In an interaction with Shweta Papriwal, Editor, indiainfoline.com Mr. Raj Shankar, Managing Director of Redington (India) Ltd, said, "For FY20, Redington generated a turnover of Rs.51,514cr, an EBITDA of Rs.1,072cr and PAT of Rs.515cr, while delivering a 18.1% Return on Capital Employed and a 12.6% Return on Equity".
Your strategy of “De-risking the Continuum” played well especially in the current pandemic times. Can you please elaborate on your de-risking strategies?
Thank you for this comment. As an organization, we are extremely conscious of the risks in our line of business and also of the macro risks in the markets that we operate in. Some of these risks are controllable while others may not be in our control. Over the past 25+ years we have developed a finely honed expertise in managing and mitigating the major business risks covering Inventory, Receivables and Currency related matters.
Our Inventory Risk is mitigated largely through certain contractual advantages that we have as an authorized distributor. This may be in the form of Stock Rotation, Price Protection and Marketing Support, etc. We buttress this further by way of prudent provisioning. I must hasten to add that our experience and expertise in forecasting demand and tailoring our purchases accordingly, has allowed us to limit our five-year average inventory charge to ~ 6 bps, as a % of our Sales. Similarly, the best testimony to our credit and collection capabilities is the record of provision for Accounts Receivables. We have limited our five year average receivable provision to ~10 bps, as a % of Sales. To put this in perspective, if we were to adopt Credit Insurance as our only means of receivable risk mitigation, the premium that we would need to pay is likely to be substantially higher than our average receivables provision rate. To mitigate Currency risk, we hedge our exposures and ensure that the forward cover premium is part of the COGS.
A high degree of Risk-awareness and a prudent and robust risk-mitigation policy has meant that in spite of all these inherent risks, the company has been able to deliver growth consistently and since listing, the Revenue CAGR stands at 15%, EBITDA CAGR at 14% and PAT CAGR at 13%. These are risk adjusted figures. So, basically, what I am attempting to underline is, that, since the very beginning, risk management has been a fundamental, core expertise of Redington.
Covid-19 has tested our adversity quotient to the full. You would agree with me that the pandemic is not something that anyone could have predicted, planned for or prepared themselves to address. When the severity of the crisis became apparent and lockdown was announced in India and in some of the other markets that we operate in, it was quite a challenge to first understand and then to navigate the repercussions. That said, we quickly geared ourselves up to tackle it head on and constructed a Redington playbook of “7Cs”; focusing on Cash Flow, Collection, Cost, Customer, Contract, Control and Communication.
We set out to ensure that there was adequate Cash Flow / liquidity available to ride out the difficult phase of the crisis. Our Sales & Credit teams worked day and night to ensure that Collection levels were maintained. At the very outset we decided to be frugal on all Costs, eliminating all avoidable expenses and reducing those which we were immediately controllable. We ensured a strong, uninterrupted connect with our valued Customers, constantly assuring them of all support towards their critical requirements. We maintained a seamless engagement with our Vendors, whose Contracts with us are the backbone of our business, ensuring that we are in complete alignment with their plans. We established strong internal protocols & Controls, in order to exercise exceptional oversight on expenses, purchases, credit and costs. The most important component of the “7Cs” was Communication. We were constantly in touch with all of our stakeholders, with the leadership team putting in extraordinary efforts to reach out to all Redington family members, to assure them of continuity and all necessary support in the hour of crisis. .
I feel extremely proud and satisfied that our efforts and diligence has enabled us to handle and navigate the pandemic with a great degree of success. This is evident from the high level of cash in books, to the tune of Rs.4,280 Crs, with collections being more than revenues during Q1FY21. While our Revenue did decline, we were able to limit the downside to a significant extent while ensuring that our costs were reduced in proportion.
From what we have observed, your gross margin is around ~5-5.5%, EBITDA margin is typically around 2.0-2.3% and PAT margin is 1.0-1.3%. How should we understand a business with such low margins?
It is a very interesting question. Answer to this question lies in an understanding of how the distribution business works. The viability of distribution business rests on its ability to scale over a period of time. Scalability of business naturally brings in operating leverage and capital efficiency. Therefore, the margins in the business must be looked at in context to the scalability that a distributor achieves over a period of time. The gross margin available in the distribution food chain is typically at ~4-6%. This is fundamental to distribution business and you will observe this margin trend across all the distributors globally. We have been able to consistently deliver margins at the top end of the range by achieving superior operating leverage and better cost efficiencies.
Considering the fact that distribution is a Working Capital intensive business since we carry inventory procured from our vendors and extend channel financing to partners, one needs to assess the performance of the business by looking at the Return on Capital Employed. With scale and cost efficiencies in place, we deliver a high rotation of the Working Capital deployed in business and this ensures that our returns are commensurate with the efforts involved in doing business. For FY20, our Return on Capital Employed stood at 18.1% and over the years, our average Return on Capital Employed has largely been in the range of ~16-18%.
Redington has ensured its relevance as a distributor over the years. How do you see your role evolving in the future?
I am glad you chose the word “evolving” since the role of distributors has indeed been evolving over the years. If you were to look at changing landscape of technology Distribution business in the Emerging markets, you will clearly recognize that our journey has had 3 distinct phases:
Pre-2009: “Distribution 1.0”. This phase was all about building logistics capabilities and offering credit; that is, being able to make the products available closest to the origin of demand and extending channel financing, with a robust credit management framework. We can therefore classify “Distribution 1.0” as the phase of driving “reach, efficiency and scale”.
2009 – 2019: “Distribution 2.0”. This was the period of accelerated adoption of Enterprise level IT products & solutions. Our role was now not limited only to logistics and credit but also involved providing Value-Added-Services to our Vendors & Channel Partners, in the form of Pre-sales consulting, understanding the complexities involved in offering Enterprise level IT products & solutions, while leveraging this knowledge to help channel partners design & offer solutions to meet their customers’ IT requirements. Redington was the first Value Added Distributor (VAD) in India with the above capabilities.
2019 onwards: “Distribution 3.0”. Deep into our transformation into a VAD+ distribution partner, we are developing skills and capabilities that will enable our partners help their customers overcome their business challenges and achieve their desired business outcomes. This involves changing the traditional concept of Distribution and instead, offering Distribution “as-a-Service”. This aligns our business to the fast evolving customer preference of Opex over Capex, puts emphasis on “Annuity & Subscription” as our Revenue model and moves our relationship with our Vendors and our Partners from “Transactional” to “Contractual”. We would offer tailored and customized ‘Distribution Solutions” and provide a completely new Distribution experience through as “as a service” model, where our different partners can choose their preferred Distribution Services from a wide-ranging catalogue of offerings. Our Cloud Solutions business, where we now offer a comprehensive range of Solutions and Services, including end-to-end Managed Services, is but a step in this direction. We are rapidly expanding our offerings to include Professional Managed Services in niche technology practices, in the areas of Software and Cyber Security also. With Automation becoming an integral part of all business processes and systems, we anticipate that a significant part of our future business will be conducted seamlessly on a Fully Automated Digital Transaction Platform that we are in the process of building.
Speaking of Cloud business, does the growing importance of Cloud cannibalize the revenues in your traditional lines of business such as Servers, Storage, etc.?
We believe that Cloud and traditional IT infra will co-exist. As customers decide to maintain select, Mission Critical Workloads on-premise, while moving other applications to Cloud, we are looking at a hybrid model of On-prem and Cloud based Infrastructure. We therefore do not expect a deep cannibalization of the traditional on-prem businesses. However, the growth rate of cloud business will definitely be sharper than that of traditional businesses, since most organizations are moving part of their work-loads to Cloud and Cloud adoption is accelerating. One of the most interesting corollaries of Cloud adoption has been that it has led to new workloads and newer revenue generating opportunities, which were non-existent in the past
Today, every technology vendor is working on offering a Cloud-based option for their products and services. Since we represent most of these Technology Brands and have demonstrated proven Cloud capabilities, we are the “Distributor-of-Choice” to help them take their cloud offerings to customers through our channel partners. We have an extremely robust and feature-rich Automated Digital Cloud Business Platform that enables our channel partners to auto-provision, consume, view consumption reports, manage subscription and raise monthly billing of Cloud services for their customer’s usage. As a logical and critical extension to this, we offer “end-to-end” Solutions, including Consulting, Migration, Installation, Monitoring and a 24*7 Cloud Management & Support Services to our channel partners and customers.
Our sweet spot is our ability to provide cloud services and solutions to SMEs / MSMEs and we have focused on addressing this space through our partners. The whole endeavor here is to leverage on the strength and relationship that we have built with our channel partners and use their network to be access end-customers and deliver Cloud services to them. It is a win-win situation for the channel partners too, since they are able to provide these services / solutions to their customers, without having to make a big investment in skills & resources.
As we build scale, our investments in Cloud Practices will soon translate into meaningful contribution to our business, since Solutions & Services offer much higher earnings opportunities than our traditional business and is also much less Capital intensive, leading to higher ROCE. We therefore view the increasing adoption of Cloud as a definite positive development for Redington
There has been news article on Apple setting up their own online store in India. What is your view on that? Also, how should we look at E-Commerce segment in general, from a distributors’ point of view?
Some recent news reports suggest that Apple is contemplating setting up a company-owned online store. Since we do not have any direct communication from Apple in this regard, we are not in a position to offer our comments. However, experience from other markets show that Apple’s own online and offline stores have always helped in further boosting demand for Apple products, since they serve as state-of-the-art Experience Centers for Apple customers.
As regards the E-Commerce segment in general, for us it is an additional Go-To-Market avenue for our suite of IT Consumer & Mobility products, in addition to the traditional offline brick-and-mortar retail outlets. Contrary to popular perception, in the Vendor space that Redington operates in, most brands channel their business to the E-commerce segment through distributors, with customized product offerings, in order to differentiate from off-line operations. E-Commerce for us, is therefore another sales channel. Some of our partners, whom we sell to, often take advantage of established E-Commerce platforms and register as a seller on the Market-Place, to reach out to consumers. Thus, the presence of E-Commerce players has actually offered us an added advantage.
We understand that you operate in close to 36 markets spread across META, Singapore and South Asia. Despite the macro risks in some of these markets, your overseas business continues to deliver good performance. What do you attribute as reasons towards this success in such difficult markets?
Thank you for the astute observation. Just to give a brief background of our overseas presence, while setting up operations to South Asian countries like Sri Lanka & Bangladesh was a logical extension to our India business, originally we had not planned to venture too deep into the overseas markets. Our initial plan was to address the UAE market only and hence we set up our base in Dubai. Getting a distribution contract was extremely challenging but we got a break-through with HP on the back of our existing relationship in India. We proved our credentials and our subsequent market expansion also happened in partnership with HP. The rest, as they say, is history!
Very early, we understood that the Middle East is a heterogeneous market. Some of the oil-rich nations in Middle East have a high per capita income and these economies started investing heavily in Information Technology and products. We started winning few key distribution contracts and as these brands expanded their presence in different geographies in the region, we were able to grow along with them. Redington established itself as a very strong partner for these brands and together we expanded into different product categories and into different markets in Middle East. Using Middle East as a stable jump-off platform, we gradually expanded our presence across the African markets and later, through an inorganic acquisition, established our presence in Turkey.
Some of these markets had immense potential since technology products had very low penetration in these economies. We were able to offer a diverse range of brand portfolio and product categories to our channel partners, which helped them service the latent demands of their customers. In summary, we would crack a market with one brand or one product category and then proceed to quickly expand the portfolio offering.
Today, we take pride in the fact that Redington Gulf’s operations ranks No.1 in the MEA market and has maintained this pole position for 14 consecutive years. What’s even more satisfying for us is that the No.2 player is about 1/5th of Redington’s size. Overseas business has showcased consistent double digit growth across Revenue, EBITDA and PAT with Return on Capital Employed for FY20 at 19.8%.
In summary, the key differentiator is that we chose to set up in-country presence in the markets that we operate in. While some of the other distributors opted to operate only out of Dubai Free Trade Zone while distributing across the MEA markets, we established in- country operations and demonstrated an ability to make technology products available at close proximity to demand centers and often at the customers’ door step. We are truly a GLOCAL company – a “Global” company with international standards of best practices, combined with Local knowledge, skills and infrastructure.
It is therefore the in-country presence, best practices, good financial record, an intense drive for growth, combined with a strong Management team which consistently focuses on business hygiene, that has ensured the enviable success of our Overseas business.
The logistics arm of the Company – “ProConnect” faced few challenges. What is your strategy going ahead?
ProConnect is our wholly owned subsidiary, offering warehousing, transportation and value added services in the logistics sector. Logistics services is obviously an integral part of a distribution supply chain and we have built the expertise since 1993. We recognized the latent potential of a well-run Logistics services business and hence, instead of keeping it as purely captive function, in 2012 we decided to hive off Redington’s logistics division and set it up as a separate subsidiary, in order to cater to third party customers also and ProConnect came into existence.
The following 5-6 years was a period of meteoric growth for ProConnect, which is evident from the fact that the 5 year CAGR of ProConnect, up to FY19 stood at 44% for Revenues, 52% for EBITDA and 46% for PAT. Its operations expanded from 1 captive customer (Redington) to 220+ customers. This has significantly reduced ProConnect’s dependence on Redington with Redington’s contribution to ProConnect’s revenue being only 13% as on date. During this period, our logistics infrastructure has expanded to ~170+ warehouses with ~6.2mn sq. ft. of warehousing space.
While the Logistics business presented us with an enormous opportunity to scale and we did grow rapidly, unfortunately the Systems, Processes and Control measures did not quite keep pace with the explosive revenue growth and its accompanying complexities. This led to lot of pains and did put us in a bad place temporarily. In our quest to grow, we did acquisitions, and here, the limitations mentioned above, led to compounding of challenges. In FY20, ProConnect encountered severe head-winds, mainly related to one of its subsidiaries, where they were compelled to make provision towards extension of trade advances to a transportation service provider. This, accompanied by general slowdown in the industry led to ProConnect registering loss at PAT level during FY20.
We have taken a lot of corrective measures. In the way forward, we are keen to bring the subsidiary operations under “One ProConnect” banner, which would lead to better operational synergies and cost efficiencies. Our focus has shifted from Revenue to Profits, ensuring primacy of business hygiene. Though Transportation will continue to be part of our logistics solutions, the emphasis would be on Warehousing and Mission Critical Services. We will focus on verticals requiring specialized and niche services. This change in our approach would offer us an enhanced value proposition. We have started making progress in this direction and are very confident that FY21 would be a year of correction / recovery. Even with the change in approach, we believe that we have tremendous headroom for growth and our strategy in the next 4-5 years is to transform ProConnect’s business into a highly profitable, premium services operations, leveraging technology and automation to drive increased efficiencies.
There are far and few companies in India that are Promoter-less, Board Managed and Professionally run. How do you view the success of Redington in this context?
You will find it very interesting to note that Redington has been a professionally run Company since its inception in 1993. While Redington was set up with a seed capital from Kewalram Chanrai Family (Redington Mauritius Limited / Harrow Investment Holding Limited), they left its management & operations fully in the hand of professionals.
In 2007, when we decided to list Redington on the bourses, RML / HIHL became the promoter entity to meet the requirements of SEBI regulations. Interestingly, this was the first time that SEBI gave approval for a company to be a promoter, instead of individual(s). Today, with the exit of the Promoter, we have been termed by SEBI as a “Listed entity with no promoters”
Even before listing, we had already set up a Governance structure where we had an Independent Director as our Chairman and this practice continues even on date. Today, we have a ten-member Board, 50% of whom are Non- Executive/ Independent Directors, with backgrounds as diverse as Corporate Strategy, Technology Distribution, Technology Vendor, Human Resource Management & Leadership Development, Finance & Accounts and Audit. With each of these distinguished professionals providing experience and expertise from their diverse careers, you can appreciate the kind of wisdom and guidance that our Board has bestowed upon the Management. The Board accords the highest of priorities to Corporate Governance, is very interactive and has good, regular engagement with the Management Team.
Our Senior Management team, both in India and Overseas, have each been with Redington 15+ years, have grown with the Company and have been instrumental in the Redington Success Story. Each one of them demonstrates a high degree of “Intrepreneurship”, bringing a sense of personal ownership and proactiveness to the responsibilities that they carry.
It is indeed a privilege to be working alongside such a distinguished Board and with such committed & experienced Senior Team members.
Dividend payout of Redington, especially in the last 5 years is averaging at about 27%. How do you look at rewarding your shareholders?
Returning / maximizing value to our shareholders is something that we attach a lot of importance to. This is evident from the multiple interim dividends / special dividends that has been offered to our shareholders during the last few years and also from the buyback program in Sept 2018. In fact, our dividend payout has ranged from 20% to 37% of the PAT over the last 4 Financial Years, which, most shareholders are likely to consider as substantial disbursements.
It is important to mention here that since our listing in 2007, we have not gone back to the capital market to raise additional funds. We have utilized the profits of the company as growth capital and since listing, have grown EPS at a CAGR of 12%. While we will continue to place emphasis on rewarding our shareholders with attractive dividends, we also wish to ensure that a sufficient part of the profit is retained as growth capital.
What is the outlook for your business in the next 3-5 years?
Technology distribution will continue to remain an evergreen sector on the back of rapid pace of technology innovation, increasing adoption rates and emerging tech trends, which lend additional impetus to an already growing industry. In most of the markets we operate in, given low penetration rates, there is abundant headroom for growth. They are rich with opportunities for those who are prepared to stay the course and as you can see, even during the current pandemic times, we have been able to take advantage of demand spikes due to rapid societal transformations to Work-From-Home (WFH) and Learn-From-Home (LFH).
The next 3-5 years, the following projections can be offered for Redington’s business –
In terms of geographies, India is our focus market, offering a high growth opportunity. As we go forward we expect the India business to contribute at least half of the overall Revenue and Profits.
In terms of product categories, Mobility will be a strong growth driver in India led by growth from both existing brands and new brand additions.
IT Enterprise will be the other growth driver, especially in the areas of Cloud, Security, Software, etc. with increased focus on services attach. We would also evaluate assets which, if acquired, apart from enabling inorganic growth, will also offer us differentiating technological capabilities leading to a competitive advantage.
The IT Consumer segment is already witnessing a surge in demand on the back of shift to WFH & LFH regimes and we expect this to continue in the medium term. In this product segment we would focus on efficiencies, leveraging our planned B2B Digital Platform, which would also provide incremental revenue generating opportunities.
In terms of businesses mix, we expect the Services segment to do very well for us, with both ProConnect (Logistics services) and Cloud business scaling up materially and contributing with higher profit margin and significantly higher ROCE.
In conclusion, we should look at Redington as a company which would grow Earnings faster than Revenue, generating a ROE at ~20%, a ROCE of ~20% and a ROWC of ~20%.