Redington Limited (REDINGTON) Earnings Call Transcript & Summary

Thank you very much. Good evening to all who have joined us today. I feel extremely happy to share some great set of numbers that the Redington team has been able to deliver, particularly in Q3. We have reached many milestones, and let me start. We recorded the highest ever revenue in any given quarter since the inception of this company. For us to do the kind of numbers that we have delivered in this quarter, which is about INR 17,000 crores. And very importantly, we reached $1 billion of revenue as far as India is concerned. From a profit standpoint, this, again, I say with absolute pride that this has been the highest ever profit, and this is notwithstanding the fact that this is after taking -- making a tax provision to the tune of between INR 89 crores and INR 90 crores. And after that, we have delivered a profit, which is the highest ever in any quarter for Redington. In terms of the performance as compared to the industry in India, we outperformed the industry growth, growing at 43% from a PC point of view. Working capital has been at 12 days overseas and just 11 days in India. This is by far the lowest ever working capital that we have been able to achieve in any period thus far. The overseas, which registered a marginal decline in revenue by a weak 1.5%, grew margins, whether it is at gross margin level or EBIT or PAT by a strong double digit. However, I also hastened to add there have been some low lights for this quarter. There was a unfavorable high court judgment on the gift of tax case. And consequently, we had to make a provision totaling INR 89 plus crores. Now in terms of the other low light in India and also true for overseas, the investments in the large enterprise sector, particularly the IT investment, did not see a strong demand. So we are hoping that this should probably get fueled in the way forward, particularly also in India on the back of the recent budget announcement by the Honorable Minister -- Finance Minister. The turnkey business, which has done extremely well for the last several quarters, did register a single percentage degrowth in revenue and profits, but not a cause for concern. And these are some of the highlights and low lights, and let me very quickly walk you through some of the statistics, which I shared on the presentation, which was sent to all of you. The revenue at a consolidated level grew at 15%, EBITDA at 44%, PBT at 63% and 21% after taking into account the INR 89 crores of tax provision. If for a moment, you keep that outside, then our profit after tax growth at a consolidated level was 78%. Now this strong performance is across all theaters that is both India as well as overseas. Now when you look at India consolidated, top line grew by a whopping 44%, EBITDA by 79%, PBT by an incredible 173%, and the profit after tax should have been 240%. However, after taking into account the provision of this INR 89 crores, it has degrown by 1%. And if you look at distribution in India in isolation, revenue grew by 45%, EBITDA by 48%. And the PAT in effect actually grew by 91%, but because of the tax provision, it degrew by 48%. Now the good part is, like I said, both India and overseas contributed quite strongly to this performance. If you look at it by business segment, I'm very pleased to share all 3 business segments, i.e., IT, Mobility and Services, grew by 8%, 27% and 8%, respectively. Though I must confess that the contribution of Mobility was about 41% at a consolidated level, IT at 58% and Services at 1%. Now if you disaggregate this between both India and overseas, here again, in India, IT grew by an impressive 31% and Mobility by 69%, Services by 5%. So overall, I repeat again, even if you look at not only by theater, you look at it by business segment, it has been a strong performance. The next interesting aspect is our working capital. Though we did mention in the earlier calls that when business comes back to normal, we are likely to see somewhere around 10 to 11 working capital turns. But I tell you with a sense of pride that at a consolidated level, the working capital for Q3 was just 12 days. Now you would be very keen to know whether this is on the back of extended supplier credit that we enjoyed in Q1 to a very limited extent in Q2, but I must tell you that in Q3, there is really -- it is business as usual. So it has been, again, a very humbling performance for -- from a working capital point of view. There, again, when you look at India, it's a record number of just 11 days, and overseas, again, another record number of just 12 days. So overall, the working capital has been -- continues to be very well managed. The most gratifying part for all of you and certainly for us, is that for this quarter, we managed to generate free cash flow of INR 234 crores, largely coming from overseas. Every financial ratio had improved significantly this quarter. Our return on capital, employed because of our enviably low working capital, was 64%. And the return on equity, if you for a minute ignore the tax provision, was as high as 24.3%. But after taking that tax provision, it is 16.5%. Now from a cash flow and a debt level, again, I must tell you, both in India and in overseas, we had negative debt, so in other words, not only did we not have borrowing, we had free cash. In India, it was INR 180 crores, and overseas was about 2,300 plus crores, totaling INR 2,500 crores of cash. The -- both the inventory and bad debt provision for a change this time, we had reversal. In other words, this certainly also is one of the reasons why you are seeing our operating profit and the final profits be significantly higher because this time, both in India and in overseas, on inventory, we had a provision reversal. And as far as the bad debt is concerned, at a consolidated level, it was just 9 bps. And as a matter of reference, the previous year was 12 bps. Now with regard to ProConnect for the quarter, I'm extremely happy and pleased to share with you, we recorded the highest ever revenue in the history of ProConnect, INR 137 crores for the quarter. We also delivered an EBITDA of 10%, and we delivered a profit after tax of INR 2.8 crores. This is notwithstanding the fact that RCS, which is our operations in East did suffer a small loss. Now when you look at the 9 months picture, likewise, everything is just looking extremely good and positive. Let me just quickly give you a high-level perspective. Every parameter has grown during this period, whether it is the India business or the overseas business, and with regard to every business vertical, has also registered interesting growth. Just to give you a quick snapshot. Our revenue growth was 7% for 9 months, EBIT growth was 25% and PAT growth was 13%. This is after taking into account the INR 89 crores. But for that, the profit growth would have been north of 38%. The -- similarly, when you look at -- from an overall India versus overseas, India once again has registered a double-digit growth on top line, a double-digit growth on EBIT, and again would have been a very high double-digit on profit after tax, but for this tax provision that we talked about. So again, from a cash flow point of view, for the 9 months, at a global level, we have delivered about INR 2,700 plus crores of free cash. And from a net debt perspective, again, it was INR 2,500 crores, which I already mentioned to you. So overall, again, from a working capital -- sorry for that, it is 22 days for 9 months, 28 days India, 18 days overseas -- no, I'm sorry, I stand corrected. It has come down by 22 days for the previous quarter, which I've already shared with you. I repeat again, at a global level, the working capital was 12 days, India being 11 and overseas being 12. Sorry for the confusion. So I will pause here just to take any possible questions and then take it forward.

[Operator Instructions] The first question is from the line of Pavan Ahluwalia from Laburnum Capital.

Raj. A couple of questions. First, obviously, stellar quarter, clearly a bunch of one-offs, but stellar job overall. My questions are, as you perhaps might imagine, first of all, the -- a lot of the really strong revenue growth has been Apple. It looks like, right now, dependence on Apple is at a peak. Now you're a veteran of this industry, you know all the rules of thumb regarding single vendor dependence, but it's also a reality in the last few years that this 1 company has just come to dominate the industry. So there may not be much of a choice that we have, if they're making the best products and everyone wants them, we sort of have to go with them. So I'm just curious, as an industry veteran, looking at this changed landscape, what do you think? And how should we look at apple's announcement of wanting to drive its own retail stores on -- own online stores, particularly in India? And what that means for our business? I'm not talking just now, but maybe over a 3-, 5-year horizon. How do you think about the impact that might have on us and how are you positioning the company for it? That's the first question. The second question is on working capital. Obviously, very strong working capital performance. Particularly surprising given how strong the Apple contribution was, it looks like they have not squeezed you on working capital, which is good. But just curious to get your guidance, does it still stand that we should see some normalization from these levels on working capital? And finally, if you have to look at a realistic kind of medium- to long-term growth on this business on, say, a 5-, 10-year horizon, what should we be underwriting to?

Okay. So Pavan, a very beautiful set of questions. You talk about short, medium and long term. So I'll try my best to answer. So here is the first point. My personal view is that in this last 1 year, the vendor that you're referring to has done extremely well. Whether you look at it by number of units or whether you look at it by revenue growth. So the first point that I want to submit to you is that the time has increased, the market share has increased, point number 1. As I look at the next 3, 5 years out, first, I want to look at the industry. When you look at mobility at large, this is poised to grow by 11% in 2021. And we are talking about 150 million units. Yes, it is very clear from our positioning point of view, we are looking at mid- and mid-to-high, and we are really not looking at mid to low. But even so, the overall smartphone product category is poised for a double-digit growth this year and likely to continue on the way forward. When that happens on 1 hand, and on the other, the vendor that you spoke about, they are also significantly increasing their share, their contribution. I see that the overall -- the overarching opportunity for us is very interesting. So this is point number one. The relative point on that is, yes, one has to be prepared that there can be a change in the distribution landscape, and we are constantly mindful of it and preparing and planning ourselves that should this eventuality arise, how do we manage it. Now yes, more and more brands would have their own online stores, they would have their brick-and-mortar stores. So these are inevitable. But our experience tells us more and more that vendors start to do that, they are actually increasing the demand for the product. And thereby, we believe it is going to become a big advantage, even for the channel business or the distribution business. So the long and short of it is, I think we are in for a good ride. Yes, we should be prepared that there will be landscape -- distribution landscape changes or business model changes. But since the overall industry is poised for a double-digit growth in the way forward, and the vendor in particular is having a very strong performance and big plans in the way forward, we think the pie is getting bigger and bigger. And therefore, we see greater opportunities on the way forward. Now to your second question about working capital. Now see, the working capital, the way we have managed, I'll tell you the truth. The better days was 38 days this year at a consolidated level. Last year was 47. Inventory days was 28 last year, just 17 this year. Creditor days was 41 last year, 43 this year. So the first point that I want to submit to you is that, a, because of the fact that the mobility business did exceptionally well there was a high demand, and therefore, there was a very fast turnaround time. Therefore, the stock rotation and the total cash-to-cash conversion cycle was much faster than what would normally have prevailed. I must credit our credit team -- credit and collection team and our sales team, where they have been systematically been able to offer credit and collect money extremely well, much as there were concerns, even we had 3 quarters ago. But every single quarter of this -- in this last 9 months, I can tell you this is one function that has worked over time and has done supremely good numbers. Now to your point about how is it likely to play out? Yes, as we scale up the enterprise business as opposed to the consumer business and as things slowly start becoming normal, one should expect that the working capital turns is likely to be in the vicinity of about, like I said, 10, 11 turns. This is how we think it should settle down. But then, as you would have seen, we have now taken managing working capital as a very important mandate. And this is something that we have made sure every single business salesperson in the company and the finance team, they are all gold in terms of KRA to make sure there is a very high working capital turn. And delivering on the return on capital employed is one key KRA on which their performance payout is hinged on. So this is on working capital. Now to your last question about growth in the way forward. There's one thing Pavan we have always said, and we have demonstrated this in the past that Redington will always outperform the industry growth. If the industry is growing at 10%, 15%, we will make sure that we grow faster than that. This is our commitment. This is something that we have delivered, and this is something that we are committed to. So I may not be able to give you a crisp sharp answer in terms of growth, but trust me, we, as the industry is growing, given all of this learn-from-home, work-from-home and all of that. Therefore, this growth is likely to continue in the medium term, as I've already mentioned earlier. So we think that we are poised for a growth that is faster than the industry. Does that help, Pavan?

Yes, just 1 quick follow-up. So I take it the guidance on working capital normalization stands and what basically happened is your vendors have not tried to claw back the superior short-term economics you have because of the procyclical nature of inventory turns, right, so which is probably a good sign. And on Apple, I guess the only reason I ask the question is a very high proportion of mobile sales in India are actually online. Given that that's already the case, wouldn't Apple just prefer that everyone buys through their own store? And how have you seen the Apple online versus Amazon dynamic breakout -- breakup elsewhere? Is it realistic to expect that worldwide in the next few years Apple would just sell most of its phones online via its own stores? Or is there some reason to believe that Apple's online sales are more likely to happen through non-Apple platforms and be fulfilled by third party?

Pavan, when you look at globally, the way -- to the extent we understand the way they have structured themselves, they have their own stores that they have in different countries. They have the online, which is where they also, in some places, go direct. They have the corporate business, and then they have the channel business. My own gumption here, now this is something I don't know from the vendor, I can only give you our in-house view. Our in-house view is, given the landscape in India, which is so expansive and so complex, there is a crying need for a very efficient distributor who can take those products and deliver it at arm's length of demand. This is something extremely important and fundamental. And the cost at which we can do it and the risk that we take, it will be extremely difficult whether it is their own store or whether it is an online, at the end of the day, there has to be delivery that has to be made to the consumer. So our view is that given India, there is a very high reason to believe that the channel business is the one that will have a significantly higher contribution. And when it comes to channel business, we are definitely a strong player, and we have demonstrated that. So I am not overly worried in terms of some vendors going direct through their own stores or be it online or offline. Honestly, I cannot give you a better example than in Dubai or in UAE, can you believe that this vendor has 2. For a small country like that, they have 2 of their own stores, notwithstanding the APRs. And then you have the operators with whom they had a direct relationship, and still, we are able to garner a very decent share in a, otherwise, 5 so-called player scenario. So the long and short of what I'm saying is the more online there is, the more it helps to increase the demand, increase the interest for that product, which is going to be a big catalyst, and they would be investing big time in marketing and many other affordability programs. And therefore, we are likely to be a beneficiary, and I don't see that as a disadvantage at all. At least that's how it has played out thus far, and I don't see it any different in the way forward.

Just 1 sort of explanation on what you're saying, and that will be the last thing I ask, what exactly is this risk that you're taking? So if someone sitting in Delhi or Bombay or Dubai orders an iPhone online, pays for it with a credit card, all that mean -- he has made the payment. All that matters is it's going to be shipped from a warehouse somewhere to that person's address, which anyway is done by logistics firm. So I see how an enterprise or in offline retail, you're actually taking credit risk, you're funding the shopkeeper or whatever it is, right? But in an online model, where is that risk that you're taking that the vendor should not want you cut out?

So here is the point I'm making. I'm not saying it will a hybrid model. So there is going to be online, and I'm not discounting it at all. Yes, it is going to be there. The only point I'm making is, it is not a threat, it is going to be an enabler because the more they invest in marketing and in promoting the online, the more and more consumers are going to get interested and excited. That's only going to expand and increase the demand for the product. And therefore, from a channel point of view, we can serve. This is point number one. Point number two, whenever the vendor sells online, they sell it at the end-user price, no discounts. They may give you certain freebies, they may give certain benefits, but they will never discount on price. Whereas when you look at the channel, the whole model is different. Now you can, therefore, one, you would prefer to buy from a source that you believe can give you a better price; two, can also support you as and when you want. So there is always a preference for you to buy, and in India, and so also in some of the emerging markets that we distribute, price is a very important factor. And that too, the products we are talking about are pretty expensive. So, therefore, discount matters, price matters, and it is channel who can really do all of that and plus supported by certain affordability programs and so on, that can allow this whole business to happen through the channel. This shift to online, I can tell you, even in places like China, to the extent I know or we understand, the contribution from on -- from their own stores is no more than 10% to 15% or so we hear. So I don't see that as a threat at all, Pavan, trust me. I'm not trying to wish it away. I'm telling you, a, given the complexity of India, given the compliance requirement for particularly this vendor is very particular about compliance and the fact that you have to take -- you have to reach the product to the nook and corner, whether it's a Tier 2, Tier 3, Tier 4 towns and cities. Now that kind of a capability is available with the distributor, but it is impossible to have the demand across a whole pan-India being served through online. So trust me, there is a very important role for a distributor, and I'm willing to take sort of a very strong stand that the channel for this vendor will contribute the highest share of the business they do in India. This is my view.

The next question is from the line of Pranav Kshatriya from Edelweiss.

My first question is regarding the working capital. I mean, excellent show here. Can you just highlight that how should we see the trajectory of working capital getting back because what we were thinking at one point of time was as the business gets back on track, the working capital will not comply, but that has clearly not happened. So how should we see working capital coming back to normal? Second question is, what led to slightly deceleration in the growth for overseas business? Was there any seasonality into it or some timing change, which led to slightly lower growth? And third question is despite higher contribution of Mobility, the gross margins have kind of expanded, which is pretty unusual. So want to understand what's at play here?

So Pavan (sic) [ Pranav ], the first point that I want to submit to you is when you think about overseas, there are essentially 3 elements in play: one, Middle East, Africa; second, Turkey; third, is what we call as South Asia. Now the business that degrew for us, unfortunately, was the South Asia business. This degrew by a whopping 29% last quarter. And the essential reason is there are 2 major vendors, which were -- who contributed to about close to 25% of the overall revenue that we used to do. This business has got shifted to a rupee business. It used to be what we call the dollar business, which we would do out of Singapore, but this business has now got transferred to India as a rupee business. So very clearly, this has led to a decline in sales as far as the South Asia business is concerned. That would be one logical question for you. So the loss of the business for Singapore, would it be a gain for Redington India. For a start, I would say, a good part of that would be a gain for Redington India, but this is an opportunity, which can be captured by even other competitors. But for now, we are still managing to take a decent share out of that opportunity, which has got transferred. The second is the business in Turkey unfortunately experienced a decline, and this also, while the decline was a single-digit in terms of revenue decline, but that also contributed to the degrowth for this quarter. Last but not the least, particularly in Q2, which is July, August and September, we managed in Middle East, Africa and Turkey to capture a big part of the PC allocation from various vendors. We got, I would even say, a much higher allocation than what our fellow competitors could get. But because the vendors wanted to play a fair game, they said, "Look, in Q3, we will not be able to give you the same allocation because we also have to give to competition." So our allocation in Q3 was substantially reduced, and that also led to a slower growth. This is just to give you a perspective on what led to sort of a marginal de-growth in overseas. Now with regard to margin. One of the things that we were very clear. And if you remember, Pranav, 2 years or 3 years ago, we took a very sort of a resolute approach with regard to managing working capital overseas. And you would have seen over 12, 15 quarters, consistently, we have managed that. Now we are also taking an approach where how can we try and focus more on the margin and expand the margin. I must tell you, both in South Asia as well as in META, we have managed to do that across all product lines that the margin has got expanded in some by about 5, 10 bps, in others by about 30, 40, 50 bps. So I'm overall pleased that, yes, maybe the top line growth we have compromised, but the bottom line, and the margin is something that we have held on and held on quite nicely. I also must mention that during this period, there was definitely a good reason, especially when some of the products are on allocation and where supply is a constraint, we also took advantage of that and repriced it so as to enjoy a higher margin. So this is what has led to a good margin playing out overseas. Does that help, Pranav?

Yes, that's very helpful. Can you just throw some light on this -- the first working capital question?

Oh, so sorry. Yes, on the working capital, the reason why every time we sort of tell you that when business goes back to normal we should expect that the working capital is likely to have about 10, 11 turns. So this is something that we have been mentioning. And I'll tell you why. The fact that our Mobility business contribution was very high, it was as high as close to 41% at a consolidated level. This was never the case before. And particularly for this quarter, the fact that there was a very high demand, there was a very strong sales velocity, it allowed us to, therefore, the products came and went. It was a great -- that was a very strong demand. In the way forward, and right now, don't forget the Enterprise business tends to be a little soft. While there are some aspects or some product categories like Cloud and Security, et cetera, which are continuing to grow, but the bigger part of the infrastructure, whether it is the server, storage, network, et cetera, continues to be soft. In the way forward, we are expecting the Infrastructure business as also the Cloud and Security and Software to play out much stronger. So when that happens, you very well know that our credit period can no longer be 30 and 40 days. We have to now offer much higher credit period to our partners and customers. So we do expect that in a way forward, as Enterprise business continues to scale, and even the other businesses like Print and others slowly get back to normal, the working capital days will go up though in the case of Mobility, while currently it is enviably low, even that will start to be at about 12 turns with our expectation. So to give you a sense, the way you should keep in mind, when finally normalcy settles down, is somewhere in the vicinity of around 10 to 11 turns, so which means more like 33, 35 days, is how we are looking at. And believe me, if we do that, we will still be one of the best in the industry. Currently, we are enviably good. But even when we get to a normal situation, you can imagine, with about 10 to 11 turns and with north of 2% EBIT, we are already clocking 20% to 22% ROCE. So you can imagine as EBIT starts to expand, and we are able to maintain 10, 11, even 12 working capital turns, our return on capital employed will really become very, very good and interesting.

I think that clarifies. I mean to summarize what I take is, basically, we should be expecting working capital normalization. I mean, 40 days should be like 3, 4 quarters out, not really the next quarter phenomena?

No, no. That is true. And even 40 days is something that we will not allow it to go that far. Our own -- like I said, when you look about 10, 11 working capital turns, so technically, we are talking about 33 to 36 days, so -- in a way of speaking. And then to have an EBIT of north of 2% is where this whole capital efficiency starts to really become interesting.

Sure. In that light, I'll just ask 1 last question. Any thoughts on capital allocation policy in light of possibly higher ROCE and lower working capital requirements?

So great question, Pranav. There are 4 aspects that we have in mind. So number one is we have to keep in mind that even though the cash position now is extremely good, but we have to keep in mind that the working capital normalcy when it kicks in, so we'll have to deploy that additional capital. Second, we also want to make sure that there is growth capital available as we continue to drive growth in the way forward. Third, we're also having a certain amount of acquisitive capital, call if you will, because we are also evaluating and constantly looking at certain strategic investments, which can create some good value-creating opportunities. And last but not the least, we keep saying this internally all the time, if you cannot give return on the capital, you must return the capital to the shareholders. So we also want to keep in mind that there is something that we also need to reward and give certain higher returns to our shareholders. This is how we are at this point in time, thinking at a very broad level about the capital deployment.

The next question is from the line of Nitin Padmanabhan from Investec.