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Edited Transcript of REDINGTON.NSE earnings conference call or presentation 13-Aug-19 12:00pm GMT

Q1 2020 Redington (India) Ltd Earnings Call

Guindy, Chennai Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Redington (India) Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 12:00:00pm 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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* Aswin Balasubramanian

ICE Canyon LLC - Analyst

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Pranav Kshatriya

Edelweiss Securities Ltd., Research Division - Research Analyst

* Vishal Desai

Axis Capital Limited, Research Division - Assistant VP of IT Services

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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 Q1 FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. (Operator Instructions) Please note that this conference is being recorded.

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

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

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Thank you, Neerav. Good evening to all participants. So I have some good set of numbers to share based on our Q1 results. As you would have observed, our revenue growth at a consolidated level was 14%, EBITDA growth of 35%, but adjusted for Ind AS 116, the EBITDA growth would have been 25% at a consolidated level and the PAT growth of 24%. The good news is that both India as well as overseas grew on all parameters. In India, the revenue growth was 14%, EBITDA growth was 46%, but when adjusted for Ind AS 116 was 36% and the PAT growth was 23%. Likewise, when you look at overseas, the revenue growth was 14%, EBITDA growth of 27%, and when adjusted for Ind AS 116, is 17% and the PAT growth was 25%.

The interesting aspect is not only has both India and overseas done well across all parameters, all lines of businesses have also registered a growth. For example, IT grew by 9% at a consolidated level, mobility at 22% and services grew by 10%. Now when you break that down between India and overseas, I'm delighted to share that India grew IT by 6%, mobility by 23% and services by 18%. Overseas grew IT and mobility at 11% and 21%, respectively. Services registered a degrowth of 4%, largely on account of degrowth on the post-sales support services.

Likewise, when you further break down IT in India between enterprise and consumer, both have registered a growth, which is also true for big overseas business. Now when you look at working capital, I'm pleased to share that as compared to the previous year, our working capital remains the same at 44 days. This would represent about 8.3 working capital turns. Now when you further break that down between India and overseas. In India, the working capital went up by 5 days, largely on account of inventory increase and also the AP days having come off, but overseas, the working capital days reduced by 3 days.

Now from a free cash flow, we had negative cash flow, both in India and overseas, largely on account of the spike in working capital, and hence, at a consolidated level, it was a negative free cash flow.

The 2 important parameters of ROCE and ROE have registered a growth. On ROCE, both in India and in overseas, there was growth. At a consolidated level, we delivered 13.7%. Likewise, in the case of return on equity, both in India and in overseas, there was a growth compared to the previous period, and at a consolidated level, we delivered 11.2%.

The net debt to equity was 0.43. So we still continue to keep our debt levels well below the total net worth of the company.

In terms of provisions, similar to last year, our inventory provision was 0.35%, up -- just bear with me.

(technical difficulty)

My apologies. I went on mute for a brief moment as I got lost with the numbers.

I repeat again, with regard to inventory provision, it was 0.35% at a consolidated level. The previous year was 0.34%. The bad debt was nil provision, largely on account of reversal of provision in overseas and about 8 bps as far as India is concerned. However, when compared to the previous period, it was 0.26% on the bad debt provision.

Now with regard to ProConnect, they have registered a growth of 22% and -- on the revenue -- on the EBITDA, the growth was 57%, however, when adjusted for Ind AS 116, was 27%. The profit after-tax grew by 1%. This is largely on account of increase in interest as well as on the depreciation and amortization. The EBITDA margins, however, is at 16% at a consolidated level for ProConnect.

The emerging businesses are small, continue to be a relatively smaller number, but I'm happy and pleased to share that they have registered a growth of 23%, particularly a strong growth in the cloud business at 47%.

The overall services profit contribution to the India profit was 23% for Q1, which when compared to the previous period was 30%. And at a consolidated level, the services profit after tax was 12% compared to 15% in the previous year same quarter.

So with this, in conclusion, overall, we have grown both India, overseas as well as on every line of business and working capital remaining flat at 44 days.

This was pretty much the summary. I turn it over to you for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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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Couple of questions. Considering overall weakness in the economy, do you think that India growth -- such a strong growth would be sustainable? And second question is, inventory provision has remained high. I mean we were anticipating it to come down a bit. Any color on that will be helpful.

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

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So I would agree with you that we are approaching the current quarter of Q2 and probably one more quarter to the end of the year with a little more of cautious outlook. Given the various liquidity crisis that is there in the market, we are seeing that there are delays with regard to receivables and collections, which is also one of the reasons why you're seeing the working capital has gone up. So what we have only tried to demonstrate is we are extremely mindful of the risk. We are extremely mindful of the -- also the opportunity. So we are taking a very cautious approach. And for example, we have walked away from a number of opportunities, particularly on the enterprise business where we felt that there can be a bit of a challenge with regard to the credit period and collection. And to that extent, therefore, we could have compromised on growth, but we certainly want to make sure that the business that we do is profitable, and at the same time, capital-efficient.

To your other question about inventory provision. Yes, particularly for Q1, the inventory levels was much higher than we had anticipated while the general elections on one hand, all of us are aware, this has a sort of bearing to this because of the code of conduct. So the business did get slowdown. It was more conspicuous than we had anticipated. So this led to some of the inventory pile up. But we are -- as we speak, we are more than reasonably confident that we should be able to bring the inventory levels down, and more importantly, the aging inventory down. So you should see improvement in the provisions towards inventory and stock obsolescence going forward.

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

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Sir, I just have a couple of follow-up questions. I mean thank you for the detailed answer on the India part. If you can just elaborate how are you seeing demand for the IT enterprise, consumer and mobility vertical in India? And secondly, should we expect this low bad debt provision to remain low for the entire year? Or it should normalize to 10 basis point thereabout that we see generally?

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

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So I'll take your second question. So yes, the bad debt levels would get normalized more in the vicinity of around 10 bps. You're right. Of course, particularly for Q1, it was good and way within our norms. With regard to the other question, I'll let Krishnan answer please.

Okay. So -- Sorry. I will continue. Krishnan had to just step out. So with regard to how we look at the opportunity in India, we see that the -- on the IT side, on the consumer, we expect a sort of a single digit growth. We are not seeing a great bullish trend, though typically this quarter, for various festival reasons, tends to be normally a strong quarter. As far as enterprise is concerned, opportunities are there, but for us, we are extremely cautious, I repeat again, in terms of which deals and which projects to take and which not to participate. So to answer that question, is there opportunity and demand on the enterprise? The answer is, yes, there are. But we are being extremely cautious. So at this point in time, we do not want to risk capital. Wherever we think there is a requirement for a long credit period, we are clearly walking away from such transactions. Wherever we are not able to get a commensurate credit period and a credit support from our vendors, we are clearly not participating in such transactions. We are attaching a lot more importance to profitability and capital efficiency than necessarily on revenue growth, if that answers your question.

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Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [6]

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Yes, that answers, but just a small follow-up. I mean can you say that these growth opportunities are largely in the government side or they are more into the private side?

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Raj Shankar, Redington (India) Limited - MD & Director [7]

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So I will say that probably about 1/3 is on the government and about 2/3 is on the private. So -- but the bigger reference that I was making was more to the 1/3 of the business, which is the government related and not necessarily the 2/3, which is private.

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Operator [8]

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(Operator Instructions)

The next question is from the line of [Rajesh Khateer], an individual investor.

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Unidentified Participant, [9]

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I just want to understand like what is the impact of a depreciating INR when it gets -- when it depreciates gradually over a period of time and when it depreciates sharply in a short period? So for example, in the last few days, it has moved sharply from INR 68.7 to INR 71.4. So what is the impact in both the scenarios?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [10]

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See, as a concept whenever there is a gradual depreciation, that should not have an impact. Whenever there are spikes, for some period, there could be an impact, and over a period of time, it will get covered. But in the specific case that happened in the recent past, there was an appreciation that was also steep and there was a corresponding depreciation, which over a 60-day period, which is our working capital cycle, is not a major issue, which would be part of our pricing. So as far as the recent movement in rupees are concerned, it had a neutral impact as far as the Indian pricing and margins are concerned.

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Raj Shankar, Redington (India) Limited - MD & Director [11]

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So just to add to what Krishnan said, I just want you to keep in mind that approximately about 75% but tending more towards 80% of all purchases, the vendor bills in Indian rupees. So in many ways, we are agnostic to whether the rupee has appreciated or depreciated in many ways. Of course, to the extent of 20%, please take cognizance of what Krishnan said. Thank you.

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Unidentified Participant, [12]

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Okay. Sir, my next question is, like, I've seen your company's quarterly performance over last few years. I mean this quarter it was fantastic, no doubt about it, but what are the factors -- why is always Q1 relatively weak for us and Q2, Q3, Q4 are stronger, comparatively? Why is it always like that?

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Raj Shankar, Redington (India) Limited - MD & Director [13]

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So the reason is, if you look at Q4, it tends to be normally a bumper quarter for us. So if you look at the past, my sense is that approximately Q4 would contribute to something like 33% or almost 32% to 33% of the total company's annual revenue or profits. Because that is the case, generally, therefore, Q1 for us tends to be a little soft because we have really maxed out in the previous quarter. This is more the historical trend.

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Unidentified Participant, [14]

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Okay. And so like the ProConnect's profit, which you mentioned, were impacted by the interest cost and depreciation due to Ind AS. So -- like, will we see similar impact in any other quarter of this year?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [15]

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See, there are actually 2 aspects to it. One is the increase in interest cost and increase in depreciation cost on account of Ind AS change. That -- this impact you will see in the next 3 quarters also because this had come into effect from 1st of April '19. So whenever we make a year-on-year comparison, there will be a spike in interest cost and depreciation for the next 4 quarters vis-à-vis last year.

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Unidentified Participant, [16]

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Okay. And my last question sir, you have given a guidance -- where you want to be your ambition of 16% to 18% of ROCE by financial year 2021. What is the target ROE? Like, will it be, like, 13% to 14%? I mean the historical ROEs at one time your company used to post 18% to 21%. Like, so that -- like, should we expect the new normal to be always in the range of 13% to 14%? I'm talking about ROE.

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [17]

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So typically, our expectation is between 16% and 18%.

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Unidentified Participant, [18]

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That is on the ROCE, right?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [19]

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I'm talking about the ROE, which is about 16% to 18%.

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Operator [20]

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(Operator Instructions)

The next question is from the line of Vishal Desai from Axis Capital Limited.

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Vishal Desai, Axis Capital Limited, Research Division - Assistant VP of IT Services [21]

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Congratulations to the management on a strong quarter. Just a quick question. You all outlined the outlook for the Indian IT business. Could you all give us some sense, first, on the India Mobility and the same for the overseas business on the IT and mobility side as well?

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Raj Shankar, Redington (India) Limited - MD & Director [22]

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So as far as mobility is concerned, we expect that as long as there are no changes to the distribution landscape, we should continue to see good growth momentum going forward. As far as outside India is concerned, again on the mobility piece, there are some regions, which are doing well, particularly Africa. There are some regions, which are a little slower than how it was the previous year, which is in the Middle East, largely because the distribution landscape has undergone a change, where we used to be one of 3 players, so there is an addition of one more player. So we expect, therefore, the mobility business overall to register a growth, but it will be more modest.

As far as IT is concerned, the enterprise part of the business continues to show good traction. We expect that to continue. On the consumer side of the business, largely it is dependent on the growth of PCs, which to a large extent has been muted. So if that gives you a perspective.

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Vishal Desai, Axis Capital Limited, Research Division - Assistant VP of IT Services [23]

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Sure. And just to get some sense in terms of the overseas performance in Turkey, while I believe this time the growth has been flattish from what you mentioned in the investor deck, but the spike in the tax rate, I assume this is largely to do with the Turkish lira depreciating, how would I put it, a little more aggressively than expected?

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Raj Shankar, Redington (India) Limited - MD & Director [24]

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Okay. So overall, to give you a perspective, Turkey, there was a revenue growth, one. There was also a strong double-digit growth on EBITDA. And because the previous year we had sort of made a loss, this year, therefore, we have made a profit. So overall, while the business continues to be at a low ebb in terms of the overall size of the opportunity, I think, we have managed to make sure that our profitability is still protected, and we are making sure as we had said 1.5 years ago that we are making sure that our capital is deployed and the receivables are under control and our inventory is also within norms. So overall, capital -- working capital management is under control, and also, there is a higher focus on profitability than on revenue growth.

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Vishal Desai, Axis Capital Limited, Research Division - Assistant VP of IT Services [25]

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Sir, one last, if I may. While your outlook in the overall business context has been taking a cautious stance given the overall liquidity prices, just from a very high-level understanding, is there any of the accounts or any of your deals which you think there could be a potential collections issue due to which you are sounding a little cautious despite the strong performance in this quarter?

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Raj Shankar, Redington (India) Limited - MD & Director [26]

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So first of all, the answer is no. There are delays, but we do not expect any defaults that worry us or that concerns us. The reason for just giving a cautious outlook is only because there are so many uncertainties that you are aware of. And given these very uncertain times and with lots of these liquidity crisis challenges, we just want to make sure that we are not putting a higher focus on driving revenue growth, which is not what we want to do in these times. We would much rather make sure that the business is profitable, and we are capital-efficient, and that's clearly the focus. And hence when probably, I don't want you to overread into my cautious statement anymore then we are not giving revenue growth and market share priority in these times. We are giving profitability and capital efficiency highest priority. That's the message.

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Vishal Desai, Axis Capital Limited, Research Division - Assistant VP of IT Services [27]

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Much appreciated, sir. Krishnan, just one last. I think I missed the earlier commentary where we mentioned the services contribution of the PAT to the overall India and consolidated numbers. If I can just reconfirm, the contribution for the quarter was 30% in the previous quarter, that is a year back and 15% for the consolidated PAT, right?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [28]

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Yes.

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Operator [29]

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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 [30]

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Congrats on a great quarter. Just couple of things. One is, in what we're seeing today, is there anything that you're seeing in terms of the CPs, the debt that relates to CPs, is that continuing to be more than what it used to be before? And what is the contribution of CP to the overall debt number and the cost of debt as well, please?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [31]

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Yes. It is definitely smooth for us. There were some issues as far as the CP market was concerned, mainly in Q3. And then starting from Q4, it got eased out. But I can say very clearly, the risk appetite in the market is less. So to that extent, obviously, there can be some small issues, but overall, we have no challenge. A very significant part of our debts in India is constituted by CP, and if you take our recent rates, the recent rates are at about 7%.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [32]

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Sure. The second was, this quarter, I think, we would have got the residual sort of revenues from integration of Auroma. How much would that be versus the previous quarter, incrementally?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [33]

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Yes. From Auroma for the current year, we have got a revenue of about INR 21 crores and the profit is up about INR 1.2 crores.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [34]

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Sure, sure. And lastly, this -- if you look at the overseas business, there also we are basically seeing much lower growth in the enterprise, on the IT side of things. So just wanted your thoughts on why are we seeing such similar behavior in both markets? And secondly, do you think that there could be a comeback in terms of the IT side of things there? And finally, how would you characterize that market today? And what are the risks that you see in that market?

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

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So Nitin, I don't know how you picked up this point about enterprise, IT and overseas being slow. On the contrary, for Q1, they registered a strong double-digit growth. Number two is the previous year, FY '19, in the overseas, it was enterprise business on IT, which again grew double digit. So I just wanted to clarify. Probably what...

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [36]

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What I was referring to was the whole IT piece, I didn't mean enterprise, apologies there. But the overall IT piece is what I was referring to, yes.

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Raj Shankar, Redington (India) Limited - MD & Director [37]

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In lighter vein, Nitin, if you consider 11% growth in IT overseas as being a little anemic, then probably we'll have to talk again. But on a serious note, I think, given that almost 60% of the business comes out of consumer IT in the overseas markets, 40% of the business coming out of enterprise. Consumer, as you know, if PC is a barometer, PC growth has been pretty muted all across the globe and more so in this part of the world of Middle East, Turkey and Africa. And in spite of that, if we have been overall able to deliver for the quarter 11% growth, I would like to believe we have a pretty good lead and pole position in the marketplace, if that explains?

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [38]

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Sure. That explains pretty well.

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Operator [39]

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The next question is from the line of Aswin Balasubramanian from HSBC.

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Aswin Balasubramanian, ICE Canyon LLC - Analyst [40]

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Just wanted to know in terms of this working capital change, which you mentioned the cash flow. Like, what would be the contribution of, firstly, from India and from overseas? So you mentioned about INR 1,071 crore increase in Q1. So how much would be between India and overseas? And within India, like, what would be the sort of mix between -- I mean, like, how would it be between the receivables inventory and sort of creditors. Because, like, from what I can see from your P&L, the inventory seems to have actually kind of come down, right, like, the change in inventory -- that line item is about INR 115 crore decrease. So just wanted to know, like, which of the items has actually contributed to this sort of increase?

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Raj Shankar, Redington (India) Limited - MD & Director [41]

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Okay. So let me give you a quick consolidated picture. At a consolidated level, if you recall what I said was that it was 44 days in Q1 of FY '19 and we have the same working capital days of 44 in Q1 FY '20. Now when you look at inventory days, it is almost similar. This year, it is 34, previous year was 33. Now what has happened is, while the debtor days have come down by a good 1 week from 56 days to 49, so has the creditor days from 45 to 39. So essentially the -- because of the fact that we played cautiously on the enterprise space, on the IT side of the business, which is where we typically have to give longer credit period to the customers on one hand and we also have a longer credit period from the vendors. During this quarter, our mobility business grew quite strongly where our receivables and payables are much lower compared to what it is for enterprise IT. So this is where the difference is. Does that explain?

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Aswin Balasubramanian, ICE Canyon LLC - Analyst [42]

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Okay. But in absolute amount, like, between -- I'm talking about from a sequential perspective because if I look at your cash flow statement, it says about INR 1,070 crore working capital change. So from that perspective, just wanted to understand, like, sequentially how would -- from absolute terms, what would be contributing to this INR 1,000 crore? Like, if you just were to split it between India and overseas and between receivables and creditors?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [43]

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See, if you take a split of this, about INR 350 crores would be the negative cash flow from India and about INR 590 crores from overseas. And as Mr. Raj mentioned, it is primarily on account of the reduction in the AP days and a marginal increase in the inventory days. AR has come down in this period, so that had no effect as far as the cash flow is concerned.

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Aswin Balasubramanian, ICE Canyon LLC - Analyst [44]

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AR, both in India and overseas?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [45]

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Yes.

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Aswin Balasubramanian, ICE Canyon LLC - Analyst [46]

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And what was your total India debt?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [47]

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India?

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Aswin Balasubramanian, ICE Canyon LLC - Analyst [48]

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Debt.

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [49]

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Debt was INR 1,770 crores.

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Operator [50]

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(Operator Instructions) The next question is from the line of [Rajesh Khateer], an individual investor.

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Unidentified Participant, [51]

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I had 2 questions. One is on the Apple. Now that Apple has only 2 distributors in India, so what is the market share in India, specific to Apple's iPhone sales? So I'm not referring to any of other Apple products, just iPhone. And we keep hearing that iPhone sales are down and so wanted to understand how much does Apple sales in India contribute to revenue and PAT as a percentage of consolidated revenue and PAT?

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Raj Shankar, Redington (India) Limited - MD & Director [52]

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With due respects, we would have to refrain from giving any specific numbers for any specific brand. So apologies. What I could tell you is as follows: the growth of mobility business in India was 23%; the growth of mobility outside India was 21%. And so one is growth. And the other thing that I would want to tell you is, in the mobility space, we have grown on every brand, and overall, it has been a good quarter. I would -- I'm afraid I'm constrained not to be able to give you any specific numbers. Appreciate your question.

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Unidentified Participant, [53]

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Market share has grown. I just wanted to understand whether the brand you're dealing in, has that market share also grown? I mean even if you cannot give absolute numbers, so has that been growing or like can you give some color on that? Is it possible?

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Raj Shankar, Redington (India) Limited - MD & Director [54]

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I can tell you overall the brand has grown and grown quite nicely. One has to take it in the context of the price and the market share within that price range. It may not be fair to compare a brand in the overall mobility opportunity. It is important to compare the brand, specific to pricing, and in that price segment, they have a good market share and it is growing.

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Unidentified Participant, [55]

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All right, sir. Sir, my second question is, like, is there any opportunity to tie up with any of the Chinese brands in mobile phones, which are seeing very strong sales?

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Raj Shankar, Redington (India) Limited - MD & Director [56]

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The effort is on. The only challenge we have is, honestly, beyond a certain stage, we want to make sure -- because by it's very nature of the business, the mobility business does not give -- lend itself to a margin as good as we make in IT. However, the working capital efficiencies could be better. So we always want to moderate how much of business we want to do on the mobility space, and within that, which brands do we want to do where we can grow our margins, at the same time, have a capital efficiency as per our internal norms.

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Operator [57]

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(Operator Instructions)

As there are no further questions, I will now hand the conference to Mr. Shankar for closing comments.

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Raj Shankar, Redington (India) Limited - MD & Director [58]

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Thank you, Neerav. So once again, very delighted with the set of results for Q1, a double-digit growth on revenue, EBITDA, PAT, even adjusted for Ind AS 116 at a consolidated level. It is very true for India, very true for overseas. We grew every line of business at a consolidated level as well as in India and overseas. We managed to keep the working capital at the same level. ProConnect has once again delivered a strong double-digit growth in revenue and EBIT and EBITDA. And our ROCE and ROE have improved compared to the previous year. Thank you, and a good day to all.

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Operator [59]

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Thank you very much. On behalf of Redington (India) Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.