Key Rating Drivers & Detailed Description

Strengths:

Established position in IT hardware distribution business, long-standing relationships with principals & diversified geographical footprint: 

RPL ranks among the top five IT hardware distributors in India with significant market share. The company has a healthy network  of 50 branches, 50 service centers and 62 warehouses covering 730 locations in India through an ecosystem of 8,657 Channel Partners, as of September 30, 2022. RPL not only enjoys diversified and strong product profile but also principal profiles. RPL have a longstanding relationship with principals such as Lenovo, Asus, Hewlett-Packard, Sandisk, and Western Digital among others. RPL also has made significant vendor additions in the recent past, including brands such as Samsung and LG. CRISIL Ratings believes that RPL will further improve its business risk profile over the medium term, on the back of its established market position in the domestic IT hardware distribution business and continued healthy demand for its products.

Effective risk management policies and efficient working capital management leading to sound operating efficiencies:

RPL gets complete price protection from its principal vendors so that any price changes can be passed on to the customers without affecting RPL’s operating margins. Moreover, company hedges any net foreign currency exposures arising from import of products. Further, it adheres to stringent credit assessment norms and provisioning policies, such as selling products against post-dated cheques or on immediate-payment basis to dealers, which help minimize the credit risks. All these have ensured stable albeit thin operating margins. This coupled with efficient management of working capital cycle marked by gross current asset has remained in range of 80-100 days over last 3 years through March 31, 2022 while return on capital employed in range of 26-28%. Company’s debtors were at around 47 days while inventory of around 65 days as on September 30, 2022.

Healthy debt protection metrics:

RPL’s debt protection metrics have been at healthy level despite leverage and moderate profitability. The interest coverage and net cash accrual to total debt (NCATD) ratio are at 5.37 times and 0.23 times for fiscal 2022. RPL debt protection measures are expected to healthy over medium term. Interest coverage ratio was around 3.7 times for H1 of fiscal 2023.

Weaknesses:

Susceptibility to the performance of principals: 

Lenovo, Asus, Hewlett-Packard, SanDisk and Western Digital contribute around 70-71% to the sales of RPL. Deterioration in the performance of these suppliers especially drop in their market share could adversely impact the business of RPL. Similarly, product categories such as personal-computing devices, peripherals, and components contribute over 85% to sales. Although RPL continues to add principals and product categories, their contribution to revenue is not yet significant however they are on increasing trend. Any major disruptive change in technology and intense competition among principals may however impact the business risk profile materially.

Low operating margins due to intense competition:

The IT product distribution business although oligopolistic, it is a low operating margin business. Further, RPL faces stiff competition from larger and more established players in getting distributorship rights for lucrative geographies from principals. Moreover, products from newer, less-established brands could face price competition from the established principals that in turn can affect the profitability of their distributors. However, operating margin has remained around 3 % over last 2 years ended fiscal 2022 and was at 2.7% for H1 of fiscal 2023. 

Moderately aggressive capital structure:

RPL's financial risk profile is constrained by an aggressive total-outside-liabilities-to-tangible-net worth (TOLTNW) ratio. The IT hardware distribution business entails significant working capital requirements, and RPL uses short-term borrowings from banks for funding the same. Consequently, its TOLTNW ratio has been aggressive at 3.25 times as on March 31, 2022.

While the company has filed draft red herring prospectus with Securities and Exchange Board of India for fresh issue of Rs 750 crore; necessary regulatory clearances and successful completion of the initial public offering (IPO), would remain key monitorables.

Key Financial Indicators

Annexure - Details of Instrument(s)

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