Detailed Rationale

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

The outlook revision follows the stronger than expected revenue growth of 11% registered by REDIL (to ~Rs.57000 crore) in fiscal 2021, due to buoyant demand for IT products and services, as well as mobility products, and expectations that healthy demand for these products will continue over the medium term. The company is expected to sustain revenue growth over the medium term, supported by its solid market position in the IT and mobility products distribution businesses, improving product basket and increasing geographical diversification. Operating margins improved sharply to 2.43% (compared to 1.95% during fiscal 2020), driven by higher gross margins and better leverage of fixed expenses. REDIL’s operating margins are expected to remain range bound at almost similar levels over the medium term.

The outlook revision also reflects the company sustaining its strong risk management practices and prudent working capital management. During fiscal 2021, there was a sharp improvement in net working capital days driven by healthy receivable collections, extended credit period negotiated with vendors as well as lower inventory. The net working capital declined to 13 days in fiscal 2021 from 29 days during fiscal 2020. This has led to sharp reduction in debt levels, and sizeable cash surplus of ~Rs 3,493 crore as of March 31, 2021. Despite normalisation of net working capital, cash surplus is expected to remain sizeable at Rs. 1000-1200 crore. The debt requirements are however expected to remain moderate due to healthy cash generating ability and limited capital spending plans in next two fiscals.

 

Key debt metrics mainly interest cover and the ratio of total outside liabilities to total net worth (TOL/TNW), which improved to about 6.5 times (3.5 times in fiscal 2020) and 1.82 times (2.26 times) respectively in fiscal 2021, are expected to continue remaining at comfortable levels over the medium term.

 

The ratings continues 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 and improving 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 Rating 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 and its step-down subsidiary, Arena Bilgisayar Sanayive Ticaret Anonim Sirketi (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, which has enabled it to grow its mobility products business at a rapid pace.

 

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. 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 and storage. 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; the share of overall mobility revenue has increased to 35% in fiscal 2021 (compared to 32% in fiscal 2020), which supports overall growth in revenues.

 

During fiscal 2021, some vendors shifted their operating base from Singapore to India besides faster growth in India which also resulted in share of REDIL’s overseas revenues declining to ~60% in fiscal 2021 from ~63% in fiscal 2020. Also, within the overseas markets, presence across diverse markets and entry into new geographies has helped sustain the revenue growth trajectory.

 

Service business (~1% of fiscal 2021 revenues) focusses on warehousing, logistics and after sales service business, (including cloud services, digital printing, and 3D printing).

 

• 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 200 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. 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 and improving financial risk profile: REDIL’s financial risk profile remains healthy marked by steady cash accrual, nil long term debt and prudent working capital management. Adjusted gearing improved to 0.09 times at March 31, 2021 (0.58 times at March 31, 2020), mainly due to improved net working capital requirements. Despite normalisation of working capital levels over the medium term, the gearing levels are expected to remain at comfortable levels, supported by moderate capital spending needs, and steady cash accruals. Other debt metrics mainly TOL/TNW, which improved to 1.82 times (2.26 times in fiscal 2020) in fiscal 2021 are expected at 1.5-1.6 times in the next 1-2 fiscals.

Weakness

• Moderate but improving operating profitability: The distribution business is marked by low profitability margin, leading to REDIL’s operating profitability ranging between 1.9-2.4% in the past five years; improvement has been limited also by the increasing share of business from mobility products, which have lower margins, compared with traditional IT products. Besides, the company’s policy to completely eliminate forex risk, by hedging, also impacts its margins, but guards it against sharp volatility and lends stability.

 

Focus on better margin IT products and services, absence of material provisions relating to the logistics business (leading to PAT losses of Rs 57 crore in fiscal 2020), and stringent cost optimisation measures, led to REDIL registering operating margins of 2.43% in fiscal 2021 (highest since fiscal 2016). Operating margins are expected to sustain at almost similar levels over the medium term driven by increasing share of IT products in the mix and higher value added services like cloud, networking and logistics, given buoyant demand for these products.

 

• Working-capital-intensive distribution business: The company’s enterprise and consumer division within the IT products segment, is highly working capital intensive and thrives on credit sales. Given the limited number of established competitors in its domestic IT business, REDIL, based on mutual understanding with its vendors, extends the credit period considering the increase in lead time involved in such enterprise transactions. This leads to higher requirement of working capital. However, the impact on REDIL is partially alleviated as its vendors allow extended 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. This is clearly evidenced in declining net working capital levels in the last three years.

Liquidity: Strong

REDIL enjoys strong liquidity, with cash surpluses of about Rs.3,493 crore as on March 31, 2021, and large unutilized bank lines. The company has sufficient drawing power in its bank lines of Rs  2496 crore (on a standalone basis), to fund its working capital requirements, which have been sparsely utilized (covering bank lines and commercial paper) at an average of 7% over the twelve months period ending May 2021. The EMEA business under Redington Gulf also has bank lines available for its operations from local banks in the GCC and African countries.

 

During fiscal 2021, REDIL generated net cash accruals of Rs463 crore post adjustments for dividend outflow of Rs.472 crores, higher than Rs 330 crore during fiscal 2020. REDIL’s cash accruals are expected to improve to over Rs. 600 crore over the medium term driven by healthy business performance, and a prudent dividend policy. REDIL does not have any long term debt on its balance sheet, nor is expected to raise any long term debt in the near term, given only modest annual maintenance capex spend of about Rs.50-75 crore. REDIL is expected to maintain liquid cash surplus of Rs 1000-1200 crore over the medium term.

Outlook: Positive

CRISIL Rating believes that REDIL’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 improving 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 double digit revenue growth, and maintenance of operating margins at 2.4-2.5% leading to strong cash generation
• Continued prudent working capital management and dividend payout, leading to TOL/TNW ratio improving below 1.4-1.6 times.

 

Downward factors:

• Sustained weak business performance impacting revenue growth as well as operating profitability (below 2%), 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 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., holding 24.2%. REDIL has been professionally run, for over two decades. During September 2019, REDIL has been classified as a listed entity with no promoters.

 

As of March 2021, REDIL operates in 37 markets across India, METACIS and South Asia regions through a vast network of over 70 sales offices, over 205 warehouses handled with an employee base of 3,908 employees. It distributes over 235 brands through a huge network of over 33,950 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 automated distribution centres at Chennai, Kolkata and Dubai.

Any other information: Not applicable