Ladies and gentlemen, good day and welcome to Redington (India) Limited Q2 FY 2022 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 guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing Star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Raj Shankar, Vice Chairman and Managing Director of Redington (India) Limited. Thank you, and over to you, sir.
Thank you. Good evening to all participants. In fact, I feel very proud and overwhelmed to share with you that our Q2 performance has been by far one of the best in a long time. This is probably the fifth or the sixth quarter in a row that we have been delivering some good set of numbers. Let me quickly get down to what we have done at a consolidated level in Q2. Our revenue at INR 15,313 crore grew by 11%. India grew by 30%. Overseas saw a flat growth. From an EBITDA point of view, we grew at a consolidated level by 47%. 65% was the growth in India and 36% was the growth in overseas.
From a profit after tax point of view, it seems very nice to share with you that probably for the first time we have delivered at a consolidated level 2% of our revenue as profit after tax at INR 307 crore. India grew 85%, delivering 1.92%, and overseas profit was at 2.09% and grew 65%. Overall, as you can very clearly see, both the theaters, India as well as the META region, including South Asia, has done very well. The only downside, I would say, is even though we in South Asia, our revenue degrew, but from a profitability standpoint, they have delivered again a profit well over 2%. Now, when you look at by business vertical, IT at a consolidated level grew 18%, contributing to 72% of the overall business.
Mobility degrew by 3%, largely on account of overseas, particularly Turkey and Africa, contributing to 26% of the consolidated business sales. Services grew by 10%. India, in terms of IT, grew by 33%, mobility at 21% growth, and services grew by 7%. The contribution of IT and mobility was 79% and 19% respectively, services being 2%. Even if you break down within IT, both enterprise IT and the consumer IT registered strong growth at 31% and 35% in India. In overseas, the IT business grew by 6%, largely on the back of enterprise IT, which grew at an impressive 41%. Mobility degrew at 12%, and this, as I mentioned, is largely on the back of a degrowth in Turkey as well as in Africa.
In terms of the working capital, I would like to believe this is by far one of the best quarters in the history of Redington, where at a consolidated level we managed to contain the working capital at just seven days. India was at an impressive all-time low of just three days of working capital. Overseas at 11, and hence at the consolidated level it was seven. Just to sort of give you a reference, for Q2 of FY 2021, the working capital was 14 days. We have reduced it by one full week. The real improvement has come out of creditor days. While the debtor and inventory days by and large have been similar to what it was for last year at a consolidated level.
Whereas on the creditor side, we managed to increase it by a good eight days. This has resulted at a consolidated level for us to generate INR 1,620 crores of operating cash, both India contributing a higher, you know, operating cash flow at INR 1,075 crores, overseas at INR 545 crores. In spite of paying dividend, which is to the tune of INR 453 crores during last quarter, we still managed to deliver a free cash of over INR 1,000 crores, to be precise, INR 1,058 crores. This again comes largely out of India at INR 985. Overseas got impacted in terms of free cash flow, delivering only INR 73. As I said, the contribution of dividend came all of it from overseas, and that was INR 453 crores.
In terms of return on capital employed, we are very proud to share that we have delivered a 75% return, India at close to 72% and overseas at 77%. Similarly, when you look at return on equity, at a consolidated level, we have delivered a little shy of 24% as against last year's of 16%, India contributing to about 32% and overseas at 20%. One clear observation that you would have seen is that all the theaters have contributed to each and every parameter in terms of performance or growth. It is certainly not biased towards one market or one business. Similarly, when you look at from a gross debt to equity, at a consolidated level, it was 0.07. This again, I would like to believe it's one of the all-time low debt to equity.
Net debt to equity, it is -0.69, both in India as well as in overseas. It was negative. The net worth has breached INR 5,000 crores at 5,062 to be precise, and the total capital employed for last quarter was only one-third of the net worth, which is about INR 1,678 crores. Our provision towards inventory again was contained at just 5 basis points at a consolidated level, 9 basis points for India, 1 basis point for overseas. It very clearly reflects that our sales forecasting, our ordering, our stocking, and our sellout velocity has been extremely well managed. In terms of bad debt, I'm again pleased to share that at a consolidated level, it was just 2 basis points, with India being 5 basis points and overseas at a - 2 basis points.
Basically, there has been a reversal of our provision in the overseas markets. In terms of the cloud business, while I will have my colleague Rajiv probably talk a little more about it, but just to give you at a high level, we have grown both in India and overseas, and at a consolidated level, our cloud business has grown by 30% year-on-year. As far as ProConnect is concerned, we have had another good quarter. As you would remember, Q1 was good. Q2 was even better. In fact, we had an all-time high revenue registered in the month of September. For Q2, our revenue at INR 130 crores represented a 16% year-on-year growth, and our EBITDA at 11% was about INR 14 crores.
Overall, when you look at it from a growth top and bottom line, from a profitability and in terms of capital efficiency and capital allocation, I think this has been extremely well managed and one of the best quarters I can think of. Very quickly to give you a perspective, at half year, at a revenue of about INR 28,787 crores, we have delivered a profit of INR 544 crores. I just want to jog your memory that in FY 2020, our full year profit after tax was INR 515 crores. I'm pleased to share that in a half year this year we have delivered INR 544 crores. In this again, both India and overseas have done well. At the top line, India has grown by 41% and overseas by 5%.
On the bottom line, India has grown by 154% and overseas by 81%. In terms of both IT and mobility at half year, we have grown IT by 24%, mobility by 3%, services by 11%. In terms of working capital for half year, we were at eight days, three days from India, 11 from overseas. In terms of operating cash flow at a consolidated level, it was INR 1,334 crore, of which almost about 70% plus came out of India, 30% from overseas. We are happy that we generated or threw up free cash of INR 742 crore at a consolidated level, and this is for half year. In terms of ROCE, similar to Q2, it was about 77%, and in terms of return on equity was about 22%.
Gross debt to equity I've already mentioned to you. In terms of our inventory and bad debt, inventory at a consolidated level was 18 bps and bad debt at 8 bps. For half year, the cloud business grew by 42% year-over-year. ProConnect delivered a INR 240 crore revenue at a consolidated level, delivering a 10% EBITDA at INR 24 crore. In terms of profit after tax, they delivered 3%, which is approximately INR 6.4 crore. I'll take a pause here, hand it over to my colleague, Rajiv Srivastava. I'm sure all of you are very well aware that we have got on board Rajiv, who joined us in April of this year as the Joint Managing Director. He is responsible for all the day-to-day operations. Over to you, Rajiv.
Hi, Raj. Thanks so much. Appreciate your commentary. I think it's been, as you mentioned, a very rounded sort of a performance across pretty much all businesses, all geographies, and all the financial parameters that one can really track right now. I just wanted to give a sense of a bit of a color on what we are seeing in the market right now and how we see the performance in light of the story behind the numbers really. At one level, you would find that there continues to be a very strong technology adoption across a variety of customer segments or market segments and the geographies as well. We know that the work from home and learn from home is continuing. It is continuing in India.
It is continuing in the geos, overseas, Middle East, Africa, even Turkey. Those refresh cycles are working to the advantage of driving growth from just those two segments of work from home and learn from home. That's really fueling the growth or demand in the consumer IT space. Like Raj mentioned, we've done really well in the IT value space, which is the enterprise products of server storage, networks. That you'll find that in the countries we are operating, in India, UAE, Saudi Arabia, Egypt, Qatar, Nigeria, all the countries that you can think of, there is a very strong infrastructure push by government in the region.
There is an investment-led demand that is coming in apart from the consumption-led demand that we talked about from work from home and learn from home. That infra-led demand by the governments and also by people who are creating capacities is leading to digital technology adoption. We are seeing years of projects getting rolled out in a few months across manufacturing, across retail, creation of digital economy, and the infrastructure push by the government through a policy support. All of that is leading to a strong, very, very strong consumption and infrastructure demand creation. The growth in the region is on the back of investment and consumption-led growth. At a technology perspective, you heard Raj talk about the growth that we've had, very strong growth that we've had in cloud.
Cloud is leading the way, but there is a very strong shift towards subscription-led services. Base and foundational applications which are getting migrated from an on-premise to a subscription-led application-driven environment on the cloud, whether it is SAP, CRM, Salesforce automation, customer experience, all the new age applications that are being talked about right now. Also new technology of the nature of intelligence. Artificial intelligence is finding favor. Robotic automation is finding favor. CD continues to get from a very strong initial base to a much more manufacturing-driven environment, IoT.
We are also finding that as 5G is starting to become more mainstream, you'll find a lot more adoption of 5G, not as a handset or a telco technology piece, but 5G as driving applications in the domain of video and voice, and that's where the whole world is moving. There is a huge amount of shift in what people are buying and how they are buying.
Everything as a service, a shift from products to services, a shift from own to a subscription sort of a model, and that's what we are seeing. That plays very well to our strategic intent as we go forward in the market. I'm not gonna talk a lot about my, our strategic intent as we go forward, unless you have any specific questions. It plays very strongly to a play in the tech-dominated and tech-denominated spaces that we are very, very focused on right now. Let me stop here from the perspective of you saw and you heard of the numbers, and this is a bit of a commentary on how and why we are getting to the numbers and to the growth that we're looking at.
We did rejig a bit on our go-to-market models also to spread ourselves, and that gives us extended coverage, that gives us extended reach out to partners and to a variety of customer types to fulfill what we do. I'm gonna stop here and open it up for any questions and answers from all of you. More than happy to answer them.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Reminder to the participants, anyone who wishes to ask a question may press star and one. First question is from the line of Pranav Kshatriya from Edelweiss. Please go ahead.
Hi. Thanks for the opportunity, and congratulations on a good set of numbers. I have two questions. Firstly, I mean, we saw very strong growth in the India business, but correspondingly, the services business did not register a very strong growth. What exactly is happening there? Is the ProConnect business still you are in a more conservative mode and trying to grow in a much more profitable way? My second question is regarding the growth in the overseas market. What exactly led to, you know, the slowdown in the growth for the, you know, mobility business in Turkey as well as Africa? These are my two questions. Thank you.
Rajiv, I'll take the second question first, and I'll give you time to reflect on the first. I'll take your second question. Basically, as far as the mobility business is concerned, we had a very good engagement with one brand, Xiaomi, in Turkey. Unfortunately, we did not get the kind of supplies that we got in the past. This problem we have been experiencing in the last couple of quarters, where it appears to Xiaomi that Turkey is not a priority market. Since our business was largely in Turkey for mobility dependent on Xiaomi, therefore, in the absence of not getting adequate supplies, our growth was impacted.
As far as Africa is concerned, as you would know, this is a market, particularly in West Africa and Nigeria in particular, where there was a serious currency devaluation as well as there was lack of availability of U.S. dollars. While this problem was there in the past, it became even more pronounced this last quarter. Therefore, by design, we wanted to grow slow in Africa, and to that extent, this did impact our in-country business in West Africa and particularly in Nigeria, which is a big market for, you know, smartphones, as you would know. This partly explains the mobility part. Other than that, to just give you a flavor, our. When you look at the overall business, the IT business grew well, and particularly the enterprise and overseas did very well. We grew by an impressive 41%.
The consumer side of the business, when we get adequacy of supplies, the growth is very good. This particular period, we were challenged in terms of not being able to get adequate supplies. Despite that, I think overall, Middle East, Turkey, Africa did grow. In overseas, the de-growth was largely on account of Singapore and South Asia. Some of you would recall that I have made a specific mention to this particular region, where the biggest contribution comes out of our business to India. 80% of the business that we do out of Singapore is India-destined. Because more and more vendors are shifting their business, the purchases are moving from dollar-denominated to rupee-denominated. Because of that shift, in a way of speaking, Singapore.
In the same breath, I want to sort of give you this comfort that it is certainly helping us in terms of scaling up our India business. In summary, mobility business largely on the back of Turkey and West Africa, that's where we are challenged. In terms of the overall, while MEA and META is growing, it is Singapore South Asia where there is a business shift because of which you are seeing the de-growth. Over to you, Rajiv, for answering the first question.
Yes, Raj. Thanks so much. I think that explains the mobility piece. Look, I think services is an extremely strategic portion of our business, and like I mentioned to you, the business model shifts in the market play to that strategic intent of ours as to how do we shift the buying behavior and play to the buying behavior shift that is taking place in the market. You would find that our services growth has been a 10% services growth over last year. Last year included Ensure Services. This year it doesn't. If I do a like-for-like comparison, which means if I take Ensure Services revenue out from last year and this year it doesn't have it anyway, our services growth would be 19% in Q2 and at 23% for the entire half.
Our ProConnect growth for Q2 is 16% growth for Q2. Those, so I hope you can read the numbers right. Our ProConnect growth for H1 is at 25% growth. When you put these numbers into perspective, you will find that it's not a slow growth. It's growing faster than our product revenue business, which is the way we are trying to structure ourselves.
Okay. If I can have, you know, one follow-up question. I got, you know,
Sorry to interrupt you, Mr. Pranav. May we request that you return to the question queue for follow-up questions. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The next question is from the line of Sarvesh Gupta from Maximal Capital. Please go ahead.
Good evening, sir, and thanks a lot for taking my question. The first question is, I think, couple of years back, you know, when our working capital days used to be at a much higher level. I think, you know, when the pandemic came, they came down a lot because of our efforts in sort of proactively managing the working capital. The understanding was that it is supposed to sort of climb up and come back to the pre-COVID levels in terms of the working capital days. Now again, this quarter we have seen, you know, new lows being hit in terms of working capital days, primarily due to creditor days getting elongated. What's our feel and guidance on the working capital days?
What can be the sustainable number and for both India and international business as well as at the company level? That is question number one. Second is, you know, we do have some sort of a consolidated vendor base. You know, in some geographies we have seen, particularly in the developed countries, we have seen some of the brands trying to go it without the distributor. How do you see that as a risk as, you know, the Indian market becomes big and, you know, we are already seeing some of the players trying to develop their own credible presence online, et cetera. Would they not want to take the full control over the supply chain and sort of exclude the middlemen like us? These are the two questions, sir.
Thank you for your question. Krishnan, do you want to take the first one on working capital?
Yes, Mr. Raj. Sarvesh, see, we stand by our earlier statement that working capital over a period of time as some of these tailwinds go away will get normalized. In our view, over a period of time, this will happen in phases. It could range between 30-35 days. I agree with you. In the past we had been saying be prepared for some increases, and that statement still continues. Having said that, you all need to understand we will not leave any stone unturned. Wherever there are efficiencies possible, we will definitely get it captured.
As this demand and a shorter supply situation is continuing in the marketplace and also the way in which our business teams are structuring the deals with the customers and vendors, we are able to get this benefit, we think continuing and also improve from what it was in the earlier quarters. This is something which may not be sustainable. This will come back to about 35 days, but as much delayed as possible that we would strive for it.
Krishnan, do you want to touch upon the creditor days, which is where there has been a significant improvement, if you wish to?
Absolutely. See, this is something that we have been working on for a long period of time. If you have observed the last couple of quarters, we have consistently ensured the creditor days are more and more than our receivable days. This is mainly to do with, number one, the mix and also the way in which our business people have structured the deals with the vendors and in terms of getting higher and higher credit days. This is something that the team is very clearly focused in terms of working on, and that is helping us. Wherever that's possible, that trend we will continue and once if there is a normalization.
Second question is vendor going down.
Okay. Towards the end, Krishnan, you blanked out for me, but I hope Sarvesh could listen to you. Rajiv, would you want to take the second question, please?
Yeah. I'm gonna do that. I'm gonna let Raj. Look, I think Sarvesh has a great point, and it keeps coming back again and again in every sort of conversation as to where are we headed with this entire question about disintermediation or the shift of the buying behavior towards a more online sort of a model, and are brands pushing that. You'll find that all the markets that we operate in right now, also the markets we don't operate in. Of course, where I can give you a little bit of a global context over here, because I used to run that part of the business for one of the large brands.
Every brand has a sort of maturity stage where a certain part of the business goes online and depends on how it gets fulfilled is a different story. A certain part of the business gets online or a certain part of the business, and the balance part of the business stays to be in a direct fulfillment model or through engagement, through partners or the distribution network that we really manage extremely well. You'll find that in a lot of countries, that maturity model, that tipping point is in the zone of 25%-33%. That's where most of the companies sort of stay. That online model, in a lot of cases, Sarvesh, you know, is still getting fulfilled through the distribution partners for all the inherent advantages.
Because if it goes to a Flipkart, the Flipkart needs a huge range of both consumers as well as partners who come and sell on their behalf. Which is what our core competency is, providing the reach and coverage of partners to the online buyers or online sellers to fulfill the demand on behalf of consumers. Whichever way you want to cut it, you'll find that our play, whether we serve the online players ourselves or we serve it through a partner, is pretty much the net sum is not changing our equation at all. Whether partners start to go online directly or the brands start to go online through us or through the partners, we fulfill through our partners or directly through the online.
In all those senses, you'll see this operating out in countries like China, Indonesia, Singapore, India, some of the geographies of Western Europe or more mature geographies of the U.S. also, this equilibrium has been attained in a very good way. We continue to be in a very favorable position to be fulfilling either directly or through the partners onto the online model as well. That's a good state to be in.
Understood, sir. Thank you.
Thank you.
Follow up.
Thanks.
The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Hi, good evening, everyone, and congratulations on another great quarter. I had a couple of questions. One is on the working capital days. If you could just give some color on what within the mix is sort of driving the higher creditor days. And also, if you could give us a split of, you know, enterprise versus consumer. And how should one think of this on a going forward basis? Does it mean that if enterprise sustainably remains high, your creditor days will remain high, and thereby your overall working capital days will be low? Or even within that framework, is this sort of an outlier? That was the first question. The second question is on Redington Cloud.
If you could give us a sense of how that business has sort of grown and where it is sort of today.
Nitin, on your first question, I'll just be brief. I think you summed it up well, or you understood it very well. One of the reasons why you see our creditor days higher than what it was even last year is because the contribution that is coming from enterprise, both in India and overseas, has been of a higher nature compared to the past. Typically in enterprise products, because a lot of times we are structuring large deals and what we call as back-to-back deals and transactions, we are able to negotiate with the vendors sort of a credit structure that allows us to have enjoy a much higher supplier credit compared to what we enjoy on the consumer IT or on the mobility. So your point is very valid.
higher the contribution coming from the enterprise IT, the creditor days are likely to be higher as opposed to the consumer side of the business. I think it's a very valid point. On the second point, Rajiv.
Yeah, I take that, Raj. Absolutely. I think the point about cloud, again, keeps coming up in pretty much every conference. You'll find that, Nithin, that our cloud business is growing faster than the rest of the business. Our India cloud business for Q2 grew 31% and overseas grew 28% for the quarter. If you were to take it for the half, our India business grew 31%, overseas grew 54%. So on a quarter basis, we are 30+ points at a consolidated level of growth on the cloud business. We are taking a number of steps to make sure that we play into that growth story even more strongly. We are...
Just so you know, to elaborate a bit on what our approach looks like, it is across two levels. One is the level of building capabilities within the organization, and these capabilities are technology capabilities that you need to build in the company to be able to fulfill the demand for cloud. Because cloud is a technical subject, it requires skills of a different nature and a magnitude. We are acquiring those across the company, across all the geographies in the company. That's one. The second thing that we're doing, because cloud is a model that requires a different way of being addressed and administered, it is a subscription sort of a model. It needs different technology capabilities, underlying technology assets to manage the whole cloud business.
We as a company are making very strong investments in making sure that our tech capability to handle the cloud business is very strong and intense. Those two should help us to continue to outpace the market of cloud growth. We are also working very strongly with all hyperscalers in the market, and also with a whole bunch of other alliance partners to make sure that the offering that we create, the solutions that we build, the skills and competencies that we build and create are absolutely aligned with what the market wants, but also what the hyperscalers are coming up with as a future tech. Our readiness in that sense is extremely strong right now.
Would you have an absolute number for Redington Cloud?
For Redington Cloud, we did in Q2 of FY 2022, Q2 of this year, we did a total of INR 310 crores, INR 310 crores, which is a 30% growth YoY.
Sure, sir. I have more questions. I'll get back in the queue. Thank you.
All right.
Thanks. Thank you. The next question is from the line of Pritesh Chheda from Lucky Investment Managers. Please go ahead.
Yeah, sir. Thank you for the opportunity, and season's greetings, sir. Sir, two questions. One, there is another round of QoQ improvement in margin, and we've seen it happening in the last three quarters now. You called out a certain margin number last quarter. But you know, there is improvement over that. So some comments on how do you see the margin projections. Second, among all the news flows that we see on, you know, supply issues on account of chips in, you know, IT or mobility or, you know, other product lines, how are we positioned? And actually, I'm seeing a case where there is an improvement in your key vendor share in the overall revenue mix for you.
Is there any preferred vendor concept which is playing out and, you know, somehow beneficial for us? That's the second question. Third is what is the tax rate that we should assume for our business?
Okay. Krishnan, you want to take the last one? Should I say 25, 24%, Krishnan?
Yeah, we can take about 23%-24% on an average. We can take that at a consolidated level.
Sir, what we are providing is 20, and it was a lower number, so I'm just reconfirming it here.
It would differ between quarters because since we are there in multiple geographies, every geography has different tax rates. As you may know, in the case of Turkey, because of the currency depreciation, that also changes. On a steady-state basis, our projection is about 23% also.
Okay.
Now, to your first question about margin, this is largely to do with business mix. To give you a sense, in India, the contribution of IT was 79%, mobility was 19%. Since the contribution from IT is more, the margin tends to be much better, be it enterprise or be it consumer. This is the first point. The second point is something that we have already shared with you earlier, which is that unlike in the past where oftentimes on 80% of the sales we would get our full margin, but on the balance 20% we would have to compromise on our margin, whether less by 10%, 20%, and so on and so forth. In these times, because there is a certain amount of shortage, we are also a lot more prudent in our buying.
We are today not having any margin leakage. We are able to earn pretty much on our large part of our sale, the full margin. To that extent, when you see it's a combination of two things, the business mix, if it tends to be more biased towards IT, you will see the margin better. Similarly, as long as some of these shortages continue and we continue to be a lot more prudent in our buying, stocking, and selling, you will see the margin firm up, if that answers your first question. I'm afraid, your second question was more about any particular vendor bias that we may have. Honestly-
On an aggregate basis, sir, not on a particular vendor.
On an aggregate basis, your question is whether we have a bias towards any vendor?
No, no. Amidst all this supply issues, we are still able to deliver a strong growth. There in your revenue mix, I see, you know, a strengthening of the key vendor in the revenues. Are we somehow beneficiary, you know, or well-placed, you know, in the whole construct in any way?
Okay. Again, I'm afraid I'm going to repeat the answer that I've said earlier. See, one of the things that we are particularly proud of is that for most of the brands across most of the geos, we have leading market share. Depending upon the particular vendors' contribution or how much they allocate to a particular country, that is not in our hands. Whatever allocation they give to a particular country, given that we have leading market share for most of the brands, this allows us the advantage to be able to get our share in relation to what our contribution has been.
It is not that, you know, while the relationship matters and, something that we have shared with you in the past, and that is over this last 27 years that the company has been involved, we have not lost a single relationship. The fact that we continue to build and grow our relationship and on the other hand, we have leading market share across most brands and most of the geos, this does give us a strong position to be able to get, the fair allocation given our market share.
Okay. I'm just gonna add one point over here, Raj. And Pritesh, you would see this, that I talked about a shift in our go-to-market model or engagement in the marketplace. Now, we did make a shift, conscious shift towards getting to fulfill or engage with partners who are servicing end customer accounts, okay? Whether they're in the enterprise space or they are in the mid-market SMB space. All of these vendors, in times of shortages, they pivot to end customer relationships much more strongly. That played to our advantage. That played to the fact that we get the deliveries for their customers to make sure that the customer satisfaction or customer experience is taken care of. A shift towards a much more customer experience, customer-centric approach was playing out very to our advantage in that sense.
Okay. Just a clarification on your margin answer. Does it mean that, once the supply shortages, you know, even out, there has to be some normalization in the margins because then again, you go back on that 80% of the product you get full margin and 20% of the product you get slightly lower margin. This 2.8% or 2.7% that we see getting reported in the last 2, 3 quarters, that gets normalized to a lower number or adjusted to a lower number?
Okay.
Operating leverage.
The right way-
Yeah.
The right way to think about it is the following: We have, at the moment, a very high product revenue and a low services revenue. In the way forward, we are clearly pivoting the company more and more towards services, whether it is going to come out of cloud, whether it is going to come out of ProConnect, whether it's going to come out of some of our own implementation services and other security services. The services contribution over time will start to scale up. As you can very well imagine, the services business has a much higher margin, be it at a gross margin level or at an EBITDA level. We hope that not at the moment, when you look at purely from a product standpoint, the business mix matters a lot.
As we look at the way forward with services contribution scaling up nicely, the margin should also pick up, if that helps.
Okay. Yeah. This was helpful. I think this comment of yours is slightly longer, right? It must be a 5-7 year transition.
Not so long. As you can see, you know, if you take cloud, for instance, I'm sure you must have been pleasantly surprised that for last year we delivered INR 937 crore. Now, you can imagine the good part of business on the cloud, for instance, is there is really no inventory and our working capital is very good. At the moment, because we are in the building up stage, we are investing in resources, we are investing in platform. At the moment, it may not necessarily reflect all of it into a healthy EBIT. As we look at even in the medium term, you should start to see as the business starts to scale up and some of our investments start to fructify, you will see that the margins will become better.
We don't have to wait for five years, it'll be much sooner.
Okay. Thank you very much, sir, and all the best. Thank you.
Thank you.
Thank you. The next question is from the line of Krish Mehta from Enam Holdings. Please go ahead.
Congratulations on a good set of numbers, and thank you for taking my question. The first question I had was more on the cloud business. If you could provide us a number on the cloud managed services revenue for the quarter as well as the margins for cloud and cloud managed services. My second question was on how you see the transition from on-premise to a subscription model for the cloud business happening with restrictions being lifted in COVID and how the mix is changing in terms of implementation for partners.
Rajiv, do you want to take that?
Yeah, I will take both the questions on cloud, his questions on margins and how the business is gonna shift on subscription post-COVID. Is that a fair understanding, Vin?
Yes. Yes.
The first part is not margin, Rajiv. It was on managed services. He wanted to know what is the number on managed services, correct?
Right.
Cloud managed services, cloud margin. Okay, sir. Let me give you the in the reverse order first off because that's a
Rajiv, we lost you. I'm not sure about others. I'm not able to hear you, Rajiv.
This is the operator. The line for the management has got disconnected, sir. I'm reconnecting.
Oh, okay. In the meantime, just to save on time, just to give you an idea on the managed services, for Q2, I don't have a very precise number, but somewhere in the vicinity of about INR 60 crores. Roughly about INR 78 crores, 7.8 Crores or 8 crores will be the managed services. I stand corrected. My apologies. This is out of INR 310 crores. As far as half year is concerned, this is approximately about INR 24-25 crores, the managed services piece. I don't know if, Rajiv, you are back. Rajiv is not back yet. Does that help from purely a managed services part?
Yes.
Your second part on, So Rajiv is back? Oh.
They were connected. Again, the line got dropped, sir. Reconnecting them again.
My apologies. It would be better if Rajiv were to give you a response to your second question. Just bear with us for a few seconds.
Sure.
Yes, the line for the management is reconnected now.
Hello.
Rajiv, I have in the meantime given the numbers for managed services, so the first part of the question is answered.
Yeah.
The second part in terms of that subscription and implementation, something you may want to clarify.
Yeah. Thanks so much, Raj, for filling in for me. Linkages got dropped. Hey, look, I think you've got to understand the strategic significance of as to why companies are moving towards cloud, and is it a COVID-led thing or is it an irreversible sort of a phenomena? You'll find that in more ways than one, it is an absolutely irreversible phenomena. People are accelerating their project deployments from a technology perspective. People are accelerating digital adoption. All of this digital adoption is giving people the flexibility to buy at speed, which means agility, and to move their applications onto the cloud, try out new applications, try out new functionalities in a very quick and fast manner. Now, at a fundamental level, you will find that those are irreversible movements in businesses that have taken place.
People have made or businesses have made in information adoption, in information or in digitalization. COVID or no COVID, I think COVID initially helped to make this a very pronounced and a very accelerated shift. Having gone there and having seen the benefit or the outcomes of the shift towards a cloud model, which allows companies flexibility, allows companies optimization, it allows companies to roll out projects much faster. I think that accelerated phenomena and behavior is going to stick for a much longer time than you and I would have ever imagined earlier.
Thank you so much, and all the best.
Thank you.
The next question is from the line of Sangeeta Purushottam from Cogito Advisors. Please go ahead.
Yeah. Hi. Can you hear me?
Yes.
Yep.
Okay. My question was on the working capital. You mentioned that, you know, from the current low levels, it's possible that over the period of next few quarters, it could normalize to about 30-odd days or 30-35 days. Now, could you just help me understand which elements of the working capital are likely to swing back? So are you likely to see, you know, a swing in the increase in creditor days or where would you expect these numbers to, you know, reverse? And, given that your top line is so large, any swing in working capital is going to lead to a huge increase in capital deployed, right? So where could that additional capital come from?
Great question. Krishnan, I'll take that question if it's fine. Just to give you a very crisp answer, the increase would come out of inventory days. Currently, the inventory days is less than, it's about two and half weeks. Most of the vendors under normal times would expect us to keep a minimum four weeks of inventory. One way to think about it is can this 18, 19 days, it may have a tendency to go up by a week or 10 days. This is something that is likely to happen.
The second is with regards to our debtor days, with a higher contribution coming from the enterprise business. It tends to, by nature, have a longer credit period that we would have to offer to the customers, even though we try to negotiate with vendors to get a longer supplier credit as well.
Right.
To your question over time, this is also likely to increase, and therefore one could budget anywhere from five to seven days increase.
Right.
To give you a sense, and I also want to, Sangeeta, take the liberty of sharing with you that my colleague, our CFO, Krishnan, is normally highly conservative. He doesn't want a situation where, God forbid, even if one quarter we go to 30 days of working capital, he doesn't want a situation that we have not given you advance information.
Right.
Truth be told, I think we will do everything within our means that even when during normal times, now that we have become highly prudent, we've become a little smarter than COVID has taught us a lot of things. Therefore, my own view is that we would be definitely make every effort to be less than 30 days net working capital, even during good times. Sorry, even during normal times. If that answers the question on working capital, does it?
Yes, it does. Where would this funding actually come from? Because, you know, even a shrink of 20-odd days will mean actually thousands of crore needed to fund that.
Okay. Sangeeta, it's a great question, and my colleague, S.V. Krishnan, would be dying to answer this question. Let me give him the pleasure. Over to you, Krishnan.
Thanks. Thank you so much. Sangeeta, we have enough leeway in terms of the funding. As I have said currently, while our net worth is about INR 5,000 crore, our net debt is negative INR 3,700 crore. You can see very clearly what is the leverage that we have. We have enough limits in terms of stretching our working capital even much beyond what we are discussing now. That's not a concern at all, and we will not lose any business on account of lack of availability of funds.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Raj Shankar for closing comments. Thank you, and over to you, sir.
Once again, thank you to all the participants for taking the time to be with us today on the earnings call. As I said, this has been honestly a dream quarter, where every parameter, whether it relates to top line, bottom line growth, or it relates to profitability improvement, like we talked about 2% PAT on our revenue, or whether it's to do with our working capital management, generating free cash flow or giving very high returns on the capital employed or return on equity. Every single theater, every business vertical, and every parameter for this quarter has been extremely well managed. I'm proud that for the last almost five, six quarters in a row, we've been delivering great set of numbers.
Thank you once again for joining us on the call and thank you for your continued interest in Redington. Good day to all of you.
Thank you. Thanks, everyone.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Redington (India) Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.