MANAGEMENT DISCUSSION AND ANALYSIS Economic Outlook Your Company's business interests are sbrad across emerging economies and developed / under developed nations, covering India, South Asia, Middle East, Turkey, Africa (META) and CIS regions. The sensitive and fragile nature of the economies of these nations means that they are significantly impacted by any shifts in the Global economic scenario. Hence, in order to understand the performance of your Company during FY 15-16 better, it is important to juxtapose it against the developments in Global and Domestic economic conditions. Global Economy - Review and Outlook After years of stagnation, the Global economy showed small signs of recovery, albeit in pockets. The traditional economic powerhouses - USA, Germany, UK etc. led the way with sustained growth indices. However, the Japanese economy remained stagnant and most European countries were faced with continuing contraction in demand. The sustainability and resilience of overall Global economic recovery is challenged by several serious geopolitical developments. The refugee crisis - brought about by the ISIS phenomena - that threatens to overwhelm the economies of Greece, Turkey and Mediterranean European nations is a serious impediment towards global economic growth. Apart from the economic burdens that this imposes on nations, the crisis is a very serious political and humanitarian challenge. The continuing low oil prices have seriously impacted the economies of all oil-producing nations : be it in Middle-East & West Asia, or African nations like Nigeria, or Latin American nations, or a global super-power like Russia. This has seriously dented the ability of all these nations to invest in critical infrastructure or, for that matter, to maintain state-subsidized lifestyle that many of these nations offer its citizens. With fast depleting national reserves, most of these nations face serious demand contraction and are likely to witness political and social upheavals in future, unless the oil prices recover to a sustainable level. The world's growth engine of the past, China, has witnessed a gradual and continuous economic slowdown. The cessation of the frenetic infrastructural spending by China has decimated demand for commodities like steel, various other metals / minerals and cement and this has in turn seriously impacted the economies of commodity producing nations like Australia. China's economic growth is expected to remain moderate in near future. According to the International Monetary Fund (IMF), average growth in emerging markets and developing economies is expected to pick up gradually from 4.0% in 2015 to about 4.1% in 2016 and to 4.6% in 2017. The baseline projection for global growth in 2016 is projected at a promising 3.2%, though broadly in line with that in 2015. The recovery is projected to strengthen in 2017 and beyond, driven by growth recovery in the major economies in western nations, coupled with gradual easing of the stressed economies of many nations. The GDP growth in Middle East and African countries during 2015 de-accelerated sharply, due to - as mentioned above -continuing very low oil prices, decline in prices of other commodities, and the geopolitical and domestic strife in a few countries. The Governments in some of these countries have taken steps to restrain its spending, cut subsidies, and raise non-oil revenues. This is expected to show results in the next few years, but is likely to be coupled with social unrest, unless handled judiciously and with appropriate messaging to the populace. Indian Economy - Review and Outlook On the back of prudent monetary policies of RBI and incremental fiscal reforms being carried out by the Government, the Indian economy has emerged as a bright spot, becoming one of the fastest growing large economies in the world. The 7.6% growth in the GDP at constant market prices in 2015-16, according to the advanced estimates of the Central Statistics Office, shows a sustained growth impetus, when compared to the figures of the brvious 3 years: 7.3% in 2015, 7.2% in 2014 and 6.6% in 2013. The IMF, in its regional economic outlook for Asia and Pacific, retained India's growth projections at 7.5% for 2016 and 2017. The economic activity in India is expected to be underpinned by recovering private consumption, which has benefited from lower energy prices and higher real incomes. Latest projections brdict that India's GDP growth in FY 16-17 might be substantially higher than brdicted earlier and may even cross the coveted 8% mark. With implementation of the unified tax system (GST) and gradual but sustained fiscal and structural reforms being undertaken by the government, a more conducive business environment is forecast, giving all-round fillip to the economic progress of the nation. While the "Make in India" should boost investments in the manufacturing sector, the projects aimed at "Smart Cities" and "Digital India" would not only transform the way the citizens interact with various government departments, but should provide a further impetus to business activities and consumer demand within the country. Industry Structure, Developments, Opportunities and Threats Accelerated shift towards Opex based consumption of IT products and services as opposed to the traditional Capex based purchases, coupled with continued economic stress in most global economies resulted in stagnant / muted growth in the IT industry during FY 2015-16. Global Personal Computer (PC) shipments once again declined by 8% during the calendar year 2015 and by a steep 9.6% YOY during the first quarter of CY 2016, marking the sixth straight quarter of de-growth in worldwide PC shipments. This decline is largely attributed to longer refresh cycles of technology products by customers, Microsoft's offer of free upgrade to their new operating system, Windows 10 and currency upheavals in many markets, adversely impacting prices in local currencies. Asia/Pacific PC shipments reached 23.3 million units in the first quarter of CY 2016, a YOY decline of 5.1%. With high PC penetration in the major cities, brands faced a challenge to persuade customers to go in for replacements just on the appeal of incremental improvements in technology. PC shipments in EMEA totaled 19.5 million units in the first quarter of 2016, a decline of 10% year over year. In India, CY 2015 witnessed decline in PC shipments, however, the Indian market still retains the potential for future growth with continued under-penetration in Tier-3 and Tier-4 towns and the untapped potential of the huge SMB base. Increased adoption of Security and Storage solutions also augur well for increased demand for Enterprise products and software. Enhanced spends by government towards implementation of various Digital India and Smart City projects will boost demand of IT products in the medium term. While adoption of Cloud technology in India is still low, it is accelerating rapidly and in 3-5 years will definitely impact the overall demand for Servers, Storage and Software products. Global smart phone sales also witnessed substantial slow-down in growth. Although for the full CY 2015, Smartphone shipments stood at 1.4 Billion Units, an increase of 14.4% over CY 2014, during the last quarter of the CY 2015 (October-November-December), the growth tapered to a YOY growth of just 9.7%, the slowest since 2008. The smart phone market is today a highly fragmented one, with many erstwhile ODMs themselves venturing out by introducing their own brands in the mix. As per Gartner, low-cost smart phones remain demand drivers in emerging markets with 85% of buyers in the Asia-Pacific region replacing their smart phones with products of similar category / price range. Smart phone demand is expected to further taper off and is expected to grow by only 7% worldwide during CY 2016. Gartner has estimated that the combined shipment of devices (PCs, tablets, ultra-mobiles and mobile phones) in India is forecast to be 300 million units in 2015, an increase of 4.5% over 2014. After recording growth of 16 percent in 2014, sales of smartphones in China were flat in 2015. "In this saturated yet highly competitive smartphone market, there is little growth expected in China in the next five years," said Gartner. Hence India remains amongst the few growth markets for phone vendors, even as the total phone shipments are experiencing a distinct slowdown. Sales of feature phones showing continuing de-growth which is however counter-balanced by growth in smart phone shipments. With the Average Selling Prices (ASPs) of low-end models declining continuously in Rupee terms, Gartner estimates that 139 million smartphones will be sold in India in CY 2016, resulting in a YOY growth of nearly 30%, contributing to approximately 50% of total phone sales in CY 2016. The E-commerce space remains one of the fastest growing sectors in India. However, recent policy announcements which impose stricter regulations in investments in E-commerce companies has resulted in these companies being forced to bring about a change in pricing models, sharply reducing the discounts they can offer to customers. This has in turn resulted in tempering the break-neck growth of E-commerce companies and has led to a sharp reduction in their valuations and investment-attracting potential. This segment is expected to undergo a major shake-up in the years to come while retaining the potential of an attractive GTM option to many consumer brands. Key business strategies Your company has positioned itself effectively to capture all possible growth opportunities that are likely to open up across it mobility cloud and solutions space it has emerged one of the very few distributors globalist which has effectively emerged as the most voluble partner for all vendors in the volume consumer enterprise as well as the mobility space. Your company offers a diverse range of services to its vendors in the areas of volume and value distribution logistics solutions and product support services continuously adding to its offerings and infrastructural and human resource capabilities. Your Company is fully geared up to meet the rapidly changing business eco-system and remain relevant to its customers in emerging Indian market. With its strong core of Volume Distribution, your Company is engaged in continuously increasing its operational efficiencies in order to remain as the most cost-effective option for all its Consumer product vendors in the markets where your Company operates. Already the "Value Distributor-of-Choice" for all its vendors offering technology solutions to SMBs and Enterprises, your Company continues to enhance its skills in Technical Sales and Pre-sales; in order to act as "Force Multiplier" for its vendors and a valuable business associate for its channel partners in their quest to effectively service their customers' requirements. The convergence of IT & Mobility continues at a rapid pace and mobile phones are fast becoming an integral part of technology consumption. Your Company is strongly engaged with vendors in developing capabilities that would enable it to be a relevant and essential partner for addressing the swiftly changing consumer landscape. Internal Control System and their adequacy A detailed note on the Internal Controls systems of the Company and its adequacy is given in Annexure A to the Board's Report forming part of this Annual Report. Human Resource Management Your organization fosters through a faster growth trajectory, expanding and diversifying for business opportunities. Team HR at Redington too has evolved to cater the Human Power needs, aimed to realize our business goals. 'Attract, Excel, and Retain' is the philosophy on which the HR Team is thrusting their efforts. Learning Opportunities & Employee Engagements have been consistently rendered and the HR policies are continuously retuned to suit changing needs. Employee loyalty is rewarded and efforts to integrate the employee's family have been initiated. Your Company is progressing to become 'A Great Place to Work' with action plans devised and being driven by the senior employees. HR Team at Redington is all set to achieve Human Excellence, constantly listening to the current employees and market expectations. Financial Performance Analysis The Consolidated financials of your Company and its subsidiaries (including 49 overseas subsidiaries and step-down subsidiaries) have been brpared in accordance with Generally Accepted Accounting Principles in India, in compliance with the Accounting Standards and the relevant provisions of the Companies Act 2013. The audited financial statements of the Company and all its subsidiaries and step-down subsidiaries used in the consolidation are drawn up to the same reporting date as that of the Company. Segment-wise Performance Analysis Your Company identified geographical segment as the primary segment and business segment as the secondary segment based as a measure of risk and return of the business in different countries. Geographical segments reported are India and Overseas. Business segments identified are Distribution and Services (includes logistics and support services). In both geographies, your Company has performed well during this fiscal year. Despite a subdued demand environment in India, Turkey, Geo-political tensions in MEA region and various countries, the Company has managed to post double digit growth in its revenue and earnings during the year. Your Company's consolidated financial performance is marked by healthy revenue and profit mix from both domestic and overseas markets and a strong position in both these markets. Analysis on the consolidated financial performance Revenues Your Company's consolidated revenue has grown by 12.2% during the fiscal year 2015-16, with a CAGR of 13.7% for the last 5 fiscal years. India operation posted a revenue growth of 2.9% with a CAGR of 7.7% for the brvious 5 fiscal years while the overseas operations posted a revenue growth of 18.7% with a CAGR of 18.3% for the last 5 fiscal years India operation posted a strong growth of 12.3% during the fiscal year 2015-16 in IT business. Non-IT business de-grew which resulted in a lower revenue growth during the fiscal year 2015-16. De-growth in Non-IT is due to reduced revenue from Apple iPhones due to change in Go-To-Market strategy by the vendor. Revenue from Overseas operation was higher on account of strong growth in Apple iPhone and increase in market share in the IT volume space and debrciation of Indian Rupee against US Dollar by 6.9% during the fiscal year 2015-16. Gross Margin Gross margin dropped marginally to 5.93% from 5.98% during the fiscal year 2015-16. This drop is mainly on account of change in the revenue mix, whereby Non-IT revenue as a % of overall revenue increased from 20.9% during the fiscal year 2014-15 to 22.9% during the fiscal year 2015-16. Expenses All the expenses of overseas operation were higher by 6.9% during the year on account of debrciation of Indian Rupee against US Dollar. Employee Costs Employee cost increased by 15.4% during the fiscal year 2015-16. This increase is primarily on account of increment to the existing employees and additional man power mainly in the form of investment in new business verticals like Cloud Computing and "Direct To Retail" (DTR) model in telecom space. Other Expenses Other expenses increased by 13.0% during the fiscal year 2015-16. This increase is primarily on account of increase in the ensuing costs. Foreign Exchange Loss - due to debrciation of Nigerian Naira, Tanzanian shillings, Kazakhstani Tenge against US Dollar. The loss is more in the case of Naira where the risk could not be mitigated as there was no option to hedge. Rent expense - on account of contractual obligation. Consultancy charges - Your Company had appointed a consultant to study the existing and new business opportunities in the distribution and logistics space. This resulted in onetime cost which doubled the professional charges during the fiscal year 2015-16. EBITDA Growthin EBITDA is 7.3% in fiscal year 2015-16 as compared to the CAGR of 6.6% for the last five years. The percentage of EBITDA to revenue has come down from 2.4% to 2.3% during the fiscal year 2015-16 mainly on account of change in product mix. Finance Costs Finance cost increased by 13.3% during the fiscal year 2015-16. This increase is primarily due to higher utilization of working capital for Indian operations. There was no significant in finance cost in overseas operation except due to debrciation of Indian currency against US dollar. PBT & PAT PBT & PAT increased by about 7.0% and 10.1% respectively during the fiscal year 2015-16, resulting in yet another year of earnings growth. PAT growth was higher than PBT growth due to lower tax expense. The lower tax expense is from overseas operation due to the ensuing reasons: • Reduction in tax rate in Turkey. • Increased profit contribution from Overseas operation where the weighted average tax rate is lower. Operating Cash Flow Statement Cash flow from operation was negative for the fiscal year 2015-16. Negative cash flow is on account of more than proportionate investment in working capital, as compared to the increase in revenue. It was required to invest in the working capital to maintain market position when there was a subdued demand in the market. Analysis on the Standalone Financial Performance Revenue The revenue growth was 5.0% during the fiscal year 2015-16 with a CAGR of 6.6% for the last 5 fiscal years. IT business grew strongly by 11.1% as compared to de-growth in Non-IT business. De-growth in Non-IT is due to reduced revenue from Apple iPhones due to change in Go-To-Market strategy by the vendor. Other income declined by 24.1% during the fiscal year 2015-16 mainly on account of onetime income on sale of land amounting to Rs. 12.15 Crore during the brvious fiscal year. Gross Margin Gross margin has marginally increased to 5.7% during the current fiscal year 2015-16 as compared to 5.6% during the brvious fiscal year. Expenses Employee benefit Employee cost increased by 18.2% (Rs. 14.54 Crore) during the current fiscal year 2015-16. The increase is attributable to the ensuing reasons: • Additional statutory bonus provision was created in the books for the fiscal year 2015-16 subsequent to the change in the Payment of Bonus Act which contributed to increase of 3.3%. • Nook Micro Distribution Limited (Nook), a wholly owned subsidiary of your Company till March 31, 2015, was merged with your Company with effect from April 1, 2015 (refer Note 34 to Standalone Financial Statement). The employee cost of Nook contributed to an increase of 5.9% in employee cost in the standalone financial statement during the fiscal year 2015-16. • Other increase is primarily on account of increment to the existing employees and additional man power mainly in the form of investment in new business verticals like Cloud Computing and "Direct To Retail" (DTR) model in telecom space. Other expenses Overall decrease in Other Expense is 4.6%. Bank Charges reduced by 34.9% due to decrease in Letter of Credit Discounting. The sales promotion expenses decreased 26.2% during the fiscal year 2015-16 mainly on account of lower spending for promotional activities in line with the revenue and commitments agreed with certain brands. A part of the increase is also on account of merger of Nook Micro Distribution Limited (refer Note 34 to Standalone Financial Statement) with effect from April 01, 2015. Finance Costs The Increase in finance cost is on account of increase in average working capital utilisation. Interest cover ratio has also dropped to 4.49 times during the fiscal year 2015-16 as against 5.45 times for the brvious fiscal year on account of this increase in interest cost. Profit before Tax (Before exceptional item) Profit before tax grew by 4.7% during the fiscal year 2015-16. The profit before tax as a percentage to revenue grew marginally if we eliminate the onetime income from sale of land during the brvious fiscal year. The spike during the fiscal year 2013-14 is on account of sale of shares in wholly owned subsidiary Easyaccess Financial Services Limited. Profit after Tax Profit after tax grew by 3.8% during the fiscal year 2015-16. The profit before tax as a percentage to revenue grew marginally if we eliminate the one time income from sale of land during the brvious fiscal year. The spike during the fiscal year 2013-14 is on account of sale of shares in wholly owned subsidiary Easyaccess Financial Services Limited. Cash Flow Statement Your Company generated Rs. 29.1 Crore of positive cash flow from operation during the fiscal year 2015-16. Your Company has been consistently generating positive cash flow from operation signifying strong business fundamentals and prudent operational control. Net cash outflow on account of investing activities was Rs. 53.6 Crore which is primarily due to investment of equity in its wholly-owned subsidiary, Redington International Mauritius Limited to repay the long term loan. Net cash inflow on account of financing activities was Rs.48.4 Crore which is primarily due to increase in borrowing to manage the working capital requirements. Funds Employed Shareholder funds increased to Rs. 1,438.7 Crore on March 31, 2016 from Rs. 1,360.6 Crore on March 31, 2015, due to transfer of profit earned post dividend distribution during the fiscal year 2015-16. Debt as on March 31, 2016 increased to Rs. 477.5 Crore from Rs. 283.8 Crore as on March 31, 2015 due to increase in working capital utilization during the fiscal year 2015-16. The Company has kept its debts under control at less than 0.35. The Company is therefore favorably poised to capture any upswing in the business opportunity in the ensuing years, without any need for additional equity capital. Dividend With a comfortable Debt levels, the Board of Directors have recommended 105% dividend on the face value of shares for the year 2015-16, equivalent to Rs. 2.10 per share, making it the highest ever dividend payout. Book value and Earnings per Share Book Value of the Company increased from Rs. 34.0/- per share to Rs. 36.0/- per share. Earnings per share increased by 3.7% to Rs. 4.7 per share for the year ended March 31, 2016 compared to the brvious fiscal year. |