CRISIL has upgraded its ratings on the long-term bank facilities of Redington (India) Ltd (Redington India) to ‘AA-/Stable’ from ‘A+/Stable’ and reaffirmed its rating on the short-term bank facilities and short debt programme at ‘P1+’.
The upgrade is driven by CRISIL’s expectation that Redington India will be able to sustain the improvement in its financial profile over the medium term, driven by a strong and diversified market position in the information technology (IT) products distribution space coupled with operating efficiency improvements arising out of scale benefits. CRISIL also expects that Redington India’s acquisition plans in the IT products distribution space over the short term will not result in any deterioration in the financial profile.
For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Redington India and Redington India’s subsidiaries, but has excluded Redington India’s wholly owned non-banking financial company Easyaccess Financial Services Ltd (Easyaccess; rated ‘A+/Stable/P1+’ by CRISIL). The combined entity is collectively referred to as Redington India. CRISIL has also factored in the capital requirements of Easyaccess.
Redington India's financial risk profile has shown a steady improvement over time; its revenues registered a compound annual growth rate of about 15 per cent between 2006-07 (refers to the financial year, April 1 to March 31) and 2009-10, though year-on-year revenue growth slowed to 8 per cent in 2009-10. The company’s unadjusted net worth increased to Rs.13.0 billion as on March 31, 2010, from Rs.5.9 bn as on March 31, 2007, supported by steady accruals and regular equity infusions.
In October 2008, one of Redington India’s subsidiaries in Middle East and Africa (MEA) concluded an investment proposal of USD98 million from Investcorp Gulf Opportunity Fund Company 1 B S C (Investcorp); US$65 mn of this investment has been received in November 2008 and the balance is expected at the time of the proposed acquisition. CRISIL believes that this will help improve the financial profile of Redington India over the medium term. Driven by the equity infusion and healthy accruals, which helped offset the impact of higher debt levels, Redington India’s consolidated adjusted gearing (net worth adjusted for investment in Easyaccess) improved to 0.76 times as on March 31, 2010 from 1.12 times as on March 31, 2008.
Redington' debt protection metrics also improved in 2009-10, driven by lower interest costs. The company’s liquidity is healthy, supported by liquid surpluses of about Rs.6.5 bn as on June 30, 2010; however, a portion of the liquid proceeds will be utilised for proposed acquisitions in the IT distribution space.
CRISIL believes that Redington India will sustain improvement in its financial risk profile over the medium term, supported by its healthy business risk profile. Redington India’s strong market position in the IT distribution space emanates from its well-established and diversified market position across India and MEA, large product range, diversified vendor base, and wide distribution and service network. Redington India is also focusing on non-IT products in the digital printing, digital lifestyle, telecommunications, and consumer durables categories. Besides, the company’s efficient systems and processes mitigate the risks associated with the IT products distribution business – obsolescence risk, credit risk, and foreign exchange risk, among others – further supporting its market position.
These rating strengths are partially offset by the intense competition Redington India faces in the IT distribution space. The low-margin, working-capital-intensive IT distribution industry has restricted Redington India’s operating profit margin to below 3 per cent, and has led to its long working capital cycle, increasing its debt levels.
CRISIL believes that Redington India will maintain its healthy business risk profile, supported by healthy medium-term prospects for IT products in the domestic and overseas markets. Redington India’s operating margin will improve because of the company’s increasing scale of operations. The company’s financial risk profile is expected to continue to improve steadily, driven by healthy cash accruals; its moderate capital expenditure (capex) is unlikely to adversely affect its financial risk profile.
The outlook may be revised to ‘Positive’ if Redington India significantly improves its debt protection metrics and maintains healthy liquidity on a steady-state basis. Conversely, the outlook may be revised to ‘Negative’ in case of a steep decline in the company’s performance, significant increase in funding support extended to Easyaccess, or large debt-funded acquisitions adversely affecting gearing and key debt protection metric