the extent that there are higher DSO during this period, we managed to negotiate and win extended supplier credit, which certainly helped us to manage the overall working capital as far as Enterprise is concerned. Likewise, when you look at overseas, unlike in India, where I would put Mobility as #1 and IT consumer as a close second in terms of working capital management and overall performance; overseas, I would put IT consumer which, as you know, is the bigger piece of our action there, that did very well for the same reasons that I articulated for India. Delivered growth, decent margins, very strong working capital management, driven largely by a strong sales velocity on PCs. Now Mobility, I would put it as #2. We also had good working capital management there and managed to deliver growth. You would -- I don't know if I mentioned to you that in Q2 the Mobility business overseas grew by an impressive 36%. And the contribution of Mobility business to overseas revenue was also coincidentally 36%. Like in India, Enterprise business overseas is the one where we had to deploy more working capital. And again, the same philosophy was adopted, that if we are giving any higher credit, we managed to, to the extent possible and practical, get extended supplier credit. So, so far, it seems to have worked very well. I don't know, Pavan, if that answers your question.

That really helped -- I -- to kind of paraphrase, just to make sure I have understood it correctly, a lot of it is kind of growth length and grow appears to have 2 effects. One is, obviously, the higher sales velocity because of work from home and greater electronics penetration as a result of that may be. And the second is that when you have this kind of spurt of fast growth from what you're saying on supplier credit, it sounds like it, in a way, increases your [indiscernible] power a little bit of the suppliers who are very keen to make sure they don't miss out on the growth. And therefore, they're willing to be a little more generous on supplier terms to make sure that they're actually able to grab this growth. And if you look at the 20, 30-year history within this industry, we've seen that on longer horizons as well, when products, say, in a high-growth phase, folks tend to be more generous, when growth slows down, they try to squeeze out whatever they can in working capital. So it sounds like some mini version of that is playing out today. I don't know if I got this right.

So, no. I think, Pavan, you are right. If you had asked me a different question saying that how much of what you have done in Q1 and Q2 in terms of working capital management is sustainable? I think I've said this before, yes, we expect under normal terms, that there would be about 10, 11 working capital turns which is almost about 35, 37 days of net working capital. That we believe would be what is likely to play out on a steady state, but we are using this opportunity to be able to get very prudent with regard to our buying. If we get that right and manage to structure it well, I think there should be -- we should see a sustained level of improvement, both in India and overseas.

The next question is from the line of Pritesh Chheda from Lucky Investment.

Yes. So I'll just pick up from the last question on working capital. I missed that. You said that sustainable working capital -- net working capital should be 35 to 37 days in this business, which was the highest in 19 dropped to 30 days in FY '20 and what we see is about 15 days today?

Yes. So you're absolutely right. Our -- we believe that as we continue to -- as the previous caller, that as Pavan mentioned, once our Enterprise business starts to scale up and some of the supplier credits are not available. During this period, we managed to negotiate and get some extended credit. Some of that may be hard to get, so our own view is that as time goes by and as the Enterprise business starts to scale up, we believe that something like about 10, 11 turns, working capital turns, would be what is likely to settle down on a steady state.

In which case, under 2% type margin, the ROCE in the business should be not more than 16%. Is that a better way to look at it? I think that ROCE as a lever. Any other...

Very good. No, no, I think your observation is largely right, except that if we are able to rotate our working capital 10 turns, and we are able to do an EBIT of 2%. So my own sense is that ROCE should settle down at closer to 20%.

If I'm doing the math...

I'm doing a simple math. The number of working capital turns, it may not be ROCE, but it is return on working capital, I do understand that there is...

Depreciation.

... capital employed. Yes, there would be some other investments. But when I look at return on working capital, which, as you know, is 80%, 90% of all the capital that we invest in the business is that we are able to do a 10 working capital turns, and we are able to deliver a 2% EBIT, then we are at 20%, but either which way we can increase the working capital turns to 11 or 12 and still manage to deliver closer to 2%, the rest is to your calculation.

Perfect. My second question is, for the last 3 months, we were reading a lot on the matters in the IT part of the product in terms of demand for laptops, et cetera, and even phones. So I was a little bit perplexed when I saw a 9% growth in India business for the quarter. Was there any challenge or is any other thing that I need to understand for this mismatch between what was -- what we were reading and what the reported growth came in?

In the sense, you're saying whether this 9% -- sorry, I'm missing your question on what exactly -- if you could paraphrase it again, please?

I put simply that in, let's say, in the electronic space or in the durable space, we have continuously been reading that there's a lot of growth or demand for IT products and phones. And there are these monthly data which keep on coming out. But when you look at the 9% growth in the India business that you reported, it seemed like -- it seemed a lot lower than what the channel checks were suggesting in terms of growth rates. So am I missing something in this?

Not really. So let me give you some -- a little more color. So when you take India and you break it down by IT and Mobility. IT grew by 14%. So when I say 9% at India level that includes IT, Mobility and Services. If we look at IT alone, the contribution last quarter to the overall revenue of India was 77%, and IT grew by 14%. Does that somewhere mirror with what you're reading?

It is not lower than what the media reports or newspapers were keeping on talking about the side of the product growth rate. Anything else to highlight?

I really don't know what you have been reading and what is that. But here is the point that I want to make. For us, we are extremely happy with the way the business has grown. I'll give you one more statistics, I don't know if that helps. Overall, you are right, India revenue grew by 9% from last quarter. IT, in particular, which contributed to 77%, grew by 14%. Now when you look at consumer IT, it grew by 23%.

Okay. And how much is consumer IT as a portion of your India business?

It is 60% of the IT business.

So 0.6 into 0.7 sits about 30-35%.

I'll do a quick math for you. It's almost about 47% -- 46%, 47%.

So which means the Enterprise IT is where, what would be the growth -- decline or growth there?

So Enterprise IT grew by 3%. And the contribution was 40% of the IT business, which mathematically is somewhere in the vicinity of about 30%. I'm sorry if I not mention one point, which is the Enterprise and the SMB sector with regard to their investments in data center, et cetera, et cetera, that is still soft. We have not seen any pickup with regard to the investment in the SME and the Enterprise space on data centers. We are expecting that should start to look up in the way forward. And as you know, whatever growth we have been doing is largely on the back of some of our security, software, cloud, some of these businesses are showing good traction. However, some of the value businesses like server, storage, the traditional infrastructure and the traditional data center, the business is still to pick up.

Perfect.

So does that help?