| 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 debt programmes and bank facilities 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 along with Ingram Micro Pvt Ltd (another major player in this industry) garnering the major share of the market in domestic IT distribution. 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 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 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. 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 as well as overseas market; the share of overall mobility revenue has increased to 32% in fiscal 2020 (compared to 28% in fiscal 2019), which compensated for the relatively slower performance of the IT business, especially in the domestic 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 ~63% in fiscal 2020 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 2020 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. Most of the receivables (about 75% in domestic business and about 95% in Middle East region) are credit insured to mitigate default risk. 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 increased to 0.58 times during fiscal 2020, mainly due to debt drawn down to maintain higher liquid surplus to meet Covid related exigencies; however expected to revert to healthy 0.4-0.5 times over the medium term. Over the previous three years, gearing has remained below 0.5 times 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 remain healthy at 3.65 times and 0.13 times respectively as on March 31, 2020. Weaknesses: * Low but stable profitability margins: The distribution business is marked by low profitability margin, leading to REDIL's operating profitability ranging between 1.9-2.2% in the past four years; improvement has been limited also by the increasing share of business from mobility products, which have lower margins, compared with traditional IT products. * Working-capital-intensive distribution business: 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. . Given the limited number of established competitors in its domestic IT business, REDIL, based on mutual understanding with its vendors, extends the credit period considering the increase in lead time involved in such enterprise transactions. 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. Also, with the share of low margin-low working capital intensive mobility business increasing over time, net working capital days have been gradually lowered. This is clearly evidenced in declining net working capital levels in the last two years. |
| Liquidity Strong |
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REDIL enjoys strong liquidity, with cash surpluses of about Rs.2,377 crore as on March 31, 2020 and large unutilized bank lines. Cash surpluses were shored up by raising short term debt in March 2020, given the uncertainties associated with the pandemic, but will normalise as business conditions normalise, also resulting in lowering of short term debt. |
| Outlook: Stable |
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CRISIL believes that REDIL's business risk profile will continue to benefit from its leadership position in the mobility and IT products distribution business, product and geographical diversity in revenues, and healthy cash generating ability. Further, prudent working capital management and risk management practices, are expected to keep its financial risk profile at healthy levels. |
| Rating Sensitivity factors |
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Upward factors: * Sustained double digit revenue growth, and improvement in operating margins to ~2.2-2.4%, leading to better than anticipated cash generation * Continued prudent working capital management, leading to sustenance of comfortable gearing levels (below 0.5 times), and TOL/TNW ratio to 1.6-1.8 times. Downward factors: * Sluggish business performance, also resulting in drop in operating profitability below 1.5% * Stretch in working capital cycle, or significant debt-funded acquisitions or capex, preventing the expected improvement in key credit metrics; for instance, gearing of over 1 time and TOL/TNW exceeding 2.5-2.7 times on sustained basis * Considerable weakening of liquid surpluses, due to material dividend pay-out, acquisitions or share buy-back. |
| 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. |
| 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 and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated- Fully Consolidated Entities (as of March 31, 2020) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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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