Redington Limited (REDINGTON) Earnings Call Transcript & Summary

Thank you, Margaret. Good evening to all participants, and thank you for taking the time to be with us on this call. Before I get started, I hope all of you and your family are safe. And from a Redington's standpoint, we had a little bit of a challenging quarter. But as we speak, there are 4 employees who are currently going through the treatment for having tested positive for COVID-19 in India. And as far as overseas is concerned, there are 11 of our employees who are currently going through the recovery process. And in terms of vaccination just to give you a perspective, approximately about 55% of our employees have got either partially or fully vaccinated in India and about 70% of our employees overseas have got themselves either partially or fully vaccinated. Just to give you I thought was important data point. Now very quickly to jump into our first quarter of FY '22. I'm very pleased to share with you that our revenue, EBITDA, profit after tax at a consolidated level have grown by a strong double-digit, revenue at 26% growth, EBITDA at 58% growth and profit after tax at 167% over the same quarter of FY '21. But just in case, just to be a little more prudent, we also did a comparison with Q1 FY '20 and our revenue grew by 15% against Q1 FY '20, EBITDA by 49% and profit after tax by 115%. The EBITDA at a consolidated level was 2.7%, and our profit after tax was 1.76%. The revenue that we have delivered in Q1 is the highest for Redington for Q1 in its entire history. Both the theaters as in India as well as overseas have delivered double-digit growth on the same set of parameters, which is revenue, EBITDA and profit after tax. The -- in India, the total revenue, including ProConnect, grew by 57% for -- against Q1 FY '21 and 31% against Q1 FY '20. EBITDA grew by 94% and -- against Q1 of FY '21 and 32% against Q1 FY '20. And our profit after tax grew by a whopping 359% against Q1 FY '21 and about 140% against Q1 FY '20. Now when you look at overseas, the growth was 11%, 40% and 106% for revenue, EBITDA and profit after tax, respectively, and that is against Q1 FY '21. And when you compare it with Q1 FY '20, we've grown by 7%, 63% and 100%, again, for revenue, EBITDA, and profit after tax. So overall, if you see, both the theaters have really hit some record numbers on every financial parameter. Just on a side note, that the -- we had a translation sort of impact to the extent of about 2.5%. So in other words, if you look at overseas, which grew by 11% in revenue against FY '21, if you look at from a U.S. dollar growth point of view, it was 13%. Likewise, when you look at from a point of view of EBITDA, it was 4% higher. The other interesting -- this is in spite of the fact, I must qualify, with regard to our operations in South Asia, we continued to have a decline in both revenue and in profits. As I had already mentioned in my earlier calls, more and more of our technology vendors are moving their business from Singapore to India and -- which is from a U.S. dollar transaction to make it a rupee transaction. With this change, so it's a disadvantage to our Singapore operations, but certainly, it's a big advantage to our India operations. A good part of the sales that was lost in Singapore has been reasonably made up by our India operations. Overall, India contributed to 40% of the revenue and 41% of the profit after tax and overseas contributed to 60% and 59% of the revenue and profit after tax. The other interesting aspect is the -- both the verticals, i.e., which is information technology and mobility, grew double digit for last quarter. So IT grew by 33% at a consolidated level, mobility grew by 11% and services also grew by 11% though the contribution is still very small. The real solid growth came out of India, where IT grew by 72%, largely on the back of consumer IT, which grew by a triple digit. Mobility grew by 14% and services grew by 11%. In overseas, IT grew by 11%, driven by consumer IT, which grew by 27%. Mobility grew by 9%. So both the theaters have done well, India and the overseas. The industry verticals of the product categories of both IT and mobility, both have grown quite nicely. There is one point that I overlooked to mention. As we talk about overseas, this profit growth of 106% that I mentioned is after taking an impact of -- in Turkey because of the currency depreciation of Turkish lira against the U.S. dollar, the effective tax rate was 64%. And in spite of a big setback on account of tax in Turkey, we have still managed to deliver a good profit growth. The other interesting aspect, something that we feel proud, is the fact that our working capital has been contained at 18 days. Now when you look at the previous year at a consolidated level, it was 17 days. Please don't forget that when you look at the previous year, we had a lot of vendors supporting us by giving extended credit period. So as an example, in Q1 FY '21, our creditor days were 69 as opposed to only 50 days, 5-0, at this time. So we had 19 days of disadvantage, so to speak. But that was more than offset by debtor days coming down from 58 then to 46 now and the inventory days by 6 days from 28 then to 22 days now. So overall, I feel good about the fact that our working capital continues to be well maintained. This is true not only for overseas, which has consistently delivered over a protracted period of time, it's also true for India, which, again, in the last many quarters, have also consistently brought down the working capital. India had a net working capital days of 21, overseas at 17 and hence, consolidated was 18. Now in terms of cash flow, as you will know that because we had -- we threw up over INR 3,000 crores of positive free cash flow during our financial year FY '21. It was certainly not possible for us to continue to generate cash this quarter. But as we have always explained to all of you, we would request you to consider or look at cash flow on an annualized basis rather than on a quarterly basis. But having said that, our free cash flow was negative at INR 317 crores. Both India and overseas were negative at INR 127 crores and INR 189 crores, respectively. What is very gratifying is the capital efficiency. Our ROCE has now hit a new high of 52%. Again, this is true for both India and overseas. India delivered a little shy of 42%, while overseas delivered 63% plus. The return on equity, again, was at a little shy of 19%. And when you look at the previous year, we had done 8%. And overseas delivered to a little less than 16%, whereas India delivered north of 25%. So all the financial metrics and the capital efficiency certainly have been well managed during this last quarter. The other important aspect, as all of you would recall, our FY '20 or for the -- during the pandemic, our playbook was about our 7 Cs. And the first C is to do with cash flow, and the second is to do with cost and so on and so forth, and managing the liquidity well. Here, again, I'm very pleased to share with you that our net debt to equity was negative 0.49%. And if for a moment you look at gross debt to gross equity, it is 0.11. Again, we are seriously under-leveraged. This obviously gives us a tremendous headroom to be able to look at growth going forward. Our overall net worth has breached INR 5,000 crores at INR 5,224 crores. And the total capital employed in the business was INR 2,852 crores. There is one point that I must draw your attention to, which is to do with inventory provision. I want to certainly place on record that there is nothing adverse that has happened. In overseas, we have recalibrated our provisioning policy for inventory. In other words, we have made it a lot more aggressive than what was practiced in the past. So had we adopted the erstwhile inventory provisioning norms, the inventory provision would have been a little shy of 0.13%, whereas right now, it is 0.41 and, therefore, that 28 bps is largely attributed to the change in the inventory provisioning policy. So there is fundamentally nothing that you need to be worried about. As far as the bad debt is concerned, yes, it is higher than usual because there are -- in overseas, in particular, there is -- there are some receivables from some of our customers, [ stroke ] partners in Africa, where it has taken time, and because it has breached the threshold level, therefore, we have made 100% provision. We are very confident that the monies will be collected, but in order to be prudent from an accounting policy point of view, we have recorded a 100% provision. And hence, again, I repeat, there is no cause for concern here. The other aspect is, some of you would recall that we really started to double down on our cloud business, which did well for last year. We continued to be doing well on that -- on -- and executing well. I'm again pleased to share with you that we have grown about 60% in Q1 FY '22 over Q1 FY '21. So that is going well. And the other aspect is, of course, the managed services, which is approximately about 6% of the overall cloud number. So to give you a complete value, we have delivered about INR 280 crores of cloud revenue in Q1 FY '22. The last piece is about ProConnect. While we have come a long way, at a consolidated level, I'm pleased to share that we grew by 36% in revenue, delivering INR 110 crores of revenue. And our EBITDA was at 9%, about INR 10.1 crores in value terms, and our profit after tax was INR 1.9 crores. As all of you would know, we certainly had experienced a lot of challenges, particularly in the month of May in India, when the wave 2 certainly was a big negative impact to our business. But to the credit of our ProConnect team, in spite of all the odds, they continued to execute very well, and I'm actually very happy and proud about the fact that with such serious challenges and lots of difficulties that they have still been able to deliver a pretty decent growth and an EBITDA of 9%. In summary, I would say we have had a great quarter. We executed well, whether you compare it in relation to Q1 FY '21 or even in relation to Q1 FY '20. I'll take a pause here, circle it back to Margaret and hoping to get some of your questions and we'll try our best to answer. Thank you.

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

Congratulations on the quarter. Sir, I had 4 questions actually. One is on ProConnect. Just wanted your thoughts on how we should think about the steady-state margin in this business and how the business has sort of evolved. Two, I wanted your thoughts on the services business overseas, which appears to have sort of fallen quite a bit this quarter So I wanted your thoughts on what exactly is happening there. The third is on the Brightstar acquisition in Turkey that they are actually looking at. Just wanted your thoughts on that. And from an incremental capital allocation in Turkey, how are you thinking about that market in terms of incremental capital allocation. And finally, do you think despite such high tax rates and -- negative tax rate implications from Turkey, still our effective tax rates have actually been subdued? So I just wanted your thoughts on how we should think about that as well as we go forward. Those are the 4 questions.

Thank you, Nitin. As always, good set of questions. I'll -- let me take it one by one. Your first question was about ProConnect on margin. Our view is that the way we are now focused on which industry verticals to participate, and we have narrowed it down to 5 and 6 industry verticals. We are doubling down on warehouse management services and which is where we believe our core competency is and which is where we believe there is a higher margin proposition that we can earn and slowly bring down on our transportation business, which gives us top line but not as much bottom line. We are also investing heavily in terms of technology and systems that will certainly bring down cost and improve the customer experience. Given all of this, our own view is that in the way forward, you should see our EBITDA steadily go up. I will at this point in time, Nitin, hesitate to tell you a number, but trust me, you will see we will continue to drive the EBITDA upwards. The reason I'm a little cautious while saying that is because we never expected as we got into Q1 that we will have a complete 35 days of so-called lockdown in the month of May, which completely put us in a very difficult place. And in this business, there are certain standstill costs. There are certain fixed costs. And to that extent, therefore, it becomes a little difficult to predict, but we will certainly gradually take up the EBITDA margins upwards in the way forward. Now your second question with regard to service business overseas, I don't know, you made a statement that it has fallen, et cetera. Overseas grew by 11% on services for -- in Q1 FY '22 over the previous year. Contribution is 1%. And as far as the India is concerned, the services business grew by 11%, and the contribution is about 2% of the overall revenue. So to us, the overseas business is essentially the Ensure business and, to some extent, there are -- there is a ProConnect business, which we have commenced not too long ago. So it is still in early days. So to me, the growth is about 11%, like in India. So your third question about this Brightstar. So currently, Nitin, truth be told, we are still going through this whole due diligence, and the negotiations are still underway. It's a little premature to talk about that transaction at this stage. But all that I can say is, from a Redington standpoint, there is not a single dollar of capital or any kind of financial security or guarantee that we are giving to Arena to be able to acquire this asset. Purely on the strength of the balance sheet of Arena and with the capital that they have, they will be in a position to be able to take a bank loan and fund this transaction as and when we reach that stage. Look, it is certainly moving -- it's moving in the right direction, but the pandemic has only made things a little slower than we would have liked. And with regard to the negative tax rate, Krishnan, would you want to take that question?

Sure. So on a steady-state basis, you have to take a tax rate of, Nitin, about 23%, 24%. Yes, this time, it has been low because -- I mean, it is mainly because of the mix. Last time, we had a very reduced profit from India with -- in ProConnect, there was a loss, and we could not carry forward some loss and because of which the PBT and PAT were same. So this, I mean, 20.6% in the current quarter is more an aberration on a steady-state basis. We should take about 23%, 24%.

Sure, sir. That's very helpful. Just one small clarification. I think there might be an error on my part. Is -- the overseas services business, the absolute number is around INR 80 crores. And -- is that correct versus -- is that correct?

Yes, you are -- no, let me tell you the -- you're right. So it should be in the vicinity of about INR 80-plus crores because we did about INR 8,000 crores of overseas revenue and the contribution of overseas is about 1%. That's about -- yes, you're right. Sowmiya, I would need your help. But for now, Nitin, you can take it as INR 180-plus crores.

Yes. The prior year number what I have is INR 145 crores. I think that would be incorrect then.

Because it's not possible because we have grown by 11%. So I'll tell you what, please allow us to just check this out and circle back to you Nitin, if that is fine. I don't have the data sheet in front of me. Allow us to circle back to you if it is fine.

Absolutely. No worries.

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

Looks like the business is in good shape. And as you indicated, many of the trends that we were wondering about as sort of short-term trends really look like they're holding up very nicely. Just a couple of questions from my side. One is, on the India enterprise side, you've talked very extensively in the past about the pivot to the cloud and how Redington in the medium to long term is going to be a very important pipe, through which our small and medium enterprises access the cloud and that makes complete sense and it's fantastic to see the traction there. I'm just wondering on the core enterprise IT spend side, we've seen this to be sluggish for a few years now and our conventional answer -- [ first-cut ] answer has been, look, overall CapEx has been muted, the economy has been [indiscernible]...

Sorry to interrupt you, Mr. Ahluwalia. Your voice is breaking. We cannot hear you clearly.

I was going to say, how much of this is cyclical and due to the economy as opposed to structural, where, as enterprises move more and more to the cloud, the amount of spend that the enterprises do on IT hardware comes down? The second question that I had was around the new sort of regulations that we have -- regulatory action that we've seen concerning online marketplaces and the extent to which they can use their proxies to be sellers in the marketplace. We've seen one very prominent JV between Amazon and a leading Indian business family basically come apart in the last few days. Based on your read of the regulatory landscape, and I know Redington has traditionally had a more conservative view than a lot of people, are we at a point where the government has made it clear to the Flipkarts and Amazons of the world that you meant to function as marketplaces and you can't actually be taking inventory yourself either directly or through your proxies. And if so, is that a sort of sign of relief for us as a business? Because I know one big strategic potential threat we've been worried about has been vendors selling directly to Amazon or Flipkart versus going through a distributor.

Pavan, thank you for your questions. With regard to your first question on enterprise in India, so let me first give you the comfort that the -- yes, you are right, the enterprise business overall has been a little sluggish and the -- especially the traditional business. So the first 2 quarters of last year, we did have -- almost from April through September, we did see a slowdown in that business. But we started to see a certain amount of recovery in Q3, and it started to pick up momentum in Q4 and also in Q1. So the first point is, no, there is no -- we are still seeing high potential for us to continue to drive a double-digit growth on the enterprise business. This is both the traditional, notwithstanding the fact that the cloud business will obviously have a much faster accelerated growth going forward. But to your question, is the cloud business somewhere cannibalizing the traditional enterprise business? We are not seeing that so far. We have the same concern running in our head. But I can tell you, that has not played out so far, and we still see a good headroom for a double-digit growth through the rest of the year. I don't know if that answers, Pavan, your first part of the question. I was not able to hear you, Pavan. I think your audio, there is some problem, but...

Yes, that answers it perfectly.

Lovely. Thanks, Pavan. Now for the second question, Rajiv, would you want to take that question?

Yes, I can do that. I can do the question on marketplace and how the marketplaces are, and is the deal of Narayana Murthy and Amazon, is that going to be a dampener or is it going to be helping to us? Look, I think you have to get to the strategic intent behind a marketplace sort of a model. What it does to us is, a marketplace sort of a model allows to reach IT in many different parts of the country where it doesn't reach in a very good way right now. So the marketplace model will be helpful to that extent, and there is goodness and merit in that. Clearly, the way the Amazon and that deal was structured, if it is coming apart clearly, that -- we've been growing despite -- and the way in which the whole shift to online has matured over time, it has come to a point where there is a certain amount of share and that's pretty much a global phenomenon as well. The online business grows to a point, then it matures and then it plateaus at that level, whichever that level could be. For different categories of products, it will be 15%, 20%, 25%, depending upon the category you're dealing with. And then it plateaus there. We've seen that plateauing happen in India, and so we continue to grow to the point that our enterprise business, our consumer business and our commercial PC and print business as well as the mobile business, that continues to grow because there is a plateau that has already taken place. So marketplace is a good way of reaching many, many, many more customers, both partners as well as customers, across the areas in the country where it does not reach today. And marketplace will be helpful to that extent. So I think in some form or fashion, there will be a way in which the regulatory framework will allow the marketplace models to reach out to these Tier 3, 4, 5 cities across the country.

Hello. I hope Pavan -- Pavan, does that answer your question?

No. I think I was approaching it from a different angle. When we've historically discussed with you on calls, right, what is the big potential threat to us from online? The threat is the vendor sells to Amazon directly, right, or to Flipkart directly. I'm wondering with the [ Cloudtail ] venture having come undone, is that an indicator that basically the government saying, look, guys, we are watching you, and if you try and turn into actual purchasers of inventory, we are going to crack down because that's not our policy intent to allow you to be purchasers as opposed to marketplaces. Does that then mean that this potential threat we were worried about where Amazon basically buys directly from, say, Apple and cuts us out, is that a threat that the events of the last few days have made less of a threat in some way?

It would. Yes. It does.

Pavan, the short answer is -- sorry, go ahead, Rajiv.

Yes. I think, look, in a way, it does, it does. If that regulation follows through and the vendors can't sell to Amazon through their proprietary ventures that you've got, Cloudtail or whatever they've got, then it really clearly takes -- it should eventually become a boost to us. But the way we've seen the maturity of this online model, Pavan, the maturity of the online model will be that there will be a certain amount of transactions taking place online. And they will -- obviously, I mean, they will be facilitated by people like us, and we do it yet right now as well. We do it to both Amazon and Flipkart we do it, and we will continue to -- and for a variety of equipment types, not necessarily mobility devices, but also for a variety of equipment types, we continue to facilitate that, and that should continue. So if you're thinking that there will be a huge sort of a boost in the way in which our revenues can scale up because that model is coming undone, I think you'll have to be really thoughtful about it as it goes forward because all of these players, they've got -- and you you've seen -- Pavan, you've seen in the last 5, 6 years, the regulatory framework of online business in India has been undergoing many, many changes. And every change has been some positive, some negative. Net-net over a course of 5 to 6 months, it just matures and stabilizes at a point. And I haven't seen so much of a huge either positivity or negatively because of a regulatory sort of a change over the course of next -- it just matures over a period of time.

Thanks, Rajiv. Yes. So Pavan, just in short, I'll give you one numerical. First, a short answer to your question. Yes, we believe it should be a positive, but it is still a wait and watch. But yes, you are right, we have the same inkling as what you said. Now one statistical data for whatever it's worth, e-commerce contribution to our India distribution business for Q1 FY '22 was 20%, if that means anything. I'll just leave -- pass that point with you.

[Operator Instructions] The next question is from the line of [ Chirag ] from HDFC AMC.

Two questions from my side. One was in terms of the AR provisioning and the inventory provisioning, if you could give it in percentage terms on a consol basis for this quarter and the previous quarter and the rupee crore amount, both for accounts receivable as well as inventory. So that was my first question. My second was, in terms of margins, which we saw about 2.5% in both the India and overseas business, do you see these margins are sustainable? And if I can squeeze in a third question in the IT business, what was the mix, India and overseas separately, of consumer and enterprise?

Great. I'll take your last question first if that's fine with you. The contribution of enterprise business in India to our enterprise IT was 44%. Consumer IT in India, contribution was 56%. This is to India's IT distribution business. In terms of overseas, enterprise IT contributed to 30%. Consumer IT contributed to 70%. Does that help?

That's perfect.

Wonderful. Now can I request Krishnan to sort of answer or respond to inventory provisioning and AR -- bad debt provisioning please?

Sure. I'll do, Mr. Raj. So as far as inventory is concerned, for the quarter, the total provision percentage was 0.33%. And for the previous year Q1, it was 0.05%. In the case of AR, for the current year, it is at 0.16% vis-a-vis for last year 0.07%.

And what would be the normalized level for both of these?

If you take the last 15 years, it has been quite broadly, I mean, within a range. Inventory provisions would be about 0.05% to 0.06%. In the case of AR, it should be about 0.1%.

Right. And in terms of margins, what would be a sustainable margin -- sorry, I mean, in rupees crores, if you could give those numbers as well.

Sorry, one more time, regarding?

The accounts -- the AR provisioning and inventory provisioning in rupees crores as well.

Okay. So you want to know the actual value. Okay.

Yes, I have the AR provisioning. Sorry, I don't have the inventory provisioning amount, but I can get you that. AR provision amount is about INR 22 crores.

Sure. And the last question was in terms of...

So Krishnan, would it be fair to say that it is 43 -- Krishnan, is it INR 43 crores for inventory provisions so that we can also complete that response to that? 0.33 of about INR 13,000 crores?

Yes.

Okay. That answers your question also on the inventory provision value. Yes, please. Your last question?

In terms of what the sustainable margins are.