Redington Limited (REDINGTON) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Redington India Limited Q2 FY 2022 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company, as on date of this call. These statements are not guarantees of future performance and involve risk and uncertainties that are difficult to predict. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] I now hand the conference over to Mr. Raj Shankar, Vice Chairman and Managing Director, Redington India Limited. Thank you, and over to you, sir.

Thank you. Good evening to all participants. In fact, I feel very proud and overwhelmed to share with you that our Q2 performance has been by far one of the best in a long time and this is probably the fifth or the sixth quarter in a row that we have been delivering some good set of numbers. Let me quickly get down to what we have done at a consolidated level. In Q2, our revenue at INR 15,313 crore, grew by 11%. India grew by 30% overseas saw a flat growth. From an EBITDA point of view, we grew at a consolidated level by 47%. 65% was the growth in India and 36% was the growth in overseas. From a profit after tax point of view, it seems very nice to share with you that probably for the first time, we have delivered at a consolidated level, 2% of our revenue as profit after tax at INR 307 crore. India grew at 85%, delivering 1.92% and overseas profit was at 2.09% and grew by 65%. Overall, as you can very clearly see, both the creators, India as well as the meta region, including South Asia has done very well. The only downside, I would say, is even though in South Asia, our revenue de-grew, but from a profitability standpoint they have delivered again, a profit well over 2%. When you look at by business vertical, it at the consolidated level grew by 18%, contributing to 72% of the overall business. Mobility de-grew by 3%, largely on account of overseas, particularly Turkey and Africa, contributing to 26% of the consolidated business sales. Services grew by 10%. India, in terms of IT grew by 33%, mobility at 21% growth and services grew by 7%. The contribution of IT and mobility was 79% and 19%, respectively services being 2%. And even if you break down within IT, both enterprise IT and the consumer IT registered strong growth at 31% and 35% in India, in overseas, the IT business grew by 6%, largely on the back of enterprise IT, which grew at an impressive 41%. Mobility de-grew at 12% and this, as I mentioned, is largely on the back of de-growth in Turkey as well as in Africa. In terms of the working capital, I would like to believe this is by far one of the best quarters in the history of Redington, where at a consolidated level, we managed to contain the working capital at just 7 days. India was at an impressive all-time low of just 3 days of working capital, overseas at 11 and hence, at the consolidated level, it was 7%. And just to sort of give you a reference for Q2 of FY 2021, the working capital was 14 days, so we have reduced it by 1 full week. And the real improvement has come out of creditor days, while the debtor and inventory days, by and large, have been similar to what it was for last year at a consolidated level, whereas on the creditor side, we've managed to increase it by a good 8 days. This has resulted at a consolidated level for us to generate INR 1,620 crore of operating cash, both India contributing a higher operating cash flow at INR 1,075 crores, overseas at INR 545 crore. In spite of paying dividend, this is to the tune of INR453 crore during last quarter we still managed to deliver a free cash of over INR 1,000 crores to be precise, INR 1,058 crore. This again comes largely out of India at INR985 crores, overseas got impacted in terms of free cash flow, delivering only INR 73 crores. As I said, the contribution of dividend came all of it from overseas, and that was INR 453 crore. In terms of return on capital employed, we are very proud to share that we have delivered a 75% return. India at close to 72% and overseas at 77%. Similarly, when you look at return on equity, at a consolidated level, we have delivered a little shy of 24% as against last years of 16%, India contributing to about 32% and overseas at 20%. So one clear observation that you would have seen is that all the theaters have contributed to each and every parameter in terms of performance or growth so, it is certainly not biased towards one market or one business. Similarly, when you look at from a gross debt to equity, at a consolidated level, it was 0.07. This again, I would like to believe it's one of the all-time low debt to equity. At net to debt -- net debt to equity, it is negative 0.69, both in India as well as in overseas, it was negative. The network has breached INR 5,000 crores at INR 5,062 crores to be precise and the total capital employed for last quarter was only one-third of the network, which is about INR 1,678 crore. Our provision towards inventory, again was contained at just 5 bps at a consolidated level, 9 bps for India, 1 bps for overseas. It very clearly reflects that our sales forecasting, our ordering, our stocking and our sell-out velocity has been extremely well managed. In terms of bad debt, I'm again pleased to share that at a consolidated level, it was just 2 bps with India being 5 bps and overseas at a negative 2 bps, basically, there has been a reversal of our provision in the overseas markets. In terms of the cloud business, while I will have my colleague Rajiv, probably talk a little more about it. But, just to give you at a high level, we have grown both in India and overseas and at the consolidated level, our cloud business has grown by 30% year-on-year. As far as ProConnect is concerned, we have had another good quarter. As you would remember, Q1 was good, Q2 was even better. In fact, we had an all-time high revenue registered in the month of September. For Q2, our revenue at INR 130 crores represented a 16% year-on-year growth and our EBITDA at 11% was about INR 14 crores. So overall, when you look at it from a growth -- top and bottom line, from a profitability and in terms of capital efficiency and capital allocation. I think this has been extremely well-managed and one of the best quarters I can think of. But very quickly to give you a perspective at half year, at revenue of about INR 28,787 crore we have delivered a profit of INR 544 crore. I just want to jog your memory that in FY 2020, our full year profit after tax was INR 515 crore. I'm pleased to share that in a half year this year, we have delivered INR 544 crore. And in this again, both India and overseas have done well at the top line, India has grown by 41% and overseas by 5%. On the bottom line, India has grown by 154% and overseas by 81%. In terms of both IT and Mobility at half year, we have grown IT by 24%, Mobility by 3%, Services by 11%. And in terms of working capital, for half year, we were at 8 days, 3 days from India, 11 from overseas. In terms of operating cash flow, at a consolidated level, it was INR 1,334 crore, of which almost about 70% plus came out of India, 30% from overseas. We are happy that we generated free cash of INR 742 crores at a consolidated level, and this is for half year. In terms of growth rate, similar to Q2, it was about 77% and in terms of return on equity, was about 22%. Gross debt to equity, I've already mentioned to you and in terms of our inventory and bad debt inventory at a consolidated level was 18 bps and bad debt at 8 bps. And for half year, the cloud business grew by 42% year-over-year. ProConnect delivered a INR 240 crores revenue at a consolidated level, delivering a 10% EBITDA at INR 24 crores. And in terms of profit after tax, they delivered 3% which is approximately INR 6.4 crores. I'll take a pause here, hand it over to my colleague, Rajiv Srivastava. I'm sure all of you are very well aware that we have got on board, Rajiv, who joined us in April of this year as the Joint Managing Director. He is responsible for all the day-to-day operations and over to you, Rajiv.

Hi Raj, thanks so much. Appreciate your commentary and I think it's been, as you mentioned, has been a very rounded sort of a performance across pretty much all businesses, all geographies and all the financial parameters that one can -- one is tracking right now. I just wanted to give a sense of -- a bit of color on what we are seeing in the market right now, and how we see the performance in light of the story behind the numbers really. And at one level, you would find that there is -- there continues to be a very strong technology adoption across a variety of customer segments or market segments and the geographies as well. We know that the work from home and learn from home is continuing. It is continuing in India, it is continuing in the geos overseas, Middle East, Africa, even Turkey. And so, those refresh cycles are working to the advantage of driving growth from just those two segments of work from home and learn from home. And that's really fueling growth or demand in the consumer IT space. Like Raj mentioned, we've done really well in the IT value space, which is the enterprise products of server storage networks and that -- you'll find that in the countries we are operating in India, UAE, Saudi Arabia, Egypt, Qatar, Nigeria, all the countries that you can think of, there is a very strong infrastructure push by government in the region. So, there is an investment-led demand that is coming in, apart from the consumption-led demand that we talked about from work from home and learn from home, and that infra-led demand by the government had also by people who are creating capacities is leading to digital technology adoption, so we are seeing years of projects getting rolled out in a few months across manufacturing, across retail, creation of digital economy and the infrastructure push by the government through a policy support. All of that is leading to a strong -- very strong consumption and infrastructure demand creation. So, the growth in the region is on the back of investment and consumption-led growth. At a technology perspective, you heard Raj talk about the growth that we've had, very strong growth that we've had in cloud. Cloud is leading the way, but there is a very strong shift towards subscription-led services. So, base and foundational applications, which are getting migrated from an on-premise to our subscription-led application-dev environment on the cloud, whether it is SAP, CRM, Salesforce automation, customer experience, all the new age applications that are being talked about right now. And also new technologies of the nature of intelligence, artificial intelligence is finding flavor, robotic automation is finding flavor. [ CD ] continues to get from a very strong initial base to a much more manufacturing-dev environment, IOT and we are also finding that as 5G starting to become more mainstream, you'll find a lot more adoption of 5G, not as a handset or telco technology piece, but 5G as driving applications in the domain of video and voice and that's where the whole world is moving. So there's a huge amount of shift in what people are buying and how they're buying. Everything else -- a shift from products to services, a shift from own to a subscription sort of a model, and that's what we are seeing and that plays very well to our strategic intent as we go forward in the market. And I'm not going to talk a lot about our strategic intent as you go forward, unless you have any specific questions, but it plays very strongly to a play in the tech-dominated and tech denominated spaces that we are very, very focused on right now. So, let us stop here from the perspective of you saw -- you heard of the numbers, and this is a bit of a commentary on how and why we are getting to the numbers and to the growth that we're looking at. We did rejig a bit on our go-to-market models also to spread ourselves and that gives us extended coverage, that gives us extended reach out to partners and to a variety of customer types to fulfill what we do. So, let me -- I'm going to stop here and open it up for any questions and answers from all of you, and more than happy to answer that.

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

Thanks for the opportunity and congratulations on a good set of numbers. I have two questions. Firstly, we saw very strong growth in the India business but correspondingly, the services business did not register a very strong growth. So, what exactly is happening there? Is the ProConnect business still -- you're in a more conservative mode and trying to grow in a much more profitable way? And my second question is regarding the growth in the overseas market, so what exactly led to the slowdown in the growth for the Mobility business in Turkey as well as Africa? So these are my two questions. Thank you.

So Rajiv, I'll take the second question first, and I'll give you time to reflect on the first. So, I take your second question so basically, as far as the mobility business is concerned, we had a very good engagement with one brand, Xiaomi in Turkey. Unfortunately, we did not get the kind of supplies that we got in the past and this problem, we have been experiencing in the last couple of quarters where it appears to Xiaomi that turkey is not a priority market, and since our business was largely in Turkey for mobility dependent on Xiaomi, therefore, in the absence of not getting adequate supplies, our growth was impacted. As far as Africa is concerned, as you would know, this is a market, particularly in West Africa and Nigeria, in particular, where there was a serious currency devaluation as well as there was lack of availability of US dollars. While this problem was there in the past, it became even more pronounced this last quarter. So therefore, by design, we wanted to go slow in Africa and to that extent, this did impact our in-country business in West Africa and particularly in Nigeria, which is a big market for -- in all smartphones, as you would know. So this partly explains the mobility part. Other than that to just give you a flavor, our -- when you look at the overall business, the IT business grew well and particularly the enterprise and overseas did very well. We grew by an impressive 41%. So, the consumer side of the business, when we get adequacy of supplies, the growth is very good. This particular period, we were challenged in terms of not being able to get adequate supplies, but despite that, I think overall, Middle East, Turkey, Africa did grow. In overseas the de-growth was largely on account of Singapore and South Asia. Some of you would recall that I have made a specific mention to this particular region, where the biggest contribution comes out of our business to India. 80% of the business that we do out of Singapore is India destined. And because more and more vendors are shifting their business, the purchases are moving from dollar-denominated to rupee denominated. And because of that shift, in a way of speaking before. But in the same breath, I want to sort of give you this comfort that it is certainly helping us in terms of scaling up our India business. So in summary, mobility business, largely on the back of Turkey and West Africa, that's where we are challenged. And in terms of the overall, while MEA and Meta is growing, it is Singapore, South Asia, where there is a business shift because of which you are seeing the de-growth. Over to you Rajiv for answering the first question.

Yes. Thanks so much. And I think that's clear for the mobility piece. Look, I think services is an extremely strategic portion of our business. And like I mentioned to you, the business model shifts in the market, play to that strategic intent of ours as to how do we shift the buying behavior and play to the buying behavior shift that is taking place in the market. You would find that our services growth has been a 10-percentage services growth over last year. Last year included Ensure Services this year it doesn't. If I do a like-for-like comparison, which means if I take Ensure Services revenue out from last year, and this year doesn't have in anyway. Our services growth would be 19% in Q2 and at 23% for the entire half. And our brokerage growth is for Q2 is a 16% growth Q2. So I hope you can read the numbers right. Our ProConnect growth for H1 is at 25% growth, so when you put these numbers in perspective, you would find that it's not a slow growth, it's going faster than our product revenue business, which is a way we are trying to structure ourselves.

If I can have one follow-up question.

Sorry to interrupt you, Mr. Kshatriya, may we request that you return to the question queue for follow-up questions. [Operator Instructions] The next question is from the line of Sarvesh Gupta from Maximal Capital.

Sir first question is, I think a couple of years back when our working capital used to be at a much higher level, I think when the pandemic came down a lot because of our efforts sort of proactively managing the working capital, but the understanding was that it is supposed to sort of climb up and come back to the pre-COVID levels in terms of the working capital days. Now again, this quarter, we have seen new lows being hit in terms of working capital days, primarily due to creditor days getting elongated. So, what's our feel and guidance on the working capital days? What can be the sustainable number for both India and international business as well as at the company level? So that is question number one. Second is, we do have some sort of consolidated vendors in some geographies, we have seen, particularly in the developed countries, we are seeing some of the brands trying to go without the distributor. So how do you see that as a risk as the Indian market becomes big and we are already seeing some of the players trying to develop their own credit and presence online, et cetera. So would they want to take the full control over the supply chain and sort of exclude them like us, so these are the two questions sir.

Thank you for your question. Krishnan, do you want to take the first one on working capital?

Yes, Mr. Raj. Sarvesh see, we stand by our earlier statement that working capital over a period of time as some of these tailwinds, it goes away, will get normalized. And in our view, over a period of time, this will happen in phases. It could range between 30 days, 35 days. And I agree with you, in the past we had been saying we prepared for some increases and that statement still continues. But having said that, you all need to understand we will not leave any stone unturned. Wherever there are efficiencies possible, we will definitely get it captured and as this demand and the shorter supply situation is continuing in the marketplace and also the way in which our business teams are structuring the deals with the customers and vendors, we are able to get this benefit -- continuing and also improve from what it was in the earlier quarter. So, this is something that may not be sustainable, this will come back to about 30 days 35 days, but as much delayed as possible, that we would strike for it.

Krishnan, do you want to touch upon the creditor base, which is where there has been a significant improvement if you want wish to?

Absolutely. See, this is something that we have been working on for a long period of time. If you have observed the last couple of quarters, we have consistently ensured the creditor days are more and more than our receivable days. And this is mainly to do with number one, the mix. And also the way in which our businesspeople have structured the deals with the vendors and in terms of getting higher credit days. So, this is something that the team is very clearly focused in terms of working on, and that is helping us. So wherever that's possible, that trend, we will continue. And once there is a normalization -- in question is vendor going back.

Okay. Towards the end, Krishnan, you blanked out for me, but I hope Sarvesh could listen to you. Rajiv, would you want to take the second question, please?

Yes, I'm going to do that Raj. Look, I think Sarvesh has a great point and it keeps coming back again and again in every sort of conversation as to where are we headed with this entire question about disintermediation or the shift of the buying behavior towards a more online sort of bottle, are brands pushing that and you will find that all the markets that we operate in right now, also the markets we don't operate in of course where I can give you a little bit of a global context over here because I used to run that part of the business for one of the large brand. Every brand has a sort of a maturity sort of stage where a certain part of the business becomes -- goes online -- it depends on how it gets fulfilled is a different story, but a certain part of the business gets online for a certain part of the business and the balance part of the business stays to be in -- in a direct sales model or through engagement, through partners or the distribution network that we really manage extremely well. And you will find that in a lot of countries, that maturity model, that tipping point is in the zone of 35%, 30%, 33% and that's where most of the companies sort of stay whether -- and that online model, in a lot of cases Sarvesh, if you know, is still getting fulfilled through the distribution partners for all the inherent advantages because if it goes to a Flipkart, the Flipkart needs a huge range of both consumers as well as partners who come and sell on Flipkart and which is where our core competency is, providing the reach and coverage of partners through the online buyers or online sellers to fulfill the demand on behalf of consumers. So whichever way you want to cut in it, you'll find that our play, whether we serve the online players ourselves or we serve it through a partner is pretty much -- the net sum is not changing our expression at all. So whether partners start to go online directly, or the brands start to go online through us or through the partners, we fulfill to our partners or directly to the online. So in all those senses, and you'll see this operating out in countries like China, in countries like Indonesia, Singapore, India, some of the geographies of Western Europe or more mature geographies of U.S. also, this equilibrium has been attained in a very good way, and we continue to be in a very favorable position to be fulfilling either directly or through the partners onto the online model as well. That's a good state to be in.

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

Congratulations on another great quarter. So, I had a couple of questions. One is on the working capital days, if you could just give some color on what -- within the mix is sort of driving the higher creditor days and also, if you could give us a split of enterprise versus consumer? And how should one think of this on a going-forward basis? So does it mean that if enterprise sustainably remains high, your creditor days will remain high, and thereby, your overall working capital days will be low? Or even within that framework, is this sort of an outlier? So that was the first question. The second question is on Redington Cloud. If you could give us a sense of how that business has sort of grown and where it is sort of today?

Nitin, your first question, I'll just be brief. I think you summed it up well or you understood it very well. One of the reasons why you see our creditor base higher than what it was even last year is because the contribution that is coming from enterprise, both in India and overseas, has been of a higher nature compared to the past. And typically, in enterprise products because a lot of times, we are structuring large deals and what we call as back-to-back deals and transactions, we are able to negotiate with the vendors sort of a credit structure that allows us to have -- enjoy a much higher supplier credit compared to what we enjoy on the consumer IT or on the mobility. So your point is very valid. Higher the contribution coming from the enterprise IT, the creditor days are likely to be higher as opposed to the consumer side of the business. I think it's a very valid point. On the second point, Rajiv?

Yes, I'll take that Raj. Absolutely and I think the point about cloud, again keeps coming up in pretty much every conference. But you would find Nitin that our cloud business is growing faster than the rest of the business. Our India cloud business for Q2 grew 31%, and overseas grew 28% for the quarter. If you were to take it for the half our India business grew 31% overseas grew 54%. So on a quarter basis, we have 30-plus points at a consolidated level of growth on the cloud business. And they are taking a number of steps to make sure that we play into that growth story even more strongly. We are -- and just to elaborate a bit on what our approach looks like. It is across two levels. One is the level of building capabilities within the organization and these capabilities are technology capabilities that you need to build in the company to be able to fulfill the demand for cloud because cloud is a technical subset. It requires skills of a different nature and magnitude. So, we are acquiring those across the company, across all geographies in the company that's one. The second thing that we're doing, because cloud is a model that requires a different way of being address and administered it is a subscription sort of a model, so it needs different technology capabilities, underlying technology assets to manage the whole cloud business. And we, as a company, are making very strong investments in making sure that our capability to handle the cloud business is very strong and intense. So those two should help us to continue to outpace the market of cloud growth. We are also working very strongly with all the alliance partners, with all hyperscalers in the market and also with a whole bunch of other alliance partners to make sure that the offering that we create, the solution set that we build, the skills and competencies that we build and create are absolutely aligned with what the market was, but also what the hyperscalers are coming up with as a future tech. So, our readiness in that sense is extremely strong.

Sir, would you have an absolute number for Redington Cloud?

For Redington Cloud, we did in Q2 of FY 2022, Q2 of this year, we did a total of INR 310 crore, which is a 30% growth Y-o-Y.

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

Sir two questions. One, there is another round of Q-o-Q improvement in margins, and we're seeing it happening in the last 3 quarters now. You called out a certain margin number last quarter, but there is an improvement over that. So some comments on how do you see the margin trajectory? Second, amongst all the news flows that we see on supply issue on account of chips and the like your mobility or all the product lines. How are we positioned and actually, I'm seeing a case where there is an improvement in your key vendor share and the overall revenue mix for you. So, is there any preferred vendor concept which is playing out and somehow beneficial for us? That's the second question. And third is, what is the tax rate that we should assume for our business?

Okay. So Krishnan, you want to take the last one, should I say, 25%, 24%, Krishnan?

Yes, we can take about 23%, 24% on an average so we can take that at the consolidated level.

Sir, what we are providing is 20%, and it was a lower number, so I'm just reconfirming it.

See, it could differ between quarters because since we are there in multiple geographies, every geography has different tax rate and as you may know, in the case of Turkey, because of the currency depreciation, that also changes so on a ready state basis, our projection is about 23% or so.

Okay.

Now, to your first question about margin. This is largely to do with business mix. To give you a sense, in India, the contribution of IT was 79%, mobility was 19%. So since the contribution from IT is more, the margin tends to be much better, be it enterprise or be it consumer, so this is the first point. The second point is something that we have already shared with you earlier, which is that unlike in the past where oftentimes on 80% of the sales, we would get our full margin but on the balance 20%, we would have to compromise on our margin whether left by 10%, 20% and so on and so forth. But in these times, because there is a certain amount of shortage, we are also a lot more prudent in our buying so, we are today not having any margin leakage, we are able to earn pretty much on our large part of our sale, the full margin. So to that extent, when you see -- it's a combination of two things: the business mix, if it tends to be more biased towards IT, you will see the margin better. And similarly, as long as some of these shortages continue and we continue to be a lot more prudent in our buying, stocking and selling, you will see the margin firm up. If that answers your first question. I'm afraid, your second question was more about any particular vendor bias that we may have?

Sir, on aggregate basis, not on a particular vendor.

On an aggregate basis, your question is whether we have a bias towards any vendor?

No. So amidst all this supply issue, we are still able to deliver a strong growth, and in your custom -- in your revenue mix, I see a strengthening of this key vendor in the revenues. So are we somehow beneficiary or well placed in the whole construct by any way?

Okay. Again, I'm afraid I'm going to repeat the answer that I've said earlier. See, one of the things that we are particularly proud of is that for most of the brands across most of the geos, we have leading market share, so depending upon the particular vendors' contribution or how much they allocate to a particular country, that is not in our hands. But whatever allocation they give to a particular country, given that we have leading market share for most of the brands, this allows us the advantage to be able to get a share in relation to what our contribution has been. So it is not that while the relationship matters and something that we have shared with you in the past, and that is over this last 27 years that the company has been involved, we have not lost a single relationship. So, the fact that we continue to build and grow our relationship and on the other hand, we have leading market share across most brands and most of the geos, this does give us a strong position to be able to get the fair allocation given our market share.

I'm just going to add one point over here Raj and Pritesh, you would see this that I talked about a shift in our go-to-market model or engagement in the marketplace. Now, we did make a shift -- conscious shift towards getting to fulfill or engage with partners who are servicing and customer counts, okay? So whether they're in the enterprise space or they are in the mid-market SMB space. All of these vendors, in times of shortages, would pivot to end customer relationships much more strongly. And that led to an advantage -- that played to the fact that we get the deliveries for their customers to make sure that the customer satisfaction and customer experience is taken care of. So, a shift towards the much more customer experience, customer-centric approach was playing out well to our advantage in essence.

Okay. Sir, just a clarification on your margin answer so does it mean that once the supply shortages even out, there has to be some normalization in margins because then again, you'll go back on that 80% of the product is at full margin and 20% of the product there is substantially over-margin. So, it's 2.8% or 2.7% that we see getting reported in the last two, three quarters that gets normalized to a lower number or adjusted to a lower number or?

So, the right way to think about it is the following. We have, at the moment, a very high product revenue and low services revenue. But in the way forward, we are clearly pivoting the company more and more towards services, whether it is going to come out of cloud, whether it is going to come out of ProConnect, whether it's going to come out of some of our own implementation services and other security services, the services contribution over time will start to scale up. As you can very well imagine, the services business has a much higher margin, be it at a gross margin level or at an EBITDA level. So, we hope that not at the moment, when you look at purely from a product standpoint, the business mix matters a lot. But as we look at the way forward, the services contribution scaling up nicely, the margin should also pick up. If that helps.

Okay. Yes, this was helpful. But I think this comment of here is slightly longer, right? It must be a 5, 7-year transition?

Not so long. As you can see, if you take cloud, for instance, I'm sure you must have been pleasantly surprised that for last year, we delivered INR 937 crores. Now, you can imagine the good part of business on the cloud for instance is, there is really no inventory, and our working capital is very good. And at the moment, because we are in the building up stage, we are investing in resources, we are investing in platform so at the moment, it may not necessarily reflect all of it into a healthy EBIT. But, as we look at even in the medium term, you should start to see as the business starts to scale up and some of our investments start to fructify, you will see that the margins will become better. We don't have to wait for 5 years; it will be much sooner.

Okay. Thank you very much sir and all the best.

Thank you. The next question is from the line of Krish Mehta from Enam Holdings.

Actually it's a good set of numbers and thank you for taking my question. The first question I had was more on the cloud business, if you could provide us a number on the cloud-managed services revenue for the quarter, as well as the margins for cloud and cloud-managed services? And my second question was on how you see the transition from on-premise to a subscription model for the cloud business happening with restrictions being listed in COVID and how the mix is changing in terms of implementation for partners?

Rajiv, would you want to take that?

Yes. I will take both the questions on cloud; his questions on margins and how the business has shifted for subscription post COVID. Is that a fair understanding Krish?

Yes.

The first part is not margin Rajiv. It was on managed services, he wanted to grow what is the number on managed services, correct?

Right.

Cloud services, okay. So let me give you the -- in the reverse order, first because that's a...

Rajiv, we lost you, I'm not sure about others, I'm not able to hear you Rajiv.

This is the operator. The line for the management has got disconnected sir. I'm reconnecting.

So in the meantime, just to save on time, just to give you an idea on managed services. For Q2, I don't have a very precise number, but somewhere in the vicinity of about INR 60 crores is our -- sorry, roughly about INR 78 crores is our -- no sorry, my apologies INR 7.8 crore or INR 8 crores will be the managed services, I stand corrected my apologies. And this is out of INR 310 crore and as far as half year is concerned, this is approximately about INR 24 crores, INR 25 crores, the managed services piece. I don't know if Rajiv, you are back, so he is not back yet. So does that help from purely a managed services part? Your second part on -- so Rajiv is back.

They were connected again, the line got dropped sir, reconnecting them again.

My apologies certainly, better if Rajiv has to give you a response to your second question. So just bear with us for a few seconds.

Surely.

The line for the management is reconnected now.

So Rajiv, I have, in the meantime, given the numbers for managed services so the first part of the question is answered. The second part in terms of that subscription and implementation, something you may want to clarify.

Thanks so much Raj for filling in something else, I just got dropped. I think you got to understand the strategic significance as to why companies are moving towards cloud. And is it a COVID related thing or is it a reversible sort of a phenomena. And you will find that in more ways than one, it is an absolutely irreversible phenomenon. People are accelerating their project deployments from a technology perspective, people are accelerating digital adoption and all of this disruption is giving people the flexibility to buy at speed, which means agility and to move their applications onto the cloud, try out new applications, try out new functionalities in a very, very quick and fast manner. Now, at a fundamental level, you will find that those are irreversible movement in businesses that people have taken place. People have made, our businesses have made information adoption, in information or in digitalization. So COVID or no COVID, I think COVID initially helped to make this a very pronounced and a very accelerated shift having gone there and having seen the benefit on the outcomes of the shift towards cloud model, which allows companies flexibility, allows companies optimization, it allows clouds companies to roll out projects much faster. I think that accelerated phenomena and behavior is going to stick for a much longer time than you and I would have ever imagined earlier.

The next question is from the line of Sangeeta Purushottam from Cogito Advisors.

Hi, can you hear me?

Yes.

Okay. My question was on the working capital. You mentioned that from the current low levels, it's possible that over the period of next few quarters, it could normalize to about 30 odd days or 30 days to 35 days. Now, could you just help me understand which elements of the working capital are likely to swing back? So are you likely to see an increase in creditor base or where are you -- where would you expect these numbers to reverse? And given that your top line is so large, any swing in working capital is going to lead to a huge increase in capital deployed, right? So, where did that capital come from?

Great question. So Krishnan, I'll take that question if it's fine. So just to give you a very crisp answer, the increase would come out of inventory days. Currently, the inventory days is it's about 2.5 weeks. Most of the vendors under normal times would expect us to keep a minimum 4 weeks of inventory, so one way to think about it is, can this 18, 19 days, it may have a tendency to go up by a week or 10 days, so this is something that is likely to happen. The second is with regards to our debtor days, with a higher contribution coming from the enterprise business, it tends to, by nature, have a longer credit period that we would have to offer to the customers, even though we try to negotiate with vendors to get a longer supplier credit as well. And to your question over time, this is also likely to increase and therefore, one could budget anywhere from 5 to 7 days increase. This is to give you a sense. And I also want Sangeeta to take the liberty of sharing with you that my colleague, our CFO, Krishnan, is normally highly conservative, so he doesn't want a situation where God forbid, even if one quarter, we go to 30 days of working capital, he doesn't want the situation that we have not given you advance information. The truth be told, I think we will do everything within our means that even when during normal times, now that we have become highly prudent, we've become a little smarter than -- COVID has taught us a lot of things so therefore, my own view is that we would be -- definitely make every effort to be less than 30 days net working capital even during good times -- sorry, even during normal times. So, if that answers the question on working capital, does it?

Yes, it does. So where would this funding actually come from? Because even a swing of 20-odd days, will mean actually [ INR 1,000 ] crores needed to fund that.

Okay. So, it is a great question and my colleague, SV Krishnan, would be dying to answer this question, so let me give him pleasure. Over to you Krishnan.

Thanks Raj. Sangeeta, we have enough leeway in terms of the funding. I had said currently, while our net worth is about INR 5,000 crores, our net debt is negative INR 3,700 crores. So you can see very clearly what is the leeway that we have, so we have enough limit in terms of stretching our working capital, even much beyond what we are discussing now so, that's not a concern at all and we will not lose any business on account of lack of availability of funds.

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Raj Shankar for closing comments. Thank you and over to you sir.

Once again, thank you to all the participants for taking the time to be with us today on the earnings call. As I said, this has been honestly a dream quarter where every parameter, whether it relates to top line, bottom line growth or it relates to profitability improvement, like we talked about, 2% PAT on our revenue or whether it's to do with our working capital management, generating free cash flow or giving very high returns on the capital employed or return on equity. Every single theater, every business vertical and every parameter for this quarter has been extremely well managed. I'm proud that for the last -- almost 5 quarters, 6 quarters in a row, we've been delivering great set of numbers. And thank you once again for joining us on the call, and thank you for your continued interest in Redington. Good day to all of you.

Thank you. Ladies and gentlemen, on behalf of Redington India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.