Redington Ltd Q1 FY2024 Concall Summary

Key Takeaways

• A tale of two geographies: Record Q1 revenue and gross profit masked a sharp divergence: SISA delivered PAT growth while Rest of World PAT fell 41%, driven by financial disruption in emerging markets.
• PAT hit by external financial shocks, not operations: PAT declined 21% YoY, but excluding elevated interest and factoring costs, it would have grown 9%. The pain is concentrated in Turkey, Egypt, Nigeria and other stressed currency markets.
• Mix shift toward enterprise is a structural tailwind: Consumer products (PCs, smartphones) degrew, but data centre infrastructure and cloud surged ~40%, lifting the higher-value TSG segment and reshaping the revenue profile.
• Management is investing through the cycle: Gross margin dipped 12 bps partly from deliberate technology investments in digital and cloud platforms, which management argues will pay back in 4–6 quarters.
• What to watch next quarter: Whether Turkey’s factoring cost eases as policy normalizes, the pace of working capital improvement, and any sign that the PC/smartphone tide is turning.

The Two-Geography Divergence

• SISA held the line: SISA delivered growth across revenue, gross profit, EBITDA, EBIT and PAT, with PAT up 2%. The region demonstrated resilience despite the constrained demand environment.
• Rest of World absorbed the shocks: Revenue grew 29% but EBITDA degrew 17%, EBIT degrew 19%, and PAT fell 41%. Currency devaluation in Egypt, Nigeria, Kenya, Ghana, Turkey, Sri Lanka and Bangladesh was the primary drag.
• Turkey is the epicentre of financial stress: Factoring costs rose from INR 49 crores in Q4 to INR 60 crores in Q1, with local interest rates at 25–30%. Despite this, Turkey generated ~INR 12 crores PAT on ~INR 2,200 crores revenue.
• Post-election policy shift offers a path out: Turkey’s new finance ministry raised interest rates 6.5% in a single day and freed the forex rate. Management expects factoring pressure to persist for one more quarter, then improve, though not to normal.

S V Krishnan: "We think for one more quarter, this will continue... So we think some sense is coming in, into the market. They were holding on to forex rate that's now -- it's now let free. So maybe about a quarter more, we may have to go to through. After that, I don't think it will come back to normal. It will definitely be better than this."

PAT Bridge: The Real Story Beneath the 21% Decline

• The headline masks operational health: PAT fell 21% YoY, but stripping out increased interest and factoring costs, PAT would have grown 9%. The damage is financial, not operational.
• Gross margin erosion had two components: The 12 bps drop (5.99% to 5.87%) translated to ~INR 48 crores. Of that, ~INR 25 crores was genuine margin dilution from a one-off telco-heavy business mix, and ~INR 22 crores was deliberate technology investment spend.
• Other expenses inflated by multiple stress points: Factoring charges, forex losses, and bank charges were elevated across Turkey, Egypt, Sri Lanka, Bangladesh, Nigeria and East African markets. Where forward contracts are possible, Redington uses plain vanilla forwards or natural hedging; the challenge arises when dollars cannot be repatriated at revised rates.
• Working capital expanded on the payables side, not receivables: The 12-day YoY increase in working capital days (28 to 40) came primarily from lower accounts payable days as vendors rolled back COVID-era credit terms, not from AR or inventory deterioration. Vendors where Redington gets less credit performed better, compounding the mix effect.

Demand Environment & Mix Shift

• Consumer products hit cyclical trough: PC industry declined 13.4% globally, smartphones declined ~15%, both at 2014 levels. Work-from-home and learn-from-home demand subsided, dragging the ESG (endpoint) segment.
• Enterprise and cloud are the growth engine: Data centre infrastructure (servers, storage, networking, software, security) and cloud products saw robust demand, driven by back-to-office procurement and cloud migration. Enterprise products grew ~40%, cloud grew 44% in Q1. TSG segment growth was ~40%; ESG growth was 11%.
• Networking product delays persist but are easing: Delivery delays for certain networking products continued to impact project business, though the overall shortage situation has improved considerably.
• Competitive consolidation is handing Redington share: As market conditions toughened over the last 1–1.5 years, some competitors in India, Middle East, Africa and Turkey are trying to sell out or cannot function. Redington is gaining share without compromising profit or working capital.

Rajiv Srivastava: "Our gaining of -- our desire is not to do business and gain share by compromising our profit or compromising our working capital, anything of that nature."

Technology Investments & Digital Pivot

• Digital platform is scaling fast: More than 20% of India business has shifted to the digital model in less than one year, a shift management calls profound for a B2B distributor. The platform is already working with more functionalities to come.
• Cloud platform is live with hyperscalers: The cloud platform is operational with Amazon, Google and Microsoft, enabling the shift toward everything-as-a-service (opex/subscription model).
• Generative AI is a declared strategic pivot: Management stated it is "only fair for us to have a very strong pivot on generative AI," responding to disruption from 5G, IoT, Edge computing and GenAI.
• Managed services buildout underway: Redington is building competencies for managed services for private and public cloud security and audits, targeting services at 10% of overall cloud revenue within 3–4 years, at a 30%+ gross margin profile.
• Sales organization restructured for the new model: Redington moved from brand-focused, product-centric sales to a horizontal sales force where one salesperson covers the full portfolio (PC, printer, server, storage, network, security, cybersecurity, cloud), aligned to customer requirements rather than product push.
• Investment payback expected in 4–6 quarters: Management stated that in the course of the next four to six quarters, each of these investments will pay back significantly, though the full services transition will take 3–4 years.

Rajiv Srivastava: "More than 20% of our business in India has shifted to the digital model now already, which is a very, very significant shift. No company does that. A B2B shifting of 20% in less in one year, it's a very, very profound shift."

Margins & Cost Structure

• Gross margin dilution was partly structural, partly transient: The INR 48 crores GM impact split into INR 25 crores of genuine dilution (0.12%) from a one-off telco-heavy mix that will not repeat, and INR 22 crores of technology investment that management chose to sustain.
• Employee costs are rising with reskilling: Costs are increasing because of reskilling, redesigning, and hiring for the new horizontal sales and services model, not from headcount bloat.
• Inventory protection is strong but not absolute: For vendor-initiated price drops, Redington is completely protected. For high-obsolescence products, stock rotation is possible. If Redington makes a stocking mistake, it can negotiate with the vendor for support, but protection is not 100%. Inventory provision ran at 9 bps of revenue, slightly above the 6 bps long-term average.
• Cost normalization will take quarters, not one quarter: Management confirmed inflated costs (factoring, forex, bank charges) will normalize over subsequent quarters but declined to pin it to Q2 specifically, saying "quarters."

Rajiv Srivastava: "Trading off at 0.12% of GM just because -- was a very, very responsible thing because we wanted to make sure that we can maintain our business momentum in a difficult environment and demonstrate the lead that we have."

Guidance & Commitments

Key Metrics