CRISIL has revised its rating outlook on Redington (India) Ltd (RIL)’s long term bank facilities to ‘Negative’ from ‘Stable’, while reaffirming the ratings at ‘CRISIL AA-’. The ratings on the short term facilities have been reaffirmed at ‘CRISIL A1+’.

The outlook revision reflects expected weakening in RIL’s capital structure and debt protection metrics. This is because RIL’s wholly owned overseas subsidiary, Redington International Mauritius Ltd (RIML) will be purchasing 25.97 percent equity stake in RIML’s subsidiary - Redington International Holdings Ltd (RIHL). The 25.97 percent equity stake is currently held by Investcorp, a private equity investor. Subsequent to the acquisition, RIML will hold 96 percent equity stake in RIHL. The purchase consideration, valued at USD 113 million, will be funded through USD 80 million (Rs. 4 billion) of debt. RIL intends to close the deal before March 2012. CRISIL believes that the incremental debt will result in RIL’s consolidated gearing deteriorating to 1.9 times as of March 31, 2012 from 0.99 times as of March 31, 2011. Given the trading nature of RIL’s business, CRISIL believes that the expected gearing is high for the rating category. However, given the management’s stated intention of maintaining a moderately leveraged capital structure, CRISIL believes the sharp increase in RIL’s gearing levels to be temporary in nature and will revert to moderate levels in the next four months. The timing and extent of improvement in gearing will remain a key rating sensitivity factor for RIL.

RIHL is the holding company for RIL’s operations in the Middle East and African(MEA), which constitute more than 50 per cent of its revenues. In November 2008, Investcorp had announced the investment proposal of USD 98 million in RIHL; subsequently Investcorp invested USD 65 million for a 25.97 per cent equity stake in RIHL. RIHL had largely utilized Investcorp’s USD 65 million to fund its Turkish acquisition (Arena Bilgisayar Sanayi ve Ticaret Anonim Sirketi [Arena]) in 2010-11(refers to financial year, April 1 to March 31) for USD 42.48 million.

The ratings continue to reflect RIL’s strong position in key markets, product segment and geographic diversification and strong risk management practices. These rating strengths are partially offset by RIL’s low margin, and working-capital-intensive nature of its information technology (IT) product distribution business.

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. CRISIL, in its gearing calculations, has not netted off the surplus cash. (RIL had cash surplus of Rs. 5.4 billion as of September 30, 2011 out of which Rs.1 billion is related to working capital purposes).

RIL’s business risk profile is marked by healthy revenue mix with almost equal contribution from both domestic and overseas markets, and a strong position in both these markets. 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 the low-margin and 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. Working capital requirement also gets accentuated because of the company’s practice of not using credit available from its vendors. However, the unavailed credit available from vendors enhances RIL’s financial flexibility. Vendors also provide cash discounts on early payment, which support the wafer-thin margins of IT product distributors. CRISIL believes that working capital borrowings of RIL will increase in line with higher business levels.

Outlook: Negative
The negative outlook reflects CRISIL belief that RIL’s capital structure and debt protection metrics will weaken considerably after RIL makes the largely debt funded acquisition of Investcorp’s stake in RIHL. The ratings may be downgraded if the proposed inorganic gearing correction does not happen within the desired time frame. Conversely, the outlook may be revised to ‘Stable’ if RIL’s capital structure improves significantly as per expectations.

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, which contribute nearly 52 per cent to the company’s revenue mix; a significant portion of these revenues are from the Middle East (43 per cent), Turkey (29 per cent), and Africa (14 per cent). Other key overseas markets include Bangladesh, Singapore, and Sri Lanka. RIL is among the earliest entrants in the MEA market. In 2010-11, 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 financial company in January 2008.RIL has also ventured into logistics services through automated distribution centres (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 (21.10 per cent) and Synnex Mauritius Ltd (Synnex; 23.68 per cent); Redington (Mauritius) Ltd is the promoter group and Synnex is the strategic investor.

For 2010-11, RIL (consolidated, but excluding Easyaccess) reported a profit before minority interest of Rs.2.5 billion (Rs.2.0 billion for 2009-10) on sales of Rs.174.3 billion (Rs.137.3 billion for 2009-10). For the six months ended September 30, 2011, RIL (consolidated, including Easyaccess) reported a profit before minority interest of Rs.1.4 billion (Rs 1.1 billion for the corresponding period of the previous year) on sales of Rs.106 billion (Rs 74 billion for 2009-10).