Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of Redington Limited (REDIL; formerly Redington (India) Ltd).

 

The ratings continue to reflect the strong business risk profile of REDIL backed by its solid and established market position in the information technology (IT) and mobility products distribution business, improving product and geographical diversification in revenue from the domestic and international markets, and strong risk management practices. The ratings also factor in the company's healthy financial risk profile and strong liquidity. These strengths are partially offset by modest operating margin and large working capital requirement in the distribution business. 

 

In fiscal 2024, REDIL registered healthy revenue growth of 13%, driven by healthy demand from Indian mobility solutions group (MSG) and enterprise solutions group (ESG), which together contribute more than 50% to the company’s revenue. While healthy demand for IT products from the enterprise segment with increased work from office benefitted the ESG segment, addition of new vendors in the mobility segment along with the premiumization trend aided growth in the MSG segment. REDIL is likely to register healthy revenue growth of 8-9% over the medium term, supported by healthy trends in TSG (IT-Enterprise), driven by higher investments by corporates and the government in IT infrastructure, accelerated cloud spending, cybersecurity, AI integration. High growth potential in the MSG segment due to shift towards 5G and premiumization will also aid revenue growth. This will help REDIL solidify its established market position in these product segments, where it is among the market leader.

 

The company’s operating margin declined to 2.6% in fiscal 2024 from 2.96% in fiscal 2023, majorly due to change in product mix, increased investment to develop digital capabilities and other risk mitigation initiatives.However, the operating profitability was better than the pre-pandemic level, due to focus on operating efficiency with increased digital distribution, leading to control over costs. The operating margin will likely sustain at 2.6-2.7% over the medium term due to increased share of revenue from high-margin IT enterprise segments and cloud services, along with benefits of operating leverage and cost efficiencies implemented over the past few years.

REDIL has a strong financial risk profile, as reflected in sizeable networth of Rs 7,453 crore as on March 31, 2024, and marginal reduction in debt to Rs 2,820 crore (Rs 3,154 crore a year earlier). Gearing levels were comfortable at 0.38 times at March 31, 2024. To meet its large working capital need, the company avails primarily working capital facilities from banks, as well as commercial paper. Besides, REDIL also undertakes non-recourse factoring of receivables, especially in the overseas markets viz. Turkey and Middle East. REDIL continues to focus on managing its working capital prudently, as reflected in net working capital days improving to 34 days in fiscal 2024 from 36 days in fiscal 2023, despite overall increase in scale of operations.

 

However, debt metrics such as interest coverage ratio declined to 3.1 times in fiscal 2024 from 4.96 times in fiscal 2023 primarily on lower operating profitability and an increase in interest costs on factoring of receivables due to steep rise in interest rates in Turkey in fiscal 2024, as result of the hyperinflationary environment in that country. Moderate improvement in interest cover is likely in the near to medium term, with initiatives to lower debt levels at operating entities in Turkey. Also, despite the working capital-intensive operations, the ratio of total outside liabilities to tangible net worth (TOL/TNW) improved to 2.22  times as on March 31, 2024, from 2.32 times a year earlier with steady improvement in net worth. The TOL/TNW ratio is expected at 1.9-2.1 times over the medium term.

 

Return on capital employed (RoCE) remained healthy at 23.8% in fiscal 2024 because of efficient use of capital, and is expected to stay over 20% over the medium term.

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 similar business operations. REDIL has also provided need-based financial support to some of its subsidiaries. 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 and Ingram Micro Pvt Ltd (another major player in this industry) have garnered the major share of the market in domestic IT distribution. REDIL emerged as the leading player in the domestic IT distribution market by displacing Ingram micro on account of steady increase in wallet share from existing clients, addition of brands and various strategic initiatives.

 

REDIL is also the market leader in the Middle East and Africa (MEA) markets through its step-down subsidiary, Redington Gulf FZE, while another step-down subsidiary, Arena, is one of the largest players in Turkey. REDIL 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 consolidated its position as a leading distributor for these vendors over time.

 

In the mobility business, too, REDIL remains a significant distributor for smartphones. It has tie-ups with leading brands. 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 channel partners. This has enabled it to grow revenue, 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 services business verticals, as well as geographically with presence in 40 markets. The IT consumer segment handles the distribution of personal computers (PCs), laptops and other consumer lifestyle products, while the IT enterprise segment offers networking, software, server storage and cloud services. In the mobility vertical, REDIL focuses on smartphones. The company has gradually enhanced the proportion of mobility revenue in its overall revenue, supported by addition of new brands   of smartphones in the domestic as well as overseas markets. Hence, the share of mobility revenue increased to 35% in fiscal 2024 from 27% in fiscal 2018. While material ramp up in mobility revenue has been partly affected by change in the go to market (GTM) strategy of a major vendor, REDIL has added new vendors to limit loss in revenues.

 

While the threat of direct to retail models remains, REDIL is better placed to mitigate the situation, due to its diverse product portfolio and presence in diverse geographies. Besides, the direct to retail/ecommerce model is unlikely to reduce offline market substantially, as seen in developing countries. REDIL ventured into the cloud business three years ago and offtake has been healthy, with the business recording on-year growth of 37% in fiscal 2024. While the share of the cloud business remains low, it is expected to grow at a faster rate than overall business leading to an increase in its revenue share. The services business focusses on warehousing and logistics, support, warranty, infrastructure and AMC services.

 

CRISIL Ratings has also notes that an agreement was signed on May 6, 2024, between Arena Bilgisayar Sanayi ve Ticaret AS (Arena), a step-down subsidiary of REDIL listed in Istanbul, Turkey and lyzi Payment and Electronic Money Services Inc, Turkey (lyzic) for the sale of 100% of the equity/ownership interest in the fintech payments business, Paynet Odeme Hizmetler AS (Paynet), which is a wholly owned subsidiary of Arena. Overall consideration for the transaction is $87 million plus adjusted net cash.

 

• Strong risk management practices: Strong risk management practices have enabled REDIL 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 which 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 strong relationship with vendors ensure limited risk arising from product obsolescence. Most of the receivables are credit insured to mitigate default risk. The robust risk management practices have led to average receivables and inventory provision of less than 0.1% of revenue.

 

REDIL also has a robust management information system, which helps keep track of the credit history of its channel partners. This will be enhanced with implementation of SAP across all its business locations. Furthermore, the company 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, backed by its strong cash generating ability and prudent working capital management. Sizeable net worth of Rs 7,453 crore as on March 31, 2024, ensures healthy capital structure despite working capital intensive nature of operations. Adjusted gearing improved to 0.38 time as on March 31, 2024, from 0.46 time a year earlier due to slight reduction in working capital debt with marginal improvement in the net working capital days. The gearing is expected to improve gradually with improvement in networth and absence of significant capital spending.

 

Interest coverage ratio declined to 3.1 times in fiscal 2024 from 4.96 times in fiscal 2023, on account of slight dip in operating profitability and increase in interest costs (including factoring costs) due to continuing moderately high interest rates in India and steep rise in interest rates to over 50% in Turkey, where REDIL has subsidiaries in the IT distribution space (companies contribute 10-12% of its revenues). Debt levels at its leading and 49% stake held subsidiary in Turkey, Arena, had risen in 2022 to fund an acquisition.

 

Arena recently announced signing of a share purchased agreement (SPA) with Iyzico, for the divestment of its Paynet business, for a consideration of USD 87 million plus adjusted net cash. Paynet is a fintech initiative specializing in payment facilitating services focused on payment transactions in the B2B sector. It was developed internally by Arena to work with their channel partners in Turkey. The deal is expected to be consummated post receipt of regulatory approvals, and the proceeds would be used to pay down some of the debt at Arena. This and stabilization of interest rates in Turkey, along with steady operating profitability at REDIL is expected to lead to a gradual improvement in interest cover in the near term, and will remain a monitorable.

 

RoCE was healthy at 23.8% in fiscal 2024 because of healthy profitability and should sustain over 20% over the medium term. The TOLTNW ratio improved to 2.22 times as on March 31, 2024, from 2.32 times as on March 31, 2023, with steady increase in networth. The TOLTNW ratio is expected at 1.9-2.1 times over the medium term.

 

Weaknesses:

• Modest, but stable, profitability: The distribution business is marked by low profitability, as reflected in operating profitability of 1.9-2.2% during fiscals 2017-2020. Improvement in the profitability was limited by the increasing share of business from mobility products, which had lower margins, compared with traditional IT products. The operating profitability improved to 2.96% in fiscal 2023 driven by higher share of IT products in the revenue mix and better gross margins, as well as savings in administrative and other costs, including travel. In fiscal 2024, the margin moderated and normalized to 2.6% due to change in product mix and increase in investments to develop digital capabilities. The operating profitability is expected to stabilize at 2.6-2.7% over the medium term due to initiatives to increase the share of IT enterprise segment and other value-added services such as cloud, networking and logistics.

 

• 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 the domestic IT business, REDIL, based on mutual understanding with its vendors, agrees the credit period considering the high lead time involved in such enterprise transactions. This leads to higher working capital requirement in line with ramp-up in operations. However, the impact is partially alleviated as its vendors allow credit to the company on a case-to-case basis. Also, with the share of the low-margin and low working capital intensive mobility business increasing over time, net working capital days have gradually lowered. Over fiscals 2021 and 2022, the net working capital remained at 14 days mainly due to demand chasing supply. The net working capital increased to 36 days in fiscal 2023 with normalisation of working capital cycle, and improved marginally to 34 days in fiscal 2024. This is better than net working capital of the more than 45 days in the past.

Liquidity: Strong

REDIL enjoys strong liquidity, with cash surplus of about Rs 1,621 crore as on March 31, 2024, However it may be noted that, majority of cash is scattered across the subsidiaries with cash largely available at subsidiaries in Singapore, Middle East, Africa and Arena (Turkey). This will be utilized for the subsidiaries’ own operations as there is no support between the entities in form of ICDs/or any other support and the treasury operations are managed by respective overseas subsidiaries. Hence the cash available in the subsidiaries is not normally utilised by Redington India.

 

REDIL has additional cushion in the form of Bank limits of ~Rs.3000 crores which has been utilised at 69% on an average (including utilisation of commercial paper, which has been carved of its bank limits) over the past 12 months ended June 2024. Cash accrual is estimated over Rs.900 crore (post adjustments for dividend outflow) in fiscal 2025 and is expected to remain healthy and sufficient to meet nominal term loan obligations, capex and incremental working capital requirement.

 

ESG Profile of Redington Limited

CRISIL Ratings believes the Environment, Social, and Governance (ESG) profile of REDIL supports its already strong credit risk profile. The IT distribution sector has low impact on the environment owing to its low emission and comparatively low waste generation due to the low energy intensive nature of operations. The sector also has a low social impact.

 

REDIL is developing a detailed ESG framework which will mitigate environmental and social risks.

 

Key ESG highlights:

• The company has a continuous focus on conservation of energy and has taken adequate measures to optimise usage of power and for virtualisation of data centre.

• The company aims to achieve zero E-waste to landfill  and become single-use-plastic-free across all facilities in future.
• The share of female employees in its total workforce stood at 18% and attrition rate of permanent employees was 21% in fiscal 2024.

• The company’s governance structure is characterised by 43% of independent directors on its board, 29% women directors, split in chairperson and chief executive officer positions, 100% investor complaints redressal rate.

 

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 the high share of market borrowing in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes that REDIL’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 improving 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:

• Sustained healthy revenue growth, and operating margins at above 3-3.2% leading to much stronger cash generation
• Continued prudent working capital management or debt reduction through monetization of non-core investments/businesses benefitting key debt metrics, for instance TOL/TNW ratio improving below 1.30 times

 

Downward factors:

• Weak business performance impacting revenue growth, operating profitability (below 2.25-2.5%) on a sustained basis, and cash generation.
• Stretch in working capital cycle, or significant debt-funded acquisitions or capex, leading to deterioration in key debt metrics; for instance TOL/TNW exceeding 2.5-2.7 times

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 has a diversified holding structure with the largest shareholder, Synnex Technology International Corp, holding 24.1% through its investment arm Synnex Mauritius Ltd, Taiwan. During September 2019, REDIL was classified as a listed entity with no promoters.

 

As of March 2024, REDIL operates in 40 markets across India and META region with an employee base of 5,000 employees. It distributes 400+ brands through a network of 50,000+ channel partners. While distribution of IT and mobility products accounts for a bulk of its revenue, REDIL is enhancing its presence in the cloud solutions space and logistics business in India and the Gulf region.

Key Financial Indicators

As on/for the period ended March 31	Unit	2024	2023
Revenue	Rs crore	89346	79377
Profit After Tax (PAT	Rs crore	1239	1439
PAT Margin	%	1.4	1.8
Adjusted debt/adjusted networth	Times	0.38	0.46
Interest coverage	Times	3.1	4.96

 

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	541	NA	CRISIL AA+/Stable
NA	Short Term Loan*	NA	NA	NA	2040.5	NA	CRISIL A1+
NA	Commercial Paper	NA	NA	7-365 days	1900.0	Simple	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	418.5	NA	CRISIL AA+/Stable

*Facilities are interchangeable between fund and non fund based limits

Annexure – List of entities consolidated - Fully consolidated entities (as of March 31, 2024)

Direct subsidiaries

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
ProConnect Supply Chain Solutions Ltd	Full	Operational similarities
Redington International Mauritius Ltd	Full	Operational similarities
Redington Distribution Pte Ltd	Full	Operational similarities
Redserv Global Solutions Ltd (refer to note 50)	Full	Operational similarities

 

Step-down subsidiaries

S.No.	Name of the company	Extent of consolidation	Rationale for consolidation
1	Redington Gulf FZE(refer note (vii)	Full	Operational similarities
2	Redington Egypt Ltd (limited liability company)	Full	Operational similarities
3	Redington Gulf & Co LLC	Full	Operational similarities
4	Redington Kenya Ltd	Full	Operational similarities
5	Cadensworth FZE	Full	Operational similarities
6	Redington Middle East LLC	Full	Operational similarities
7	Ensure Services Arabia LLC	Full	Operational similarities
8	Redington Qatar WLL (refer note (i) and (iii) below)	Full	Operational similarities
9	Redington Qatar Distribution WLL (refer note (i) below)	Full	Operational similarities
10	Redington Ltd	Full	Operational similarities
11	(Ghana)	Full	Operational similarities
	Redington Kenya (EPZ) Ltd (refer note (iii) below)
12	Redington Uganda Ltd (Uganda)	Full	Operational similarities
13	Cadensworth United Arab Emirates LLC	Full	Operational similarities
14	Redington Tanzania Ltd	Full	Operational similarities
15	Redington South Africa (Pty) Ltd (formerly known as Ensure IT services (Pty) Ltd)	Full	Operational similarities
17	Redington Turkey Holdings S.A.R.L.(RTHS)	Full	Operational similarities
19	Arena Bilgisayar Sanayi Ve Ticaret A.S. (refer note (ii) below)	Full	Operational similarities
20	Arena International FZE (refer note (ii) below)	Full	Operational similarities
21	Redington Bangladesh Ltd	Full	Operational similarities
22	Redington SL Pvt Ltd	Full	Operational similarities
23	Redington Rwanda Ltd	Full	Operational similarities
24	Redington Kazakhstan LLP	Full	Operational similarities
25	Ensure Gulf FZE	Full	Operational similarities
26	Redington South Africa Distribution (PTY) Ltd (formerly Ensure Technical Services (PTY) Ltd)	Full	Operational similarities
27	Ensure Middle East Trading LLC (refer to note (i) and (iii) below)	Full	Operational similarities
28	Ensure Services Uganda Limited (refer to note (iv) below)	Full	Operational similarities
29	Ensure Technical Services Tanzania Ltd (refer to note (iv) below)	Full	Operational similarities
30	Ensure Ghana Limited (refer note (iv) below)	Full	Operational similarities
31	Proconnect Supply Chain Logistics LLC	Full	Operational similarities
32	Ensure Technical Services Morocco Ltd (Sarl) (refer to note (iv) below)	Full	Operational similarities
33	Redington Senegal Limited S.A.R.L.	Full	Operational similarities
34	Redington Saudi Arabia Distribution Company	Full	Operational similarities
35	Paynet Ödeme Hizmetleri A.S. (refer to note (ii) below)	Full	Operational similarities
36	CDW International Trading FZCO	Full	Operational similarities
37	RNDC Alliance West Africa Ltd	Full	Operational similarities
38	Redington Turkey Teknoloji A.Ş. (formerly known as Linkplus Bilgisayar Sistemleri Sanayi ve Ticaret A.S.)	Full	Operational similarities
39	Ensure Middle East Technology Solutions LLC (refer to note (i) & (iii) below)	Full	Operational similarities
40	Proconnect Saudi LLC	Full	Operational similarities
41	Redserv Business Solutions Pvt Ltd	Full	Operational similarities
42	Redington Distribution Company LLC	Full	Operational similarities
43	Arena Mobile Iletisim Hizmetteri ve Turketici Elektronigi Sanayi ve Ticaret A.S. (refer to note ((ii) below)	Full	Operational similarities
45	Online Elektronik Ticaret Hizmetleri A.S. (refer to note (ii) below)	Full	Operational similarities
46	Paynet (Kibris) Odeme Hizmetleri Limited (refer to note (ii) below)	Full	Operational similarities
47	Redington Cote d’Ivoire SARL (refer to note (iv) below)	Full	Operational similarities
48	Africa Joint Technical	Full	Operational similarities
49	Services	Full	Operational similarities
	Redington Angola Ltd
50	Redington Saudi for Trading Co	Full	Operational similarities
51	Redington Bahrain W.L.L.(refer note (i) below)	Full	Operational similarities
52	Redington Gulf FZE Jordan	Full	Operational similarities
53	Arena Connect Teknoloji Sanayi ve Ticaret Anonim Serketi (formerly Brightstar Telekomünikasyon Dağıtım Ltd. Şti.) (refer to note (ii) below)	Full	Operational similarities
54	Arena Connect İletişim ve Servis Limited Şirketi (formerly MPX İletişim ve Servis Limited Şirketi) (refer to note (ii) below)	Full	Operational similarities
55	Proconnect Holding Limited ( refer to note (v &vi))	Full	Operational similarities
56	Redington Gulf Arabia for Information Technology (refer to note v & vi)	Full	Operational similarities

 

Note

1. Although the holding is less than 50% of equity shares, the group has the power over these companies, is exposed to or has rights to variable returns from its involvement in these companies and has the ability to exercise its power over these companies to affect its returns and therefore exercises effective control. Consequently, these entities are considered as step-down subsidiaries of REDIL and are consolidated.
2. Redington Turkey Holdings S.A.R.L (RTHS), Luxembourg, has the power over these companies, is exposed to or has rights to variable returns from its involvement with these companies and has the ability to exercise its power over these companies to affect its returns (through control over the composition of the Board of Directors of Arena). Consequently, Arena and its subsidiaries are included in the consolidated financial statements. A definitive agreement has been executed on May 6, 2024, between a step-down subsidiary of Arena, which is listed in Istanbul, and lyzic for the sale of 100% of the equity/ownership interest in its fintech payments business, Paynet Odeme Hizmetler A.S (Paynet), which is a wholly owned subsidiary of Arena.
3. Liquidation in process as at March 31, 2023.
4. Liquidated during the year.
5. Incorporated during the year.
6. Yet to commence operations.
7. A sale and purchase agreement (SPA) was executed on February 29, 2024, between Redington Gulf FZE, a wholly owned subsidiary of REDIL, (Seller), and Business Integrated Operating Systems FZ-LLC, Dubai, for the sale of 100% of the equity ownership of Citrus Consulting Services FZ-LLC UAE, (Target), a wholly owned subsidiary of the Seller and step-down subsidiary of the Company. The transaction was completed on July 16, 2024.