Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of ProConnect Supply Chain Solutions Limited (Proconnect) at ‘CRISIL AA-/Stable/CRISIL A1+’

 

Standalone ProConnect’s revenues registered a growth of 7% year-on-year supported by increased volumes from major customers which offset the loss of contract from a key customer in e-commerce space. Operating profitability declined due to lower gross margins resulting in moderation by ~200 bps to 7.4%. ProConnect has planned to complete the acquisition of two overseas entities, ProConnect Supply Chain Logistics LLC, Dubai(PSCL) and ProConnect Saudi LLC (PSL) by October 2022. However, the process was delayed due to a delay in receipt of approvals from local authorities and accordingly the overall revenues were lower than earlier estimated levels. ProConnect’s revenues are expected to grow at a healthy clip over the medium term. Besides, ProConnect is also expected to consolidate the overseas entities from 1st April 2023, which will further support revenue growth.

 

Standalone operating profitability moderated to ~7.4% for fiscal 2023 from ~9.4% in fiscal 2022 as the customers continue to focus on reduction of supply chain costs. ProConnect completed the acquisition of two Automated Distribution centres (ADC) along with assets for Rs 104 Crs from its parent, Redington Limited (Redington; rated ‘CRISIL AA+/Stable/A1+’) in May 2023. These ADCs were already managed by ProConnect and hence the asset transfer will not entail material additional revenue contribution. Albeit, operating profitability will benefit from savings on rentals. ADC acquisition is completed with a mix of Internal accruals, equity and a term loan of Rs 35 Crores.

 

Proconnect is expected to acquire the overseas entities PSCL & PSL from Redington through a newly formed SPV namely ProConnect holdings Ltd in Dubai, subject to the timely receipt of approvals. The acquisition shall be funded out of Rs.80 crores equity infusion made by Redington through rights issue. ProConnect also has plans to set up a new ADC in Saudi Arabia, which is expected to be funded through a mix of debt and internal accruals

 

The company’s financial risk profile is adequate and improving. Its net worth increased to Rs.171 crores on March 31, 2023, supported by equity infusion and the company was debt free as on March 31,2023. Despite the debt addition of Rs.35 crores in fiscal 2024, the capital structure remains healthy supported by improved networth. Debt protection metrics remain healthy despite the additional debt expected to be added towards proposed ADC in Saudi Arabia. Gearing to remain modest and debt to earnings before interest, tax, depreciation and amortization (Debt/EBITDA) to remain comfortable at below 1 time over the medium term. Besides, the company is expected to undertake routine capex of Rs.20-30 crore annually for which no additional debt is expected to be added. Net Cash accruals from operations is expected to gradually improve to ~Rs.50-60 crores annually from Rs.36 crores in fiscal 2023.

 

The ratings continues to reflect the healthy business risk profile of ProConnect supported by presence across diverse segment in the warehousing and transportation segments, wide customer base, adequate financial risk profile, as well as managerial and organization support provided by its parent, Redington Limited .These strengths are partially offset by highly fragmented and intensely competitive nature of logistics sector, and moderately working capital intensive nature of the company’s operations.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has consolidated ProConnect with PSCL and PSL. PSCL and PSL shall become the wholly owned stepdown subsidiaries of ProConnect effective 1st April 2023. PSL, PSCL are in similar line of business and will receive significant operational and managerial support from ProConnect.

 

Further, the parent notch-up criteria have been applied factoring support from parent, Redington. 

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Presence across diverse segments with wide customer base: In its initial year of incorporation in fiscal 2012, Redington was Proconnect’s major client contributing about 80% to the revenues. However, with the addition of clients over the years, Redington’s contribution has come down to 20% in fiscal 2023, though it remains among the top 3 customers. At present the company has over 150 clients spread over different industry verticals, but IT and telecom segments account for the maximum share. Top clients for the company include Redington, Samsung, Reliance, etc. The top 3 clients contribute around 60% of the revenues.

 

The company provides both warehousing and transportation services, with warehousing services accounting for ~65-70% of revenues. ProConnect has a network of 147 warehouses and handles about 65000 SKU’s,150000 tons per annum across 36000 customer locations. The company works on an asset-light model with the majority of the warehouses on short-term leases. Over the medium term, Proconnect has planned to invest Rs.100 crores in upgrading the infrastructure, to develop IT capabilities and in automation which are expected to improve operating efficiencies.

 

• Adequate and improving financial profile: The company’s financial risk profile is adequate and improving. Its net worth increased to Rs.171 crores on March 31, 2023, supported by equity infusion and the company was debt free as on March 31,2023. Despite the debt addition of Rs.35 crores, the capital structure remains healthy supported by improved networth. ProConnect has plans to set up a new ADC in Saudi Arabia.. The company will take additional term loan of crores to fund the project. Debt protection metrics remain healthy despite the additional debt expected to be added. Gearing to remain below 0.25 times and debt to earnings before interest, tax, depreciation and amortization (Debt/EBITDA) to remain comfortable at below 1 time over the medium term.

 

Further, the company is expected to undertake routine capex of Rs.20-30 crore annually for which no additional debt is expected to be added . Cash accruals from operations is expected to gradually improve to ~Rs.50-60 crores annually (from Rs.36 crores in fiscal 2023).

 

• Support from the parent, RIL: ProConnect is a wholly owned subsidiary of Redington and  provides backward as well as forward linkages for Redington. Also, Redington’s entire supply chain with respect to physical business is managed by ProConnect, rendering ProConnect a valuable channel partner for Redington. Redington is one of India’s leading distributors for IT hardware and mobility products and is growing rapidly through operations in 38 markets across India and META region through a vast network of over 83 sales offices and over 200 warehouses. It distributes over 294 brands through a huge network of over 28,607 channel partners.

 

Given strong business linkages between Redington and ProConnect, Redington has constantly provided support to obviate any pressures on the latter’s balance sheet, and to also support growth plans. Besides providing short term loans to reduce borrowing costs, RIL has also infused equity into ProConnect to support acquisitions as well as to manage debt levels. Three of four board members of ProConnect are also on the board of Redington and they offer strategic inputs and oversight. Redington has a demonstrated track record of supporting its associate and subsidiaries companies, on a need basis, in a timely manner, and the same is expected to continue in case of ProConnect, which enhances its financial flexibility. RIL is also expected to continue being the largest stakeholder in ProConnect.

 

Weaknesses:

• Highly competitive and fragmented nature of logistics industry: The USD 270 billion Indian logistics sector is highly fragmented and unorganized (over 85% share) given the presence of many players in the market, both in the warehousing and transportation verticals. This result in intense price competition across players, and limits significant improvement in operating profitability.

 

• Moderately working capital nature of operations: The company’s operations are moderately working capital intensive; albeit the company has been focusing on pruning working capital needs, resulting in gross current assets reducing to 91 days in fiscal 2023, from 153 days in fiscal 2019. Receivables, at 60  days as on March 31, 2023, constituted 47% of current assets and 24% of total assets. Maintaining an efficient working capital cycle as the business expands and enters new geographies will be critical.

Liquidity: Strong

ProConnect’s liquidity profile benefits from its linkages with Redington, which enjoys superior liquidity with only short term borrowings on its balance sheet, and cash surpluses in excess of Rs.1000 crores. CRISIL Ratings expects support from Redington will continue in a timely manner, as has been demonstrated in the past.

 

On a standalone basis, ProConnect’s liquidity is adequate, supported by expected cash accruals of over Rs.50-60 crores per annum and bank limits of ~Rs.53 crores which has been utilised at 54% on average in the past 6 months ended October 2023 . The company’s accruals will suffice to meet repayment obligations of ~7 crores in fiscal 2024, and ~Rs.11 crores each in fiscals 2025 and 2026 respectively. While the transfer of ADCs and subsidiaries from Redington were funded by mix of equity, internal accruals and debt , routine capex is expected at ~Rs.20-30 crore annually. Routine capex and incremental working capital needs are expected to be funded from accruals, unutilised bank limits and cash surpluses.

Outlook: Stable

ProConnect is expected to sustain its healthy business performance leveraging its established position in the warehousing vertical, and presence across diverse segments and wide customer base. Its linkages with Redington, also offer opportunities to enhance offerings in the META region. The company’s financial risk profile is expected to remain adequate, supported by better cash generation, despite debt being raised for acquiring assets.

Rating Sensitivity Factors

Upward factors

• Healthy improvement in scale of operations with sustained double-digit profitability, resulting in better than expected cash generation
• Better than expected improvement in financial risk profile and debt metrics, due to higher cash generation or equity infusion
• Improvement in the credit profile of RIL

 

Downward factors

• Moderation in business performance and lower than expected operating profitability (below 4-5%), impacting cash generation
• Significant moderation in financial risk profile and debt metrics, due to sizeable debt funded acquisition or elongation of working capital cycle
• Change in ownership with RIL not holding majority stake
• Change in stance of support by RIL, or moderation in the credit profile of RIL

About the Company

ProConnect was started in 1993 by RIL as a division to provide supply chain services for its India business. The company was incorporated as a separate company from 2012 and provides end-to-end supply chain solutions to over 160 leading brands across industry verticals. ProConnect provides cohesive package of end-to end supply chain solutions across India with over 168 warehouses and over 6 million square feet of space, delivery capability to more than 36,000 customer locations. It currently also operates two ADCs - in Chennai (operational since August 2009), Kolkata (operational since February 2014). Besides, ProConnect also operates an ADC in Dubai on leased basis. The company remains wholly owned by RIL.

About the Parent

Set up in 1993, REDIL is a leading distributor for IT hardware and mobility products. The company made its initial public offering in early 2007. It currently has a diversified holding structure with the largest shareholder, Synnex Technology International Corp through its investment arm Synnex Mauritius Ltd., Taiwan, During Sept 2019, REDIL has been classified as a listed entity with no promoters.

 

As of March 2023, REDIL operates in 38 markets across India and META region with an employee base of 4700 employees. It distributes over  290+ brands through a huge network of over  42000+ channel partners. While distribution of IT and mobility products contributes a bulk of its revenue, REDIL is also enhancing its presence in the cloud solutions space and logistics business in India and the Gulf.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Working Capital facility^	NA	NA	NA	60	NA	CRISIL AA-/Stable
NA	Proposed Working capital facility	NA	NA	NA	20	NA	CRISIL AA-/Stable
NA	Non-Fund Based Limit&	NA	NA	NA	5	NA	CRISIL A1+
NA	Proposed Non Fund based limits	NA	NA	NA	5	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	85	NA	CRISIL AA-/Stable

&Bank Guarantee

^Can be used as Cash Credit, fungible with SBLC, PCFC