Redington Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Record revenue, profit recovery underway: Revenue hit an all-time quarterly high of INR 23,550 crores (+8% YoY), while PAT margin improved sequentially for the third straight quarter to 1.45%, showing the company is correcting profitability after a period of elevated finance costs.
• Growth deceleration is deliberate risk management: YoY growth slowed from ~25% in Q1 to 8% in Q3, driven by a conscious pullback in Africa (currency volatility) and Turkey (high factoring costs), plus walking away from low-profit enterprise deals. Management frames this as a 1-2 quarter correction, not a demand problem.
• Cloud resell is booming, but services need work: Cloud revenue grew 43% YoY, but the 45% surge in resell dwarfed managed services growth of just 2%, the latter held back by a conscious rationalization of low-margin segments.
• Turkey is a strategic headache that won't be abandoned: Arena revenue degrew ~3% and factoring costs remain punishingly high because alternative banking channels are scarce, yet management refuses to downsize, citing Turkey's size and its role as a launch pad into European markets.
• What to watch next quarter: Whether the EBIT margin can reach the promised 2.5%-2.6% band, any sign that Africa currency caution is easing, and the pace of AI-related product inflections (AI PCs, AI servers) that management expects to drive the next growth cycle.

Profitability & Margin Recovery

• PAT margin on a steady climb: PAT as a percentage of revenue rose from 1.17% (Q1) to 1.36% (Q2) to 1.45% (Q3), reflecting the company's stated pivot toward minimum profitability thresholds and return on capital discipline.
• Finance costs are the main drag on profits: Lower profitability this year is primarily due to finance costs; coming out of COVID, the company had an unsustainably favorable capital deployment situation, and the combination of revenue growth and higher interest rates drove a sharp increase in interest costs across all distribution companies.
• Interest and factoring costs easing slightly: Combined costs dropped from INR 192 crores (Q2) to INR 179 crores (Q3), helped by softer interest rates across geographies and improved working capital efficiency.
• EBIT margin guided to 2.5%-2.6% near term: Management expects EBIT percentage to hold in this range for immediate quarters; a structural uplift depends on a higher contribution from Technology Solutions Group and services, which is not expected soon.
• Tax rate set to rise: The current effective tax rate of ~22% will increase to ~25% from next financial year, driven by the introduction of a 9% UAE corporate tax.
• Return ratios improved: ROE moved up to 19.4% (from 17.4%) and ROCE to 22.1% (from 21.6%), keeping the company above its stated 20%+ ROCE objective.
• Employee costs at a floor: Employee cost as a percentage of revenue is at historically low levels; management plans to hold it at similar levels because further reduction is not easily achievable.

S V Krishnan: "In Turkey, it is more situational. It is not our willingness. The cost that we pay on factoring is pretty high. Still, we have no option. The funding in other banking channel is literally very less, so we are only hoping that things will get normalized."

Geographic Performance & Risk Management

• India Distribution is the standout: Revenue grew 21% YoY with PAT up 10% YoY, delivering solid execution across the home market.
• Middle East & Africa grew modestly but masks divergence: Overall revenue grew 4% YoY, with Saudi Arabia up 14% for the quarter, while Africa was deliberately throttled back due to currency volatility and availability risks. Management prioritized risk management over growth.
• Turkey degrew on macro and factoring pain: Arena revenue fell ~3%, with factoring costs representing ~85% of Turkey-related charges because limited banking channel funding leaves the company with no alternative. Management hopes for normalization but cannot give a timeline.
• ROW weakness is a choice, not a shock: The cautious approach to Africa and the drawdown of the Turkey solar business (government curbed business borrowing amid inflation, plus falling panel prices made the business too risky) were deliberate decisions to protect capital.
• Turkey is a long-term strategic hold: Despite the lira collapsing from TRY 1.48 to north of TRY 30 to the dollar since Redington invested, the company has never posted a loss in Turkey. Management views it as a large, interesting market and a launch pad into Europe, so downsizing would make the company irrelevant to brands.

S V Krishnan: "I really don't know whether we can call it like that. Definitely, Turkey is a very large market, very interesting space. Unfortunately, for whatever reasons, the economic situation has not been great. And as you know well, when we invested, the Turkish lira was TRY1.48 to \$1. And today, it's north of TRY30 to \$1."

Business Segment Dynamics

• Direct-to-retail and state-level initiatives underway: The company built a direct-to-retail program for Android brands and wearables to reach smaller stores, and is working with PC brands to open state-level retail chains that are not pan-India players.
• Refurb, e-waste, and rural PC exploration: Management is exploring entry into refurb and e-waste, driven by Make in India and related initiatives, and is in early discussions with brands and rural go-to-market partners on the rural PC segment, particularly lower-end PCs with AI coming into the picture.

Hariharan: "I don't see that as an area of threat for us. We will continue to complement the brands' direct approach."

AI & Technology Inflection

• AI is on the radar but still early: Management is beginning to look at AI as a new trend, noting that it is starting to get real with many products, but the company is still working to understand customer needs, identify the right brands, and build solutions. More detail is promised over the next few quarters.
• AI-driven product cycle is the next growth catalyst: With AI PCs, AI chips in servers, and new solutions on the horizon, management sees the next 2-3 years bringing inflections that the company intends to capture, while remaining careful about risk in certain markets.
• TSG building new solutions in India: Progress includes Digi Glass and building SOCs (Security Operations Centers) for customers, part of a Redington-led business push.
• Digital and cloud platform investments continue with ROI discipline: The company is still building technology capabilities but optimizing investment levels with a continued focus on returns.

Hariharan: "So the next 2, 3 years, there are going to be inflections. Clearly, we're going to take advantage of those. But we do want to be careful about not taking too much risks in certain markets."

Working Capital & Balance Sheet

• Working capital has stabilized: After a period of normalization, working capital days have held steady in the 35-40 day range for the last 2-3 quarters, and management expects this range to persist.
• ROCE discipline is the decision-making principle: The company's objective remains generating ROCE above 20%, a threshold met this quarter (22.1%), and management states this will continue to guide decisions.
• Growth slowdown is not a deliberate revenue deceleration: Management pushed back on the idea that it is deliberately slowing revenue, framing the correction as going after a minimum profitability percentage and minimum return on capital employed, with growth rates correcting in 1-2 quarters as Africa and platform investment risks are managed.

Guidance & Commitments

Key Metrics