Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of  Redington India Limited (REDIL) to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Positive’; the short term rating and commercial paper has been reaffirmed at ‘CRISIL A1+’.

 

The upgrade in long term ratings follows the stronger than expected performance driven by healthy demand for IT products and services despite the moderation in mobility products resulting in revenue growth of 10% in fiscal 2022. CRISIL Ratings expects REDIL will continue to sustain healthy growth in revenues over the medium, supported by improving product basket and geographical diversification, as well as healthy demand for the IT and mobility products, which will help REDIL further solidify its established market position in these product segments, where it is among the market leaders.

 

The company’s operating margins have improved to 2.9% in fiscal 2022 (compared to 2.43% in fiscal 2021) driven by better gross margins and better product mix. Operating margins are expected to sustain at ~2.5-2.8% over the medium term.

 

CRISIL Ratings has also taken into consideration the REDIL’s strong risk management practices and prudent working capital management. During fiscal 2022, the net working capital days (NWC) was at 14 days (almost similar to 13 days in fiscal 2021, but much better than 29 days in fiscal 2020). The reduction in NWC was primarily driven by Change in sales mix and lower inventory due to the healthy demand scenario. The reduction in NWC has led to sharp reduction in debt levels and sizeable cash surplus of ~Rs. 3647 crores as on March 31, 2022. Cash surplus is expected to moderate in line with business requirements over the medium term, as the company may deploy the same to fund its working capital/capex requirements rather than raise debt, given rising interest rates.

 

Return on Capital employed (RoCE) has improved to 29.8% in fiscal 2022 (compared to 21.5% in fiscal 2021) driven by better profitability and is expected to sustain at over 20% over the medium term. However due to effective working capital management , the ratio of Total outside liabilities to total net worth (TNW) ratio increased to 2.08 times in fiscal 2022, from 1.81 times in fiscal 2021. TOL/TNW ratio is expected at ~1.9-2.1 times over the medium term.

 

The ratings continue to factor REDIL's solid and established market position in the IT and mobility products distribution business, improving product and geographical diversification in revenues in domestic and international markets, and its strong risk management practices. The rating is also supported by the company's healthy financial risk profile and strong liquidity. The above rating strengths are partially offset by its modest though improving operating margins and working capital-intensive nature of the distribution business. 

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of REDIL and REDIL’s subsidiaries, due to operational similarities. All these companies have been together referred to herein as REDIL.

 

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:

Strong market position in IT and mobility distribution business: REDIL has a strong market position in the IT products distribution within India along with Ingram Micro Pvt Ltd (another major player in this industry) garnering the major share of the market in domestic IT distribution.

 

REDIL is the market leader in the Middle East and Africa (MEA) markets through its step-down subsidiary, Redington Gulf FZE, while its step-down subsidiary, Arena Bilgisayar Sanayi ve Ticaret A.S. (Arena), is one of the largest players in Turkey. The company is one of the few supply chain solutions providers with presence in the major emerging markets around the world. It has strong relationships with leading vendors such as HP, Dell, Samsung, Lenovo, Cisco, and Microsoft in the IT products business, and has over time consolidated its position as a leading distributor for these vendors.

 

In the mobility business too, REDIL remains a  significant distributor for smartphones. It has tie-ups with leading brands such as Apple, Google, and Samsung,

 

The company’s market position in both its business segments is underpinned by its ability to rapidly grow its vendor list, its diverse product profile, strong distribution infrastructure, and well-entrenched relationships with the channel partners. This has enabled it to be well placed to grow its revenues, supported by buoyant demand for IT products and services.

 

Diversified revenue mix with healthy geographical footprint: REDIL’s revenue stream is highly diversified in terms of the IT, mobility, and service business verticals, as well as geographically with REDIL present in 38markets. The IT consumer segment handles the distribution of personal computers (PCs), laptops and other consumer lifestyle products, while the IT enterprise segment caters to networking, software, servers storage, cloud services. In the mobility vertical, REDIL primarily focuses on smartphones. The company has gradually enhanced the proportion of mobility revenue in its overall revenue supported by the rapid penetration of smartphones in the domestic market as well as overseas market leading to share of mobility revenue increasing to 35% in fiscal 2021. However, in fiscal 2022 the share of mobility revenues has declined to 29% driven by degrowth in global smartphone market due to chip supply constraints .The mobility revenues were also impacted by change in go to market (GTM) strategy of one of major vendors. Nevertheless, the impact of lower revenues from mobility segment was offset by better growth in IT segment in fiscal 2022.

 

While the threat of direct to retail models remain, REDIL is better placed to mitigate the threat due to its diverse product portfolio and presence across diverse geographies. Besides, the direct to retail/ecommerce model is unlikely to reduce offline market substantially as seen in developing countries.

 

REDIL ventured into cloud business two years ago and offtake in cloud business has been healthy with cloud business recording a growth of 41% YoY in fiscal 2022. While the share of cloud business remains low at ~2%, it is expected to grow at a much faster rate than overall business leading to improvement in share of revenues.

 

Service business (~1% of fiscal 2022 revenues) focusses on warehousing and logistics.

 

Strong risk management practices: REDIL has followed strong risk management practices that have enabled it to mitigate risks inherent in the distribution business. These include risks arising from vendor concentration, product obsolescence, volatility in exchange rates, and credit risks. The company has a diversified vendor base with regard to distribution of products of more than 290 vendors overall. This reduces the revenue concentration risk from a single vendor. REDIL follows healthy foreign exchange risk mitigation practices such as 100-per-cent hedging on exchange rates, which helps minimise foreign currency fluctuation risks. The quick conversion cycle and its strong relationship with its vendors also ensures limited risk arising from product obsolescence. Most of the receivables (about 75% in domestic business and about 95% in Middle East region) are credit insured to mitigate default risk. The robust risk management practises have led to average receivable provision to be ~0.12% of revenues while the average inventory provisioning has been ~0.08% of the revenues.

 

REDIL also has a robust management information system, which helps keep track of the credit history of its channel partners. This will be further enhanced with implementation of SAP across all its business locations. Furthermore, the company also maintains sizeable cash as a contingency measure to ensure continuation of operations, especially in volatile international markets.

 

Healthy financial risk profile: REDIL’s financial risk profile remains healthy marked by strong cash generating ability and prudent working capital management. The company had low debt on its balance sheet of ~Rs.633 crores at March 31, 2022, largely short term in nature. Adjusted gearing has improved to ~0.11 times on March 31, 2022, compared to earlier levels of >0.4 times till March 31, 2020, mainly due to strong cash generation and improved net working capital management. Gearing is expected to remain at low levels over the medium term, as no significant capital spending is proposed, and incremental working capital needs can be met from cash surpluses. Interest cover ratio also remained healthy in fiscal 2022. However, the TOL/TNW ratio increased to 2.08 times at March 31, 2022, from 1.81 times at March, 31, 2021 (2.25 times at March 31, 2020), due to higher creditors, and is expected at ~1.9-2.1 times over the medium term.

 

Weakness:

Moderate but stable profitability margins: The distribution business is marked by low profitability margin, leading to REDIL’s operating profitability ranging between 1.9-2.2% between fiscals 2017-20; improvement was limited also by the increasing share of business from mobility products, which had lower margins, compared with traditional IT products. The operating profitability improved to 2.43% in fiscal 2021 driven by better product mix and better leverage of fixed expenses. In fiscal 2022, the operating profitability further improved to 2.90% driven by higher share of IT products in the mix and better gross margins. The profitability is expected to range between ~2.5-2.8% levels over the medium term due to initiatives to increase share of value-added services like cloud, networking, and logistics, and share of mobility products (with lower margins) may increase as the chip shortage eases.

 

Working-capital-intensive distribution business: The company’s enterprise and consumer division (including software sales, storage, servers, networking) within the IT products segment, is working capital intensive. Given the limited number of established competitors in its domestic IT business, REDIL, based on mutual understanding with its vendors, agrees the credit period considering the increase in lead time involved in such enterprise transactions. This leads to higher requirement of working capital, in line with increase scale of operations. However, the impact on REDIL is partially alleviated as its vendors allow credit period to the company on a case to case basis. Also, with the share of low margin-low working capital intensive mobility business increasing over time, net working capital days have been gradually lowered. Over the past two years, NWC has remained at 13-14 days mainly due to effective working capital management NWC is expected to increase over the medium term, but incremental funding is likely from cash surpluses.

Liquidity: Strong

REDIL enjoys strong liquidity, with cash surpluses of about Rs. 3,647 crore as on March 31, 2022, and large unutilized bank lines. During fiscal 2022, REDIL generated net cash accruals of Rs.940 crore (post adjustments for dividend outflow of Rs 516 crore), higher than Rs 483 crore during fiscal 2021. REDIL’s cash accruals are expected to remain healthy and is expected to be sufficient to meet capex and working capital requirements.

 

The company has bank lines of Rs. 2,957 crore (on a standalone basis) which have been sparingly utilized ,to fund its working capital requirements,

Outlook: Stable

CRISIL Ratings believes that RIL’s business risk profile will continue to benefit over the medium term from the diversity in its revenue, established relationship with global IT vendors, sustenance of healthy operating margin, and high cash generating ability. Further, the company is expected to sustain its healthy financial risk profile, supported by prudent working capital management and minimal capital spending.

Rating Sensitivity Factors

Upward Factors:

• Sustained healthy revenue growth, and operating margins at above 3-3.25% leading to much stronger cash generation
• Continued prudent working capital management, leading to TOL/TNW ratio improving below 1.0 -1.3 time.

 

Downward Factors:

• Weak business performance impacting revenue growth, operating profitability (below 2.25-2.5%) on a sustained basis, and cash generation.
• Stretch in working capital cycle, or significant debt-funded acquisitions or capex, leading to deterioration in key debt metrics; for instance TOL/TNW exceeding 2.5-2.7 times

About the Company

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, holding 24.3%. REDIL has been professionally run, for over two decades. During Sept 2019, REDIL has been classified as a listed entity with no promoters.

 

As of March 2022, REDIL operates in 38 markets across India and META region through a vast network of over 83 sales offices, over 200 warehouses handled with an employee base of 4460 employees. It distributes over 294 brands through a huge network of over 28,607 channel partners. While distribution of IT and mobility products contributes a bulk of its revenue, REDIL is also enhancing its presence in the logistics business in India and the Gulf. It has set up three ADCs at Chennai, Kolkata and Dubai.

Any other information: Not applicable