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Edited Transcript of REDINGTON.NSE earnings conference call or presentation 5-Nov-19 11:30am GMT

Q2 2020 Redington (India) Ltd Earnings Call

Guindy, Chennai Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Redington (India) Ltd earnings conference call or presentation Tuesday, November 5, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Raj Shankar

Redington (India) Limited - MD & Director

* S. V. Krishnan

Redington (India) Limited - CFO & Whole Time Director

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Conference Call Participants

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* Aasim Bharde

IDFC Securities Limited, Research Division - Research Analyst

* Nagraj Chandrasekar

Laburnum Capital Advisors Private Limited - VP

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Pranav Kshatriya

Edelweiss Securities Ltd., Research Division - Research Analyst

* Ritesh Poladia;Girik Capital;Analyst

* Rohit Balakrishnan;Vrddhi Capital;Analyst

* Sachit Khera;Smart Equity;Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Redington (India) Limited Q2 and H1 FY '20 Earnings Conference Call. This call may contain forward-looking statements about the company, which are based on the beliefs, opinion and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. (Operator Instruction]

I now hand the conference over to Mr. Raj Shankar, Managing Director. Thank you. And over to you.

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Raj Shankar, Redington (India) Limited - MD & Director [2]

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Thank you. Good evening to one and all. I'm very pleased to announce the results for our second quarter. Our revenue, as you would have understood by now, grew by 11%, EBITDA by 24%, profit by 24%. Now when you break this down between India and overseas, both the theaters have done well. India grew top line by 15%, EBITDA by 40% and profit after tax by 37%.

Now while talking about India, I also want to bring to your attention that we have placed a great emphasis on reducing our working capital. So you would see that we have reduced by a good 17 days in terms of working capital in our second quarter over the same period last year.

Consequently, this has also resulted in an operating cash flow, which is the highest in any quarter in India of about INR 1,137 crores and a free cash flow of INR 1,089 crores. Our return on capital employed in India was 16.8%. It's amongst the highest in several quarters and our return on equity for the quarter was 18.4%. I'm also pleased to share with you that our net debt-to-equity was kept largely under control in terms of -- at a consolidated level, it was 0.09 and as far as India is concerned, it was 68%. With regards to our provision for inventory, it was 18 bps -- sorry, with regard to our provision for inventory, it was a reversal of 28 bps, a clear testimony to the fact that we have managed to sell out some of our aging inventory, and that has come as a reversal. And our provision for bad debt was 18 bps. Now when you move to overseas, likewise, the growth in top line has been 9%, EBITDA growth of 13% and the profit after tax growth of 17%. I'm pleased to share with you that our operations in Turkey did well for the quarter.

In terms of the working capital, while overseas for several quarters have managed their working capital very well, I'm once again pleased to share there has been a further reduction of 5 days from 37 to 32 in the overseas entities. This has resulted in an operating cash flow of INR 653 crores in overseas and a free cash flow of INR 518 crores for the quarter. From a return on capital employed, overseas delivered 11.5%, and the return on equity was a little shy of 11%. The more delightful news is that when you look at net debt, i.e. gross debt minus cash, it was negative. So to that extent, it has been extremely well managed and lot of financial discipline continues to be put in place.

In terms of provision towards aging inventory, like in India, there was a reversal of 22 bps, again a testimony to the fact that we have managed to sell out some of our aging inventory, which has come as a reversal of our provision. And from a provision towards bad and doubtful debt was 10 bps, which is something which has been (inaudible) when compared to the same quarter previous year, when it was 14 bps.

Now, therefore, when you look at a consolidated picture from a cash flow point of view, we have delivered free cash flow of INR 1,608 crores for the quarter, and our net working capital has reduced from 41 days in Q2 of last year to 30 days in Q2 of this year. Our return on capital employed and return on equity is 13.5% and 12.9%, respectively, for the quarter at a consolidated level. Again from a gross debt point of view, at the consolidated level, it was 31%. Net debt, as I already mentioned, was at 9%.

Now as we move to ProConnect, we did experience some challenges, but for a start, while the revenue grew by 19%, the EBITDA growth was 78%, but the profit after tax degrew by 68%. This is primarily on account of a loss that we had to suffer in our investment company, which we made at east. Now we, therefore, are trying to put the correction in place. We expect that this would take 1 or 2 quarters, and while this is a large part of the reason for the degrowth, I also must confess that the shift in business from warehouse management to a higher contribution coming from transportation, which has yielded a lesser gross margin and hence a lesser EBITDA and hence lesser profit is also part of the reason as to why there is a significant decline in the profit after tax.

With regards to the services contribution to the overall revenue, at a consolidated level it was 3%. For India, it was 6% and overseas was 2% by revenue. However, from a profit standpoint, services contributed to 16% of the total India profits and to 11% of the consolidated profits. The other interesting aspect of the -- of this quarter was that all 3 lines of businesses, whether it is IT, mobility and services, all grew by 7%, 16% and 12%, respectively. And also furthermore, when you look at between India and overseas, I'm again pleased to share that again IT, mobility and services have registered growth by 3%, 42% and 14% in India, 10%, 5% and 9% in the overseas markets.

Let's take a look at our H1 of the current financial year. We have registered a 13% revenue growth, 29% EBITDA growth and a 24% profit after tax growth. Again both India and overseas have registered a double-digit growth across all these 3 parameters, i.e., revenue in India grew by 14%, EBITDA by 43%, profit after tax by 31%. Overseas grew revenue by 11%, EBITDA by 19% and profit after tax by 20%. As I have already mentioned to you, Turkey, both in Q1 and Q2, has done reasonably well and delivered profit growth. I'm also pleased to share with you that for H1, all 3 lines of businesses that is IT, mobility and services grew at a consolidated level by 8%, 19% and 11%, respectively. Like in Q2, also for H1, both India and overseas registered a growth in IT, mobility and services by 4%, 34% and 16% in India, and 10%, 14% and 2% for the overseas markets. Overall, it has been -- again, from a ProConnect standpoint, we registered a growth of 20% in revenue for H1, 69% growth in EBITDA and 38% degrowth in profit after tax. This essentially comes out of the degrowth that we experienced in Q2, which I just briefly explained.

The overall contribution at a consolidated level for services, just to reiterate for H1, is 19% of the total India profit and 11% of the total consolidated profit for H1 FY '20.

With this, I pause my narrative. I hand it over to you for any questions that you may have.

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Questions and Answers

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Operator [1]

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[Operator Instruction]

The first question is from the line of Pranav Kshatriya from Edelweiss.

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Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [2]

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My first question is, you have demonstrated exceptionally strong execution on working capital side. So just wanted to get a sense that how sustainable it is? Should we expect this to remain at this level by end of the year? Or it can revert back to normal levels of almost 40-odd days effect we have seen earlier? That's my first question. Second question is on ProConnect. Can you just give us a little more sense on what exactly is the problem? In the remarks, you alluded to a reduction in the margin, but if I look at the EBITDA margin, growth is -- EBITDA growth is certainly strong, and possibly, there could be some Ind AS 116 there, but if you can give EBITDA growth on a Y-o-Y basis on a like-for-like basis, it will be helpful. And then third, if you can just brief us that which part of below EBITDA line item is pulling down the profitability for ProConnect?

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Raj Shankar, Redington (India) Limited - MD & Director [3]

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So to your question about working capital, I genuinely think that 30 days at a consolidated level is exceptionally good as you would agree, and this is certainly not sustainable. But at the same time, given our laser focus on managing working capital both in India and overseas, we certainly want to make sure that we get better and better. So to your point that where we currently have approximately 12 working capital turns, we believe that anywhere around 9 to 10 turns is something that we will continue to strike.

With regard to your other question on ProConnect, the point first I wanted to make was, yes, you are right that the EBITDA growth to a certain extent is inflated on account of Ind AS 116. The point to note here is the -- we had an arrangement as far as our operations in east is concerned, such that all the transportation needs and requirements for all our customers was essentially done through a dedicated arrangement where -- or an exclusive arrangement where there were dedicated fleet of trucks that was made available at all times. For any number of financial and other reasons, this transportation service provider, unfortunately, was not able to provide all the transportation needs and requirements and that resulted in us not being able to meet the SLA requirements of our customers, which certainly impacted the business as well as customer satisfaction. Consequently, we tried to salvage the situation by trying to engage some third-party company, which came at a significantly higher cost pushing down the margin. And therefore, this resulted in an aggravated situation where we went into a loss position as far as this operation is concerned in east.

Now on the other hand, we also have a situation on our ProConnect, let's say, standalone business, where, because of a significant shift in the business from the warehouse management services, which used to be a major contributor and which used to yield higher gross margin, and then this shifted to the transportation business, which gives you a higher scale, you would see that our revenue has grown, but unfortunately, the yield in this transportation business is low. And it got further pushed down as some of the rates were -- unfortunately, did not work well for us, resulting in a situation where our margins really came down significantly. To the point where EBITDA shows a growth whereas profit shows a degrowth, as I mentioned to you, on one hand, there is the Ind AS 116 effect, while on the other, there is also a significantly higher interest cost also on account of Ind AS and the depreciation with the compounded problem of the challenge that I talked about in east, resulting in a significant degrowth for the quarter. We hope to correct the situation in the next 1, maximum 2 quarters because this is a complete shift from an arrangement, which was working well for almost about 8 quarters in a very seamless fashion. The last 2, 3 quarters has been a very turbulent period, and we are just making the shift, making alternate arrangements, and we hope to make all the shift in maximum 1 to 2 quarters if that explains.

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Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [4]

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Sir, that explains but just a bit of a clarity required. So if you can help us with for H1 what would be the EBITDA growth adjusted for Ind AS 116? And I was just thinking that if you have incurred higher costs relating to getting a third-party supplier or the penalties, should that not come as a part of the operating cost and hence should not -- it should ideally lead to lower EBITDA on a year-on-year basis? Why this is pulling down the PAT but not the EBITDA?

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Raj Shankar, Redington (India) Limited - MD & Director [5]

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I think it's a very fair question. Just to give you a perspective, when you look at H1, for ProConnect, we grew top line by 20%, EBITDA by 69%, but when you remove the benefit of Ind AS 116, then actually, the EBITDA has degrown by 3%. Now -- and then don't forget because of the -- again, the interest cost being high and on account of Ind AS 116 and the depreciation being high resulting in a degrowth in profit after tax by 38%.

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Operator [6]

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The next question is from the line of Nagraj Chandrasekar from Laburnum Capital.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [7]

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I just had a couple of questions on Turkey. What does the working capital there look like as of now? Are there any -- we are 2, 3 quarters past stage of maximum stress in terms of FX movements and working capital buildup. Are there any further provisions required here? And what does the P&L there look like in the first half on a Y-o-Y basis?

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Raj Shankar, Redington (India) Limited - MD & Director [8]

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To a large part, the working capital continues to be under control. Our debt-to-equity, just to give you a sense, is approximately about 55%. Just give me a moment, please. Okay. So I'll let Krishnan probably answer the part on the working capital, but suffice it to say that the working capital continues to be under control, and our net debt-to-equity is about 55%. This is point number one. Point number two, with regard to the half year P&L, just to give you a sense, our profits or EBITDA growth was quite significant, purely because the previous year same quarter, we literally got thrown under the bus with the ForEx -- Turkish lira devaluation, et cetera. So it makes it look like the EBITDA growth is like 108%. But keeping that aside, our EBITDA has done reasonably well at approximately about 2.7%, and our profit also -- and we have been profitable for the quarter, which was not the case in the previous year. This is for the half year.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [9]

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And just on -- following up on Turkey. In the last couple of weeks, we have seen a sort of spat between India and Turkey regarding various issues. Is there any risk to us as part owners of Arena in Turkey as a result of this?

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Raj Shankar, Redington (India) Limited - MD & Director [10]

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The short answer is no.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [11]

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And then coming back to a follow-up on ProConnect asked by the previous participant. Just wanted to understand, as our business moves more to some cleanly leasing out warehouse space and managing space for clients towards more managing transportation, full-service 3PL for customers. Just wanted to ask, given this experience and experience with the acquisition of Aurora (sic) [Auroma], we did last year, how we are thinking about capital allocation going forward? Because this seems to be the addition of business that comes at lower margin than lower returns on invested capital. So just wanted to get your sense of how you're thinking about growing this incrementally, both organically and inorganically?

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Raj Shankar, Redington (India) Limited - MD & Director [12]

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I think that's a great question. So there was a time, I must confess, in the last almost about 25 quarters where we have been able to deliver pretty much consistently at top line growth and the bottom line growth, more often than not double digits. But we have now come to the conclusion very clearly and we are now redefining our strategy in terms of the way forward, where we now want to be focused on, let's say, largely the warehouse management services and also want to make sure that we place greater emphasis on a margin expansion and a profitable business than driving scale. What has helped us so far is to be able to achieve a certain amount of operating leverage with scale, but the next part of the journey is more about focusing on a few industry verticals, focusing both on the warehouse management services, using the power of technology and systems and be able to drive a more profitable growth than to drive scale and achieve operating leverage. So this is where there is going to be a definite shift in our strategy. We are going through a complete rethink on the strategy, and this, we plan to roll out next year.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [13]

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So would it just -- one last follow-up. Would it just entail leasing more warehouse space and using -- continuing to use 3PL -- third-party fleets for transportation work? Or would it just be more focusing just on building our own warehouse assets and trying to become more of a warehouse owner and operator. Just could you give a sense of practically what that would mean in terms of business strategy?

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Raj Shankar, Redington (India) Limited - MD & Director [14]

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Okay. So what we intend to do? That's the first step in our whole engagement. We have today, definitely, leased a lot of warehouses on a pan-India basis. Our whole internal mix is not about building and operating, we certainly want to make sure that we bring in smart warehouses from just having logistics centers, using lot of technology, using systems, et cetera. So the capital allocation is not about the warehouse per se, but more in terms of investment. And how do we make some of these warehouses into smart warehouses? Using more emphasis on technology and systems. So there would be definitely third-party -- transportation requirements that would get met, but that would be with engaged third-party companies. But our bigger part of the focus, our bigger part of the margin, revenue, et cetera, will come out of how do we convert some of these warehouses into smart warehouses. And through that, get better traction from customers with an expanded margin and higher profitability.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [15]

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Got it. Would there be any sort of peer, either in India or abroad, we could sort of look at as a direct comparable for where you see ProConnect in the future?

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Raj Shankar, Redington (India) Limited - MD & Director [16]

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There are a couple of companies here and there. There is nobody who is working on a complete, even the kind of model that we have in mind. So in fact, some of our own strategic investors in Redington have got -- have built some really -- some state-of-the-art or world-class centers using advanced storage retrieval systems, et cetera. Of course, these are at a completely different scale. But to answer your question, there is nobody prima facie that we are trying to benchmark. Those are our companies in different places be it in Singapore, be it in Taiwan or in some places in Germany that have got some really cool but real smart warehouses.

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Operator [17]

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The next question is from the line of Ritesh Poladia from Girik Capital.

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Ritesh Poladia;Girik Capital;Analyst, [18]

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My question, I think it's Slide 19 of free cash flow statement in the presentation. Sir, couldn't understand there is a direct tax paid of INR 514 crores.

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Raj Shankar, Redington (India) Limited - MD & Director [19]

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Just bear with us. We are just catching up yet. Krishnan?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [20]

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See, this is mainly on account of the reduction in the working capital that had happened between March and now and -- and that's the main reason why it is. So INR 514 crores reduction in working capital. And this is both in...

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Ritesh Poladia;Girik Capital;Analyst, [21]

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It says direct tax paid. It's says it's direct tax paid of INR 514 crores?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [22]

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No, no. It has got interchanged. It is the working capital deployment, which should have been INR 514 crores, sorry.

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Ritesh Poladia;Girik Capital;Analyst, [23]

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Okay. Again upon seeing -- if I seen in your results mostly accounts line, where there is a cash flow statement, your net cash generated from operating expenditures in consol for half year, it's INR 311 crores, and there it is showing INR 941 crores. What was the mismatch on this? I think because of that interchange I guess your calculation in actual has grown (inaudible)

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [24]

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No, no, no. Okay. See, what is there as part of the financial slides that is presented to the stock exchange is there are factoring that gets done sometimes in the quarter end which -- I mean it would impact the cash flow, but what we show in the earnings presentation is eliminating the balance sheet -- I mean, balance sheet-related factoring. This is the pure business performance. From the -- I mean business performance perspective, there is INR 500 crores reduction in the working capital, which has resulted in this INR 600 crores of free cash flow for the quarter. This is from the business. If you eliminate the factoring impact then you can match it with the balance sheet.

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Ritesh Poladia;Girik Capital;Analyst, [25]

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So where does this factoring is involved under (inaudible) accounts? In which head would you account that?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [26]

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It would be part of AR, accounts receivable, in the balance sheet. This was there as of March. There was no factoring that was done as of end of September. So that difference will be there, which would be about some INR 630-and-odd crores.

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Operator [27]

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The next question is from the line of Sachit Khera from Smart Equity.

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Sachit Khera;Smart Equity;Analyst, [28]

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Am I audible?

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Raj Shankar, Redington (India) Limited - MD & Director [29]

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Yes.

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Sachit Khera;Smart Equity;Analyst, [30]

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Sir, I wanted to know how the company thinks about the key strategies for growth in the core distribution business? I mean as we can see that there has been no progress in the company being able to gain the sponsorship of the Chinese brand in the mobile business, for example. And gradually, the market share of those brands is increasing. So that's one thing I wanted to sort of understand what -- how does Redington think about organically growing the business? Are there any strategies that probably the investors are not aware of? Maybe if you could start with that and then I could proceed to the second one?

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Raj Shankar, Redington (India) Limited - MD & Director [31]

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So let me first clarify. The contribution of mobility at a consolidated level to Redington's revenue is 28%. You will agree this is quite significant for a business vertical. Likewise, when you look at India in particular, 24% of the India distribution revenue came out of mobility and in overseas 3-0, 30% came out of mobility. So the first point I want to share with you is both in India as well as outside India, there is a significant contribution from mobility. Now to your point about vendors of different origin, you would probably have seen this announcement in the last couple of weeks, but I'm pleased to share that Redington has now been appointed as a distributor for OnePlus. We have been appointed as an offline distributor for a number of markets in north and east region.

Now we are seriously excited with this opportunity. And this is just to give you a sense that we are building and adding brands to our portfolio in India. Similarly, when you look at outside India, we have a very nice balanced portfolio, where the contribution coming from outside of Apple is almost about 40% to 45% in terms of revenue, if not more. Yes? Just to give you a sense.

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Sachit Khera;Smart Equity;Analyst, [32]

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Okay. Got it. And I mean is the company thinking in terms of expanding, let's say, the product categories? Or I mean I guess I'd like to just understand more about how does the company think about scaling this vertical?

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Raj Shankar, Redington (India) Limited - MD & Director [33]

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Okay. So just -- while I certainly don't want to give a very general answer, but it's important that you understand. Over the last 10, 12, 15 years, the way Redington has grown is there are 4 growth vectors and we continue to participate in each one of them at different times. So we grow by adding brands to our portfolio. Imagine a company like ours having close to 200-plus brands in our portfolio, all technology and mobility brands that you can think of. Second, we address about 13 markets across the emerging markets of India, South Asia, Middle East, Turkey and Africa. So growth through an extensive and expansive network of markets. Third is by gaining and growing the market share, having acquired a brand then we continuously strive towards increasing our market share to become the #1 or a high #2 player for that brand in that market. And the last but not the least, we continuously keep looking for how do we get into new product categories? How do we keep looking at new business adjacencies? So that also drives growth. So over the last 15 years, especially post listing, we have continuously sort of been struggling across these 4 growth vectors. This is the reason why post listing the company has been able to deliver a 15% revenue CAGR and a 14% profit CAGR.

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Sachit Khera;Smart Equity;Analyst, [34]

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Got it. Secondly, this is a small data point. Could I know the accounts receivable base for the Indian as well as the overseas market for Redington? I don't know if it's already given in the slides.

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Raj Shankar, Redington (India) Limited - MD & Director [35]

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I could still do it very quickly. As far as DSO in India is concerned, it is 57 days, DSO for overseas 44 days, consolidated 49 days. Just for your reference, last year consolidated for DSO was 55 days. So there is a reduction of 6 days.

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Operator [36]

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[Operator Instruction] The next question is from the line of Rohit Balakrishnan from VRDDHI Capital.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [37]

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Sir, just wanted to understand, looking ahead maybe couple of years out, do you see the mix of revenues from -- that you have between India versus overseas, with -- the share of India going up over the next 2, 3 years from where it is currently?

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Raj Shankar, Redington (India) Limited - MD & Director [38]

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Yes. We do see the contribution definitely expand. Just to give you a sense. If you look at last year, the revenue contribution from India was 35% and by logical conclusion, overseas was 65%. For this particular quarter, India contribution has increased to 39%. So this is for the quarter. Now similarly, when you look at the half year, India contribution again, from 34%, 35% has gone up to 38%. So to answer your question, over time, we clearly see that the contribution coming from India will continue to be on a rising mode.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [39]

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Got it. That's helpful, sir. So on the point of you increasing the services bridge and to the question that the earlier participant asked and specific to ProConnect. So, sir, I mean whatever margin that we have, although we had improvement in the last year, do you see that sort of declining given that our mix is now changing, which you alluded to, and I actually could not understand in terms of the point around -- so what you explained was that the mix moving towards more transportation, the margins would go down, but it will also help in the overall scale. But from a return on capital point of view, how does the current business stand? And how does the business which you intend to sort of expand into? Is it dilutive or is it accretive? Could you just spend some time on that?

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Raj Shankar, Redington (India) Limited - MD & Director [40]

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Okay. So to give you a sense. If you look at ProConnect a couple of years ago, we were able to deliver a profit after tax of anywhere around 8%, which you will agree for a logistics business is probably at the higher end. But at that time, significant part of the contribution came out of warehousing management services. Now in the recent past and especially post-GST as you can imagine, there has been a significant spike in the transportation needs and requirements, which have certainly given us a quick opportunity to be able to engage with customers using transportation as a way to engage with these customers.

But transportation business as compared to warehouse management services is a lower-yielding business where, just for the purpose of discussion, if the profit -- the profit percentage that we could possibly make out of warehouse management services is somewhere in the vicinity of about -- let's say at a net level about 10%. In the case of transportation business, it is at best about 4%. So with a significant shift in the business in the last few quarters, now we see that the transportation business is allowing us to scale the business all right, but it's also yielding us lower margin, and hence the point I was making is that when you look at, for half year, our profit percentage of revenue is about 4%. Whereas in the past, until about a couple of years ago, it used to be close to 8%. I think essentially this was the point I was making. Now what we are trying to do is we are telling ourselves that, look, we don't want to just drive scale and try to achieve operating leverage just by doing more and more of transportation business. Our core competency and serious differentiator, we believe, is in our warehouse management services capability, and now by bringing in smart warehouses through technology and systems, I'm sorry for repeating that again, so we believe that we can, once again, over time, restore our margin and hence our profitability.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [41]

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Okay, understood. And just on this point, sir, so does this give -- I mean from a customer captivity point of view, does it increase our value addition to the customer in terms of the services that we offer or the stickiness that we have with the customers?

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Raj Shankar, Redington (India) Limited - MD & Director [42]

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Yes. It's a great question. So one of the thought process that we had was, it doesn't matter if a customer has got a transportation requirement, let's use that as -- in a way of -- as they say, putting a foot in the door, and then once you get that business going, you improve the stickiness and then you start to upsell, cross-sell, deepsell, et cetera. But then in the bar game, while it takes a little time for us to be able to engage with that customer into other logistics services, which can be more margin yielding and profit yielding, but that takes time. So we are telling ourselves that even in the interim, while we want to be the supply chain arm or the logistics arm of our customer, we want to place a greater emphasis going forward by focusing more on WMS rather than on transportation. So I'm not saying that we are taking a binary approach. We have, thus far, in the last few quarters, focused more on transportation because we thought that could give us a foot in the door and hence scale. But we have -- having a complete rethink on our strategy where we want to now focus more on WMS, even though it may not give us scale in the short term, but over the medium to long term, it will give us a higher margin and hence a much better profit.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [43]

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Got it. And, sir, just last question from my side also on ProConnect. Is that -- I mean from a medium-term point of view, do you -- I mean do you see that as ProConnect sort of being a separate entity in terms of -- I mean from a listed entity? Or I mean -- or do you still see that -- I mean the thought process is that will be part of Redington for the foreseeable future. I'm talking from a medium-term point of view not maybe 1, 2, years point of view?

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Raj Shankar, Redington (India) Limited - MD & Director [44]

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So we always see ProConnect as continuing to be an important asset of Redington. So to answer your question, whether now, the short term, medium term, long term, this is something very important. And the reason I'm saying that there are 2 points. Point number one, 100% of Redington's logistics requirement is completely serviced by ProConnect in the last 7 years and -- which we wanted to continue into the foreseeable future, and thereby continue to derive benefit on account of efficiency as well as cost optimization. So that's very fundamental. But the whole thought process is, while doing so and having built the capability in warehouse management services over a protractive period of time, why can't we leverage this capability and the infrastructure that we have for third-party -- for a 3PL business, and that is what has got us into ProConnect in the last 6, 7 years. There we have built a very enviable customer base of about 180-plus customers and we have almost about 6.5 million square feet of warehouse space on a pan-India basis. So this essentially is how we see ourselves in the way forward. Now could we, therefore -- sorry, go ahead.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [45]

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Go ahead, go ahead, sir. Go ahead.

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Raj Shankar, Redington (India) Limited - MD & Director [46]

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Could we therefore see ourselves in terms of having, for instance, a strategic tie-up, a strategic partnership with someone who's got really high capability in the area of smart warehouse and technology, et cetera, et cetera, which is very much AI and ML-enabled that we would seriously evaluate, but at the same time keeping the 2 objectives that I've just discussed, over to you.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [47]

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Sir, this is very helpful. I just wanted your quick comment on this being -- still being there. But as an addition to that, maybe as a part of shareholder value creation, can this be also continued with like these companies being separate in terms of being listed entities like maybe a spin-off or something like that? It's what I wanted to understand. Again, coming from the point of view of a -- medium- to long-term point of view?

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Raj Shankar, Redington (India) Limited - MD & Director [48]

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So we would certainly evaluate all possibilities. At this stage, you will agree with me. Last year, ProConnect turned over INR 403 crores in terms of top line. We are still, in terms of size and scale, not big enough. There is a lot more work that needs to be done. So we want to now spend a lot of our time putting our nose to the ground, building really a -- sort of a good world-class company in ProConnect. And if it means having a strategic tie-up and if at a point in time, we think sort of there are ways in which we can unlock value for our shareholders, et cetera, we would certainly consider all of that. But at the moment, we are putting our nose to the ground and making sure that we build and scale this business to make it a world-class company.

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Operator [49]

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The next question is from the line of Aasim Bharde from IDFC Securities.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [50]

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Sir, first question. Sir, depreciation expense is high in Q2 at the consol level, even if you compare it Q-o-Q. Sir, could you call out on to what has led to this sharp rise?

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Raj Shankar, Redington (India) Limited - MD & Director [51]

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It is mainly on 2 counts. One, we discussed about Ind AS 116. While there were some carloads available, we identified few more leased assets, which will -- which had got moved from the lease rental to depreciation in the current quarter, so that had impacted Q2. Second, we have got this FAP implemented in India that has added to additional depreciation cost in India.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [52]

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Okay. So in the next couple of quarters, this Q2 should be the ideal run-rate, right?

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Raj Shankar, Redington (India) Limited - MD & Director [53]

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Yes, in a way of speaking.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [54]

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Okay, okay. Sir, second question. Sir, could you talk about how IT enterprise business has done in Q2 and H1? And what is the visibility for the rest of the year?

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Raj Shankar, Redington (India) Limited - MD & Director [55]

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So in terms of our enterprise business, it has been -- we have, by design, as you would know, decided to put greater emphasis on working capital. So, therefore, instead of driving growth and market share, we have now put a little bigger emphasis on getting our working capital in order. So we have, by design, walked away from a number of big deals because wherever there was an extended credit period or a risk that we felt was beyond our risk appetite, we have shied away. Consequently, our enterprise business, therefore -- overall, like I mentioned to you, our enterprise business has been a little muted. It did better outside India than India, both for the quarter as well as for the half year. But in India, we will -- as far as the outlook is concerned, we are very well poised from going forward to be able to gradually scale this business and both in terms of top and bottom line, but being very mindful of our working capital norms.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [56]

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So should I assume that given the fact that you are going to focus on, say, for example, your mobility part of the business in the near term, at least for FY '20, your consol gross margins would be lower Y-o-Y, right?

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Raj Shankar, Redington (India) Limited - MD & Director [57]

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Sorry. Okay. If you look at gross margin from a percentage point of view, yes, you are right. But -- sorry, just one second. Yes. From a percentage point of view, it could probably -- you're right. Just to give you a sense, for Q2 FY '20, our gross margin was 5.6%. Now we believe that this is, by and large, sustainable, and if you look at H1 of FY '20, the gross margin was about 5.7%. Because the point you need to keep in mind is, we do a fine balancing between mobility on one hand, which in terms of margin percentage could be lower than IT, but IT enterprise definitely has a much higher-margin propensity. But on the contrary, mobility gives you a much better return on capital employed because the amount of credit that you need to deploy would be far less as opposed to the enterprise business, which would also be in line with our expectations, but mobility would be at a much higher level.

So the point I'm really making here is, I urge you, A, on one hand, to look at gross margin, which is fine, but also look at ROCE, and that would give you a complete picture. So when you look at -- if I have to drive this point about ROCE. Where is ROCE? So if you look at ROCE, just to give you a sense. Now for '18/'19, our ROCE was 12%. And I mentioned to you that in H1 of the current year, the mobility contribution in India has been on the rise. And yet when you look at our ROCE, it is 19.9% for half year. This is as far as India is concerned. Does that make sense?

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [58]

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Yes, yes. Yes, it does. Point taken. Sir, and third question, can you just give what -- a guidance on what your full year tax rate will be for this year?

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Raj Shankar, Redington (India) Limited - MD & Director [59]

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It would be about 20%, 21%, India being at about 27%, 28%, overseas at about 15% overall.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [60]

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Okay. And you won't be adopting the new tax rate that was announced by the finance ministry this year, right, for the India business that you...

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Raj Shankar, Redington (India) Limited - MD & Director [61]

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No, no, no. We are adopting that. But after eliminating the disallowances, the -- I mean the tax rate, I mean it is coming at about 28% for us -- for the India part of the business.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [62]

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Okay. Sure. Sir, and finally, could you just give some more details on this OnePlus partnership? Is this just your distribution? Or do you help set up or manage OnePlus stores? And also is this an exclusive tie-up in the north and east markets?

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Raj Shankar, Redington (India) Limited - MD & Director [63]

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Okay. So one is, certainly, they are looking at Redington as an offline distributor, and they have considered our candidature for north and east, point number one. We are not managing their stores, but it's a different business model that we are engaging as far as the off-line is concerned. But I would much rather -- as they say, I don't want to count the chickens before they are hatched, this is a very, very recent relationship, less than 10 days to 2 weeks old, so give us a little more time before we can give a little color and context to this. But the good news is this is a very -- it's a brand which has got a terrific pull, and we are, therefore, excited with this partnership and we see as good opportunity for us to be able to drive growth and capital efficiency.

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Operator [64]

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The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [65]

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Great numbers, congratulations. Sir, I just wanted a clarification on the stand-alone P&L. It looks like there is a big other income of INR 142 crores. What does that pertain to?

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Raj Shankar, Redington (India) Limited - MD & Director [66]

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It is a dividend that is received from our overseas operations during Q2. What we have done this year is, whatever dividend that we have paid to the shareholders, the similar amount we have got as a dividend from our overseas subsidiaries. We found it to be tax effective. And this amount is what has got funded for our dividend payment, and hence in the stand-alone, it is coming there as an income.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [67]

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Sure. So would that mean that overall, from a capital structure perspective, the overseas, let's say, return ratios should be better? And is this something you'll continue to do going forward, considering that, that business is usually highly capitalized?

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Raj Shankar, Redington (India) Limited - MD & Director [68]

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Okay. So if I could take that question. Now to that extent if you see the free cash flow, earlier this dividend amount would get reduced from India's free cash flow. So this time, this INR 136 crores has got reduced from the overseas cash flow. So point number one just so that you understand that the free cash flow, even though we have delivered in overseas a positive free cash flow for the quarter, this is after the dividend amount of INR 136 crores. I just thought it's important to understand. Second, to the point that Krishnan made, we have found a very interesting but a tax-efficient way of being able to use that capital, which we have overseas, point number two. Point number three, to your question about this should, therefore, result in better return ratios, the one thing you would agree more than anybody else is overseas when we look at ROCE, and if they have delivered, for instance, for the quarter, 11.5%., this is dollar return on capital employed. If they have delivered a return on equity of 10.9%., this is dollar return on the capital invested. So, therefore, the point I want to make is returns have been good, reasonably good, provided you looked at dollar cost of capital and the dollar return. Now will this dividend that is getting paid out from overseas, will it improve the return ratios? Yes and no. Return on capital employed, I would agree with you, yes. But return on equity because our interest would go up because our borrowing will go up to that extent. Therefore, your ROE would get, to that extent, compromised. Does that answer your question, Nitin?

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Operator [69]

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Ladies and gentlemen, as there are no further questions, I now hand the conference over to Mr. Raj Shankar, Managing Director, for closing comments.

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Raj Shankar, Redington (India) Limited - MD & Director [70]

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So thank you once again to all for participating on this call. So we had a very good quarter driven by both India and overseas, showing a very strong performance of double-digit growth, revenue, EBITDA and profit. I'm truly delighted that we have delivered a significant positive free cash flow, coming essentially out of managing our working capital very well. ProConnect is one area where we are now going to put a greater emphasis in terms of rethink on the strategy, and we will make sure that in the next 1 or 2 quarters, we give it the thrust that it requires to once again make it into a profitable growth business. Thank you once again to one and all.

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Operator [71]

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Thank you. Ladies and gentlemen, on behalf of Redington (India) Limited, we conclude this conference. Thank you for joining us, and you may now disconnect your lines.