Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long-term bank facility of Savex Technologies Pvt. Ltd (STPL; part of the Savex group) at 'CRISIL AA-/Stable’ and reaffirmed its ‘CRISIL A1+’ rating on the commercial paper.

 

CRISIL Ratings understands that Savex group has entered into definitive agreement to make strategic investment in Inflow Technologies Private Limited (Inflow) by acquiring controlling stake. The said deal is pending approval from Competition Commission of India (CCI). CRISIL Ratings also understands that the combined entity will aid business risk profile of Savex group because of the synergies. It will aid diversification of product portfolio and enhance geographical reach in South Asia as well as support Savex group’s market position by strengthening enterprise, servers and networking (ESN) portfolio enabling Savex group to be a full-service IT distributor. On the other hand, Inflow will benefit from size and domestic reach of Savex group. CRISIL Ratings believes the group’s financial risk policy will remain supported with balance sheet remain lean despite the acquisition. CRISIL Ratings shall continue to monitor the developments and implications on Savex group.

 

The rating continue to reflect the ability of the company to cement its market position as a leading distributor in the growing Information and communication technology (ICT) industry, reflected in revenue growth in the range of 25%-30% in fiscal 2021 aided by the strong performance of key principals HP and Lenovo (in laptops) and Samsung (in mobile phones). The company has managed growth over the past few years through prudent risk management practices which has kept financial risk profile healthy. The Savex group will likely sustain its revenue and profitability because of its focus on adding principals in new product categories and expanding geographical footprint, plans to provide value-added services and bundled offerings to customers and grow the high-margin ESN business. Expected healthy demand for ICT products will also benefit the group.

 

The ratings continue to reflect the established position of the Savex group in the ICT products distribution business, its diverse customer base, longstanding relationships with reputed principals, wide distribution network across India, experienced management team, and prudent risk management policies. The ratings also factor in its strong financial risk profile driven by comfortable gearing and healthy debt protection metrics. These strengths are partially offset by high dependence on the performance of its key principals and working capital-intensive operations.

 

CRISIL Ratings had upgraded its rating on the long-term bank facility of  STPL to 'CRISIL AA-/Stable’ from ‘CRISIL A+/Positive’ on dated March 31, 2021.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of STPL and its subsidiary, Savex Singapore Pte Ltd (SSPL) as the two companies, together referred to as the Savex group, have significant operational and financial linkages.

 

Unsecured loan of Rs 24.65 crore as on March 31, 2020, from the promoters has been treated as neither debt nor equity, as the loan is expected to remain in the business over the medium term.

 

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 position in the ICT products distribution business and wide distribution network

The group has a strong position in both the retail and enterprise segments in the technology products distribution business. It competes with Redington India Ltd and Ingram Micro Pvt Ltd, which are major players in the ICT product distribution landscape in India. The Savex group has been associated for more than a decade with its principals, which include leading players such as Samsung in the telecom mobility segment, and HP and Lenovo in information technology (IT) products such as notebooks, desktops and printers. The group has consolidated its position as a leading distributor for these vendors and has exclusive arrangements with some of them in a few states. It has benefitted from the strong performance of its key principals. Citrix, D-link, Logitech, Ubiquiti, Microsoft, Avaya, Aruba are some of the other principals. Additionally Savex group shall benefit from Inflow’s principals which are in cyber security, unified communications and collaboration, Networking, Automatic Identification and Data capture & POS, infrastructure and application software, storage management, electronic security products & related services where it is not majorly present. CRISIL shall continue to monitor the revenue growth.

 

Experienced management and strong risk management practices

The promoter, Mr Anil Jagasia, has experience of more than three decades in the business. The management team has experience of more than two decades in the technology and telecom products distribution business, which has helped develop strong relationships with distribution partners. Mr Raunak Jagasia, the second generation of the promoter family in the business, is actively involved in the daily operations.

 

Prudent risk management practices have helped mitigate the risks inherent in the distribution business, such as vendor concentration, product obsolescence, price fluctuation and counterparty credit risks. The group has steadily added vendors and has more than 15 vendors, but still derives more than 80% of revenue from Samsung, HP and Lenovo, and hence is susceptible to the performance of the key principals in India. The principals compensate for any price fluctuation and product obsolescence. The top 10 customers contribute less than 10% to the operating income. Diversified customer base, policy of limiting credit exposure to a single customer, and limited credit offered to clients safeguard against counterparty credit risks. Any large exposure to customers with weak credit history is adequately insured. A robust management information system helps keep track of the credit history of channel partners and maintain a credit limit for each of them. There have been very few instances of bad debt. Adherence to the risk management policies while growing at a rapid pace will remain a key rating sensitivity factor.

 

Strong financial risk profile

The Savex group’s financial risk profile is strong indicated by healthy gearing which is expected below 1 time as on March 31, 2021 driven by healthy networth. The networth should remain healthy over the medium term because of steady accretion to reserve as the group will likely follow a zero dividend policy. Incremental working capital requirement is expected to be funded partially through cash accrual keeping gearing below 1 time over the medium term. In the absence of any large debt-funded capital expenditure (capex) or acquisition, the total outside liabilities to tangible networth (TOLTNW) ratio is expected at 1.0-1.5 times over the medium term. Interest coverage (4.3 times in fiscal 2020) is expected to remain healthy.

 

Weaknesses

Susceptibility to the performance of principals

Samsung, HP (both laptop and enterprise business) and Lenovo contribute around 80-90% to the sales of the Savex group. Any impact on the performance of these suppliers could adversely impact the business of the group. Similarly, product categories such as mobiles, notebooks and desktops contribute 80-85% to sales. Although the group continues to add principals and product categories, their contribution to revenue is not yet significantly. Any major disruptive change in technology and intense competition among principals may however impact the business risk profile materially.

 

Working capital-intensive operations

The operations are working capital intensive because of sizeable inventory and receivables. Nevertheless, the group has scaled up business while maintaining its working capital cycle because of the higher share of telecom and mobiles sales which thrives on lower credit period and inventory than ESN business. Efficient working capital management is important considering the low profitability of the business. The group will continue to scale up in the enterprise segment (servers, storage, networking) which is working capital intensive as it thrives on large inventory and credit sales. The group is looking to expand into new geography and product categories which may test its working capital management in the medium term. Gross current assets are expected at 65-75 days over the medium term.

Liquidity- Strong

Liquidity is strong due to healthy cash accrual, moderately utilised bank lines, and absence of term debt obligation. Cash accrual is expected to remain healthy in fiscal 2021 and will be sufficient to meet incremental working capital requirement and ensuing debt repayment obligations over the medium term. Bank limit utilisation averaged 72% over the 12 months through December 2020, including one-time limits availed to manage sales during the festival season and peak period. Current ratio was 1.7 times as on March 31, 2020, and is expected above 1.5 times over the medium term. There is no major dividend payout, extraordinary director remuneration, or large capex/acquisition which will materially impact liquidity. Cash and bank balance stood at Rs 19 crore as on March 31, 2020, of which around Rs 16 crore was unencumbered.

Outlook Stable

The Savex group will continue to benefit from its strong market position in the technology products distribution business, strong financial risk profile and experienced management team.

Rating Sensitivity factors

Upward factors

• Better-than-expected revenue growth and operating margin, leading to net cash accrual over Rs 500 crore
• Improvement in the working capital cycle

 

Downward factors

• Significant fall in revenue and operating margin leading to decline in net cash accrual
• Sluggish business performance of any key principal
• Stretch in the working capital cycle, significant debt-funded acquisition or capex, or any change in risk management policies, resulting in total outside liabilities to tangible networth (TOLTNW) ratio above 2 times.

About the Group

STPL, incorporated in 1988 and promoted by Mr Anil Jagasia, is one of the largest ICT product distributors in India. The company is headquartered in Mumbai and has 86 sales offices and 42 warehousing and stocking locations catering to over 650 cities in India.

 

SSPL, a 100% subsidiary of STPL, was established in 2010 to cater to customers who wish to buy products in foreign currency.

Key Financial Indicators (Consolidated)

As on / for the period ended March 31		2020	2019
Operating income	Rs crore	15,359	11,975
Reported profit after tax (PAT)	Rs crore	210	163
PAT margin	%	1.37	1.36
Adjusted debt/adjusted networth	Times	0.98	0.89
Interest coverage	Times	4.18	4.25

 

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	Working capital facility	NA	NA	NA	2440	NA	CRISIL AA-/Stable
NA	Proposed Working Capital Facility	NA	NA	NA	100	NA	CRISIL AA-/Stable
NA	Commercial paper	NA	NA	7-365 days	500	Simple	CRISIL A1+

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Savex Singapore Pte Limited	Full	Subsidiary of Savex Technology Pvt. Ltd.
Savex Technologies Private Limited	Full	Standalone company