Redington Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Record Q1, broad-based growth: Revenue and operating margin hit all-time Q1 highs, driven by supply chain orchestration demand and growth across all regions and product categories.
• Mix shift is lifting margins: Value products grew 30%, cloud grew 48%, and solar surged ~190%, all carrying structurally higher margins than the volume core.
• Working capital rose but within guardrails: Net working capital hit 28 days, the low end of the guided 28–35 day range, as part-shipments in the enterprise space built inventory that management expects to normalize in one or two quarters.
• Management is investing for the next cycle while sweating the present: Opex growth ran below revenue and gross margin growth, funding capability build-out in cloud, shared services, and new geographies without sacrificing near-term profit delivery.
• What to watch next quarter: Whether the part-shipment inventory clears as expected, the pace of cloud services mix shift toward higher-margin migration and SaaS work, and any demand signal change as global GDP forecasts soften.

Demand Environment

• Core engine intact: Continuing, growing demand for supply chain orchestration drove the quarter, with technology adoption accelerating across enterprises, MSMEs, mid-market, government, and education. Consumer demand softened, but that is a smaller exposure.
• Technology cycle decoupled from GDP: Management believes the enterprise, mid-market, and SMB technology buying cycle is "here to stay for a bit," arguing that digital growth has decoupled from GDP growth because technology is now inseparable from business survival and expansion.
• Geographic tailwind: Every country in Redington's operating footprint received positive GDP growth guidance for the rest of the year from the IMF, even as the global forecast was cut from 4.1% to 2.9%.
• Near-term visibility, long-term prudence: Management has a good hold on where Q2 is headed and says it is trending alright, but explicitly declined to provide long-run guidance given disrupted global supply chains and financial markets.

Rajiv Srivastava: "business and technology have almost become inseparable... digital growth has been de linked from GDP growth and companies are using technology to either stabilize their operations or grow faster... it has become pretty much absolutely the most crucial thing for businesses to survive."

Margin Structure & Efficiency

• Mix shift at work: Margin improvement is being driven by a shift from volume products (14% growth) to value products (30% growth), the steady scaling of cloud, ProConnect and logistics, and the solar business which inherently carries higher gross margins.
• Cost discipline holding: Despite additional costs for capability building, opex growth was lower than both revenue and gross margin growth, producing better operating profit. Management describes a "maniacal focus" on optimizing every part of the business.
• Cloud margin ladder: Product re-sale margins sit at 5–9%, entry-level provisioning services at 10–15%, and complex migration and SaaS services at 25–40%. The current mix is heavier on entry-level services, but capability building is underway to climb the ladder.
• No long-term margin guidance: Management declined to project sustainable consolidated EBITDA margins, citing the evolving global environment, and will take it quarter-by-quarter.

Rajiv Srivastava: "services stretches from a very rudimentary fundamental entry level infrastructure services of provisioning which will give you a margin of 10 to 15% but if you scale up the services to the level of migration and platform in software as a service, then you start to get in the game of 25-28-30-35-40%."

Working Capital & Balance Sheet

• 28 days, within range: Net working capital landed at the low end of the guided 28–35 day range. The increase from prior levels was attributed to global market disruptions, part-shipments in the enterprise space causing inventory build-up of unbilled stocked goods, and the nature of IT value/enterprise performance tending to increase debtor days.
• Part-shipment normalization expected: The main driver of the working capital spike was part-shipments received in the IT value space. Management expects this to normalize in about one or two quarters once the shortage situation resolves.
• Inventory provision is precautionary, not a loss: Inventory provision rose to 0.55% because part shipments received required provisioning under the existing model. Management believes these will not be taken as a hit and the provision will reverse once the product is sold; they chose not to change the provisioning model despite having the option.
• Payables strategy is deliberate: Trade payables have increased over five years through conscious negotiation of extended credit days with vendors and use of outside financial institutions. The objective is to cover AR days with creditor days, which has been achieved in recent quarters.
• Structural improvement vs pre-COVID: The current 28-day cycle compares to 40–45 days pre-COVID, a roughly 40% improvement.

S V Krishnan: "we had an option of changing the inventory provision model because we do not think these will be taken as a hit but we thought it could be prudent not to make a change and we had gone ahead"

Cloud Business

• 48% growth, services faster: Cloud business grew 48% YoY across all geographies, with managed services on cloud growing 62%.
• Revenue ambition: Management believes cloud can reach roughly ₹5,000 Cr in the FY25 timeframe, "or a year up and down," if executed well.
• Alliance-level game: The company is pivoting to a strong cloud portfolio aligned with hyperscalers (Microsoft, Google, Amazon) and platform companies (ServiceNow, Adobe, Salesforce, Oracle, IBM/Red Hat, SAP). Management argues the game must now be played at the alliance level, not just product or partner level.
• AWS strategic agreement: Redington struck a Strategic Collaboration Agreement with Amazon Internet Services Private Limited covering all regions it operates in: India, Middle East, and Africa.
• Capital-light returns: Cloud business, both re-sell and services, requires no working capital, making ROCE quite attractive.

Rajiv Srivastava: "If you play it well there is every reason that we can get to those kinds of numbers in the timeframe you are talking about or a year up and down."

New Growth Engines

• Solar business surging: Solar grew roughly 190% in Q1, driven by the global and Indian push toward sustainable energy and India's commitment to 50% green energy by 2030. Redington differentiates as the only organized distribution partner also doing consultancy and advisory services for solar plant setup.
• Geographic expansion underway: Redington is setting up a subsidiary in Jordan, expanding operations in Bangladesh across products, solutions, services, and logistics, and looking at a few more countries. Management also flagged huge potential in more mature Southeast Asian economies like Singapore, Malaysia, Thailand, Philippines, Vietnam, and Myanmar.
• Shared services center live: A new shared services center consolidating country-wide operations was set up last quarter, enabling more optimized operations.
• Portfolio hedge in the making: The three-dimensional strategy runs the core business (~97–98% of revenue) for efficiency, expands into new geographies and product categories, and forays into new categories (cloud, logistics, services, supply chain). These new businesses are small now but as they scale will provide a hedge against core downside and lift overall margins.

Rajiv Srivastava: "the geographies, we play in are literally the sunshine capital of the world. There is huge amount of potential possibility which exists there in the solar business."

Regional & Segment Notes

• Broad-based growth: All regions (India, Middle East, Africa, Turkey, South Asia) and all product categories (IT volume, IT value, mobility, services portfolio) contributed to growth.
• SSA restructuring: South and South Asia has been de-growing mainly because the vendor model moved from offshore to onshore for the India portion, which was a significant part of SSA. This prompted a restructuring to manage SISA as one integrated unit centrally out of India. Sri Lanka is significantly impacted but the business there is not large; the company is playing safe with covered risks.
• Turkey resilient: Turkey continues to be a technologically enabled country with businesses and governments using technology efficiently, contributing to growth.
• Mobility broad-based: Mobility grew in both the home market and rest-of-world markets.

Guidance & Commitments

Key Metrics