Ladies and gentlemen, good day and welcome to Redington Limited Q2 FY 2024 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 and then zero on your touchtone phone. Please note that this conference is being recorded.
I now hand the conference over to S.V. Krishnan. Thank you, and over to you, Mr. S.V. Krishnan. Go ahead.
Thank you. Good morning to all. First, let me take this opportunity to introduce Mr. V.S. Hariharan, our new Global Chief Executive Officer, who assumed this position from 11th of September 2023. Hari's journey with Redington has been a remarkable one, and that goes back to more than 20 years ago. As part of HP, he has dealt with Redington as a distribution partner and has been a key constituent of Redington's foray into the large format digital printing category, which today has grown to a size with high profitability. He has served as a board member and offered valuable insights and guidance, now has taken up this leadership role in the company. Hari brings with him a wealth of experience spanning across three decades in sales, marketing, and digital management. His professional journey includes significant leadership roles at industry giants such as Hewlett-Packard and GoPro.
In these roles, he contributed to creating innovative, world-leading printer products and driving revenue growth through effective sales leadership. He excels in managing both mature and emerging markets while achieving substantial cost efficiencies through geographic focused initiatives. He's an unusual leader in that he has taken the road less traveled. At its peak, after a successful 18-year career at HP, he decided to step back and become a successful entrepreneur in accessible solar products market. His remarkable journey resonates deeply with our company's values and aspirations. The synergy between Hari's extensive experience and Redington's strategic objectives is obvious to all, and I'm sure this is the beginning, beginning of another great chapter in Redington's 30-year-long history.
With this, I request Hari to say a few words about his first few months with the company. Over to you, Hari.
Thank you, SVK. Good morning to all. It's a pleasure to be here and meeting you all. I'll just share very briefly bit of my background, my first impressions in the first 60 days, and our near-term plans. As SVK said, I've been associated with Redington for nearly 20 years, while working at HP and then as a board member. I've admired the company both from far and up close, and it's a pleasure to be here in this role. Over the last 60 days, I've been reviewing and learning the nuances of the business with the leadership team, and I've been traveling around a fair bit, meeting the India teams, the Middle East, Africa teams in Dubai, the Saudi Arabia teams in Riyadh, and the Turkey teams. I've been very impressed with the quality of leadership and the talent we have.
I've also been meeting the leadership level of various brands and vendors, and the kind of joint plans we have with the brands and the feedback we have from them on Redington and the initiatives we are working on, makes me feel really good in terms of the long-term prospects for the company. The regions we operate in continue to have very positive signs of growth. We are very well-positioned as a key distributor in these markets. Let me go a little bit by business units. Technology Solutions Group and Cloud offer great growth opportunities and the largest headroom. Cloud, with our strong partnership with the hyperscalers and the SaaS brands, we're experiencing strong growth. Within Mobility, the new product introductions have gone very well and show good momentum. In the Endpoint Solutions Group, the emerging category of solutions offer a good growth opportunity.
As you may be aware, we have embarked on a number of investment initiatives in the last year, starting with the digitalization of the company in the B2B platform. While the focus on some of these initiatives may continue to remain, we are looking at fine-tuning and right-sizing the investments to get the best ROI for the company. The business platform enables us to have better efficiency and response time for reaching smaller partners, cross-selling to our large managed partners, and scaling up growth brands. As an emerging market distributor, Redington over the years have, has done a great job of managing risk while focusing on return on capital. We will continue to focus on these basics as a distribution company while playing in the new growth areas. In the near term, most of the geographies outlook is positive, and we'll work towards maintaining and growing our position.
We do see some signs of stress in Africa due to geopolitical factors. We will be cautious to navigate for profitable growth in Africa and driving the acceptable return on capital. As we look at the Q2 results that have gone by, they have been good, and I'd let Krishnan walk you through the results in greater detail. I'm happy to take on questions you may have. Thank you.
Thanks, Hari. Okay, so just the, you know, the results on the results. We've had in Q2 highest ever revenue and highest ever gross margin for any quarter. That's something which is a very interesting situation to be in. On a year-on-year basis, the revenue grew by about 17%, the gross margin grew by about 10%, EBIT grew by about 2%, PAT grew by about 22%. But for a moment, if you look at on a quarter-on-quarter basis, because our objective is to make sure that we need to improve now from where we were, and on that score, revenue grew by 5%, gross margin grew by 10%. There is a growth in the gross margin from 5.9% to 6.1%.
After three quarters, we have crossed gross margin of 6%, so that's something which we feel is, is positive. EBIT had grown by 17%, and PAT has grown by 22%. So on a quarter-on-quarter basis, there is an improvement in EBIT percentage and PAT percentage by 20 basis, and all the major geos have shown growth in the profit after tax. The PAT percentage, which was 1.2%, in Q1, has improved to 1.4% in the current quarter. At the same time, we have also seen the working capital on a quarter-on-quarter basis decrease by five days, from 40-35 days, which I think is a very important, important milestone. That has resulted in operating cash flow, and, and free cash flow being positive.
Operating cash flow for the quarter was INR 1,249 crores, and the free cash flow for the quarter was INR 1,120 crores. Just wanted to make a mention here, there is a reclassification that was done in the way in which we show the free cash flow. Earlier, we used to net off dividend, which we had found, I mean, the practice being followed by other companies, both India as well as global, is not to net off the dividend. Even if you, if you take on an apple-to-apple comparison, the dividend removal, which was about INR 563 crores in the current quarter, we would still be at about INR 560 crores of free cash flow. Return on equity for the quarter is about, I mean, is about 17.4%. Return on capital employed at 21.6%. Our net debt to equity is about 0.3x .
Another important metric we—I mean, we always measure ourselves, is the provision for inventory and provision for aged receivables. I'm pleased to share with you there is a reversal of inventory provision in the current quarter to 0.29%. This is primarily on account of the drive that we are doing in terms of liquidating the aged inventory, just to make sure that it is in a proper state. So that has enabled this reversal in the current quarter. The bad debt, it continues to be about the long-term average. For the quarter, it is at 12 days.
Let me pause for now, and if there are any questions, we can 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 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 assembles. The first question is from the line of Vivek Ramakrishnan from DSP Mutual Funds. Please go ahead.
Thank you. Sir, congratulations on a good quarter. I can see the management efforts in terms of improving a lot of the things that you said in the earlier quarter. So my questions are around, you know, in terms of working capital and the fact that you are always vulnerable to high-interest costs in the economy that affect your PBT, your profit before tax. In terms of working capital, last quarter, we got a feeling that you were looking for market share gains and you were pressing on in terms of business. Have you eased it off a little, given, you know, the fact that the market conditions are not, or at least volatile, it's not deteriorating? And what is the outlook going forward on working capital? That's my only question, sir.
Okay. So, so the mantra, Vivek, very clearly, we did want to drive profitable growth and keep the capital efficiency on top of it. So this is something that we are very particular, and that's the way the business is being driven.
Yes, there is a working capital reduction in the current quarter. I just want to tell you that we are being very, very cautious, but there are also some tailwinds that happen because of new product launches, because of testing people, that gives it some advantage. Please don't consider this as a steady state. I think we would be around 35-40 days in terms of our working capital. Whatever is best possible, we will try our best to make sure that it is efficiently managed.
I think we've lost the person who was asking the question. We'll move on to the next question. The next question is from the line of Priya Rohira from Emkay Global. Please go ahead.
Yeah. Hi, thanks to the management team, and showcasing a strong momentum on the revenue side and sustaining quarter after quarter. My first question relates to the demand environment. We've seen a material improve in discretionary. How do you see the acceptance of the products that is done? Secondly is, among the new product introductions, are there any products which you think can give supernormal growth in the coming years, depending on the feed you've seen in the market? And the third is, if you could share some outlook on the margin side, like, we have seen a little bit volatility in the recent quarters, primarily because of, you know, investments we would have done, but any color over there would be helpful.
One second. Yeah. So the three questions were, one was on demand, and the second was on the new product introduction, and the third one was on margin improvement. Let me try and take each one separately. So if we look at some of the theaters that we are in, the demand environment continues to be strong. So maybe India and UAE, Saudi Arabia, demand continues to be strong. And this is across all categories. As I mentioned, Technology Solutions Group, the demand is strong, the Cloud has high growth, and so is the Mobility with the new product introductions. I think Endpoint Solutions Group is the only place that we see muted demand, partly driven by the global organizations not buying PCs at the same pace as we expected.
Specifically on the new product introductions, they're all about the mobility products, and you're aware there are a number of big brands that have introduced products in the last month, and the acceptance of the product actually is really good. And we are a bit fulfilling demand in a way, whatever supply we get is going out of the door. So the acceptance of the products is very good. We expect margins to be staying at the current levels in most of these businesses, the gross margins. We don't see any deterioration in any of the businesses that we are seeing, and we are closely watching it.
As Krishnan said earlier, we're going after profitable growth, so we are trying not to gain share at the expense of compromising on margin.
Just a follow on. The gross margin, I do understand, is a function of, you know, the vendor, how much we partake, and also the demand environment. I was getting more color from the EBITDA margin perspective, depending on the investments you would have understood or any products which are in the pipeline for which you think selling and marketing is key.
We are, we think an EBITDA range of about 2.4%-2.5% is something we should be able to hold on. We don't foresee a challenge. Yes, there will be a mix change that can possibly help us if the TSG does more better compared to mobility. But overall, we are quite confident about this range.
Sure. Okay. Thank you, sir. Thank you for answering my question.
Priya, are you done with your question?
Yes, I am.
Thank you very much. Before we take the next question, a reminder to all the participants that you may press star and one to ask a question. The next question is from the line of Sarath Reddy from Unifi Capital. Please go ahead. Sarath, can you hear us?
Hello?
Sarath, can you hear us? Are you--
Are you able to hear us?
Now, now I can hear you. We can hear you.
Yeah. Hi, team. Thanks for the opportunity. So my first question is that, adjusted for the inventory provisioning, is it fair to say that the EBITDA margin per se has been flat Y-o-Y?
Okay. See, inventory provisioning, while I had said there has been a reversal, but, it is important that we don't consider the complete inventory provision reversal as a profit. Because while, selling these, these products, there will also be some erosion in the, in the margin that could be there. So some part of it would have come as part of, the margins for sure.
Okay. Sir, secondly, could you speak a little bit about the interest cost? Because, you know, if you look at this quarter, the number which includes your bank charges as a part of interest, could you just call out what is the actual interest rate that we are paying, and how do you expect the trajectory for the rest of the year?
Look, it varies between different market edges. In India, it the range is about 7.2%-7.5%. In our Middle East business, it's about 5.5%-6% today. In Turkey, it's quite high. We discussed last time, and it continues to be high. In fact, it has gone up even further, where our interest rate is close to 30%.
Got it. Could you call out what has been the absolute factoring cost this quarter, and what is the trajectory on other expenses going forward?
Okay. So factoring cost, absolute amount in the current quarter is about INR 86 crore. And predominantly, this is in Turkey. And as discussed last time, there are no enough bank funding available in Turkey, and the companies that are—I mean, that affects across various industries, and the companies. So factoring is a tool for us to get funding, and this is the cost of it in the current quarter. Overall, we think we should be able to maintain OpEx as a percentage of revenue. We don't foresee that as a problem.
Got it. Sir, mobility is strong this quarter, which had lower working capital. You mentioned that 35 days is maybe not the right number. So what is the normalized working capital today, especially in the context of the call you called out last time, that vendors have rolled back to earlier credit cycles?
As I have said, about 35-40 days is something is a range that you should keep that in mind on a steady-state basis.
Got it. And, sir, Mr. Hari, could you just call out that, you know, what are your thoughts on the strategy going forward, beyond profitable growth? And what were your motivations to take up the role, you know, from being a board member to running the organization?
Sure. So, in terms of strategy and directions, we have always—we had embarked on a few things, as we had discussed, in the call and before. One is clearly cloud. There is a lot of work on cloud, and right now, within cloud, we work with hyperscalers on the resell and driving the consumption. That's clearly one strategy we will continue. The second is we see a lot of headroom on technical solutions and across all theaters. And we continue to look at how to step that up and see what kinds of solutions we can play in, both product solutions and related efficiencies.
In terms of the other areas, specifically in the Endpoint Solutions Group, there are a lot of emerging solutions, like gaming, like wearables, et cetera. Clearly, we will play a role in those, and those are good opportunities for us. And on Mobility, we also see good traction on Android, as well, and we will continue to play on Android solutions as a growth area. We did embark on digitalization, and I did mention that, but we will fine-tune our investments in digitalization, but continue to play there as a way to reach our smaller partners and our growth brands, as I mentioned.
Now, in terms of my motivation, clearly I have been associated with Redington, and it was a company that I've always admired. It's in multiple theaters, complex business, managing the business really well, you know, balancing between risk and return. When an opportunity presented itself, and the board was reviewing the candidates, and they asked me if I would be interested, and I said, "Definitely," and I'm honored to actually lead the company. So the motivation is to be able to drive and lead a global distributor to a much better place.
The opportunity as in all the theaters is great, the industry is transforming, and with my background and experience, I worked across consumer, SMB, and enterprise, and I worked across PC printers, Unix boxes, in my past 30 years. I thought I'd be able to contribute and play a role in the growth of Redington.
Sure. Thank you, and all the best.
Thank you so much.
Thank you. A reminder to all the participants, you may press star and one to ask a question. The next question is from the line of Amit Khetan from Laburnum Capital. Please go ahead.
Yeah, thank you. Three questions here. The first is cyclical, the second structural, and the third focused on your role as CEO. So the cyclical question would be, we obviously saw a big surge in demand post-COVID, and various industries are still equilibrating to a post-COVID world. Given the amount of possible over-ordering of IT equipment during COVID, one would expect a fall-off in subsequent quarters and years. Some of that is starting to be seen. I'm curious to get your point of view on the extent to which we are through with that versus, you know, could we expect a significant slowdown going forward, not because of any industry issue, just 'cause people over-ordered during COVID? The second question from a structural standpoint. Do you see any change in terms of the need for distributors?
Overall, is the pie for distributors shrinking, where the module distributors are getting squeezed out, the Redingtons and Ingrams of the world are holding their own. But broadly, with a consolidation in the channel for electronic goods, especially on the retail side with Amazon and Croma and, like, you know, what does that do to the pie overall? I understand that we're a small percentage of the pie, but would be curious to get your thoughts on the size of that pie. And finally, as CEO, is it fair to say that your role will be focused more on the growth initiatives and the core distribution business will basically run as is, or do you expect to be spending time on both?
If you could give us a sense of where you see most of your time being spent as CEO, that'd be a great help.
Sure. Thank you for all those questions. So let me address the first one. So on the demand side, I think, as we had COVID and, during COVID, and the early part of post-COVID, the consumer demand was one of the--
There is an echo coming. I don't know why is this--
Mr. Amit, I'm sorry to interrupt you, but there is some background noise. So if you could just-- Are you sure?
Yeah, muted it.
Sure. Go ahead.
Oh, okay.
Okay, sorry. I'll start again. So, in terms of the demand--
No, it is still continuing.
There is a slight echo in the call.
Can you hear me, Amit?
Yeah, we can hear you. We muted our speakerphone.
Okay. So, Mr. Amit , is there any background sound from your side? Because there's a slight disturbance. Are you using a handset, Mr. Amit Khetan? Hello? Hello.
No, no, I think it looks fine. Let's, let's start. Go ahead. I'm sorry.
Okay. So, as I was saying, during COVID and the early part of post-COVID, we saw a huge surge in consumer demand, and that was partly driven by work from home and a lot of the consumers upgrading their equipment. Right after that, we did see a consumer slowdown, and the enterprise demand picking up very strongly. We see that enterprise demand continuing for a while. And cloud is also enabling transformation and purchase of new kinds of products. So we don't see a slowdown. So we think it will continue. So as of now, the enterprise demand, it's strong, and we expect that to continue. Same in the mobility area. And consumer, we do expect it to start to come back.
Some of the areas that I foresee, it is too early to say, but I take India as an example. We have reached it only to 200 million of the 1.4 billion population. There is a huge semi-urban, rural population that don't, don't have access to computing, and I see some of that happening over the next few years, as right size type of products get to these kinds of customers, and that will drive the consumer demand again. So that's the first part. In terms of the structural change, we do not see a big impact. Clearly, there is fine-tuning happening, things like direct to retail, and those kinds of those markets are coming up. Things are getting a little bit more specialized.
We are working on how to reach retailers, telco retailers in the space, and also sell PC to them. So an evolution of omni-channel, as well as existing channels that are specialized, being able to sell other categories, that will evolve. And scale obviously helps for things like these. And obviously Redington has scale, and to be able to create a set of partners across the country, where they were selling telco products earlier, we could sell consumer PCs and wearables and those kinds of things. So we see evolution of channels, especially in mid-market and in states. And we don't see a big structural change.
Now, in terms of my role, I see two parts to it. The early part, the first 6-12 months, is clearly working on the core business and really looking at what investments we decided to make and to make sure that we are hunkering down, fine-tuning those, and getting the best out of those investments, digital, cloud, et cetera. And really important, because they are additional fees to our core business. And once we have really got this to a stage where we are getting our expected profit and return on capital employed, we will start driving new growth areas again. So, it's a mix. Initial part will be just focusing on the core business and getting the best profitable growth out of the core business and stabilizing all the theaters.
As I mentioned, we had some stress points, especially Africa, overseas, so we are working on how to stabilize those. Once we are beyond that, we will drive new growth opportunities after that. Clearly, we have a very good leadership team to take forward what has already been done. So I should really focus on getting into new areas and how do we drive growth there. Clearly, we are a distribution company-- So we are going to work on the adjacencies and not give out of our current DNA, but we will look at growth opportunities in adjacencies.
Thank you.
Thank you. Thank you. The next question is from the line of Drashti from Thinqwise. Please go ahead.
Hello, sir. Thank you for the opportunity, and congratulations on the number. My question is related to the geopolitical--
Drashti, sorry to interrupt you, but you're not audible. Could you speak a little louder from the handset, please?
Sure. Is this better?
A little better, but I would request you to speak close to the mic or the headset, whatever you're using.
Yeah. So, thanks for the opportunity, sir. My question relates to the geopolitical shifts that you mentioned in Africa. So if you could quantify if you've evaluated that, what's the impact on our balance sheet or on our P&L? And also in the other geographies, so I know that the situation right now in Israel and Hamas is not directly impacting us, but if there could be any indirect impact in any of our geographies, and what are your first thoughts on the overall geopolitical shifts in the global situation? Thank you.
Okay. So, again, this is not to get all of us worried about it, but it's just to be more cautious. Clearly, the wars that are going on, the exchange rate movements in various geographies in Africa. We already know the Nigeria situation, the Egypt situation, and now Kenya is also part of that. So both the exchange rates and the dollar stability and the liquidity, everything, will be impacted because of the wars and the oil prices, et cetera. So we're just cautious, and we are looking at it very closely to make sure that we are playing in a way that we are not taking excessive risk. That's the point I wanted to make.
So we don't see a big impact, but we want to play cautiously in the second half, so that we are not, as a distributor, there's always being very focused on managing risk well. We want to be sure that we are not taking any undue risks. You want to add, Krish?
Yeah. Just if I can add, see, it is about $1 billion business, Africa as a territory for us, which for our current, overall size, is about 10% of our total business. As, as Hari said, while there are concerns, we will, we will navigate very carefully, but for us, risk management is far more critical. Growth is something that's available even otherwise. I mean, you would have seen in the first half, we added about $1 billion incremental revenue in our total numbers. So there is, there is growth opportunity, but we would want to make sure that, the balance sheet and risk management is proper.
So till now we are not, we are not seeing impact because of the geopolitical tensions in Africa region, right?
So it could be there, which is why we are calling out, and, one is Africa, and another one definitely what's happening in the Middle East because of Israel and Gaza. So those, we need to see how those pans out. It's important for us to call out upfront what challenges that lie in front of us. We have discussed about Turkey in the past, and that continues to be a worry for us. So we will handle it carefully, but, but these are some challenges that are there in the overseas markets.
Sure. And, sir, what would be our Turkey growth this quarter? If you could, give some numbers or give highlight something on the Turkey subsidiary of ours. What would be the growth number, and what would be the Turkey margins, like you mentioned last time?
In fact, there is a good growth that we had seen in terms of revenue across markets. So when we say 17% year-on-year growth, 10% quarter-on-quarter growth, is just not at the consolidated level. This is true with India, this is true with Middle East, Africa, this is true with Turkey. All the markets are growing well. And in terms of profitability, in the challenged markets, obviously the profit percentage could be lower, and this is where we would want to be careful in terms of how do we do the business.
Understood, sir. Thank you.
Thank you. The next question is from the line of Nikhil Choudhary from Nuvama. Please go ahead.
Hi, thanks for the opportunity. My first question is regarding the investment we are doing, particularly streamlining some of the investment we have done in the last couple of years. Can you please give us kind of in terms of which are the areas where we are seeing, you know, investment getting trimmed, and what will be the cost quantum?
One second. Yeah. Okay, Nikhil, we are doing various investments, but I would want to categorize that into three broad categories. One is the digitalization initiatives that has become very important, and as common this inquiry in the earlier question. It is, I mean, it has become very important for us, and we are bringing a change to the ecosystem, and we have to bring in change internally as well. So that investment is happening in terms of automation, in terms of within analytics, et cetera, that is something that would continue. See, we are now differentiating our investment into need to have and nice to have. Need to have is something that we would want to pursue on that something which is fundamental for us.
Nice to have is something while we think directionally is important, we want to make sure that we phase it out, so that the impact is not felt in the immediate quarters. Second is in the Cloud business. There are investments that are required both from the platform perspective as well as from the resources perspective. On the platform, we think it is important because that's the way to deliver and reach the market. In terms of talent, we will be careful as we are growing the business, how much we need to invest on the talent part of it. But as you have heard from Hari, definitely this is a segment that we are focused on.
The third part of the investment is in the digital platform. While this is definitely important, maybe we may have to slow down the pace of investment just to make sure that we are all in terms of the required ROIC. So, we are focused on this, and we will make sure that it is properly calibrated.
Very helpful, I think. My second question, sir, is regarding that you mentioned that we are seeing challenges in global geographies and, you know, and we are looking at profitability growth. One, in this quarter, we have seen growth coming from outside of SISA. Rest of the World grew faster than SISA. So just want to understand how we are thinking in terms of, you know, maybe trimming back some of our investment in those current geographies. You know, the third quarter, as you just like to mention, that the factoring cost, factoring cost in Turkey was so high. So just want to understand how we should think about the coming quarter, given the change in strategy happened in the middle of the quarter.
Okay. See, these are difficult markets. We are not making any new investments in those. These are regular business that we are doing. What business that we appropriate, what we would want to leave it on the table is something that we need to decide basis the expected profitability and the capital protection. As we had said, for us, I mean, profitable growth and capital efficiency is the, is the mantra. We would want to make sure those are properly in place. But having said that, there are growth opportunities. We would want to be relevant, and we would want to be important for the global brands. As you know, this is something which is very important for us to make a statement. In India, we have become number one today.
In the past, we used to be number one distributor in the Middle East and Africa as a region, and today it is also there in India. Except for Turkey, where we are number two, in all other markets, we, I mean, we hold a leadership position, and that's something which we would want to protect, but at the same time, subject to the risk management properly in place.
Sure. This last one from my side. Currently, you know, about EBITDA margin to be just the current trend. Just want to understand if there is assumption that you'll see further in inventory basically roll back in terms of provision, then we write it for that EBITDA margin, or you expect that effect to come from some other expense flexibility?
As I've answered, I don't think we need to look at the increase in EBITDA margin as an account of inventory provision reversal, because all the inventory provision reversal hasn't got flowed down into EBITDA. A part of it went towards, I mean, selling the product at a reasonable price. As we move into the future, we think this will get protected, irrespective of whether there is an inventory provision reversal or not. But inventory provision reversal is something that's still available only for some time, that cannot get continued for long. But we are confident about protecting the margins.
Yeah. Very helpful, thank you. And congratulations on this quarter. Thank you.
Thank you. Ladies and gentlemen, before we take the next question, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to one or two per participant. Should you have a follow-up question, we would request you to rejoin the queue. The next question is from the line of Aasim from DAM Capital. Please go ahead.
Yeah, hi, good morning to you both. First question, just continuing on the managed services fees within cloud. You did talk about the investment bit, but can you also talk about, you know, what kind of an annual run rate it is on revenue and cost currently?
Okay. So managed services fee today about, I mean, 4.4% of our total cloud business, which has improved from 4.2% last quarter. So that's where we are. In terms of profitability, while gross margins would be better in this, the cost that we need to invest in talent is high. We will not see high profitability at this point in time. Once we get the scale, we should see the profitability being better.
Currently, we still, sorry, go ahead.
No, go ahead, please.
I just wanted to just get a sense that currently it will still be margin dilutive, right? Or is it, at least positive on EBITDA? That's one sense I wanted.
It is positive.
It is. So I just wanted to give you a sense of how we are thinking about it. So I'm sure you understand the cloud part, there is retail and there's driving consumption, and then there is a services piece. So we are approaching the services piece in a way, the bundled services with the cloud can drive more consumption. So we are driving those areas that drive more consumption. So either I can look at it standalone, but it can also drive more consumption, which drives more retail and more margins there. So you have a double effect when you are doing the managed services on cloud.
Got it. Second question, basically, I just wanted to understand how we look at working capital debt on the balance sheet as a percentage of total liability. In the past during just immediately after COVID, when working capital days had dropped a lot, I think most of the working capital was financed with cash on books. So can we go back to a level where cash on the balance sheet funds a larger portion of working capital over taking short-term debt? Basically, can we go to a net cash level in the next two-three years?
Actually, this is the working capital intensity business per se. When you see a growth of this nature in a working capital-intensive industry, obviously there will be absolute amount of increasing working capital and accordingly, increase in debt. We are very focused on making sure that the leverage in the balance sheet is within an acceptable level, and that we are very confident we don't foresee a challenge. But I think we can go back to positive cash balance. That was more during the COVID period and being a lot.
Can I add, it is important, both from a brand vendor perspective and Redington perspective, maintain and grow our market shares, within acceptable limits. And we have joint plans with brands and vendors, and we are driving those, well, maintain our position in the growing market. So we have to really balance both the factors, and that's the kind of risk we are taking in terms of profitability growth.
Return on capital employed is attractive. Our objective is between 18% and 20%. That's something that we are focused on, so that we know what money is getting invested, there is an adequate return.
Got it. Krishnan, just I think I missed one or last part of your previous statement. Did you talk about positive net cash will eventually be reached, right? Or did I mishear that wrong?
I said there will be debt, but you will see returns.
Okay. And just lastly, the factoring costs that you mentioned earlier, so where is it booked in the P&Ls?
It is there as part of OpEx, because factoring by nature is sale of receivable. It cannot be there as part of interest costs. It is there as part of OpEx. This INR 86 crore, what I had mentioned, is part of the OpEx, that's there in the book.
Understood. Okay, thanks, Krishnan, and wish you all the best for your new role.
Thank you.
Thank you. A gentle reminder to all the participants, in order that the management is able to address questions from all participants in the conference, please limit your questions to one or two per participant. Should you have a follow-up question, we would request you to rejoin the queue. The next question is from the line of Dhvani Shah from Investec. Please go ahead.
Hello, thank you for this opportunity. I also had two questions. One was, can you provide some color on the performance of ProConnect in this quarter?
Okay. I mean, ProConnect performance is mediocre in the way of speaking. We are making—I mean, we are making some corrections in the form of streamlining the revenue streams. We haven't degrown, but we haven't grown either. And we have a neutral profit situation. But having said that, the outlook for the next two quarters definitely looks positive. And I'm sure this will come back into the, within quotes, growth zone model in the next few quarters.
Okay. And just another question to harp on, the earlier, first question was that you had mentioned the other expenses would remain in the range as is, and the benefit of the inventory provisioning is, not something that you can focus on. So how do you expect the EBITDA margin to improve to 2.4%-2.5% from the current 2.2% level?
This will happen in the form of higher gross margin. We know there are possibilities to increase the gross margin. It's not easy, it's going to take time, but if you ask where is the lever? The lever will come in the form of better margins.
Okay. Thank you so much.
Thank you. The next question is from the line of Girish from WhiteOak . Please go ahead.
Thank you for taking the question. Sir, did you say that Africa is a $1 billion annualized business?
Very sorry to interrupt you, but your voice is not audible. Could you speak a little louder or from,
Yeah, is it better now? Hello.
A little, but I would request you to speak. Are you speaking from a speakerphone, Girish?
No, I'm speaking from a headset, sir.
Okay, because the management, can you hear him clearly?
Yeah.
Okay, go ahead.
Okay, great. Thank you so much. Sorry for that. I'll try and speak. So my question was that I just want to understand, if you, if I heard it correctly, that Africa is $1 billion business on an annual basis.
Yes, you are right, Girish.
Sir, what should be the bigger countries there?
It could be Nigeria, Kenya, Senegal, in that order.
Okay. So next, second question is on this, presentation deck, slide 17, where you have the halfway performance region-wise. So, Rest of the World , gross margins are up, EBITDA is down. So one of the reason is factoring, and one of the reason is higher investments. So can you just briefly explain that, you know, how much is the drag coming from the two individually? Just quantify it to the extent possible.
It would mainly be in the factoring because, I mean, Turkey, it comes under the Rest of the World , which is where we have seen a very, very high cost fee. You'll be surprised, the factoring cost today ranges between 50%-55%. That's the cost of funding that's there in Turkey. In fact, every numbers of Turkey will look very mind-boggling for us. The inflation rate is about 61.5%. The government announced interest rate that's available for the consumers and for SMB is about 35%. And when we were there in Turkey a week back, on that day, it got increased from 30%-35%. So it is a bit different, difficult market.
But I need to tell you, to the full credit of the team out there, we have still been growing, we are still not losing money. We are still making profits. Whether the profit is attractive or not, that's a different question, but we are still making profits. We haven't dropped the ball. So that's something which we would want to tell you.
So what I wanted to understand was that, see, if you see, H1 FY 2024, INR 1,500 crore of gross profit versus INR 1,330, right? So almost INR 170 crore higher, we are making in gross profit. But if you see the EBITDA is down about INR 85 crore. So if you just quantify this INR 170 crore + INR 85 crore, is INR 255 crore extra OpEx is sitting between gross profit and EBITDA. How much of that is coming from factoring and how much of that is coming from investments that you might be making, other investments?
Okay. I may have to collect it independently. I don't have exactly the numbers for me to answer you. Sorry. You want me to answer?
Yeah.
Okay. For H1, the factoring cost is INR 147 crore.
INR 147 crore for H1. What was it in the base H1?
It would be about INR 80 crore.
INR 80 crore, okay.
INR 47 crores . No, no, no. One second. INR 47 crores.
Extra INR 100 crore is explained by this?
Yes.
What is--
Balance would be the increase, increase in cost, increase in normal OpEx.
Increase in normal OpEx, okay. This is also higher versus the baseline, because earlier in last call, you said you're making some investments. Where are we in that journey and when they would normalize?
Investments are mainly India, India-focused, and some could be at the global level, not necessarily at Rest of the World . See, some of the things that may explain this increase is also the Forex loss that we had talked about last time in few markets, increased AR provision that would be there. So some of these are factors that constitute that increase. But we can discuss the numbers one on one, Girish.
Sure. I'll connect with you, sir. Thank you so much.
Thank you. The next question is from the line of Devang Patel from Sameeksha Capital . Please go ahead.
Hi, sir. The growth that we've seen in rest of world has been higher than in SISA. Yet, if you see the working capital, the improvement is again higher than rest of world, as compared to SISA. Can you talk about why this, what explains this dynamic?
Yeah. Can you repeat the question? Sorry, we haven't followed that.
We've seen a higher growth in rest of world segment, revenue growth Y-o-Y, H1 or Q2, and yet the, you know, margin improvement is better in rest of world compared to SISA. Can you give some color on where have you been able to, you know, have better working capital improvement in rest of world despite a higher growth?
Okay. See, there is a better working capital management in Middle East during the last quarter. And that's one of the reasons why our overall working capital days has come down. And this is something which had happened in Middle East, but I'm sure it will, it will happen in other places as we go forward.
So then just to put this in context of the pendulum effect you were talking of in the previous call. So can we say that the worst is over for us in terms of working capital pressures? Because now you are expecting the other geographies also to be stable or improve.
I would not want to say that, Devang. With the current environment, the volatility, the level of volatility is definitely high, and there are some specific segments in the industry which are also, as Hari explained, are very, very challenged in terms of demand. I do not think we can take, I mean, the current level into the future. We have to wait and see. But we are on top of it. For us, the capital efficiency is very key.
Okay. Sir, and lastly, could you just explain again, inventory provision reversal, and how much this quarter versus how much it is usually for us?
Inventory provision reversal in the current quarter is about 29 basis points.
And, on average, it tends to be about?
On an average, if you take the last 15 years, it's about 6 basis points, 0.06%.
That would be similar in the first quarter also? So roughly about--
First quarter was [audio distortion] 99 basis points.
Okay. Thank you so much. That's all.
Thank you.
Thank you. We will take that as the last question. I would now like to hand the conference over to Mr. V.S. Hariharan for the closing comments. Please go ahead.
Yeah, thank you so much for attending this call and asking a lot of really good questions, made to think. We will continue to do a good job for you, and we're looking forward to the Q3 discussion, which will happen in three months, and hope to deliver good results. 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.