| Redington Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank facilities and commercial paper of Redington Limited (REDIL, formerly known as Redington India Limited) at ‘CRISIL AA+/Stable/CRISIL A1+’
Healthy demand for IT products from the enterprise segment and addition of new vendors in mobility segment despite the moderation in demand from IT consumer segment has resulted in revenue growth of 27% in fiscal 2023. Operating margins declined to 2.7% in fiscal 2023 from 2.9% in fiscal 2022 driven by change in product mix and increase in investments to develop digital capabilities.
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. Operating margins are expected to sustain at ~2.5% over the medium term.
During fiscal 2023, the net working capital days (NWC) increased to 36 days compared to 14 days in fiscal 2022 driven by change in product mix where the lead times are higher in IT enterprise segment, Inventory has also been higher than expected due to supply chain issues.. Besides due to chip shortage, some of the products were delayed leading to higher inventory. Credit period offered by vendors declined as the vendors rolled back the extended credit period offered during COVID.. The increase in NWC has led to increase in debt levels to over Rs.3000 crores in fiscal 2023 compared to Rs.670 crores in fiscal 2022. Cash surplus has declined to Rs. 1951 crores compared to Rs.3659 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.
Return on Capital employed (RoCE) has remained healthy at 25.7% in fiscal 2023 driven by healthy profitability and is expected to sustain at over 20% over the medium term. Despite the increase in working capital, the increase in ratio of Total outside liabilities to total net worth (TNW) ratio was limited to 2.3 times in fiscal 2023 compared to 2.1 times in fiscal 2022. TOL/TNW ratio is expected at ~2.1-2.3 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 38 markets. 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 32% in fiscal 2023 compared to 27% in fiscal 2018. There has been impact on mobility revenues due to change in in go to market (GTM) strategy of one of major vendors. However this has been mitigated by addition of new vendors.
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 three years ago and offtake in cloud business has been healthy with cloud business recording a growth of 54% YoY in fiscal 2023. While the share of cloud business remains low at 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 2023 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 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 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, 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. Besides, healthy networth of Rs. 6903 crores as on March 31,2023 ensures healthy capital structure despite the increase in short term debt due to normalization of working capital cycle. Adjusted gearing has increased to 0.4 times compared to 0.11 times in fiscal 2022 due to increase in working capital debt. Gearing is expected to moderate gradually with improvement in networth and absence of significant capital spending. Interest cover ratio also remained healthy in fiscal 2023 at 8.32 times . However, the TOL/TNW ratio increased to 2.3 times at March 31, 2023, from 2.1 times at March, 31, 2022, due to higher creditors, and is expected at ~2.1-2.3 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. In fiscal 2023, the margins were at 2.67% supported by healthy demand from the enterprise segment. However profitability is expected to sustain at ~2.5% 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.
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 years fiscal 2021 and fiscal 2022, NWC has remained at 13-14 days mainly due to better demand scenario and effective working capital management. NWC has increased to 36 days in fiscal 2023 with normalization of working capital cycle however still is better than above 45 days seen in the past. |
Liquidity: Strong REDIL enjoys strong liquidity, with cash surpluses of about Rs. 1951 crore as on March 31, 2023, and bank lines of Rs.2800 crores which has been utilized on an average at 12% over the past 12 months ended April 2022. During fiscal 2023, REDIL generated net cash accruals of over Rs.1000 crore (post adjustments for dividend outflow of Rs 515 crore).REDIL’s cash accruals are expected to remain healthy and is expected to be sufficient to meet capex and working capital requirements.
ESG Profile of Redington Limited CRISIL Ratings believes that REDIL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The IT distribution sector has low impact on the environment owing to its lower emission and comparatively lower waste generation due to the low energy intensive nature of operations. The sector also has low social impact.
The company is in the process of developing detailed ESG framework which will mitigate environmental and social risks.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. The commitment of REDIL to ESG principles will play a key role in enhancing stakeholder confidence, given high share of market borrowing in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL 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:
Downward Factors:
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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%.. 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. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of Entities Consolidated - Fully Consolidated Entities (as of March 31, 2023) Direct subsidiaries
Step-down subsidiaries
Note
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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