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Management Discussion and Analysis Report
Your Companys business interests are spread across India, South Asia, Middle East, Turkey, Africa (META) and CIS regions. In todays inter-connected world, no region or country is totally immune to the geo-political or economic upheavals of another region or country.
Since most of the geographies in which your Company operates fall in the "emerging", "developing" and "leastdeveloped" categories, the impact of global developments tend to impact them more than most.
A discussion of Global geopolitical and Economic developments, in the year gone by, is therefore essential, in order to position your Companys FY Rs.18 business performance in the proper context.
INDIAN ECONOMY - REVIEW AND OUTLOOK:
2017 is a milestone year for the Indian economy, as it marked the successful roll out of the Goods and Services tax Act, which will help in reducing internal barriers to trade, increase efficiency, and improve tax compliance. The economic disruptions due to the ban on high-value currency notes towards the end of 2016 and the roll out of GST in July 2017, have started to normalise and growth is expected to stabilize. After a year of disruptions and growth slowdown, the Indian economy is consolidating the gains from the recent reforms and is moving in the right direction.
As per recent report released by International Monetary Fund, GDP growth in India is projected to increase from 6.7 percent in 2017 to 7.4 percent in 2018 and 7.8 percent in 2019, lifted by strong private consumption as well as fading transitory effects of the currency exchange initiative and implementation of the national goods and services tax. Over the medium term, growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivize private investment The World Economic Situation and Prospects 2018 report of the United Nations also indicates that the outlook for India remains largely positive, underpinned by robust private consumption and public investment as well as ongoing structural reforms.
The Union Budget for 2018-19 focused on uplifting the rural economy and strengthening of the agriculture sector, healthcare for the economically less privileged, infrastructure creation and improvement in the quality of education in the country. The Budget included various measures to provide a push to the economy, which among others, include major investments in infrastructure via all-time high allocations to rail & road sector and reduced corporate tax rates etc.,
IMD forecasts a normal monsoon for 2018, and if the predictions are accurate, the agricultural sector is set for a boost and other sectors like fast moving consumer goods, auto, fertilizers, and cement are likely to benefit greatly.
GLOBAL ECONOMY - REVIEW AND OUTLOOK:
Year 2017, was a tumultuous year marked by geopolitical tensions, and deep political divisions in many countries. On the economic front, however, 2017 ended on a high note, with GDP continuing to accelerate over much of the world in the broadest cyclical upswing since the start of the decade. As per the recent report by IMF, the global growth was at 3.8 percent, the fastest since 2011. With financial conditions still supportive, global growth is expected to pick up to a 3.9 percent rate in both 2018 and 2019.
The World Bank has reported that in advanced economies, growth in 2017 is estimated to have rebounded to 2.3 percent, driven by a pickup in capital spending, turnaround in inventories, and strengthening external demand. Growth in emerging market and developing economies is estimated to have accelerated to 4.3 percent in 2017, reflecting firming up of activity in commodity trade.
Middle East & Africa:
The structural challenges in the Middle East economies including small indigenous labour force, lack of private investment, very low economic diversification outside of oil production have held back the growth in this part of the globe. Though oil prices are getting stronger due to the recovery of oil demand and correcting the balance between supply and demand, there is a need for substantial reforms in the fiscal policies of the countries in MEA region.
In June 2017, Bahrain, Saudi Arabia, the United Arab Emirates, and the Arab Republic of Egypt cut diplomatic and economic ties with Qatar. All seaborne and air travel links from the involved countries to Qatar were shut down and bank lending to Qatar was restricted. This led to a chaotic disruption in Qatars financial market.
The World Bank has reported that in Turkey, growth sharply accelerated to 7.4 percent in 2017 from 3.2 percent in 2016. But Turkeys rapid growth has also drawn a warning from
the International Monetary Fund, which has mentioned that Turkeys current account gap could widen due to strong domestic demand and higher oil prices.
The economic and political uncertainty remains elevated. The state of emergency put in place after the 2016 failed coup attempt and associated measures affected the predictability of the regulatory environment. The Presidential Elections slated for in the year 2019 has now been advanced and is expected to pave the direction of the future course of business in Turkey.
INDUSTRY STRUCTURE, DEVELOPMENTS, OPPORTUNITIES AND THREATS
IT products distribution landscape in India is evolving and witnessing a digital revolution. Disruptive technology changes including Internet of Things (IoT) solutions, robots, drones, augmented & virtual reality (AR/VR) and 3D printers are expanding opportunity horizons while acting as serious disruptors to traditional hardware, software and services businesses. Digital transformation in many industry segments require the distributors who provide digital solutions beyond the offerings of the traditional distribution business. Channels are building their resources to adapt to these changes and transform themselves into solutions provider. Many leading IT product suppliers, are implementing new initiatives and promotions, to enable the downstream channel to exploit new market opportunities in this digital transformation.
According to the latest forecast by Gartner Inc., IT spending in India is projected to total $87.1 billion in 2018, an increase of 9.2 percent from 2017 estimated spending of $79.7 billion. Enterprise software and IT services continue to exhibit strong growth, with the devices segment continuing to drive the majority of overall IT spending in India.
In 2017, Investments by the Government gained momentum after slowdown due to demonetization. Gartner forecasts that IT spending in the Indian government sector is projected to reach $8.5 billion in 2018, an increase of 8.9 percent from 2017 estimated spending of $7.8 billion. Several initiatives by the government, such as the Make in India, Start-up India, Skill India, and the corresponding policy frameworks to support these initiatives, such as the new electronics policy, software product policy, data security and protection policy, will have a positive effect on government IT spending in the near future. One such initiative is the Digital India programme which aims to transform the country into a digitally empowered society and knowledge economy. It calls for technology investments in the backbone infrastructure, advanced data analytics, digital security, digital payment and e-commerce infrastructures. This will be a key driver for IT spending growth in the Indian government sector over the next few years.
Digital business initiatives are forcing infrastructure and operations leaders in India to adopt a hybrid IT infrastructure model that can deliver reliable, innovative and cost-effective solutions to the business in a timely manner. Technologies such as software-defined data centers are helping businesses optimize their existing resources, and as a result reducing overall spend on compute and storage resource.
Government support, improved vendor offerings, and an emergence of proven best practices have all combined to push cloud computing to the top of many organizations priority lists. There is an increased adoption of cloud due to high demand in compute intensive workload and due to a desire to lower IT infrastructure and administrative costs.
Gartner recently reported that India public cloud services revenue is projected to grow 37.5 percent in 2018 to total US$2.5 billion, up from US$1.8 billion in 2017. However, the growth rate is expected to flatten, which is indicative of a maturing market. Infrastructure as a service (IaaS) is estimated to be the fastest-growing segment in the public cloud market. This growth is being driven by organizations refraining from pursuing data center build-outs and consolidation among data center vendors.
As per IDC, Global Smartphone vendors shipped a total of 334.3 million units during the first quarter of 2018, resulting in a 2.9% decline when compared to the 344.4 million units shipped in the first quarter of 2017. The Chinese smartphone market, the worlds largest, was the biggest contributor to this decline, with shipment volumes dipping below 100 million in the quarter, which is the first instance since the third quarter of 2013.
India is the worlds third largest smartphone market and continues to hold its position of being the biggest feature phone market globally. IDC has reported that the Indian smartphone market presented a sharp contrast to the rest of the world, delivering a healthy 14% annual growth, with a total shipment of 124 million units in 2017, making it the fastest growing market amongst the top 20 smartphone markets globally. The market resumed its double-digit growth after a temporary slowdown in 2016 caused by factors such as demonetization and a shortage of smartphone components.
INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY
A detailed note on the Internal Controls systems of the Company and its adequacy is given in Annexure A to the Boards Report forming part of this Annual Report.
HUMAN RESOURCE MANAGEMENT
Your company recognizes the importance of building a strong Human Capital for the futuristic world. Learning culture in Redington has been accelerated through Technology enabled learning and by learning Technology. Flexible HR policies reflecting our organization value of Trust and work-life balance have been continuously devised. Employee engagement activities are conducted to make our workplace a fun-filled one. The total number of employees of the Company as on March 31, 2018 is 1,774.
FINANCIAL PERFORMANCE ANALYSIS
The Consolidated financials of your Company and its subsidiaries ("The Group") have been prepared in accordance with the Indian Accounting Standards (Ind AS) to comply with the requirements prescribed under section 133 of the Companies Act, 2013 ("the Act") read with Rule 3 of the Companies (Indian Accounting Standards) Rules.
The Consolidated financial statements are presented in Indian Rupees (?) which is the functional/presentation currency. All financial information presented in Indian Rupees has been rounded off to the nearest Crores unless otherwise indicated
SEGMENT WISE PERFORMANCE:
Your Company has identified "India" and "Overseas" in accordance with Ind AS 108 as its Operating segments. The reported operating segments;
a. engage in business activities from which the Group earns revenues and incur expenses,
b. have their operating results regularly reviewed by the entitys chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and
c. have discrete financial information available.
ANALYSIS OF THECONSOLIDATED FINANCIAL PERFORMANCE
Fiscal year 2017-18 has been a challenging year as your Company had to experience introduction of GST and subdued demand in the India segment and operational challenges due to geo-political tension in some middle-east countries and Turkey in overseas segment. Your Company could grow despite the above challenges in both revenue and earnings after tax at consolidated level during the fiscal year 2017-18.
Consolidated revenue grew by 5.7% during the fiscal year 2017-18, with a Compounded Annual Growth Rate (CAGR) of 15.6% since listing. The growth in IT business is 2.9%, mobility business is 7.8% and service business is 22.9% respectively.
The subdued revenue growth in year 2017-18 as compared to CAGR is on account of de-growth in Indian segment due to GST impact and in overseas segment due to adverse currency translation impact .
India segment share in the overall revenue dip due to the introduction of GST which reduced the average selling price of the products by approximately 4.7% for the full year.
Gross margin grew by 3.6% (5.6% of revenue) during the fiscal year 2017-18 over fiscal year 2016-17 (5.7% of revenue). Gross margin growth is lesser than revenue growth due to sales mix. Mobility business which returns lesser gross margin percentage grew at a higher rate than IT business.
The benefit of faster growth in high-margin services business is offset by sales mix in the distribution business.
The consolidated overhead expenses grew by 6.3 % in the fiscal year 2017-18 as compared to the revenue growth of 5.7%. However overheads as a percentage of revenue has been constant at 3.6%. The overall increase of 6.3% is due to the increase in following costs for respective reasons.
a. Employee Costs:
Employee cost increased by 4.1% in the fiscal year 2017-18. The increase is primarily due to:
Increment to the existing employees.
Investment in new verticals for business expansion.
Grant of Stock appreciation rights to the employees during the year.
b. Other Expenses:
Other expenses increased by 8.0% in the said fiscal year 2017-18. This increase is primarily due to increase in the following costs:
Increase in freight cost and warehouse handling charges which in line with increase in services business revenue.
Increase in sales promotion expenses due to contractual obligation with concerned vendors.
Increase in insurance cost on account of insurance of receivables.
The increase in other expenses is primarily on account of increase in expenses which is directly related to revenue and mitigation of risk. Your company has been very judicious in incurring expenses and has initiated many cost saving measures to leverage the expenses.
EBITDA with a CAGR of 14.2% since listing has de-grown by 1.23% during the fiscal year 2017-18 due to drop in gross margin percentage as overheads are kept globally under control.
Finance costs increased by 7.0% during the fiscal year 201718. Finance costs grew at a higher rate than revenue growth during the fiscal year 2017-18 due to increase in working capital utilisation in business.
Finance cost of overseas segment decreased by 11.1% despite marginal increase in interest rates, due to improved average working capital turns. Overseas segment continues to impress with consistent increase in working capital turns that resulted in lower interest cost.
India segment average working capital turns increased primarily due to GST implementation resulting in higher finance cost as a percentage of revenue. However, India segment could recover towards the end and reduce the closing working capital by March 31, 2018.
Profit Before Tax (PBT):
PBT with a CAGR of 15.7% since listing has decreased by 3.7% during the financial year 2017-18 due to decline in Gross Margin as the overheads and Interest costs are kept globally under control.
Profit After Tax (PAT):
PAT (after Non-controlling interest) with a CAGR of 15.2% sinces listing has grown due to reduction of Non-controlling interests, due to reduction in profits of Turkey in the current fiscal year. The subdued performance of Turkey on account of prevalence of Geo-political tension in the Turkey Market.
a. Cash flow generated from operation was Rs. 185.6 Crores for the fiscal year 2017-18. Better working capital management towards the close of the financial year resulted in better operational cash flow.
b. Cash from investment activities was negative at Rs. 19.1 Crores largely on capital expenditure during the year which includes investment in SAP software for India business.
c. The excess cash flow generated from operation was utilised for the purpose of repayment of loan.
With the above repayment your Company has maintained its Net debt to equity ratio at 0.2 times and is favourably poised to capture any upswing in the business opportunity, in the ensuing years.
|Particulars||FY 2017-18||FY 2016-17|
|Return on Average Capital Employed (%)*||15.5||15.2|
|Return on Average Equity (%)*||14.5||15.3|
|Book Value/ Share (in Rs.)||87.7||78.2|
|EPS (in Rs.)||12.0||11.6|
|Interest Cover (No. of times)||4.8||5.2|
|Gross Debt : Equity (No. of times)||0.4||0.4|
|Net Debt : Equity (No. of times)||0.2||0.2|
* Goodwill has been excluded and Capital reserve has been included appropriately.
Return on capital employed has marginally improved in the current financial year 2017-18 primarily due to proper working capital management in overseas segment. Your company is confident of improving this in the ensuing financial year by adopting better working capital management strategy in India business and reduce borrowing.
Return on Average Equity has dropped, due to lower earnings growth in the current year.
Book Value per share:
Book value has increased by Rs. 9.5 due to higher EPS of Rs. 12.0 pershare and despite dividend payment in the current fiscal year.
EPS has also marginally improved due to Profit growth in the current fiscal year. There is no change in the underlying weighted average equity shares between the current fiscal year and the previous year.
ANALYSIS OF THE STANDALONE FINANCIAL
The fiscal year 2017-18 experienced introduction of Goods & Services Tax (GST). Post GST, point of collection of excise and counter veiling duty moved to customer, resulting in reduction of selling price of the products purchased and sold by your company. Consequently, revenue reduced by approximately 4.7% for the full year.
Modest growth during the fiscal year 2017-18 is primarily due to de-growth of 16.9% in the mobility business. Introduction of basic customs duty (BCD) for mobility products coupled with two time increase in BCD rate within a span of eight months and change in "Go to Market" strategy of key brands contributed to this de-growth.
The reduction in selling price and modest revenue growth accentuated the expenses ratio.
Your Companys revenue has a CAGR of 12% since listing.
Other income dropped by 1.2% during the fiscal year 2017-18. This drop is due to one-off interest income from Income-tax refund received in the previous fiscal year. Sans the one-time interest income, other income grew by 16.2% during the fiscal year 2017-18.
Gross margin remained stable at 5.4% during the current fiscal year 2017-18 as there is no material change in the sales mix.
Reduced purchase and selling price reduced the absolute value of rebates (calculated as a % of sales), resulted in a loss of 0.2% on the revenue.
Employee benefit expense
Employee cost has increased by 12.1% during the current fiscal year 2017-18. Increase is primarily on account of:
Investment in emerging businesses which contributed to an increase of 3.7%.
Stock compensation expense in respect of the Stock Appreciation Rights granted during the year to the eligible employees contributed to an increase of 2.1%.
Other expenses decreased by 5.4% during the fiscal year 2017-18. The decrease is primarily attributable to the ensuing reasons:
Commercial taxes reduced by 6.5% during the fiscal year 2017-18. Octroi was subsumed under GST from July 1, 2017 which is the primary reason for reduction in commercial taxes.
Exchange loss (net) decreased by 3.3% due to better position of INR vis-a-vis USD, during the fiscal year 201718 as compared to the previous year.
Sales promotion expenses increased by 2.1 %. Spending on promotional activities is an agreed commitment with certain brands and hence had to be spent.
There has been a reduction in cost in all other expenses and your company has been very judicious in incurring expenses and has initiated many cost saving measures in leveraging the expenses.
EBITDA de-grew by 5.4% during the fiscal year 2017-18. De-growth in EBITDA is primarily due to reduction in gross margin on account of drop in rebate value which is a factor of selling price. The impact of 0.2% reduction in gross margin percentage due to GST has resulted in de-growth of EBITDA.
Your Companys EBITDA has a CAGR of 13% since listing.
Finance costs increased by 22.2% on account of the increased working capital. Average working capital increased on account of the following reasons:
Delay in utilisation of GST transition credit due to requirements of filing of returns under GST. Per GST Act Tran 2 had to be filed only after December 31,2017 which resulted in accumulation of transition credit.
There was a delay in issuing of credit notes by vendors for rebates on account of introduction of GST. Vendors were deliberating on the process of issuing credit notes to align with GST requirement and it took time.
Post GST there had been a general delay in collection as market was agnostic on claiming of input credit of GST & increase in IGST billing.
Consequent to high interest expense and reduction in margin due to the above mentioned reasons, interest cover ratio decreased to 3.7 times during the fiscal year 2017-18 as against 4.9 times for the previous fiscal year.
Profit before Tax (PBT)
Profit before tax de-grew by 13.3% during the fiscal year 201718. De-growth in PBT is due to various factors as explained above.
Your Companys PBT has a CAGR of 14% since listing.
The spike during the fiscal year 2013-14 is on account of sale of shares in wholly owned subsidiary Easyaccess Financial Services Limited amounting to Rs. 65.8 Crores. If this one- off item is excluded, the PBT for the year 2013-14 would be Rs. 249.6 Crores.
Profit after Tax (PAT)
Profit after tax de-grew by 11.7% during the fiscal year 2017-18. De-growth in PAT is due to various factors as explained above.
Your Companys PAT has a CAGR of 14% since listing.
The spike during the fiscal year 2013-14 is on account of sale of shares in wholly owned subsidiary Easyaccess Financial Services Limited amounting to Rs. 65.8 Crores. If this one- off item is excluded, the PAT for the year 2013-14 would be Rs. 174.0 Crores.
Cash Flow Statement
Cash flow from operation was positive at Rs. 141.6 Crores for the fiscal year 2017-18. Positive cash flow from operation could be achieved inspite of modest increase towards the working capital at the end of the year as compared to the opening working capital. Though average working capital increased during the fiscal year 2017-18 mainly due to GST, your company could reduce the closing working capital due to effective discussion with the vendors and partners which resulted in positive cash flow from operation.
Cash flow from investment activity was positive at Rs. 60.5 Crores for the fiscal year 2017-18 due to dividend from subsidiaries and sale of a land situated at Delhi.
Shareholder funds increased to Rs. 1,689.5 Crores from Rs. 1,609.7 Crores as at March 31,2017, due to the accumulation of profit earned during the fiscal year 2017-18 net-off dividend pay-out for the fiscal year 2016-17.
Debt as on March 31, 2018 increased to Rs. 766.3 Crores from Rs. 707.3 Crores as at March 31,2017, due to increase in working capital utilization during the fiscal year 2017-18.
Your company has maintained debt equity ratio at 0.38 times of equity. Your Company is favourably poised to capture any upswing in the business opportunity in the ensuing years, without any need for additional equity capital.
With comfortable debt levels, the Board of Directors have recommended 120% dividend on the face value of shares for the year 2017-18, equivalent to Rs. 2.4 per share.
Book value and Earnings per Share
The book value of your Company increased from Rs. 38.7/- per share to Rs. 42.2/- per share.
The earnings per share decreased by 11.8% for the year ended March 31, 2018 to Rs. 4.60 per share as compared to the previous fiscal year. The reduction is on account of reduction in PAT as discussed above.