April 03, 2013

Mumbai

Redington (India) Limited

Rating downgraded to ‘CRISIL A+/Stable’

Total Bank Loan Facilities Rated
Rs.17,500 Million
Long-Term Rating
CRISIL A+/Stable (Downgraded from ‘CRISIL AA-/Negative’)
Short-Term Rating
CRISIL A1+ (Reaffirmed)

(Refer to Annexure 1 for details on facilities)

Rs.6000 Million Short-Term Debt
CRISIL A1+ (Reaffirmed)

CRISIL has revised its rating on the long-term bank facilities of Redington (India) Ltd (RIL) to ‘CRISIL A+/Stable’ from ‘CRISIL AA-/Negative’. The rating on the short-term debt and bank loan facilities has been reaffirmed at ‘CRISIL A1+’.

The rating downgrade reflects CRISIL’s belief that RIL’s gearing correction will take longer than previously expected. In March 2012, RIL’s wholly-owned overseas subsidiary, Redington International Mauritius Ltd (RIML) consolidated its equity stake in RIML’s subsidiary, Redington International Holdings Ltd (RIHL), from Investcorp, a private equity investor. Post acquisition, RIHL has become a wholly-owned subsidiary of RIML. The purchase consideration(including employee’s shares), totaled USD 125 million, was funded through USD78 million (Rs.4 billion) of debt. Following the debt-funded acquisition, the gearing had deteriorated to 1.69 times as on March 31, 2012 from 0.99 times as on March 31, 2011.

Given the management’s stated intention of inorganic deleveraging, CRISIL believed that the sharp increase in RIL’s gearing would be temporary and the gearing would revert to moderate level by December 31, 2012. Contrary to CRISIL’s previous expectation, however, the gearing correction is expected to happen through organic means and only gradually over the next three years. Given that the gearing correction is expected to take longer than expected to fructify, CRISIL has downgraded the long term rating of RIL.

CRISIL’s ratings on RIL continue to reflect its strong market position in key markets, healthy product and geographic diversification, and strong risk management practices. These rating strengths are partially offset by RIL’s low margin, working-capital-intensive information technology (IT) product distribution business, and moderate financial risk profile.

RIL’s business risk profile is marked by healthy revenue mix with almost equal contribution from both domestic and overseas markets, and a strong market position in both these markets. RIL is the largest distributor of IT products in India, followed by Ingram Micro. RIL and Ingram Micro together command a market share of 70 per cent in the domestic IT distribution. Apart from the strong market position in the domestic markets, RIL is also the market leader in Middle East and Africa markets and is among the earliest entrants. RIL’s Turkey step-down subsidiary, Arena Bilgisayar Sanayi veTicaret Anonim Sirketi (Arena), is the second largest player in Turkey. RIL’s market position is underpinned by its ability to rapidly grow its vendor list, its diverse product profile, its strong distribution infrastructure, and its well-entrenched relationship with its channel partners. RIL follows strong risk management practices that help it to mitigate the impact of its risks associated with the IT products distribution business, including efficient logistics and inventory control, according to market demand; stringent credit assessment norms and provisioning policies; and healthy foreign exchange risk mitigation systems.

The above-mentioned rating strengths are partially offset by RIL’s low margin and the working-capital-intensive nature of the IT distribution industry. The IT products distribution business is working-capital-intensive and thrives on credit sales and large inventories. CRISIL believes that RIL’s prudent working capital management practices will enable the company to manage its increasing working capital requirements and maintain its operating margin over the medium term. Driven by the high working capital and acquisition debt (USD78 million), gearing will remain high over the medium term; CRISIL believes that RIL’s gearing will gradually improve to around 1 times by March 31, 2015 from around 1.6 times as on March 31, 2013.

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of RIL and RIL’s subsidiaries, but has excluded RIL’s wholly-owned non-banking financial company, Easyaccess Financial Services Ltd (Easyaccess).The combined entity is referred to as RIL. CRISIL has also factored in the capital requirements of Easyaccess.

Outlook: Stable

CRISIL believes that RIL’s healthy cash accruals will enable it to gradually improve its gearing and debt protection metrics over the medium term. The outlook may be revised to ‘Positive’ if the correction in RIL’s gearing is quicker than expected, backed by higher than expected revenues and profitability. The outlook may be revised to ‘Negative’ in case of weakening of revenue growth, leading to weaker gearing and debt protection metrics, over the medium term.

About the Company

Set up in 1993, RIL is a leading distribution company for IT hardware products and lifestyle digital products. RIL’s overseas operations contribute nearly 54 per cent to the company’s revenue mix; a significant portion of these revenues are from the Middle East and Africa (66 per cent), Turkey (22 per cent), and South Asia (12 per cent).RIL is among the earliest entrants in the Middle East and African market. In 2010-11(refers to financial year, April 1 to March 31), RIL, through one of its subsidiary company, acquired a 49.4 per cent stake in the Turkish-based entity, Arena. Arena is the second largest distributor of IT products in Turkey. Other significant acquisition of RIL includes Easyaccess, a non-deposit-taking, non-banking finance company in January 2008. RIL has also ventured into logistics services through Automated Distribution Centre’s (ADCs) in Chennai (operational since August 2009), and Jebel Ali, Dubai (operational since September 2010). RIL plans to open new ADCs in Kolkata and New Delhi.

RIL made its initial public offering (IPO) in early 2007 and mobilised funds aggregating Rs.1.38 billion. RIL currently has a diversified holding structure with no shareholder holding more than 26 per cent. RIL’s main shareholders include Redington (Mauritius) Ltd (21.06 per cent) and Synnex Mauritius Ltd (Synnex; 23.63 per cent); Redington (Mauritius) Ltd is the promoter group and Synnex is the strategic investor.

For 2011-12, RIL (consolidated, but excluding Easyaccess) reported a profit before minority interest of Rs.3.1 billion (Rs.2.7 billion for 2010-11) on sales of Rs.211.4 billion (Rs.166.7 billion for 2010-11). For the nine months ended December 31, 2012, RIL (consolidated) reported a profit before minority interest of Rs.2.36 billion (Rs.2.25 billion for corresponding period in 2011-12) on sale of Rs.173.56 billion (Rs.157.01 billion).

Annexure 1 - Details of various bank facilities

Current facilities
Previous facilities
Facility
Amount
(Rs. Million)
Rating
Facility
Amount
(Rs. Million)
Rating
Cash Credit
7724
CRISIL A+/Stable
Cash Credit
7274
CRISIL AA-/Negative
Letter of Credit
4220
CRISIL A1+
Letter of Credit
1450
CRISIL A1+
Proposed Cash Credit Limit
376
CRISIL A+/Stable
Proposed Cash Credit Limit
2266
CRISIL AA-/Negative
Short-Term Loan
3480
CRISIL A1+
Short-Term Loan
4160
CRISIL A1+
Working Capital Demand Loan
1700
CRISIL A+/Stable
Working Capital Demand Loan
2350
CRISIL AA-/Negative
Total
17500

Total
17500
--

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Last updated: April 30, 2012

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April 03, 2013

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