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Edited Transcript of REDINGTON.NSE earnings conference call or presentation 11-Jun-20 12:00pm GMT

Q4 2020 Redington (India) Ltd Earnings Call

Guindy, Chennai Jun 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Redington (India) Ltd earnings conference call or presentation Thursday, June 11, 2020 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

* Sowmiya Manickam

* Sriram Ganeshan

Redington Gulf FZE - CFO & Director

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Conference Call Participants

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* Aasim Bharde

IDFC Securities Limited, Research Division - Research Analyst

* Aditya Bagul

Axis Capital Limited, Research Division - Assistant VP of Midcaps

* Jayesh Gandhi

Aditya Birla Sun Life AMC Limited - Fund Manager

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Pavan Ahluwalia

Laburnum Capital Advisors Private Limited - MD & Director

* Pranav Kshatriya

Edelweiss Securities Ltd., Research Division - Research Analyst

* Rishabh Chudgar

* Ritesh Gandhi

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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 Q4 and FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinion and expectation 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 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, sir.

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

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Thank you. Good evening to one and all. We are pleased to share with you the performance for Q4 FY '20 and the full year, financial year 2020. So let me start with Q4, though I would want to lay more emphasis on the full year, financial year '19/'20.

The revenue grew for the quarter at a consolidated level by 1%, whilst the profit de-grew by 29%. This essentially happened or largely happened on account of the ProConnect performance being a big drag. We will talk about it in a short while. But if, for a moment, we exclude ProConnect out of the equation, our revenue growth, of course, would have continued to be at 1%, but our profit decline would have been 3% with an EBITDA growth of 4%.

Now when you break this down by geography, India for Q4 registered a revenue de-growth of 7% and a profit de-growth of 74%. But again, for a minute, with your permission, if I exclude ProConnect and look at our India Distribution business, the revenue de-growth was 7%, whereas the profit growth, profit after tax, grew by an impressive 33%.

Now when you look at overseas, overseas grew top line by 5%, EBITDA by 8% and the profit after tax by -- de-grew by 14%. This is largely on account of the interest cost being higher during this period and the tax in Turkey, which contributed handsomely to the profits, therefore, the tax component became larger.

Whilst sharing this, I hasten to add that being the start of or the -- through the second half of March being the COVID period, we had an impact on India Distribution by about INR 800 crores of sales which we lost; in Middle East, Turkey, Africa, we lost about $110 million of business; and in Singapore, South Asia, we lost about $27 million. These were confirmed orders, but we were unable to execute on account of lockdown. This totals to somewhere in the vicinity of about INR 1,800 crores which would have, of course, pushed the top line impressively by another 15%, and even the bottom line, from a distribution standpoint would have been at least in the vicinity of additional INR 20 crores to INR 22 crores.

But whilst talking about COVID, I already shared with you on our call on 30th April that we did come up with a Redington playbook, which we called it as the 7 Cs, starting with making sure that our people are completely safe and protected. Thus far, there have been very few cases, positive cases, but we have managed to ensure that we continue to support them and their family. And we hope and pray that this number does not increase.

On the other hand, the 7 Cs basically relates to cash flow, which, again, I wish to share with you with a higher level of confidence today than on 30th April, that we have managed to secure and have a very reasonably comfortable position with regard to our cash flow. And notwithstanding whether this COVID is going to play out to have a pessimistic or a negative impact or a severe impact, I think we are reasonably well prepared. We are focusing a lot on collections. We are making sure that we are frugal on costs. We have also want to share that the management has taken a cut in the compensation with the clear objective that once we complete or pass over this COVID period, we should be able to get the business back to its old glory.

From a customer point of view, we stay very closely connected with them and continue to be an important bridge between the vendor and the end customer. And very importantly, we have managed to ensure that we have not lost a single contract. On the contrary, we continue to reinforce our engagement with our vendors. We have ensured that we put in all controls so that if at any point in time we know that there is a problem on account of any issue, we have a contingency plan and a remedial plan in place. We also make sure that we communicate regularly to all our stakeholders, particularly our employees, to make sure that they follow all the hygiene conditions and practices.

Sorry for the digression, just to come back, therefore, I was talking about the overseas for Q4, which grew top line by 5%, EBITDA by 8%, but de-grew profits by 14%, largely on account of increase in interest cost and the tax in Turkey.

If for a minute we were to look at from a working capital perspective, for the quarter, I am very pleased to share that the consolidated level, we brought down the working capital by 3 days. Here, overseas continued to maintain their working capital at 29 days, both for last year and this year; whereas in India, there has been a significant reduction from 43 days last year in Q4 to 33 days in Q4 of FY '20.

The other very gratifying part is that the company delivered positive free cash flow, both at India and at overseas level, delivering a positive free cash flow at a consolidated or global level of INR 1,267 crores. The return on capital employed, if taken at a net debt level, this works out to about 16.3%, largely coming out of overseas which delivered a 20.3% ROCE. Similarly, with regard to our gross debt-to-equity, this was 0.54 at a consolidated level, net debt-to-equity was just close to being 0 at 0.03.

In terms of the full -- the ProConnect, I must mention here, this was a big setback for this year, particularly for Q4 where we delivered a revenue of about INR 95 crores, but de-grew profits or made a loss of INR 37 crores. This is largely coming out of the trade advances that we had paid, if you remember, from our operations in East to RAPAL, which unfortunately we had to take a provision because the partner did not pay us the settled trade advance. And in the meantime, since COVID had come into place, so that has become a very convenient excuse. So we did have to take a big provision there. We also had to take an impairment, both at RCS level as well as at Auroma, which resulted in the profit after tax being minus INR 37 crores.

If for a minute, I switch gears and go to the full year FY '20, the revenue growth was 11%. And what is very -- again, very gratifying is that we breached a revenue of INR 51,514 crores. We had this fond desire of breaching this INR 50,000 crores mark, which I'm happy that we could deliver in a rather difficult year. And in terms of the EBITDA, we grew by 10% and the profit after tax de-growth was -- sorry, growth was just 1%. This is essentially on account of ProConnect. Therefore, if we exclude ProConnect, the profit after tax growth would be 20%.

As far as India is concerned, which includes Distribution and ProConnect, the revenue growth was 10%, and the profit de-growth was 16%. But if for a moment, you exclude ProConnect from India and only look at the India Distribution business, our top line grew by 10%, EBITDA by 17% and profit after tax by 45%. However, ProConnect, on the other hand, did deliver a turnover of INR 432 crores, thereby growing at 7% year-on-year, but made a loss for the full year at INR 57 crores. Again, a big part of this is a provision towards the trade advance, which was given; also, there were impairments; and we also had some of the contracts on which our margins came under pressure.

If we, for a minute, shift to overseas, for the full year, the revenue grew by 11%, EBITDA by 17% and profit after tax by 10%. Now here, again, I must mention Turkey. They had a very good year and grew on all, the revenue, EBITDA and profit after tax for the full year.

If you for a minute look at it by business vertical as an IT, Mobility and Services, I'm pleased to share all 3 businesses grew; IT at 2%; Mobility was very strong at 26%; and Services grew by 9% at a consolidated level. The -- at an overseas level, again, IT, Mobility and Services registered a growth of 7%, 18% and 6%, respectively. In India, the one low light being that IT registered a de-growth of 5%, but this was more than made up by Mobility, which grew by an impressive 51% and Services grew by 11%.

If for a minute, again, we look at the working capital, at the consolidated level, we brought down the working capital from 37 days for FY '19 to 31 days in FY '20. Overseas continued to be steady. However, they brought it down by 1 day from 31 days to 30. India had an impressive working capital reduction from 48 days in FY '19 to 31 days in FY '20. This certainly was one of the big reasons why we also delivered free cash flow, positive free cash flow for the full year FY '20 at a consolidated level at INR 967 crores. This was contributed significantly by India at INR 792 crores and by overseas at INR 175 crores.

Again, if you look at the return on capital employed, the -- at a consolidated level, it was 18.1%. I hasten to add here that we have taken the net debt basis. And overseas was a significant contributor at 19.8% ROCE with India at 15.8%. On return on equity, at a consolidated level, we delivered 12.6%, which was 12.8% in the case of overseas and 12.1% in the case of India. At a gross debt-to-equity and at net debt-to-equity, it was 0.54 and 0.03, respectively.

In terms of provision, at a full year level, the inventory provision was just 2 bps in the case of India, 8 bps in the case of overseas, thereby the inventory provision was about 6 bps. In the case of provision towards bad and doubtful debt, the -- at a consolidated level, it was 0.1%, with overseas at 2 bps and India at 22 bps.

I certainly share with a heavy heart and a tinge of sadness that ProConnect, for the full year, registered a growth of 7% turning over INR 432 crores, but made a loss of close to 56 -- INR 57 crores and largely, again, coming out of the trade advance, which I already mentioned. So for us, the biggest learning from all of this, and I must confess, if the one thing that all of you would certainly have in your mind, is that for this company, ProConnect, which had an impressive past, where we grew the top line and bottom line by 6x in 6 years, 2013 to 2019, we grew revenue from INR 65 crores to INR 404 crores in FY '19, from INR 4.4 crores in FY '14 to INR 29.5 in FY '19. So we had an impressive track record, but I must confess that we in spite of making a significant investment in the acquisition of the asset in East, we still -- the company was largely managed by the erstwhile the owner of the company. And we should have taken all necessary steps towards changing the management and putting in all our systems, processes and controls. Since in the first couple of years, it was working well and since the arrangement with the partner was such that they would provide all the transportation services for the entire operations in East and, therefore, we did not have to invest in anything to do with transportation, and we thought that was a good arrangement to keep the business asset-light. But in the absence of not having our own management on the ground and not putting in effective controls, giving trade advances, which were not properly scrutinized, I certainly stand guilty in front of all of you as -- that we could have managed it better.

The only thing that I want to tell you now is we certainly have put a complete rethink and have got a new plan in place. We are very confident that in the way forward, we should be able to get ProConnect. This year will be a year of correction and consolidation. We will definitely. A big part of the issue is already behind us. We have taken the necessary hit for the year gone by. We are bringing in a lot of changes in terms of organization structure, business structure and putting in much better controls and making sure that we focus more on profits there on scaling the revenue.

With this, I will now want to hand it over to the -- to all of you for your questions. Before I do that, I just want to share with you that I have on this call, my colleague, who is the CFO for our overseas operations, Sriram Ganeshan. Sriram is a chartered accountant and has been working with Redington for 20 years. I would say he has been very instrumental in helping the company through this whole evolution from being a small company in the first, second year of operation at $35 million to now last year in FY '20, we breached the USD 4 billion mark, setting up the complete operations, taking care of the Center of Excellence in India, taking complete ownership and accountability and amazing individual, extremely knowledgeable, very analytical, very mature. We took your feedback that it would be good to have somebody from overseas, which has been a significant contributor to the top and bottom line of the company for the last several years, if not a full decade, we thought it may be a good idea to have him on this call. So if there are any questions relating to META, which is Middle East, Turkey, Africa, Sriram would be delighted to answer that. Sriram, would you just want to introduce yourself before I hand it over for questions from the investors.

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Sriram Ganeshan, Redington Gulf FZE - CFO & Director [3]

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Sure, sir. Thank you for the kind words. Hello, everyone. Wish you a very good evening, and I hope all of you are keeping safe. As Mr. Raj said, I've been working with this great institution for the last 20 years, and I am responsible for finance and the Center of Excellence operations for Redington Gulf. So happy to address any questions that you may have.

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Raj Shankar, Redington (India) Limited - MD & Director [4]

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Thank you, Sriram. Back to you, yes.

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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 Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [2]

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Hope you are all safe and well. I just had 2 questions. One is on, if you could give some color on those -- the 3 businesses within logistics, which is ProConnect, Auroma and Rajprotim, what are the changes that you're looking at strategically within those businesses? I am sure ProConnect on its own is doing pretty well. But if you could give some color on each of those. And whether do you think there is a need for CapEx-heavy model for the Transportation business and your thoughts there?

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

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Thank you. Nitin, for your question. Krishnan, I will take your help subsequently. Let me just give a perspective and then if Nitin has a follow-on question you may want to add. So first is, Nitin, when you look at the 3 businesses, just to give you a sense, the RCS did approximately about INR 73 crores and change as far as FY '20 is concerned, and -- but, however, delivered a loss a little shy of INR 50 crores. Now when you look at Auroma, we did about INR 82 crores and delivered a profit of about INR 3.4 crores. Krishnan, wherever you feel the numbers need to be sharper, you may chip in. And the balance, as you can imagine, comes out of ProConnect. Our biggest challenge has been that since a good part of the capital was invested in funding RCS and Auroma, et cetera, so there was a huge burden on ProConnect in terms of interest cost and what have you. So if you have -- the question is, in terms of the way forward, what do we plan and what's exactly our strategy. The first thing that we would want to do is completely relook, reassess our RCS operations, where we have brought in a completely new team. It's already in place, and there are -- now all the contracts are now being vetted and validated. And we believe that in the next 1 quarter, notwithstanding COVID, we should be able to at least put this RCS business, at least, at being efficient and at least starting to breakeven. However, we are also evaluating the opportunity if there are any other possibilities of unlocking value. But I will, for a moment, leave that as -- just as a point for you to note though I may not be in a position to dwell into detail.

On the other hand, as far as Auroma is concerned, while the company is doing reasonably well and profitable, what we intend to do is to merge it during the course of the year and make it as a part of ProConnect so that we have 1 ProConnect, no more of having RCS and Auroma, et cetera, so that it becomes very clearly 1 company having operations on a Pan-India basis. The primacy to warehouse management and mission-critical services is what is going to be the focal point. Transportation businesses will only be a part of the total logistics solution, but transportation as a business since it tends to be yielding very low-margin and profits, we have, therefore, decided to completely downsize that part of the business. There was an endeavor towards doing the Transportation business in the past purely because it helped us to scale the top line, but it's certainly a drag as far as the bottom line is concerned. But fundamentally, we want to make sure that ProConnect continues to deliver best-in-class service to Redington, which is something which continues to be an important anchor customer.

So in summary, in the way forward, it is going to be focus on profits and not on top line; focus on making sure business hygiene is taken care of; focus on ensuring that we bring about one ProConnect, whether it means merging Auroma or if RCS we cannot find any other solution that we think is attractive or compelling, then would also be a part of one ProConnect; focus a lot on warehouse management and mission-critical services, which is core to what we know, what we understand and where we believe the value proposition is. If that explains, Nitin, I'm sorry, I took a little more time. I hope that gives you a reasonable color.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [4]

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Yes, it does. That's very helpful, actually. So reducing, by the end of the year, we should be in a position to really get back to the normal mode of business and growth for this entity?

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

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So that is exactly the plan, Nitin. We believe this is a business which is core to Redington. We have -- yes, we have got it wrong. We have learned. We know what went wrong. We have now started to put all the fixes in place. So therefore, to your question, we will -- we are confident that we will be able to correct it. We will be able to consolidate it and once again put this company back on the growth mode by the end of the year.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [6]

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Sure. That's very helpful. Just one last one from my side. Is this anything that you are planning in the near to medium-term with regard to Turkey? I ask this because the stock is up 15%.

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

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I -- honestly, Nitin, I have still no idea what ignited the stock price, I honestly don't have an idea. But all that I can say is the company is doing very well contrary to what most people think, and they may still feel that Turkey, they may have some bad memories of the currency going through a serious depreciation. But I want to tell you that FY '20, they have delivered remarkable numbers. Every single quarter, they grew top and bottom line. We are -- we have generated positive free cash flow. In the marketplace today, I probably being a little audacious to say that we are probably the leading player from an IT distribution standpoint. So we are extremely well placed. So we, therefore, want to continue to put our nose to the ground and continue to drive this business because we are extremely well placed.

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Operator [8]

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The next question is from the line of Aditya Bagul from Axis Capital.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [9]

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Good evening, Mr. Shankar, Mr. Krishnan, and Mr. Sriram. I genuinely hope that everyone at your end, especially the Redington family are all doing well. Sir, 3 questions from my end. Firstly, just wanted to get your understanding post the COVID situation, is there a change in terms of the narrative by some of our key clients, HP, Dell, Apple? Are they looking to modify what their earlier targets were? And if so, what is it -- what is the quantum of the decline that we are looking at? That's question number one. Question number two is, can you dwell a little more in terms of reduction in terms of our working capital? Just want to understand what was the reduction, is it more structural? So if you could help us understand what was the working capital, let's say, on 15th of March or on 31st of May, that would be sort of helpful.

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

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Excellent. So that would have meant 2 questions or the second one has a part A and part B to it, right?

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [11]

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Yes, sir.

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

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Okay. I'll take the working capital question first. So you would probably have seen as far as the working capital for overseas is concerned, it has been quite stable and steady over the last 4 years or over the last 20 quarters. And it is somewhere in the vicinity of about, let's say, 29 to 33 days. So I think over a period of time, we have managed to keep the working capital under check and control, and it has worked out well as far as overseas is concerned.

Now as far as India is concerned, this was something where we wanted to make sure that we put all the fixes in place. So to answer your question, even though when you look at the year-over-year, we had for the full year 48 days of FY '19 coming down to 31 days. But if you look at the individual components, the debtor days, which used to be 67, came down to 57. The inventory days, which used to be 36, has come down to 23. And of course, the creditor days, because we didn't buy as much during second half, also came down by 6 days from 55 to 49. So the first point I'm trying to impress upon you is this reduction is an all-rounded improvement, whether it is in terms of debtor days, inventory days or, for that matter, the creditor days.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [13]

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That's quite impressive, sir.

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

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I -- say that again?

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [15]

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No. I just said that is quite impressive.

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

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Yes, thank you, thank you. So this -- now, I also want to mention here that -- sorry, the mobility business that we did, which was absolutely a wonderful performance any which way one looks at it, certainly was a big contributor to the capital efficiency. So we, therefore, want to continue to drive and scale that business because there is a huge merit in continuing to pursue the mobility business because it is working capital efficient and it is ROCE interesting. So that is what is going to continue to be an important factor to make sure that this is just not a flash in the pan. Now that 31 days may be a very aggressive number, but I would believe that something like about 5 to probably 5.5 weeks is where we want to really focus and make sure that we peg it at that level or less at all times.

Mr. Rao (sic) [Bagul], I forgot your first question, and I'm sorry.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [17]

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Yes. Understanding here, sir -- and that is quite impressive. So what you're saying is that on a structural basis, our working capital at the India business has come down from 49, 50-odd days to about 40 days. Is that...

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Raj Shankar, Redington (India) Limited - MD & Director [18]

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Absolutely, or less. Correct. Correct.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [19]

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Perfect. Understood, sir. My second question was trying to understand whether there was a change in narrative by some of these clients.

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Raj Shankar, Redington (India) Limited - MD & Director [20]

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Yes.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [21]

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And if so, the magnitude of the change?

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

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Before I answer that question in a pointed fashion, I must tell you that it has never happened for us in India that our accounts receivable is equal to accounts payable. So the first thing I want to say is with regard to the vendors that they have been supportive and we've also negotiated hard with them, and at the same time, ensuring that we stand by them to make sure that their objectives are met. So the first thing is, there is a very nice equitable relationship and it has worked well on both sides.

Now with regard to the narrative, this current quarter, the -- they are -- they fully understand that the business would tend to be a little soft. But again, I don't want to spill the beans. Our own internal view, which was a little -- we had looked at 3 scenarios, which is moderate impact, sort of a significant impact and severe impact. We planned everything basis significant impact. It appears that we are going to be now somewhere landing between moderate and significant, if the current trend is anything to go by for the current quarter or the current half year. This is how it appears.

So for the next quarter, as far as the vendors are concerned, they believe that while the business will not bounce back to normal, that they believe that the pickup should start and things should start to progressively get better. So Q2 will be definitely better than Q1. And they all expect that the real bounce back and the business being normal would more happen in Q3 and beyond.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [23]

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Understood, sir. Understood. That's quite candid, sir. Sir, just one last question on the -- yes, okay, I'll come back in the queue.

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Operator [24]

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(Operator Instructions) The next question is from the line of Pavan Ahluwalia from Laburnum Capital.

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Pavan Ahluwalia, Laburnum Capital Advisors Private Limited - MD & Director [25]

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Just 2 questions. One is on the competitive environment, so, obviously, this has been an industry where Redington and Ingram have been the leaders. And then there are maybe 3 or 4 mid-sized players in the market, and then a long tail of smaller-sized players. Any early signs on how this might evolve? Are the, either the midsized players or the smaller distributors, starting to potentially throw in the towel or be less active or anything like that? And second, in terms of credit risk, as you look at the portfolio right now, are you worried about potential credit issues on the receivable side? For example, with, say, smaller shops that may not be able to sustain closure for a month or 2, as we've seen in the lockdown. Any sort of analysis you've done in terms of what we can expect best?

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

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Krishnan, would you want to take the question on credit risk?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [27]

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Sure. Yes. So as Mr. Raj explained, one of the 7 Cs that we have been pursuing very focusedly is the collections. And I can say, during this period of lockdown, if at all, we are only positively surprised with the collections that had happened vis-à-vis our expectation. So as we speak, no, we haven't had any lone case of any issues as far as the ARs are concerned. So the collections have been good. And we also want to focus on the partners who have good customer bouquet, who have been having good credit history and sound financials in terms of focus on, and then also structure certain financial solutions by this thing tying up with financial institutions, wherein the partners can be provided more funds to this thing handle the current COVID situation. So broadly, we are comfortable, and we don't foresee any challenge in this.

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Raj Shankar, Redington (India) Limited - MD & Director [28]

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So Pavan, if you're satisfied with that response, I just want to add one more thing.

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Pavan Ahluwalia, Laburnum Capital Advisors Private Limited - MD & Director [29]

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Can I have just one follow-up, sir. That was for India. I am curious about internationally as well. As you look at the portfolio today, are there any areas where you, as the CEO, are concerned that we may have credit issues? Or you feel pretty satisfied that despite this big disruption, we're not likely to see credit quality issues in significant measure across the portfolio?

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Raj Shankar, Redington (India) Limited - MD & Director [30]

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So I will certainly give you that feedback, and I also want Sriram to comment about overseas. Here is my comment, Pavan. Absolutely truth be told, I was nervous. I may not have given that impression. I was worried. And all that I can tell you now looking at the way the collections have happened through April, through May and until today, I am -- definitely, we are far better placed. Things are just very quickly coming back to normal. So we, at the moment, are not seeing any signs of worry or concern. I don't want to give the impression that everything is hunky-dory. But all that I can tell you is this was worrisome about a couple of months ago. But looking at the way that our team has managed to do the collections, it is extremely satisfying. So that's one point.

The other point I wanted to mention about overseas, in particular, which may not be true for India, a good part of our sales comes out of online and offline stores where, by and large, payments are not a real risk. But having said that, I would like Sriram to comment.

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Sriram Ganeshan, Redington Gulf FZE - CFO & Director [31]

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In terms of the Middle East, Turkey, Africa, while in the initial phase of lockdown, there were some delays in terms of collection coming in from customers for obvious reasons. I think subsequently since late May, collections are absolutely on track. As Mr. Raj said, we are quite pleasantly surprised that the collections are flowing in very, very well. No concerns at the moment on collectibility or delinquency from a customer standpoint.

One other point, which may be of interest is, since some of our receivables are also insured, our credit insurers have continued to maintain the credit limits that are offered for customers for Redington's business, also placing comfort on our strong credit management policy. So to summarize, at the moment, collections are largely on track. And there are no concerns for changing collectibility perspective.

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Raj Shankar, Redington (India) Limited - MD & Director [32]

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Sriram, one question that Pavan asked in the last call, which you may want to clarify. What percentage of the business that we do in the Middle East is credit insured?

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Sriram Ganeshan, Redington Gulf FZE - CFO & Director [33]

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Sir, from a Middle East standpoint, if you look at markets, UAE and [Saudi] is our largest market, about 93% to 94% of our receivables would be insured, sir, for these 2 markets.

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Raj Shankar, Redington (India) Limited - MD & Director [34]

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Thank you, Sriram. Pavan, does that give you a perspective on credit and collections?

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Pavan Ahluwalia, Laburnum Capital Advisors Private Limited - MD & Director [35]

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Yes. Thank you, very much.

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Raj Shankar, Redington (India) Limited - MD & Director [36]

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Okay. Excellent. To your first question, at the moment, it's still early days, Pavan. We have no good feedback or a clue in terms of some of these, as you said, the mid and the small distributors probably finding themselves in the cash flow pressure, et cetera, et cetera. At the moment, it is still early days because effectively business started on the 11th of May. And even there, you would know there are still a lot of red zones, et cetera, et cetera. So probably a quarter from now, we would be in a better position to give you a better feedback. But my guess is that things will change. So there would be a scope for consolidation.

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Operator [37]

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The next question is from the line of Jayesh Gandhi from Aditya Birla Sun Life.

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Jayesh Gandhi, Aditya Birla Sun Life AMC Limited - Fund Manager [38]

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One real commendable job has been on the net cash flow from operations, which has been really very strong this year. And I'm really glad to hear the management commentary about collections coming in, which is good. But what is surprising to me is our outflow on finance cost has really not gone down this year. For the next few years, obviously, the business will get impacted in the first quarter, but hopefully comes back in the quarter 3 -- quarter 2 and quarter 3 and thereon. How do we see the overall finance cost for the next few years? Will it go down or do you see it remaining at this level?

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Raj Shankar, Redington (India) Limited - MD & Director [39]

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Great question. Krishnan, do you want to take a stab at that?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [40]

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Sure. So first, as part of our exercise to bring in efficiency, the capital allocation has been, I mean, an important component of our decision now. So we would want to rationalize capital and channelize that to the businesses where it is higher -- higher ROCE carrying and more strategic in nature. So we think we will be able to rationalize the working capital and not let the current better working capital situation to let it slip. And with this, we think our working capital utilization and debt levels will be in control. There could be some small increase in the interest rate because of the current situation. So the interest rate can go up. And also interest cost, while on one hand, because of working capital efficiency can come down, this is a situation where we should also keep higher cash balance, positive cash balance, this is what we would normally would want to keep. So that should also can possibly add on to some interest costs. So just to sum it up, I don't expect worsening of this. But there may not be some substantial reduction in the interest cost, and that's very conscious, just wanted to be safe. And this is something that can happen as we move forward in the future years.

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Jayesh Gandhi, Aditya Birla Sun Life AMC Limited - Fund Manager [41]

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Sorry to reiterate this point, but due to interest outgo for the whole year, both on a consolidated basis, it was nearly INR 200 crores, whereas our net debt levels are significantly lower. In fact, the interest costs outgo is higher than the net debt level as on March. So I'm just wondering, is there something better that we can do and of course...

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

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No, no. It's a very fair question. Krishnan, let me try and articulate. So to answer your question, should we see the finance cost as a trend, notwithstanding this quarter, next quarter because of COVID, therefore, we are taking certain contingency measures, so I'm keeping that aside. On a steady state, should we look at finance cost coming down? The answer is, yes, you should see that. The reason is our working capital is coming down. And I would like to believe that our interest rates will also come down. So all things considered, we should look at a reduction in finance cost. The question is how much, but conceptually, this is the way you should look at it. Krishnan, would that be fair?

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

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Should be fine, yes.

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Jayesh Gandhi, Aditya Birla Sun Life AMC Limited - Fund Manager [44]

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Yes. Since we are at this point, is it you look at it as a percentage of sales or as an overall cost in the business? How does the management look at it?

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Raj Shankar, Redington (India) Limited - MD & Director [45]

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Wow. Fantastic, sir. I really appreciate. So for us, we used to look at it as a cost. Now it is an important item, which is factored as a percentage of sales. And therefore, when we do the pricing, we take this into consideration while doing the pricing. So if there are transactions where the credit period is longer than the -- credit period given to the customer is longer than the credit period that we enjoy from the suppliers, then we want to make sure that we factor for that cost of capital while doing the pricing. So the whole approach now has changed. So if that would answer your question, it will be, going forward more as a percentage of sales.

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Jayesh Gandhi, Aditya Birla Sun Life AMC Limited - Fund Manager [46]

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Wonderful. Good to know that, sir. Other last question I had very quickly is on the international operations, Turkey. I always thought that we had an opportunity to reduce the capital employed there by getting some money back either in form of dividend or buyback our shares, et cetera. I don't know what happened to that plan. I know Turkey is doing well, but I guess a lower capital employed international would really help, right?

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Raj Shankar, Redington (India) Limited - MD & Director [47]

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It's a fair point. But since you have raised that, I'm a little keen to share something with you, and I hope I have the time, and I'm not eating into somebody else's questions. Overseas, I just want to tell you, for FY '20, the cost of debt capital was 5.4%. The return on capital employed was 19.9%. Of course, I must mention that we have taken net debt into consideration. This is, therefore, a value creation call, if you will, of around 14-plus percent. So the first point, there is oftentimes a mistaken notion that overseas does not give the right kind of return on capital employed as India because the way to look at it is India, the cost of capital and the borrowing is in Indian rupees, therefore, returns are to be measured in relation to that. Overseas, the borrowing is in U.S. dollars and the currency and the equity is in U.S. dollars. Therefore, when you look at return on capital employed, this is for last year, and if for a moment, you tell me, "Hey, give me one view of the previous year." Cost of debt capital was 5.5% overseas, whereas return on capital employed was 18.2%, which you will agree is approximately about 13%. So net and sum, the overseas at the moment in the last few years is giving an interesting return on capital employed. So we -- that does not take away the fact that can we deploy capital even more efficiently to maximize return, I am with you. But I just thought it may be helpful to probably understand this perspective.

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Jayesh Gandhi, Aditya Birla Sun Life AMC Limited - Fund Manager [48]

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No. Thanks for it. I thought we had a plan to reduce it. That's why I thought I would ask you this.

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Raj Shankar, Redington (India) Limited - MD & Director [49]

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No, no. You're absolutely right. But I thought Nitin asked a question that since then, the stock price has run-up and a few other things, the currency had depreciated. So it's looking a little different than what it was earlier. So at the moment, allow me to only say so much, but we will in due course of time. We are evaluating all options. Let me continue to say there is nothing off the table, except that it is not looking as attractive as it once was.

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Operator [50]

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The next question is from the line of Dharmesh Gupta from Maximal Capital.

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Unidentified Analyst, [51]

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Sir, related to this COVID crisis, one thing which a previous participant was alluding to was that there might be consolidation in favor of larger players in the industry. But then there might be a consolidation in terms of your customer base as well. So that is one trend. And second trend being because of lower income, there might be down-trading in terms of the brands that people use. And Apple is one of your major, which is much more pricey brand compared to many others that you have, which -- so considering these 2 trends, how do you see the interplay of these 2 trends on your business for this year and going forward? And second question is on the working capital days reduction in India business, which has come down quite sharply, is this sustainable? Because this frankly increases the return on capital employed by almost a factor of 20%, 25%. So is this sustainable and what cost? And if it is sustainable, then what are the reasons behind sharp decrease?

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

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So on the last question with regard to working capital. I did mention that while it has certainly come down, you're right to 31 days for last year, what one should look at is somewhere in the vicinity of about 5, 5.5 weeks, which is somewhere around 37, 40 days. This in our opinion for India would be a good target to assume because this will be approximately about 9 to 10 working capital turns. And to that extent, it makes the ROCE that much more interesting. And this is clearly what we are focused on. Now to your previous question, is there a likelihood...

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Unidentified Analyst, [53]

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Just follow-up, sir. Is that a sustainable working capital level, which is much lower than the previous years?

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

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No. Like I said, 31 is something that is, honestly, too good to be true. So which is why I want to just sort of set the expectations right, that if we are able to do around 37, 40 days, which is doable, and which is what now, as a company, we are extremely focused on. So is that doable? That's exactly what our focus is and what our aim is. So we are allocating capital as they say, make the suit according to the cloth available, so we are saying this is the capital, and let's try to maximize return.

Now to your earlier question about the consolidation. Can it happen at the partner level? Yes, you're right. Logically speaking, and I would also assume that will be some level of consolidation happens, but it is finally who is the last man standing. And we believe that we are extremely well placed. We have a very clear opportunity for us. So we believe when there is a distributor consolidation, if it happens, there would also be a partner consolidation that could happen. I cannot argue against it. But that should not take away the opportunity for those who will continue to play the game. So I believe that in the way that we have positioned ourselves as a very strong distributor playing, both the consumer and the enterprise space, both on IT and mobility, we should be able to continue to drive this business profitably.

You had one more question. My apologies, I don't remember.

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Unidentified Analyst, [55]

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Sir, the down-trading in the brand mix?

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

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Yes. Now honestly, it may be difficult for me to give you too much of input. Suffice it to say that contrary to what you said, the business that is really showing a lot of traction, a lot of momentum, once again for this year, at least in the last 1 month since the commerce is possible, it is the Mobility business. While the Enterprise and the IT consumer is also catching up, the one that's leading the game for us is the Mobility. And I have absolutely every reason to believe that this will be another good, solid year for Redington in the Mobility space, without a doubt. I'm sorry I'm sounding extremely overconfident, but I feel very bullish going by what we have been able to deliver for the last 5 quarters and continuing into this year.

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Unidentified Analyst, [57]

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Understood, sir. Your margins are lower for less expensive brands and vice versa. Is that true, sir?

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

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Look, margin, when you look at it as a percentage will be higher. But when you look at it in absolute value, what you make out of one device, of a mid- to high-end phone and what you make of a mid- to low-end phone, you would agree with me that there would be a stark difference.

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Unidentified Analyst, [59]

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Understood. So you don't fear the down-trading, sir?

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Raj Shankar, Redington (India) Limited - MD & Director [60]

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I -- see, it may happen. See, it will be very inappropriate of me to say, no, it will not happen. Yes, it could happen, but that is for a certain point in time, but I think soon, the dust will settle down. And then you will see that. The way the -- some of these companies are positioning themselves now is very different than the way they position themselves in the past. So you would see that some of the recent launches done by some of the global brands, they are extremely attractively priced, and they have very good functionality and features, makes it a very compelling and an attractive proposition for consumers. And trust me, I'm probably repeating myself, if the last 1 month is anything to go by, I think, it's certainly giving me even more a stronger conviction that this will play out. This down-trading may happen for some time, I cannot disagree, but it will eventually normalize itself.

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Operator [61]

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(Operator Instructions) The next question is from the line of Pranav Kshatriya from Edelweiss Securities.

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Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [62]

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My question is with regards to this COVID-19 led disruption, in the call, which was hosted in April 30th, you had expected around 15% to 20% kind of a decline can happen in Q1 and then subsequently recovery taking us back to the normal level in 2 quarters. Given the lockdown has extended and the number of cases are also increasing, do you see risk to this number? Any update on that would be helpful.

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

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Sowmiya, I would request you to step in because I don't recall mentioning 15 -- I don't know if he mentioned as 5-0 or 1-5. Sir, what did you mention it as 1-5 or 5-0?

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Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [64]

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1-5.

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Raj Shankar, Redington (India) Limited - MD & Director [65]

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Unlikely. Sowmiya, could you please check the record?

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Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [66]

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I might have -- I mean, my interpretation could have been wrong you know whatever.

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Raj Shankar, Redington (India) Limited - MD & Director [67]

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Okay. Okay. No, no. Then I wish to clarify. Sowmiya, if you have the number, you can clarify. Otherwise, I'll continue.

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Sowmiya Manickam, [68]

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Sure, sir. Sir, we had spoken in the April 30th call, we had made a mention that there is probably a likelihood of that kind of decline rate to happen for the H1.

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Raj Shankar, Redington (India) Limited - MD & Director [69]

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Okay. So here is what I would tell you, given that April and May and now we are in June, our initial projections was that we would for this month or for this quarter, we would probably de-grow, let's say, about 40% or so. But I can tell you, as we speak, that number will be lesser than -- the de-growth will be lesser than that. And if that is on one side and on the other, as we look at Q2, we are expecting Q2 to be better than Q1. So this should improve as we go into Q2. Like I said earlier, I expect really things to get back to normal starting Q3. And of course, Q4 will be absolutely back to our heydays.

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Operator [70]

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Next question is from the line of Aasim Bharde from IDFC Securities Limited.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [71]

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Sir, just one question. Can you talk about the IT business outlook for FY '21? In FY '20, it was negative. And in this quarter, actually, there has been a lot of noise about IT enablement for work from home and all. So what would be the outlook for the segment this year?

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Raj Shankar, Redington (India) Limited - MD & Director [72]

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Okay. For [ADF], so because I wanted to first clarify that IT grew for us last year at a consolidated level, albeit by just 2%, overseas grew by 7% and India de-grew by 5%. Since your question is specific to India, how do we look at it, given all this work from home opportunity? Very clearly, we see that as a positive opportunity. There are times when we want sometimes supply and availability can be a constraint. At this point in time, certainly, there is demand and probably a pent-up demand to be served. So the next some months and some quarter is certainly going to be interesting. So we do see this as a positive opportunity.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [73]

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There should be growth, right, this year?

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Raj Shankar, Redington (India) Limited - MD & Director [74]

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There should be -- no, okay. Now the word growth has a bit of a catch to it. Because if the whole of April was a lockdown, and if May, we could technically start business on the 11th of May and 18th is when some more places started to open up, so how much ever we try and do, the word growth, when it is not on a like-for-like comparison, may not be a right way to look at it. But if your question is, how well poised is Redington to capture this new found opportunity on account of work from home towards various mobile devices, whether it's tablets, whether it's iPads, whether it's PCs, whether it's laptops and the mobile printers and what have you, the answer is absolutely well poised, and this is something that we are certainly driving and pushing for.

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Aasim Bharde, IDFC Securities Limited, Research Division - Research Analyst [75]

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Okay. Sure. Sir, just one final question. On Rajprotim, all the advances have been provided for, right?

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Raj Shankar, Redington (India) Limited - MD & Director [76]

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Absolutely. Sorry, Krishnan, would you want to take that question, please?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [77]

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Yes. It is completely done.

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Operator [78]

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The next question is from the line of Rishabh Chudgar from Enam Holdings.

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Rishabh Chudgar, [79]

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I hope you and the team are safe. I actually, just had 1 quick question. Will it be possible to share what would be the capital -- what will be the ROCE, which is from the Mobility business now? Because I'm seeing that incrementally, your ROCE levels are increasing and a lot of your revenue CAGR in the Mobility business across India and overseas is higher. So has there been a change in the ROCE level in this segment?

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Raj Shankar, Redington (India) Limited - MD & Director [80]

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So the question is specific to ROCE for Mobility business in India and overseas, is that the question?

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Rishabh Chudgar, [81]

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Yes, compared to what it would be 2 years back.

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Raj Shankar, Redington (India) Limited - MD & Director [82]

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Okay. Krishnan, do you want to take that?

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S. V. Krishnan, Redington (India) Limited - CFO & Whole Time Director [83]

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Okay. So it will be better. I mean our threshold ROCE level is about 15%. That's something that we keep it as a fundamental ROCE. Definitely, what we earn from the Mobility business is much better than the 16%. I'm not specific in percentage here, but it is definitely much better than the rest of the businesses.

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Operator [84]

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Take the next question from the line of Ritesh Gandhi from Discovery Capital.

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Ritesh Gandhi, [85]

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Congratulations on a performance, given the COVID situation, especially on the Distribution side. Sir, just had a question on -- given the pressure of potential OEMs would also have on their own profitability, and do you think there is a risk that brands like Apple might move to kind of direct distribution with the online players like an Amazon or Flipkart, which could in turn impact us, given in other global markets, they do go directly to Amazon?

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Raj Shankar, Redington (India) Limited - MD & Director [86]

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Okay. So do I see, first of all, your first question, are these vendors now going to come under pressure and, therefore, is there a likelihood that they can probably skip and go directly to online players? If that is the question, the answer is very unlikely. One can never rule out who can do what. But I'll tell you very unlikely, and this is something over the last 5 years, we have demonstrated this, that this concern was there 5 years ago when some of the online players were really shaking the market. And therefore, there was this tendency and worry and concern whether the vendors will go direct and thereby completely disintermediate the distributors. If this 5 years is anything to go by, trust me, we have hardly lost any business on account of this business model or a change in the business model.

The vendors need us because if they want reach, coverage and they want to make sure their products are available at arm's length of demand, they need a player like Redington who's got a Pan-India presence, who's got the ability to take products and deliver that at arm's length of demand.

Now with regard to online players, even they need, they don't want to carry inventory. They want to be working capital light. So to that extent, they also want to make sure if there is a distributor who is able to give them credit and they are able to sell on cash, because if you deal directly with the vendors, vendors have their own set of conditions. You need to give a standby letter of credit, and these are the terms and conditions, there is a minimum order quantity and so on and so forth, which a distributor would be able to do because they are able to amortize their cost on a Pan-India basis, which any company will be -- any one company will be finding it difficult, more so when they dabble in so many million products. So it would just not make sense to be able to go to them and do this. So both the online companies and the vendor, both of them need there is an absolutely clear role of a distributor, without a doubt. Trust me, there is absolutely no way that a distributor can get disintermediated. Whether the business from online can go to offline and vice versa, that may be possible, but we believe that our business is pretty solid and has a long shelf life.

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Ritesh Gandhi, [87]

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Good. Sorry, and our profit margins, which we make for online versus offline, these are identical. So if we sell an iPhone, hither it to a local store or through online, I guess...

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Raj Shankar, Redington (India) Limited - MD & Director [88]

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The word identical may not be the right term I would use. But for the -- if one were to look at the quantity, one were to look at buying big quantities, secured payment terms and so on and so forth, the margin that we make, if one were to look at risk adjusted margin, and for the capital that we invest in that particular transaction, I would say, yes, it would be, to a large extent, similar.

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Ritesh Gandhi, [89]

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Got it. And, sir, just last question, in actually, other more kind of actually developed e-commerce, I mean, markets like America, et cetera, do Apple and all would [go in] directly to Amazon? Or are they still using like global American distributors just because of the importance and the role effect?

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Raj Shankar, Redington (India) Limited - MD & Director [90]

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See there are 2 ways of looking at it. One, a lot of these online players, they have what they call as a direct and indirect model. The indirect is the marketplace. So to the extent it is marketplace, obviously, there is no question of going direct. So in fact, more and more of our partners who buy from us are really going to the online marketplace and sell their products. So -- and whereas, yes, there is a certain amount of direct business to that extent, like I said earlier, the online companies, more often than not, prefer to work with the distributor with -- who can take care of all their shipments, logistics, deliveries, et cetera, et cetera. So for them, they want someone to manage their entire operation so that they can continue to pamper the customers, the consumers.

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Operator [91]

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As there are no further -- due to time constraint, I now hand the conference over to Mr. Raj Shankar for closing comments.

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Raj Shankar, Redington (India) Limited - MD & Director [92]

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Thank you. Thanks to each and everyone for joining us on the call today. Like I said, for the full year, I am extremely pleased that the Distribution business, both in India and overseas, did exceptionally well. I am extremely happy, more so with the India distribution in terms of the bottom line. I am also very gratified by the fact that we threw up positive free cash flow, both for the quarter as well as for the full year. We were very focused on getting our working capital under check and control, which was accomplished both in India and outside. The one sore point was ProConnect. Thank you for your continued support, trust us that we have. We know what went wrong. We have put some of the fixes in place. We will correct it. We will consolidate it this year. We will get it back to the growth mode before the end of this year. That's exactly what we are focused on.

Once again, thank you for your time, and good day to you, and please stay safe.

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Operator [93]

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