Ladies and gentlemen, good day, and welcome to Redington (India) Limited Q2 FY '23 earnings conference call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict.
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. Rajiv Srivastava, Managing Director. Thank you, and over to you, sir.
Thank you so much. Good morning, and I hope you all can hear me clearly. Thanks so much for participating and joining early morning today on our conference call. On this call, I've got my Chief Financial Officer and my Finance Manager on the call. Chief Financial Officer, it's S.V. Krishnan, and Financial and Lead Analyst is Deepika on the call.
I just wanted to give you a sense on how the quarter went by, what we see in the market as a preamble, and then we can open it up for question and answers from each one of you. Just as a precursor or a beginning, I just wanted to reiterate that we are really pleased to report another strong quarter of sales and operating margin growth.
We closed the quarter with a growth of 25% on revenue. Our EBITDA grew by 22%, and PAT grew by 26%. All strong numbers supported by solid execution across businesses and geographies. Because of that, Redington continues to gain share and secure new opportunities in the markets that we really compete in. Now, this is despite an evolving macroeconomic environment. Despite of that, we remain well-positioned to continue to grow our business profitably by helping our customers and suppliers navigate an increasingly complex market.
Redington achieved record revenue and operating margin for the second quarter of the year, as our continued investment in improving our technology capabilities, in building deeper partnerships with our vendors and partners and tier two and tier three partners, in making our breadth of offerings far more comprehensive than ever before, and also in innovating in business models.
All of these investments in these four areas have started to play out. This is the highest ever quarter two for us, both from a top-line and bottom-line perspective. First time ever that we've had two consecutive quarters of 25%+ growth. Just as an additional information, this has been the highest ever growth, half yearly growth since the time we went public.
Now, I just wanted to also let you know that this delivery has been really broad-based, with all our operating regions and various business units contributing to growth. All our theaters, Middle East and Africa, Turkey, and South Asia have seen pretty robust growth. All the business units, value categories, the volume categories, clouds, services, have all seen broad-based, very fundamental, very solid growth. The business dynamics in the quarter have been mixed.
You have seen global technology reports and global reports from the mobility conferences that tech demand related to work from home and learn from home has been coming down. It has been subdued. In fact, the work from home and learn from home, which is the consumer market reflection of how the consumer trend is shaping up, has de-grown.
That is got balanced out by demand from enterprises, from mid-market, from SMB. Those three segments of enterprise, mid-market, and SMB have more than made up. Back to office, the procurements related to data centers, migration to cloud have been the new catalyst for us. In area of data center migration, cloud, back to office, new technologies have been leading.
New technologies of the nature of artificial intelligence, technologies around data capture and data analytics and data, analysis for various companies, how you manage and, utilize your data for insights. Those are the ones which have been really leading, the way, and we think that that will be the trend going forward as well. Our geographies, the places we operate in, India, Middle East, Africa, Turkey, and the countries, limited countries of South Asia, they are largely consumption and investment-driven.
Most of the GDPs have shown a positive trend, though we are seeing a slight softening going forward. By virtue of the GDP showing a positive trend, one of the major spenders have also been government. Like I said, it has been consumption-led. Clearly, there has been some parameters which are not so favorable, but very stable business environment that we've been operating in.
You're also aware of the financial situation across the world is highly volatile, and there are obvious headwinds. Let me call out a few. We've seen a very high inflation regime, high commodity prices, increase in interest rates, which means the cost of capital has gone up significantly. These impact demand, but it makes less money in the hands of consumers and buyers, and they also impact margins.
We've seen currency devaluation in some of our operating countries, which is Nigeria, India, Ghana, and some of the other ones. Even India, for instance, and we've seen that happen in many countries, Sri Lanka and Bangladesh, all over the place. While there has been a delay in delivery of networking products, which has impacted the execution of large project business, shortage situation of technology products has eased considerably.
It continues in the mobility products, but in the rest of the core information technology, which is PCs, servers, storage, it has eased significantly. The networking products of the variety of Aruba and Cisco, those are the ones which continue to be impacted by the shortage and supply chain disruptions. We've seen a hardening of oil prices.
You know where we operate, so it possibly impacts a lot of countries we are operating in. Obviously, there have been some good and some not so good financial indicators. We expect, because of the geography that we are covering, we expect these to balance out for us. We will continue to be extremely watchful and cautious over the next few quarters because you know how the world is globally interconnected completely.
I think these are balancing out for us. Let me also give you a peek into the future. As we project ourselves into the future, we do see or anticipate a continuation of a constrained demand environment in certain categories. Categories would be access products which are PCs and printers at home, work from home, learn from home, like I said earlier.
It will be better. The demand environment will be better in categories like data centers, clouds, services, accessories, and some mobility products will see an upswing. We therefore expect to sustain a reasonable revenue and margins from our recently implemented operating environment improvements that we've created for ourselves amidst the backdrop of whatever is going on in the world from a geopolitical and financial perspective.
Net-net, I think, our strategic initiatives, our ability to execute in a tough market is delivering for us, and that makes us extremely optimistic about the future. We've had one of the business I did talk about earlier was on the ProConnect, on our logistics business, and that has been a good turnout and a good stabilization in growth.
We can discuss in detail about all the numbers through the questions that you might have, but this is the commentary I wanted to paint to you so that you get a context on what's driving our performance and how we foresee our sales projection into the future. Let me stop over here and open it up for questions.
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 the touchtone 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 is cleared. The first question is from the line of Shalini Vasanta from DSP Mutual Fund. Please go ahead.
Hi. This is Vivek Ramakrishnan. My question is on two issues. One, has the working capital cycle normalized and it seems to be stable at this number. Is this the number that you expect to see continuing? The second question is, do you get a sense that there's still a lot of latent demand in the sense that, you know, are you really well laid out the shift from working from home to MSMEs and so on? Do you still feel that there is still latent demand, and how do you read the situation? Thank you.
Okay. Thanks, Vivek. Let me answer both the questions, and I can ask Krishnan to add to your working capital question also. Let me take it in reverse order so that we can just get Krishnan also into the discussion. Look, like I said, demand for work from home and learn from home has come down. It's not gone away, it's come down.
It will get balanced over the short run through a refresh cycle that is bound to happen very quickly, because of the migration of operating system from Windows 10 to Windows 11. There is that interesting dynamic that is gonna play out, that people will love to or try to upgrade their systems from a technology perspective from Windows 10 to Windows 11. That will create one cycle of demand.
May not be latent, but it will force a demand towards the actual product. The demand that is there on the hybrid technology, because we are seeing a very rapid and aggressive movement by MSMEs and by enterprises, government, education, all kinds of sectors, to shift their operating working styles to a more digital environment. I'm refraining myself from calling digital transformation. That is maybe context, maybe connotation.
Every company is trying to move towards a more digital working model. That demand will continue. That demand will continue towards the creation of data centers as a pattern. It will accelerate towards putting more applications and workloads on the cloud. It will continue towards more cyber security to be created for companies and for more capabilities to be created by more companies.
I think we are seeing that in such a dynamic play out and that part of the business will continue to be very, very robust. The drive or direction that companies are taking towards converting their environments to be more digital and everything digital and everything in all the journeys with the customers, employees, partners, I think that journey is irreversible.
Some companies will be faster on that curve than others, but that really is the one which is building the demand today in the enterprise, MSME, government and public sector market. That's something which is a good demand environment which we are seeing constantly and consistently, of course.
The working cycle, if you recall on the last call, we had guided that the working cycle will be stabilizing somewhere in the range of 27-28 to 35 days, which is higher than the COVID time, but lower than the pre-COVID time. That exactly is the way in which the working cycle has played out in this quarter. We are at 27 days, which is right at the lower range of our guidance that we've given.
That's how we see it. The working capital will have a tendency to increase because, like we said, the financial markets are the way they are, and that's the reason we went up to this level. Our guidance continues to be in this zone of 27 to 28 and to about 35 days. Krishnan, you may want to add something.
Yes, Rajiv. Thank you. I think you have explained it clearly, Rajiv. Just to supplement that, see what we have observed while there is an increase in the AR, there is a good increase in AP, which neutralizes the AR increase. Primarily, the working capital increase has been in the form of inventory days increases.
This again, if you go back to our last call, we had mentioned there is a very unique situation that's happening in the market where in enterprise products particularly where we have got part shipments. We couldn't get the complete shipments because of some shortage of products or supply chain issues, and we are not able to bill the customer. That's one of the reason why we have excess inventory.
Second, in the consumer business specifically, where there is a softer demand, it has resulted in higher inventory getting built up, which we think over a period of time, I mean, both these issues will get resolved, and we are quite confident we should be staying well within the range that we mentioned.
Thank you very much. Sorry if I can just sneak in one more question. Are the margins the same regardless of which channel, you know, whether it's going into working from home or enterprise solutions? Are your margins the same across both these channels? That's it from my side. Thank you.
Yeah, no. Look, margins are driven by many things, not just the channel you sell into or the segment you sell to. They're driven by the category of products you buy, whether you buy it as a product or as a service, or you buy as a capital expense or what kind of integration you are acquiring. Depending upon the type of sale you make, the margins will get driven by that.
Whenever there is a larger integration required, the margins are better. Whenever the products are higher, the margins are better. Even when you sell to home, a product that costs INR 30,000 will provide lower margin than a product that costs INR 65,000. I mean, it's driven by a variety of factors. Our margin regime has stayed very consistent over the last couple of quarters. It's turned out to be very well. That way you'll have to think of how margins play out.
Thank you very much, and good luck.
Thank you.
Thank you. The next question is from the line of Pranav Kshatriya from Nuvama. Please go ahead.
Hi. Thanks for the opportunity. My first question is regarding the sustainability of the growth. I mean, you did give some color on, you know, there are a few moving parts which are going up and going down. But we have not really seen this kind of growth for a long time. Can we expect this 25% kind of a growth sustained?
Because historically, we have typically seen, you know, the low to mid-teen kind of a number on the growth side. So that's my first question. And if you can comment a bit on what led to 40% odd growth in the ROW consumer segment. And secondly, I would also like to understand how should we see the tax rate going forward. These are my two questions. Thank you.
Okay. I think a bit of the answer was within your question. The sustainability of growth, whether you sustain 25% or not, is something that, you know, it's hidden in your question that you're saying there's a world market which is a little uncertain right now. That is where we see it. In the last quarter, there was a significant drop in the PC industry across the world.
It actually dropped by 15%. You know that happened. Our volume business was much better than that. Our volume business was up 24%. The way we think about growth for ourselves because we are so matured in our position, we think of growth across two or three dimensions.
One is we obviously try and gain share in which one market we are present in. Bit of our organic growth in these kind of products comes from share deals. The second we do is we expand the products to new geographies, new countries. This is what we benefit from the last quarter, and that starts to help and deliver for us in a new quarter.
The third we do is we add new categories of products in the same geographies as before. All of these are starting to work out for us. I think there is a very concerted and a very focused growth strategy that plays out. Now, can we sustain 25% of kind of a growth even if the markets dip a lot more and and just by virtue of that HP becomes that much more successful in the market?
I think that's a moot question. We'll see how it plays out. The only thing I can tell you is two points. One, we are very focused on delivering a double-digit growth. We're very focused on outstripping the market growth by a factor. We will continue to grow faster than the market, and we should obviously deliver a double-digit growth.
If the market turns out to be better, we will be much better than the market. I think that's the way we want to play it out. It is hazardous to give a very exact and say, "Look, I no matter what happens with the market, I will continue to grow at 25%." That's a very hazardous sort of a, and I wouldn't be, you know, going in that zone, in that direction.
I can only tell you the way we are trying to operate for ourselves and execute our plan, we will outstrip the market growth, and we are focused on delivering double-digit growth. I think that's from a growth perspective. The second point of yours is about what led to a consumer growth in the market in Middle East. Look, Middle East has been a very different dynamic. It behaves quite often differently than the rest of the market. Clearly this quarter was a revelation for us from the perspective of how the growth is taking place in the Middle East. There are two or three things happening.
Middle East, if you see, UAE is one country which is really focused on modernizing itself and growing all the cities in this region. The second country which is similar and focused on growing everywhere is Saudi Arabia. Africa has got a country like Nigeria, country like Kenya and Ghana, which are very focused on growing.
We don't play in South Africa, which is also growing, but I'm just talking about the countries we are focused on. Those are the countries which are growing very fast. There was an event which obviously is happening right now in Qatar, which is the soccer World Cup, which is fueling a huge amount of demand for all kinds of technology and all kinds of non-technology products as well. I think the
If you net it out in these, in the way in which I'm trying to talk to you about all the countries which are really very focused on changing themselves, transforming themselves. There's a country transformation which is at play in a lot of countries in the Middle East and Africa, and that really helps us. I think that's what led to our consumer growth being so high, or better. Turkey turned out to be better than what we had expected it to be earlier. All those factors led to growth in the consumer segment in Middle East and Africa. Like I said, our growth sustainability, I always explain to you how we look at.
Yeah. For your third question, Pranav, with respect to the, I mean, tax rate on a sustainable basis, we have mentioned this before. I think on a sustainable basis, you should take about 21%-22% at a weighted average rate. This I would say from a short to medium term. From a medium to long term, it could be at about 25%-26%. The reason being, the global minimum tax rate is expected to come up in about two years' time from now. If you look at in Q1, we were at about 21%. This quarter it is down.
It's primarily because of the mix and also what you, I mean, what we have seen in Turkey when we have very significant depreciation in the currency. It impacts, I mean, our tax rate. That hasn't happened in the current quarter, and which is also one of the reason why the tax rates have been down in the current quarter. Otherwise on a sustainable basis for the next one to three years, you can take about 21%-22%.
Sure. Thank you so much. I'll come back for my questions on other segments in the queue. Thank you.
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Hi. Good morning. Rajiv, your voice is very muffled. I don't know if it's only for me, but it's very muffled on the call. So there's this one. The question is on the, if you could just give some color on the enterprise segment. What proportion of the IT business right now is the enterprise segment and how that is sort of, I think almost 100% of the incremental revenue is from the IT side on a sequential basis. So just wanted your thoughts on how that business is doing and how it'll do going forward.
The second is some data points on provision for inventory and provision for receivables, how that has sort of moved on a sequential basis. Your thoughts on how the cost of debt is sort of playing for us. I'm sure we do a lot of commercial paper 45 days. But how are the interest rates sort of moving for us, and how do you anticipate the impact on a going forward basis? How much of that do you think will really flow through into the gross margin for an offset? Those are the questions.
All right. Nitin, many questions and thanks so much. Let me take a stab at the first one on how the IT and how the segment split of IT is working out. I'll let Krishnan talk about the provision of cost of debt interest rate. Okay?
Yeah. Rajiv, your voice is very muffled. I don't know if it's only for me, but it's very muffled.
Okay. Is it any better now for you?
Good. Yeah, yeah. It is very clear now. Very clear.
Okay. All right. No problem. Let me do this. I was using a hands-free. My apologies. In case you guys want me to repeat anything, I can do that. Let me give you a certain, a bit of color on the way the enterprise segment is working out.
See, our split of our revenues in Q2 is IT portion, which is volume, value, cloud, is about 74%. Within that, you know, enterprise comes within that. Our enterprise segment grown 15%. I'm splitting the enterprise segment into two now. The first enterprise segment for us is purely products of server, storage, network, and software, those kind of varieties there.
The second enterprise segment that I'm treating is, and I'm hoping going forward we can put more emphasis on that, is going to be cloud. Because the whole world, the buying of technology, the way technology is getting consumed by people is so dramatically different from just a couple of years.
It mandates us to have a segment like that. Our value business in Q2 has grown 15%. Our cloud business has grown 67%. And both are fairly democratic in the geo context. India has grown, and so has Middle East, and so has Africa, and so has Turkey. For both of these. Both enterprise products and the cloud products.
Going forward, to the earlier question that Pranav had asked about sustain, and the question about latent demand in the market from Vivek. I mentioned to you that there are many digital migration projects which are on right now. Companies are focused on becoming more capable, on becoming more friendly and more consumer and customer-centric.
They've realized that the only way you can manage this dynamic is by adopting more digitalization as opposed to putting more people behind processes. That shift or transformation of conversion towards more digitalization, more capability, leads us to believe that the value part of the business, which is products of the nature of server, storage, network and software, will have a good run.
The cloud, because a lot of capabilities for and cloud has got many other reasons why people are adopting cloud. It will continue to get accelerated and adopted. I think those are the things. That's the way in which we see the enterprise part of our technology play out. Now, there is a volume products which go into enterprise. Okay?
PCs and laptops, they also find. They are volume products, but they have a consumer segment, learn and work from home, and they have a commercial enterprise, government and that kind of a segment, where people are buying for their offices. That demand of refresh of technology. In the last three years, what happened was when people go home, the technology refresh was deferred. It did not happen at all.
Now when people are coming back to the offices, they now suddenly realize that the equipment they bought three, four, five years ago is no longer current. They need to transfer that equipment to a more current technology. There is a refresh cycle which is playing out. The other one which I said earlier was, there's a refresh cycle of the operating system from Windows 10 to 11. I do anticipate a fairly stable, fairly robust enterprise IT buying cycle.
Sure. Just a follow-up on that quick one. Whatever you mentioned both on products and on the cloud, for us it's slightly different, right? The cloud is more SME, MSME and SME, right? Mid-market. Whereas the product server storage, volume product enterprise, you could have a lot of large procurements there. So on the large procurement side, just wanted your thoughts on, is that because of the shortages that were there, are you basically seeing elevated order books and that sort of continuing in that space or and how long do you see that continuing?
Yeah, look. Like I said earlier, the shortage situation has got hugely moderated over the last two quarters. We saw shortages in chips and a whole range of supply chain disruptions in servers, in storage, in networking. All of those elements, product categories were impacted by shortage. All of those product categories are not anymore impacted by shortage.
Server and storage has gone out of the shortage cycle. The only product that continues to be in the shortage cycle or supply chain constraints is the networking product. Products of the nature of Cisco, products of the nature of Aruba and those kind of products which continue to be on short supply.
Now, in case you have a project which necessarily includes all the elements, those projects, and by virtue of that, those large procurements will undergo a delayed execution cycle. Okay? In case you have projects which do not require every single component to be done simultaneously, those projects are going through, and there are many, many, many such projects which are still continuing to go through.
Some projects are obviously impacted because of the mismatch, imbalance in the complete offering bill of material of a particular project delivery. That dynamic continues on the networking side, but otherwise, largely, like I said, it's been taken care of and addressed in server storage and also in PCs and printers. Krishnan, do you want to address the questions on provisions and cost of debt and interest?
Yes, sir. I'll do. See, from a provision for debt perspective for the current quarter, we are at about 0.03%. I mean much lower than our long-term average of about 0.1%. It's about three basis points for the current quarter. The provision for inventory has been slightly at an elevated level of about 0.24%, which would normally be at about six basis points.
This increase is primarily on account of the factors which I had said for the earlier query. On one hand, we have received part shipments, and we are yet to bill. It is taking time for the rest of the BOMs to come in. Since we have a very consistent provisioning methodology, we thought we should continue to provide for it.
Second is the inventory buildup in consumer, which also had impacted the increase in provision percentage. Which we think once the situation gets normalized, because eventually all these will get sold and there will be a reversal happening at a future quarters.
For your question, Nitin, on the interest rate, yes, the interest rate has spiked across the board, across the markets. Some of these increases are quite steep. I mean, we are able to manage. To answer you in terms of our interest rate increase, we have seen about 2% interest rate increase overseas and about 1.5% interest rate increase in India. These are weighted average.
I mean, we have this in multiple products. Some of the loans we had this included before, which is also helping us. When we approach the CP market as we speak now, we are still able to get at about 6%, sometimes even sub-6%. That's something which I mean, as we are now, we are quite okay. The challenge is in Turkey, where there is a significant increase in the interest rate. This is the actual market interest rate. If you go by what is declared by the central bank, it wouldn't be so. There is a big divergence between what was declared by the central bank and what's the real market rate.
You'll be surprised it's about 33%-34%. That's where we have a challenge in terms of interest cost. Having said that, we are trying our best to realize this in the form of better margins and whatever profits that we have declared is in spite of that. Does that answer you, Nitin?
Yes, sir. It does answer. But historically, your ability to sort of pass this through, and get it, on the gross margin level has been quite consistent. There may be lags, but you usually do it. That should sort of continue, right? That's a fair assumption.
Absolutely. You are perfectly right. Immediate passing on is not possible because some of these transactions, contracts will get structured before. With the lag, we will be able to recover. That's why I said we are not too highly disturbed. This is something which we need to be watchful within considering our P&L is highly interest sensitive.
Sure, sir. Perfect. Just one quick last one. The question that Pranav had asked on the tax rates, actually our standalone tax rate has also gone down, right? Our effective tax rate on a sequential basis, it's around 8% ETR. Is there anything specific one-off out there or no?
Okay. I just need to check. Sorry. I mean.
Sure. No worries.
I don't know. One second, I mean, I'm just thinking aloud, but definitely I'll come back to you. See, during the current quarter, we had the dividend income from overseas subsidiaries. Since whatever dividends that we receive from overseas and declare to our shareholders, it isn't subject to tax. Since it is part of the standalone profits, maybe the tax rate could be low. Generally, you will find about 24%-25% being the tax rate in standalone.
Perfect. I've got that. Thank you so much, and all the very best.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, please limit your questions to two per participant. The next question is from the line of Sanjay Parekh from Sohum Asset Management. Please go ahead.
Yeah, thank you for the opportunity, and congratulations on a great set of numbers. You know, one, in terms of character of the business, generally what I see is that we have 2% net margins. We turn around almost as of now on this first half almost 12 times.
Sorry to interrupt you, Mr. Parekh. May we request you to speak little louder?
Yes. Now it is fine. Now is it fine?
Yes, please go ahead.
Okay. In terms of character of the business, you know, we have 2% net margins. We turn around 12-13 times. We make 24%+ ROE, which is great. But, you know, when we see the cash flow, right, for a business of the scale at which we are, let's say we do INR 80,000 crores this year, cash flow also would be very important. The first half, you know, broadly we've done INR 8 net plus cash profit, but working capital need has been INR 3,000 crores. That's what I'm trying to say is when you look at a business and in your presentations you have emphatically said ROE, ROCs are good, which is very good.
Free cash generation as a part of a business at this scale, let's say you go up INR 20,000 crore more. I was just seeing, if your working capital needs are this, then yet you will not generate cash flow. How do you think about this business in terms of cash flow generation? That is the first question. The second question is global. I mean, you did allude in your initial remarks, but globally there's a huge slowdown in this space. A little more elaboration of how do we think about our, you know, for us, how do we plan out in the second half? That's all. Thank you.
If you say you wanna take the first couple of questions, then I can give them.
Sure. Sure.
I will do. Okay. See, Sanjay, I think your point is very well valid. I mean, considering the operating profit, the churn that we have in terms of working capital, obviously, it is a very highly working capital dependent balance sheet. I'll tell you, any growth rate north of 10-12% with the same working capital days in this business results in additional debt.
If the growth rates are more than 10-12%, we have to reduce the working capital days to generate the cash flow. That's the model because it's a working capital intensive. What I want to tell you here, in spite of the dynamics of this industry being what I have said, for the last six years, we have consistently generated cash flow and quite significantly.
You know very well, and I'm sure you'll appreciate what I'm saying. When you have in the last two years about INR 3,600-INR 3,700 crore of cash flow, free cash flow generation, and I need to tell you our calculation of free cash flow is after payment of dividend, which generally many people don't do. That's the way we calculate the free cash flow.
When we have made a total profit of about INR 2,000 crore in this period, and out of which about INR 1,000 crore or about INR 900 crore has been declared as dividend. You can imagine there will be a bounce back. That was because of the steep working capital reduction which we had said this more one time on account of what had happened during the COVID period.
Now it is getting normalized and this is something which is expected. Moving forward, I mean, from a sustainability perspective, if the growth rate is north of 12%, either the working capital days has to come down or there will be an incremental debt. That's the nature of the business unless and until our operating profit percentage goes up, which in our view is unlikely in this business. Not sure whether I have answered your query, Sanjay.
Yes, sir.
Yeah. Okay.
Okay. Thanks, S.V. Krishnan. Look, I'm going to be repeating a lot of what I said to the other question on growth and how we are thinking about growth from Pranav and this sustained growth of high levels or what it will be. There is a global slowdown. We see that, and we mentioned, and if you see all the reports of all the IT companies across the world today, whether it is HP or it is Microsoft or Dell, VMware, Lenovo, whoever you think, see, everybody is guiding in a certain particular manner. The global PC industry, like I said, in Q3, calendar Q3, which is our fiscal Q2, PC industry went down by 15%, and the phone industry went down by 9%. We see a global slowdown.
The way we manage our business of trying to expand categories, expand geographies and expand, and gain share is the one that has helped us in the last couple of quarters despite the slowdown. We hope to stay the course of navigating these environments to create strategies which help us to continue to grow. These are the strategies where detail has got to be stronger than ever before.
Your customer centricity has to be better than ever before. Your experiences that you deliver to your partners and your customers have to be absolutely very differentiated. We got a few things lined up in our arsenal which help us to continue to grow. That's the reason I said that earlier. We will grow faster than the market come what may.
I'm hoping that the way we see the market in this quarter, we will be in that position to stay. So that's the way we position ourselves, and that's the way we structure and strategize for our growth, yeah. Thank you, and best wishes to the team. Yeah. Thanks so much.
If I can pitch in for the earlier question, I had checked in parallel, and the lower tax rate in standalone is only because of dividend. Otherwise, the normal tax rate is maintained. Thank you.
Thank you. The next question is from the line of Chintan Sheth from Sameeksha Capital. Please go ahead.
Thank you, team, for the opportunity and congrats on the good set of numbers. Just two data points because most of the questions have been answered. On the Brightstar, if you can provide first half and second quarter revenue numbers because that won't be a part of base last year. Second, on the ProConnect profitability, if you can share some inputs on that.
The growth seems slightly muted, if you can comment on ProConnect and how we are seeing. Because given the enterprise is growing, we believe ProConnect will be, you know, complementary or beneficiary if the enterprise is picking up. If you can address this please.
Yeah. Okay. No problem. We can address both those questions of yours. On the first question on the Brightstar side, Chintan. Brightstar, we know we acquired in December last year, started to aggregate the results of Brightstar from December last year, which is calendar year 2021. We started to aggregate and indicate the results of Brightstar into a company. This quarter, Brightstar is about INR 750-800 crores. Chintan, you can give the number but-
Yes. About close to INR 800 crores revenue.
Yeah. It is.
About INR 1,500 crores.
Yeah. It's in that range. It is about less than 5% of our overall sort of revenue from that perspective. Going forward, you know, from next year onwards, obviously it will become a regular thing, which is different this year, but it will be a regular thing from going forward as we go. I'm hoping that. Sorry?
Sorry. I was just asking how it is growing from its base previous year. Is growing or is being flat on a year-over-year?
Brightstar in Turkey, I mean, if you understand Turkey a little more, you will realize Turkey has got many other interesting dynamics at play. Inflation being 100% and the capital and the interest rates being 30%. You've got to manage the business in a manner that you can stay afloat and you can still continue to make money in Turkey.
I think the Brightstar business for us has been stable, steady. It's not, we are not focusing on excessive growth there. It's very minor. It's a single-digit growth. It's a very small sort of a growth number that we have from that side. That's the way you are trying to manage that.
The question on ProConnect is also an interesting question, and I think it's important for us to get you in there. Now, ProConnect is a very strategic part of Redington. It has delivered a revenue of close to INR 140 crores in the quarter gone by, which is a 7% growth over the previous year on a year-over-year basis. We believe ProConnect will become at least a INR 1,000 crore company in the next three years. Okay. Let me tell you why we are so bullish about it. One reason for bullishness is that the entire logistics and supply chain market globally is in focus.
You're finding that a lot of such organizations are having a very, very strong business cycles right now because the supply chain market is so stressed and strained and under the assumption that logistics is something that's having a very good run. That's one thing which is there. But more from our perspective, that's a market thing.
More from the way we see ourselves in ProConnect and where we are trying to make our investments in ProConnect is very strong working on the fundamentals of the company. Those fundamentals are three or four. One fundamental for ProConnect is building the highest levels of automation and technology intervention to make sure every part of the operations and business in ProConnect is digital and automated.
You link your supply chain with the customer supply chain, link your supply chain with your partner supply chain, so that you can map on both sides, and you can be absolutely automated. We are shifting our game in ProConnect from a logistics provider to a logistics technology provider. That's one very strong thing.
The second thing that we are focused on in building out is harmonizing our operations and automating our operations or whatever, you know, from a customer experience perspective. Make sure that every single metric of measurement, every single scorecard that you create in the logistics industry. You would know that logistics industry works on scorecards. It works on experience.
That's something that we are very focused on and building it out as we speak. The third thing that we're doing is we are creating niche for ourselves by becoming a very strong and very capable solutions, solutioning for logistics. Now, logistics is not simple. If somebody wants to move some equipment from China to India, it can have multiple types of journeys, and it will have multiple types of documentation, management, handling, PH, all kinds of things.
So you need to have a very strong capability of being able to build the right solutions for a complex logistics process end-to-end, from manufacture to delivery or even pre-manufacture to delivery, and consumption is something that it gives to. The fourth thing that we are building out is on a very strong sales input. So I think we are creating a sales team.
We invested a lot in creating and building out a sales leadership across the country, and that's what we did. We are very bullish about procurement, and we see that as a very, very strategic and continuing part of our business.
Sure. Lastly, if you can, you know, elaborate because we were also hoping that 5G will be likely to, you know, roll out, maybe by end of this year. There are trials happening. Do you foresee this demand from 5G will start picking up, you know, from this year, and that could also support some consumer demand for growth for that?
Yeah. Look, I would caution you to think of 5G as a consumer demand, okay? We always equate 5G with a handset, and so if my handset is 5G enabled, I will get a handset and that's something which is there, which will happen.
Yeah.
Handsets which are 5G enabled will find favor to sell more than handsets which are. That's the overall mobility procurement demand.
Correct.
Much less than anything else, right? You gotta be thoughtful about 5G from an applications perspective, okay? The applications in 5G will create a very unique demand environment. 5G is a network which is almost a zero. It is a zero latency network, allows you to do things in real time. Your innovation cycles, your creation cycles, your manufacturing, your training and development, your healthcare, hospital, remote diagnostics and remote operating procedures, all of those will be enabled by 5G in some time to come in India.
I've seen that operating across the world. We travel to many countries wherever it is working right now, and I've seen it firsthand. You have a very disruptive sort of a 5G environment through an application play which will play out in some time. That will fuel a very strong demand for technology, both IT and mobility. Okay?
Right.
We are obviously very bullish as it plays out over the course of the next couple of quarters or years, yeah.
Sure. I'll jump back. Thank you.
Thank you. The next question is from the line of Krish Mehta from Enam Holdings. Please go ahead.
Hi. Thank you for taking my questions. I had two questions. The first is if you could provide the revenue number for your cloud business and the cloud managed services for this quarter.
Yes, I can give you the revenue number for cloud business and cloud managed services for this quarter. Our cloud business in Q2 FY23 is INR 506 crores. Our cloud managed services, INR 21 crores.
Okay, that's helpful. I wanted to understand more on the demand outlook and mix in context to cyclicality for the business. You know, like, given that there's been so many changing dynamics in terms of consumer demand versus enterprise demand, and as you said, on work from home and learn from home, how do you view the business also looking at the supply chain easing in the future, just in terms of cyclicalities in the next two, three years?
Yeah. Look, I think it should stay or pretty much mirror the cyclicality that we're seeing in this year play out. This year is a more normal year. Last year, when we were entering into fiscal last year, FY 2023, we were FY 2022 last year, we had, if you recall, there was the strains of COVID were still there in the month of April, May, June, continued into July, August, and we had a bit of a disruption there at that point in time. This year the conditions have been far more normal.
The COVID health scare is a lot less, number one. Number two, the supply chains of the world are getting restored even though expensive, but they're getting restored. Third is the commodity cycle, which the prices had gone up and there was a shortage of commodities.
While the prices continue to be high, at least the supply chain of commodities or the availability of commodities had got restored. I do see a much more normal sort of a cyclical situation this year and continuing next year than it was the previous year. Now, there are some shortages like network equipment continues to be a shortage, but I think in the course of next one or two quarters, we are hoping that will also become completely normalized.
You'll start to see the cycles of buying over the quarters getting far more steady state and standard and mirroring the business cycles of companies. The countries and companies have different business cycles. We'll have to be cognizant of the fact that the procurements are a lot less tied to the buying cycles.
For instance, if Turkey has a year end in December, Turkey pays in December. India has a year end in March. India peaks in the June quarter. You know, some of the countries have year ends in June, and they Australia, for instance, year end June. They are buying peaks in those quarters of April, May, June. Those get merged.
That's what I meant by the seasonality getting normalized to the operating environment of the country, and that's why we see no abnormal interventions anymore unless there is something else which happens, which is completely out of whack and we can't predict those kind of unforeseen situations. Otherwise, the seasonality is going to be absolutely normalized now.
Thank you. That's very helpful. Lastly, if I can just get a clarification on the accounts receivable provisioning for the quarter.
There will be few, yeah. Quite a few between. It's not something which is really. You know, there'll be, it's a laundry list there.
Okay. Thank you so much.
Yeah.
Thank you. The next question is from the line of Bhavin Shah from Sameeksha Capital. Please go ahead.
Yes. Thanks. First of all, yeah, I agree with the other, you know, callers about the sound quality, and I think it was also an issue in previous calls, and I thought, always thought it was my phone. You know, if you could. I'm surprised your conference call moderator did not point it out. My question is just one. I mean, I think you, the business is doing fantastic. Happy shareholders. If you look at opportunities, would it, in addition to what you're already doing, would it be any new geography, a new product line, or more through acquisitions?
Okay. Bhavin, great question. Let me give you a very sort of a direct answer on this. All possibilities are ripe right now. I already answered the question on new geographies. How we think of a growth is taking the existing products to the new geographies if we can sign the contracts with the vendors. Okay? That's one very strong thing that how do you get into new geography.
There are many geos which are opening up now as we speak, and we will be focused on thinking about expanding our footprint in those geographies, whether it is Southeast Asia, it is more countries in Africa. It is more countries in Middle East. It is more countries in Eastern Europe. Those kind of places we are very, very focused on.
I think we will continue to assess, evaluate our presence in those countries. That's one. The second thing is more products. Really, yes. And that's partly driven by us, but partly also driven by the way the vendors are launching new products. So if there are any product which comes up, there will be more focus. But I think, you know, the way you think of us, and we said this in some of our earlier calls, and this is really a very sort of important thing for us. We've got three pivots in our company, and everything that we do is in relation to those three pivots. The first pivot is technology.
Whatever is the latest and the most recent and the best technology which matters to our customers and consumers, we would be focused on making sure that is brought to bear in the most rapid manner. Number one. The second dimension of second pivot of our organization is innovation. Wherever and whatever innovations are required in either products, solutions and services or in operating and business models, we will be at the forefront of that.
If you see us over the course of last three quarters, you would have seen a very intense focus from us on shifting our business model from being an only brick-and-mortar provider to becoming a much more omni-channel provider for product solutions and services. From being an only completely CapEx-driven model to much more as a service operating expense model.
The one that resonates with this is the cloud portal that we launched, which allows us to build a very strong base of annuity in our business. That's the second pivot. Technology, innovation. The third pivot for us is partnerships. Okay. Whatever we can do in terms of partnerships with our vendors, bringing more brands into our customers' hands, bringing more solutions into the hands of our customers so that customers can become that much more efficient.
Or working with creating enablement for our tier two, tier three partners so that technology reaches its intended use faster than ever before. When you do that, you bring innovation to the customers faster. You eliminate friction in technology. That's what we stand for.
We stand for bringing innovation to the customers faster than ever before to reduce or limit the friction that people have in technology consumption. That's what we are. To your question, all of this allows us to play in new geographies. Obviously, we do. Expansion of products, absolutely certain. If it means that we need to portfolio, complete a portfolio by acquiring like we did in Brightstar in Turkey last year, we will be absolutely agile and aware about that.
Just one related question. As far as new geographies are concerned, it would have to be outside of any of the sort of sister companies. I mean, any of the geography sister companies operate, right? Sister company meaning, you know, ultimately there is Synnex, Arena, and so on. You know, ultimately there is same owner at some level. That's what I meant.
Look, it's not constrained by a sister company or a non-sister company because we don't have a sister company at all, and I don't relate to that terminology at all. We don't have a sister company. We operate independently as an organization. Synnex is an investment company, but we are not a promoter in that sense. I think you have to be thoughtful about those things.
We will go to the geography that makes sense for us. The way you choose geographies is on the basis of the potential opportunity or the gaps in that market. Let me give you an example. If I go to Indonesia, now my choice would be, should I enter with PC? Should I enter with servers? Should I enter with storage?
That depends upon a careful analysis of the gap that exists in the Indonesian market and where we can make a quick win to establish ourselves. I think we make different considerations on how and why, what takes you into a geography or takes you into a country versus anything else. I think we are more focused on ensuring that we have a meaningful value to add, and we can capture the value that we think we can add there.
Okay. Thank you.
Thanks.
Thank you. Ladies and gentlemen, this will be the last question for today, which is from the line of Nisarg Vakharia from Revanta Fund Management. Please go ahead.
I have a slightly broader question. If I look at your financials, there's not a single year where the company has not grown its revenues. If you look at the financials over the last four to five years, there is not too much significant difference in mix in your customers in the presentation that you mentioned.
You know, we've attributed the rise in EBITDA margins because of a premium customer like Apple, then Apple changed its strategy, go-to-market strategy. Despite all of that, the EBITDA margins are 100 basis points higher than what they have been historically over the last seven, eight, nine years. Now on a INR 60,000 crore top line, that makes a significant change in our financials.
Just want to understand, is that now all the COVID one-offs have gone away, cycles have normalized. Is this now the new sustainable EBITDA margin trend? I'm not specifically referring to 2.8%, but historically, we have bottomed out at 1.8%, 1.9%. Is the bottom now higher from that level? That's my simple question.
Yeah. Look, I can give you some color, and I'm sure Krishnan can add to it. I think your point is extremely rich and valid. I do think that the bottoms of earlier times before COVID were probably, you know, there at that point in time. I don't think we'll hit a bottom like that, but obviously we'll hit a number which will be different from what we have today also.
I think you know the wider broader point of this topic for all of us to really sort of take away is the margins are a function of many other things. Okay. While a business mix in terms of product profiles may have remained consistent, but there is a significant shift within each of those categories.
There's a shift in our product portfolio in value. We shift from products to cloud to services. There's a shift in our product portfolio in the PC and broadband access product side. PCs, printers and the supplies and consumables that we sell printers. In the mobility, we used to sell largely mobility earlier. Now we sell mobility and a whole range of accessories along with the mobility, which come with a different product profile.
We never had a solar product portfolio. We have a solar portfolio. We had very limited or smaller ProConnect portfolio in logistics. It continues to be small, but it's getting bigger all the time. I think the mix equation is going to be different just because you operate in a very different product construct or product portfolio environment. I think that's how we see ourselves. Will it go back to the old times? I don't think so. We will be somewhere in the zone. Rajiv, you wanna get more to it?
Sorry, just to interrupt. That's very helpful. If I could just follow up on that. You said that the product categories have changed, which is contributing to higher EBITDA margins. These product categories are essentially a market share gain that we have acquired from other distributors, or these are new product categories that the OEMs have launched themselves.
Combination. No, OEMs keep launching all the time new product categories. You have to keep going and doing something new in the market to acquire new product categories.
Okay.
It's a combination of the two here.
Okay. Got it.
I think, Rajiv, you have answered it. I mean, only point that if I can supplement, see, definitely as we speak now, the EBITDA margins can even be better. The EBITDA margins that you see today is after the investments that we are making for the future, for which the returns will flow in the future years, future quarters. That's the reason why, we have taken this period as a period of investment, of building the capability, and which, in our view, is going to start giving us results, even in terms of better margins and other factors.
When you say better margins, by what percentage or what do you mean?
Krishnan and everybody else, and the team, you know, I'm so late for my other call, so apologies. I excuse myself, okay?
Thank you. Yeah. Krishnan, sir, just to,
I think, ask Krishnan, and we can.
Yeah, just to press upon this point, what is the actual steps that we are?
Yeah, I will answer that.
Yeah.
See, if you look at traditional operating margin, it used to be about 2.2-2.3%. That's a sustainable, I would say, margin percentage in the traditional sense, which had moved closer to 3% now. What we think as we move forward, this would settle in between.
Okay. If I need to put a number, about 2.5-2.6%, which is where some of these investments in our view will start giving us the additional margin. It will take time because these investments are going to I mean be more I mean it will have more gestation period. Definitely we are at it, and we will make sure the margins are better as we move forward.
Okay, great. Thank you so much, sir, and all the very best.
Thank you. Thanks a lot.
Thank you. Ladies and gentlemen, as this was the last question for today, I would now like to hand the conference over to the management for closing comments.
Since Rajiv has left, I think we have had an excellent quarter in Q2, and that continues to be excellent when compared to the growth that we have had in the previous period. There are certain, I would say, challenges that are coming in the ecosystem, which we are very watchful, and we will make sure that I mean, we do our best like what we had done in the past.
I'm sure things will work out well and the investments that we are making will start giving us traction in the future quarters. Extremely thankful for your continuous support. If there are any questions, which you couldn't ask in this call, maybe we can connect later separately, and we will be happy to address your queries. Thank you.
Thank you. On behalf of Redington Limited, we conclude this conference. Thank you for joining us, and you may now disconnect your lines.