Rating Rationale
September 06, 2018 | Mumbai
Redington India Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.1750 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.1900 Crore Commercial Paper (Enhanced from Rs.1500 Crore) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities and commercial paper of Redington India Limited (RIL) at 'CRISIL AA/Stable/CRISIL A1+'.
 
The ratings reflects CRISIL's expectation that RIL will sustain its healthy business risk profile following the expected increase in product offerings and customer base in mobility space in India and overseas, and the expected gradual recovery in IT space in the domestic market over the medium term; this will enable the company to register revenue growth of about 8-10%. Also, focus on enhancing value added offerings and operational efficiencies is expected to enable the company maintain its operating margins at over 2%.
 
Further, CRISIL expects RIL will sustain the improvement in its financial profile over the medium term, by prudently managing its working capital, resulting in its credit metrics, especially ratio of total outside liabilities to tangible net worth (TOL/TNW), remaining at comfortable levels. Besides, the company's return on capital employed (RoCE) is also expected to improve to about 19-20% over the medium term, from 17.2% at present.

The ratings continue to reflect RIL's strong position in the IT and mobility products distribution business, healthy product and geographical diversification in revenue, and strong risk management practices. These rating strengths are partially offset by its low operating margin, and working capital-intensive nature of the distribution business. 
 
RIL's revenues grew by 6% during fiscal 2018, driven by stronger momentum in overseas business, partially offset by a decline in domestic business due to change in comparable GST rates as well as frequent changes in customs duty for mobility products. The revenues from IT business reported a modest growth of 3% in fiscal 2018.
 
RIL's operating profitability margin was about 2.0% in fiscal 2018 (vis-Ã' -vis 2.2% in fiscal 2017) lower due to decline in margin in mobility businesses. RIL's gross current asset days has increased slightly to 85 days in fiscal 2018, from 84 days in fiscal 2017, primarily due to increase in inventory in enterprise business. RIL's gearing and ratio of total outside liabilities to tangible net worth (TOL/TNW) has improved to 0.4 times and 1.9 times respectively as on March 31, 2018, from 0.5 times and 2.0 times at March 31, 2017. CRISIL expects continued improvement in these ratios over the medium term.
 
During the first quarter of fiscal 2019, revenues increased by 9% driven by continued momentum in overseas business. However, operating margins was lower at 1.6% (vis-Ã' -vis 1.9% during first quarter of fiscal 2018), primarily due to one off increase in accounting provisions for debtors and inventory as mandated by Indian accounting standards (IND AS). Also, there were some challenges in its overseas business in Turkey due to political reasons; albeit RIL's proactive measures to manage the potential currency risks in its Turkey business (less than 10% of consolidated revenues), Arena Bilgisayar Sanayive Ticaret Anonim Sirketi (Arena), has helped limit the impact on its overall profitability.

Analytical Approach

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

Key Rating Drivers & Detailed Description
Strengths
* Strong market position in IT and mobility distribution business: RIL has a strong market position in the IT products distribution within India being the second-largest player along with Ingram Micro Pvt Ltd (another major player in this industry) garnering the major share of the market in domestic IT distribution in domestic IT distribution. RIL is the market leader in the Middle East and Africa (MEA) markets through its subsidiary, Redington Gulf FZE and its step-down subsidiary, Arena, is one of the largest players in Turkey. The company is one of the few supply chain solutions provider 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, RIL has emerged as a leading distributor, especially for consumer products such as 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.
 
* Diversified revenue mix with healthy geographical footprint: RIL's revenue stream is highly diversified in terms of the IT, mobility and service business verticals, as well as geographically. In the mobility vertical, RIL focuses on smartphones. Within consumer digital lifestyle products, the company has major consumer and digital lifestyle brands in its portfolio and a large channel partner base. Service business (about 5% of India revenues in fiscal 2018) focussing on distribution, logistics and after sales service business, (including cloud services, digital printing and 3D printing) continues to expand and contributed about 20% of profit after tax in fiscal 2018 from Indian operations.
 
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 and the current share of overall mobility revenue stands at about 27% in fiscal 2018. While the IT spending in the domestic market has remained moderate over the past three years, faster growth in overseas markets through increased market and product penetration has resulted in share of RIL's overseas revenues increasing to about 64% in fiscal 2018 from about 59% in fiscal 2015. Also, within the overseas markets, presence across diverse markets, has helped sustain the revenue growth trajectory, despite headwinds in its Turkey business.
 
* Strong risk management practices: RIL has followed strong risk management practices that have enabled it to mitigate risks inherent in the IT 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. RIL follows healthy foreign exchange risk mitigation practices such as 100-per-cent hedging on exchange rates, which helps minimise foreign currency fluctuation risks. In Turkey, RIL has constantly ensured full hedging of all exposures and enhanced debtor collection, consequently targeting to reduce working capital and operating costs in the near term.
 
The quick conversion cycle and its strong relationship with its vendors also ensures limited risk arising from product obsolescence. RIL also has a robust management information system, which helps keep track of the credit history of its channel partners. 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: RIL has traditionally followed a moderate financial policy, except in the past, when it carried out a debt-funded acquisition of Investcorp's stake in Redington Gulf; this led to its gearing increasing to 1.71 times as on March 31, 2012 from less than 1 time earlier. Thereafter, prudent working capital management, moderate capital spending and repayment of long term debt, along with steady business performance, enabled a gradual recovery in RIL's key credit metrics over the years. The company's liquidity is also healthy, supported by moderately utilised working capital lines, and liquid surplus of about Rs. 543 crore as on March 31, 2018.
 
Weakness
* Low but stable profitability margin and working-capital-intensive distribution business: The distribution business is marked by low profitability margin and high working capital intensity. Consequently, RIL's operating profitability remains low and has ranged between 2.0-2.4% 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.
 
The company's enterprise division (including software sales, storage, servers, networking) within the IT products segment, is even more working capital intensive and thrives on credit sales and large inventories. Given the limited number of established competitors in its domestic IT business, RIL, based on mutual understanding with its vendors, extends the credit period to enable its channel partners grow the business of its vendors. This leads to higher requirement of working capital. However, the impact on RIL is partially alleviated as its vendors allow extended credit period to the company on a case to case basis.
Outlook: Stable

CRISIL believes that RIL's credit risk profile will benefit from steady cash flows from operations driven by improved diversity in its revenue profile and stable operating margins. This along with prudent working capital management will enable the company to maintain its credit metrics at comfortable levels.
 
Upside scenario:
* Better than expected revenue growth, and maintenance of operating margins at over 2%, leading to better than expected cash generation.
* Continued prudent working capital management, leading to improvement in TOL/TNW (below 1.7-1.8 times) and RoCE.
 
Downside scenario:
* Sluggish business performance, impacting cash generation sharply
* Stretch in RIL's working capital cycle, or significant debt-funded acquisitions or capex, resulting in sharp deterioration in key credit metrics; for e.g. TOL/TNW of over 2.5 times.

About the Company

Set up in 1993, RIL 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 about 24%. The original promoters, the Kewalram Chanrai group, which held stake through their investment vehicle - Harrow Investment Holding Ltd, exited the company in July 2017. RIL has been professionally run, for over two decades, with limited contribution from the promoters.
 
In India, RIL has established a vast network of over 49 sales offices, 180 warehouses, and over 256 service centres. It distributes over 130 brands through a huge network of over 30,000+ channel partners. In META region, RIL has over 27,000 channel partners, about 33 sales offices, 51 service centres and 30 warehouses. While distribution of IT and mobility products contributes a bulk of its revenue, RIL 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.
 
For the three month period ended June 30, 2018, the company reported a PAT (after minority interests) of Rs. 88.0 crores (Rs. 98.4 crores in the corresponding period of fiscal 2018), on net revenues of Rs 10,215 crores (Rs. 9,374 crores).

Key Financial Indicators
As on / for the period ended March 31   2018 2017
Revenues Rs Crores 43453 41,086
Profit after tax (after minority interests) Rs Crores 482 464
PAT margins (after minority interests) % 1.11 1.13
Adjusted debt/adjusted net worth Times 0.41 0.47
Interest coverage Times 4.29 4.12

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs. Cr)
Rating Assigned with Outlook
NA Cash Credit NA NA NA 610.00 CRISIL AA/Stable
NA Letter of credit NA NA NA 75.00 CRISIL A1+
NA Bank Guarantee NA NA NA 85.00 CRISIL A1+
NA Short-Term Loan NA NA NA 972.5 CRISIL A1+
NA Commercial Paper NA NA 7-365 days 1900.00 CRISIL A1+
NA Proposed Cash Credit Limit NA NA NA 7.5 CRISIL AA/Stable
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1900.00  CRISIL A1+      07-12-17  CRISIL A1+    --    --  -- 
            27-11-17  CRISIL A1+           
Short Term Debt  ST                      CRISIL A1+ 
Short Term Debt (Including Commercial Paper)  ST          24-04-17  CRISIL A1+  11-08-16  CRISIL A1+  05-08-15  CRISIL A1+  -- 
            17-04-17  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  1590.00  CRISIL AA/Stable/ CRISIL A1+      07-12-17  CRISIL AA/Stable/ CRISIL A1+  11-08-16  CRISIL AA-/Stable/ CRISIL A1+  05-08-15  CRISIL AA-/Stable/ CRISIL A1+  CRISIL AA-/Stable/ CRISIL A1+ 
            27-11-17  CRISIL AA-/Positive/ CRISIL A1+           
            24-04-17  CRISIL AA-/Positive/ CRISIL A1+           
            17-04-17  CRISIL AA-/Positive/ CRISIL A1+           
Non Fund-based Bank Facilities  LT/ST  160.00  CRISIL A1+      07-12-17  CRISIL A1+  11-08-16  CRISIL A1+  05-08-15  CRISIL A1+  CRISIL A1+ 
            27-11-17  CRISIL A1+           
            24-04-17  CRISIL A1+           
            17-04-17  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 85 CRISIL A1+ Bank Guarantee 85 CRISIL A1+
Cash Credit 610 CRISIL AA/Stable Cash Credit 610 CRISIL AA/Stable
Letter of Credit 75 CRISIL A1+ Letter of Credit 75 CRISIL A1+
Proposed Cash Credit Limit 7.5 CRISIL AA/Stable Proposed Cash Credit Limit 7.5 CRISIL AA/Stable
Short Term Loan 972.5 CRISIL A1+ Short Term Loan 972.5 CRISIL A1+
Total 1750 -- Total 1750 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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