Hey, what is that one common thing that you have noticed about the iPhone in the past two-three years?
Well, apart from removal of SIM tray, charger or headphone jack (Yeah! We too are pissed about it :P) You see the iPhone which was once a status symbol in India, today every third person is having it in their hands. Thanks to lockdown and big billion day sales, Apple has been able to achieve such a tremendous benchmark.
Wait, but before iPhone 14, Apple products were not manufactured in India, do you know who was the leading distributor of Apple devices?
Hand down… We are talking about Redington Ltd
About Company:
Founded by R. Srinivasan, an engineer and IIM Ahmedabad alumnus, Redington India is the second largest distributor of technology products in India.
Humble beginnings:
Post his graduation from IIM, Mr Srinivasan moved to Singapore and began importing and selling printers. This single instance embarked the beginnings of Redington. In the late 90’s Mr Srinivasan moved back to India and brought the printers and Redington business along with him. In 1997, Redington started business in Dubai, distributing computing devices and networking products. Synnex Corp, one of the largest IT distributors in the world, invested $24 million in 2005, for a 36.31 percent stake in the Redington Group.
This was a strategic move where Synnex Corp would enhance their reach in India and Redington would improve its logistics management and operational efficiency. Finally, in 2007, Redington went public via an IPO which was 43.27 times oversubscribed.
The company is the largest IT distributor in the Middle East, Turkey and Africa (META). Since 2015, Redington has been a professionally run company since the founder divested all his stake in 2018. As of November 16, the company operates in 30 countries serving 38 markets.
Business Verticals:
Redington has three major business segments- IT, Mobility and Services.
- IT comprises enterprise products like PCs, peripherals, enterprise software & cloud solutions, storage and security solutions and high end servers.
- Mobility consists of more consumer lifestyle products, like mobile phones, smartwatches, tablets, and gaming consoles.
- Services include the Supply chain and logistics business under Pro-Connect, support services through Ensure Services.
Subsidiaries:
The company operates through 4 major subsidiaries:
- Redington Distribution Pte. Ltd (RDPL) – This is a completely owned subsidiary of Redington India, located in Singapore. RDPL imports and sells computers, peripherals and networking products in the South Asia region that includes Sri Lanka, Bangladesh, Nepal and Maldives.
- Redington Gulf FZE (RGF) – Headquartered in Dubai, RGF controls the overseas distribution and services business of Redington India. RGF has a wide number of subsidiaries spread across Africa & Middle-East.
- ProConnect Supply Chain Solutions Ltd – This is also a 100 percent owned subsidiary of Redington India Ltd. ProConnect provides warehousing, transportation and other value added logistical services in India.
- Redington International Mauritius Ltd (RIML) – It’s a holding company which owns 100% stake in Redington Gulf FZE. It was setup to raise funds for the overseas subsidiary (RGF), which being a Free Zone Establishment (FZE) could only have one owner. In 2009, Redington India transferred its holding in Redington Gulf to RIML. The company did this with no consideration. The Income tax department took the view that this couldn’t be done at no consideration and slapped INR 1.38 Bn tax on Redington India for violating transfer pricing norms. Redington India settled this dispute in Q3 FY21, and paid INR 890 million, after they lost the case in the Madras High Court last year.
Business Model:
The gross margins for the IT vertical are higher than it is for mobility as the enterprise projects are for a longer time frame and the system integrators require longer credit periods to pay the money back to Redington.
Due to their reach, expertise in sales and marketing and low cost functioning, Redington is preferred by companies like Xiaomi, to increase offline sales. The value to the customer includes scale purchasing power, financing, and inventory management. Redington’s managed to keep receivable provisioning at 0.1% of Revenue and inventory provisioning at 0.04% of Revenue, for the last ten years. To meet dues during the year, Redington avails Short Term borrowings of 90 days or less, these have come down from INR 1522 Crores in FY15 to INR 543 Crores in FY22. The lower working capital loan availed, is due to longer credit period that Redington has been able to get from the vendors and the quicker inventory turnover. Redington expects the Cash conversion cycle to remain in the 33-35 days range going forward and increase EBITDA with more contribution coming in from the services and enterprise segments.
Operational side:
Ever since its listing, the company has generated a revenue at a CAGR of 14% from INR 8,667 crores in FY07 to INR 62,732 crores in FY22
The net profit has grown at a CAGR of 18% from INR 102 crores in FY07 to INR 1,280 crores in FY22.
Interestingly, the company has surpassed the milestone of INR 600 Billion since its listing which tells about the massive operations of the company.
Apple has contributed to a major part of this growth in the last decade. Apple accounted for only 1% of Redington’s revenue in FY11, which has grown to 30% in FY22. The fortunes are reversed in HP’s case, whose contribution to the top-line has decreased from 33% to 13% in the last decade. This shows the shift in technology spending from PCs towards mobiles and tablets. Dell EMC has seen impressive growth in the last four years, growing at ~30% CAGR, the fastest among the top vendors for Redington. Dell EMC provides storage and server solutions for data centres, which has seen increased adoption in the last four years.
Redington Overseas-
The overseas revenue has grown at 13.9% per year, in the last seven years, and the growth has been led majorly by the mobility segment while IT has been the largest segment contributor.
Within the Overseas segment, Saudi Arabia has contributed the most to the growth in revenues. Redington has grown its revenues in Saudi Arabia from INR 11.84 bn in FY16 to INR 73.74 bn in FY20. In FY17, Redington Saudi Arabia signed a distribution agreement for iPhones with Apple. Apart from Apple, RGF also has agreements in place with Samsung and Huawei, both have significant market shares in consumer and enterprise segments, in the META countries.
Redington has made the majority of its revenues in the overseas segment in three countries- UAE, Saudi Arabia & Turkey. Turkey currently accounts for around 53% of Redington’s overseas revenue. Redington entered the Turkey market in 2010, when RGF acquired 49.4% stake in Arena for $42 mn, the 2nd largest IT distributor in Turkey. Arena has grown revenues from Rs 31.5bn in 2015 to Rs 36bn in 2020. Redington has had trouble in maintaining profitability in the Turkey business, due to currency fluctuations (Turkish Lira depreciation) and political uncertainty in the last five years. In FY19, Redington took an impairment of INR 712 mn in Arena, due to currency devaluation and challenging business environment.
In FY16, RGF acquired Linkplus (now Redington Turkey) for $6.7mn. Linkplus is a distributor of enterprise technologies, like Oracle, Red Hat, Trend Micro, Splunk, and Versa Networks, in Turkey. They offer pre-sales and after-sales services like demo, training, periodic product maintenance and technical support.
Redington setup RDPL in Singapore to import IT products, and then export them to India and other South Asian countries. Vendors and customers preferred to sell/buy in Singapore in dollar denomination, as duties and taxes were high in India, and they were able to utilize lower overseas interest rates as well. In the last few years, the gap has narrowed, with duty harmonization in India and vendors providing the products directly in India. RDPL has thus started losing some business, as it gets shifted to India directly. Redington will eventually merge RDPL into Redington India.
RGF has set up logistical facilities in Jeddah (in 2018) and Dubai (in 2011), they provide services like warehousing, freight forwarding, local distribution, and last mile delivery through its subsidiary ProConnect Logistics. ProConnect provides these services internally to RGF as well, and that accounts for around 60% of its revenues. Apart from logistical services, Redington Gulf also provides support services in META countries through its subsidiary, Ensure Services. Ensure provides IT Infrastructure services, On-Demand Support services ( like hardware/software installation), electronic repairs, spare part distribution, etc. to both enterprise and retail customers.
With the enterprise hardware business slowing down, Redington has been developing its software distribution business for the last five years, to move from a reseller of licenses to a solution partner. RGF setup “Redington Value” in 2018, as a go-to-market solution for vendors. Redington aims to use their relationship with thousands of channel partners and understanding of the local market dynamics in the META region, to train the channel partners and help them provide customized solutions to their customers.
In line with this, Redington has set up “Red Vault”, a solution center to showcase- private cloud and software defined networking solutions to potential end customers in the META region. Redington also launched a unified cloud platform (“RedCloud”), that will offer partners and resellers a marketplace for all workloads and technologies across verticals. The RedCloud portal offers a single sign-in platform for all cloud services with a billing, provisioning, automation and online payment option. Redington has managed to add a bouquet of cloud services from AWS, Microsoft, RedHat, Oracle, IBM, etc. to the platform.
Redington India:
The Indian operations tell a similar story to the overseas, with the mobility segment leading the way in the last five years.
Within the IT segment, storage and server solutions have seen increased demand in the last three years, due to investment by Data centre providers, who are seeing high demand for outsourced data centres. Traditional IT products like PCs and Laptops have seen demand flatten, with limited incentives for frequent replacements and upgrades.
Mobility segment has continued to grow for Redington. Redington and Ingram Micro are the only major distributors of Apple products in India. Redington also has distribution rights for Samsung, Xiaomi, One Plus & Xbox.
In the Services segment, Redington had three major businesses, similar to the overseas operations- post sale services like repair, maintenance and warranty services through Ensure, spare parts distribution, installation & implementation services through Cadensworth, and logistics services through ProConnect Logistics.
In FY16, Redington merged Cadensworth into Redington India, due to increased overlap in the businesses of the two entities. Redington sold Ensure Services India to Accel Ltd, in FY21 for INR 310 million, as the company didn’t consider the business strategic to their future plans.
Peer Comparison
Ingram Micro is Redington’s biggest competition in the Indian market. Redington and Ingram address the majority of the market ( around 70%) in India. Other regional players include Savex Technologies and Rashi Peripherals.
Ingram Micro, Avnet & Arrow Electronics are present in the Middle East & Africa, and have bought stakes in companies in Turkey as well. Local players like BDL Gulf and Arab Business Machine also compete with Redington in the Middle East region. Ingram Micro, Avnet and Arrow Technologies are much larger than Redington and pose a threat to Redington, if they enter into its market.
Our View
India’s digital surge is currently being led by the consumer segment. Smartphone penetration in India has reached around 40%, with online channels accounting for 45% of the smartphone sales. The adoption in the business sector hasn’t been this uniform, with the large companies, with extensive resources, adopting digital applications and adapting workflows, while smaller companies lead the way in accepting digital payments. India had more than 650 mn internet users in 2020, this will continue to increase with greater broadband & smartphone penetration in India. The growth in digital traffic and cloud adoption has lead to massive investments in data centres in India as well.
Redington’s domestic business has seen increased competition from e-commerce players in the PC, laptops, and mobility markets. Many brands now have direct partnership with e-commerce players or Large format retailers to market their products. The competitors are expanding their reach throughout the country, adding fulfillment centres at an increasing pace. Being one of the two only distributors of Apple in India, is a big advantage for Redington. Redington supplies Apple products to both offline and online players in India. With Apple starting their own online store in FY21, Redington thinks it will lead to an increase in demand for Apple products. Since retailers offer more discounts than Apple and in big ticket purchases customers prefer to buy from a store rather than online, Redington’s share will grow as well. Redington points to countries like UAE, where they have managed to maintain their market share in Apple, despite Apple having two stores and direct partnerships with large format retailers as well. The launch of Apple’s ARM based laptops has also been very well received and expected to see good sales. In Saudi Arabia and UAE, Apple has around 30% market share in smartphones, compared to 3% in India. Apple manufacturing iPhones in India and expanding their line up to lower price points are big positives as well. Apple has in the past looked at increasing distributors in India, but reverted back to a two distributor model. Any addition to the distributors will affect Redington negatively. As far as other vendors are concerned, Redington differentiates itself with its low cost model and reach in Tier 2 and 3 cities, but with the ever expanding reach of Amazon and Flipkart, that will continue to be under threat.
In the Enterprise segment, with enterprise PC sales slowing down, Redington has focussed on software solutions – Redington is providing cloud managed solutions, with channel partners to customers. Redington is a Cloud service provider for AWS, Azure, Oracle and IBM. Redington is a Tier 2 reseller, and helps Service providers like Microsoft or Amazon reach smaller businesses who can’t afford the services of an IT company. Redington has pointed towards building a “service model” that will lead to increase in annuity income, but insists it’s still 2-3 yrs away.
The investment going into data centres in India, will also lead to increase in demand for networking and storage equipment. Redington also started distributing health and medical equipment (HME) and solar equipment in FY18. Solar distribution business was hit by governments imposing duty on imported solar panels and Redington is currently reviewing their strategy there.