| Redington India Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its ratings on the bank facilities and commercial paper of Redington India Limited (REDIL) at 'CRISIL AA/Stable/CRISIL A1+'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of REDIL and REDIL's subsidiaries, due to operational similarities. All these companies have been together referred to herein as REDIL. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Strong market position in IT and mobility distribution business: REDIL 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. During fiscal 2019, a couple of distributors for Apple products have exited the market, which further strengthened the market position in the mobility business. REDIL is the market leader in the Middle East and Africa (MEA) markets through its step down subsidiary, Redington Gulf FZE and its step-down subsidiary, Arena Bilgisayar Sanayive Ticaret Anonim Sirketi (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, REDIL remains a leading distributor for 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: REDIL's revenue stream is highly diversified in terms of the IT, mobility and service business verticals, as well as geographically. The IT consumer segment handles the distribution of PCs, laptops and other consumer lifestyle products, while the IT enterprise segment caters to networking, software, servers and storage. In the mobility vertical, REDIL primarily focuses on smartphones. In fiscal 2019, overseas revenues increased by 11% over fiscal 2018, overcoming the challenges from geo political tensions in Middle east and currency volatility in Turkey. 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 through new distribution contracts for key brands in major overseas market; current share of overall mobility revenue stands at about 28% in fiscal 2019, which compensated for the relatively slower performance of the IT business, especially in the overseas market. Muted IT spending in the domestic market, along with faster growth in overseas markets through increased market and product penetration resulted in share of REDIL's overseas revenues increasing to ~65% in fiscal 2019 from ~59% in fiscal 2015. Also, within the overseas markets, presence across diverse markets and entry into new geographies has helped sustain the revenue growth trajectory. Service business (~3% of fiscal 2019 revenues) focusses on warehousing, logistics and after sales service business, (including cloud services, digital printing and 3D printing). * Strong risk management practices: REDIL has followed strong risk management practices that have enabled it 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 with regard to distribution of products of more than 200 vendors overall. This reduces the revenue concentration risk from a single vendor. REDIL follows healthy foreign exchange risk mitigation practices such as 100-per-cent hedging on exchange rates, which helps minimise foreign currency fluctuation risks. The quick conversion cycle and its strong relationship with its vendors also ensures limited risk arising from product obsolescence. REDIL also has a robust management information system, which helps keep track of the credit history of its channel partners. This will be further enhanced with implementation of SAP across all its business locations. 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: REDIL's financial risk profile remains healthy marked by healthy cash accrual, nil long term debt outstanding and prudent working capital management. Adjusted gearing has remained below 0.8 times over the past five years driven by moderate capital spending, along with steady business performance. Other credit metrics like interest coverage and ratio of net cash accrual to total debt are also remains healthy at 3.70 times and 0.32times respectively as on March 31, 2019. 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, REDIL'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, REDIL, 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 REDIL is partially alleviated as its vendors allow extended credit period to the company on a case to case basis. Liquidity: Strong REDIL enjoys strong liquidity, with cash surpluses of about Rs.877 crore as on March 31, 2019 and cash accruals of Rs.427 crore during fiscal 2019. REDIL's cash accruals are expected to improve to Rs 450-600 crore over the medium term driven by steady revenue growth and improving profitability. REDIL does not have any term debt obligations as of fiscal 2019 and is expected to incur maintenance capex of Rs.50 ' Rs 75 crore in the medium term. During fiscal 2019, REDIL also completed the share buyback for Rs 139 crore (2.78% of the total paid up equity share capital). REDIL has sufficient drawing power in its bank lines of Rs 2441 crore, to fund its working capital requirements, which have been moderately utilized at an average of 57% over the twelve months period ending August 2019. |
| Outlook: Stable |
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CRISIL believes that REDIL'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. |
| About the Company |
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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 currently has a diversified holding structure with the largest shareholder, Synnex Technology International Corp through its investment arm Synnex Mauritius Ltd., Taiwan, holding 24.3%. REDIL has been professionally run, for over two decades. During Sept 2019, REDIL has been classified as a listed entity with no promoters, post reclassification of status of M/s Harrow Investment Holding Limited as a public shareholder. |
| Key Financial Indicators | ||||||||||||||||||||||||
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated - Fully Consolidated Entities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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