Redington Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Record quarter, margin inflection: Revenue and gross margin both hit all-time highs, with gross margin crossing 6% after three quarters below that mark.
• Working capital swung positive, but temporary: Days fell from 40 to 35 QoQ, generating positive free cash flow, though management explicitly warned this is not a steady state and tailwinds from product launches and festive season helped.
• Enterprise demand is carrying the story: Strong enterprise spending across India, UAE and Saudi Arabia is offsetting a muted consumer endpoint market, and management expects the enterprise cycle to continue.
• Turkey and Africa are the margin anchors: Factoring costs in Turkey hit 50-55% and Africa faces currency and liquidity stress from wars and oil prices; both geographies are being managed for capital protection, not growth.
• What to watch next quarter: Whether the working capital improvement holds as festive tailwinds fade, whether the inventory provision reversal tool runs out, and whether Proconnect’s promised turnaround materializes.

Demand Environment

• Enterprise strong, consumer soft: Enterprise demand is picking up very strongly across cloud, mobility and technical solutions, while endpoint demand remains muted partly because global organizations are not buying PCs at the same pace. Consumer is expected to start coming back, but no timeline was given.
• India structural story intact: IT has reached only 20 crore of India’s 140 crore population, implying a large headroom as the right products reach the remaining customers over the next few years.
• Post-COVID cycle still working through: A huge surge in consumer demand during and just after COVID, driven by work-from-home and upgrades, was followed by a consumer slowdown. Management said “we don’t see a slowdown” in enterprise and that “these cycles will continue,” but did not quantify how much of the over-ordering has been worked through.
• Africa and Turkey stress: Wars, exchange rate movements in Nigeria, Egypt and Kenya, plus dollar liquidity issues tied to oil prices, are creating caution. Turkey’s factoring cost is 50-55%, making funding extraordinarily expensive. The company is playing to avoid excessive risk, not making new investments in difficult markets, and will decide what business to leave on the table based on expected profitability and capital protection.

Krishnan: “You will be surprised, the factoring cost today ranges between 50% to 55%, that's the cost of funding that's there in Turkey. In fact, every numbers of Turkey will look very mind boggling for us.”

Margin Walk & Profitability Levers

• Gross margin crossed 6%: Improved from 5.9% to 6.1% QoQ, the highest ever, after three quarters below that threshold.
• Inventory provision reversal helped, but is finite: The reversal contributed 29 bps in the quarter versus a 15-year average of 6 bps and 9 bps in Q1. Management cautioned that not all of it flowed to EBITDA, part went toward selling product at reasonable prices, and that this tool “is available only for some time, cannot continue for long.”
• Factoring cost is the Rest of World drag: H1 factoring cost was ₹147 cr versus a base of ₹47 cr, an extra ₹100 cr that explains the bulk of the EBITDA decline in Rest of World despite higher gross profit. The balance is normal OPEX increases, forex losses and increased AR provisions.
• EBITDA margin target is 2.4-2.5%: Management is confident about protecting margins and sees the lever as higher gross margins, though it acknowledged “it’s not easy, it’s going to take time.”
• OPEX discipline: Management expects to maintain OPEX as a percentage of revenue and is phasing out “nice to have” digitalization investments while keeping “need to have” ones.

Krishnan: “This will happen in the form of higher gross margins. We know there are possibilities to increase the gross margin, it's not easy. It's going to take time, but if you ask where is the lever, the lever will come in the form of better margins.”

Working Capital & Balance Sheet

• Sharp QoQ improvement, not steady state: Working capital fell 5 days to 35 days, generating positive operating and free cash flow. Management explicitly warned not to consider this a steady state, citing tailwinds from new product launches and the festive season.
• Steady-state target is 35-40 days: Management expects to operate around that range and will “try our best and make sure that it is efficiently managed.”
• Cash-positive balance sheet is gone: The COVID-period positive cash balance was a one-off. The company will carry debt going forward but expects returns to be visible.
• Volatility remains high: When asked if the worst is over for working capital pressures, management deflected, saying “I would not want to say that... level of volatility is definitely high... I do not think we can take the current level into the future, we have to wait and see.”

Krishnan: “Please don't consider this as a steady state. I think we would be around 35 - 40 days in terms of our working capital, whatever is best possible, we will try our best and make sure that it is efficiently managed.”

Segment & Geography Performance

Strategy & Investments

• New CEO, near-term focus on core: V. S. Hariharan assumed the role on 11 September 2023 after nearly 20 years with Redington. His first 6-12 months are focused on the core business, fine-tuning investments already decided (digital, cloud adjacencies), and stabilizing stress points especially in Africa. After that, he will drive new growth opportunities in adjacencies while staying within the distribution DNA.
• Investment recalibration underway: Digitalization initiatives are being split into “need to have” and “nice to have,” with the latter being phased out. Cloud platform investment will continue but talent investment will be careful. The digital platform may see a slower pace of investment to ensure required ROIC.
• Leadership position consolidated: Except for Turkey (number two), Redington holds the number one position in all its markets, including India which it newly claimed.
• Managed services: Currently positive on EBITDA; profitability should improve once scale is achieved.

Hariharan: “The early part, the first six to 12 months is clearly working on the core business and really looking at what investments we decided to make and to make sure that we are hunkering down, fine tuning those and getting the best out of those investments... And once we have really got this to a stage where we are getting our expected profit and return on capital employed, we will start driving new growth areas again.”

Guidance & Commitments

Key Metrics