Margins may get impacted on pricing pressure: Redington

IT supply chain solution provider, Redington India, which reported marginal drop of 4.3 percent in consolidated net profit in quarter ended June expects its margin to get impacted in coming quarters due to pricing pressures, Raj Shankar, Deputy MD, Redington India told CNBC-TV18.

“The margins may come under pressure purely because in times like these everybody wants to rotate their cash flow so there is a tendency to drop prices,” Shankar said. The company’s revenues in April-June rose to Rs 6020.12 crore as against Rs 5371.63 crore in the same quarter last year. Shankar said barring margin pressure the company is confident that current year would be growth year from sales point of view. Below is the verbatim transcript of the interview Q: Business is dropping, if you look at Quarter-on-Quarter the revenues have fallen by about 10 percent as well the EBITDA is clearly under pressure even if you look at it on Year-on-Year terms. How is sales doing? Are you expecting this downturn to continue?
A: It is important to note for last quarter our sales revenue actually grew by 12.2 percent when you look at Redington Group consolidated. The overseas entities grew faster at about 15 percent. India grew again at about close to between 8 and 9 percent. So from a sales standpoint it has been a good momentum. You should keep in mind that the circumstances particularly for the last quarter were extremely challenging. Just to name a few apart from the fact that you would be aware that the recovery as far as Indian economy is concerned stated is very tepid and shallow, the Gross Domestic Product (GDP) growth is expected to dip to 5 percent and if you look at some of the overseas countries, particularly Turkey went through a civil unrest in June. You had Egypt go through a second revolution again in June. Number of countries in the Middle East and North Africa (MENA) region which were impacted by Arab Spring two years ago have been not only having Arab Spring, but summer, autumn and winter as well. Q: How things will shape up in the current and next quarter? Are things not looking like picking up? What can you tell us in terms of a yearly growth forecast?
A: If July was any indication to go by I am very pleased to share with you that we have grown both in India as well as outside India by double digit in terms of sales revenue. Even with regard to the quarter gone by which is April-May-June as I was mentioning to you that we have grown indeed both in India and outside India. What is seeing a bit of a slowdown is only the PC part of the business, because there is a clear migration to tablets and the smartphones, to that extent there is a certain amount of business on the PCs which has been cannibalized. But that said as far as Redington is concerned for every single brand that we represent as well as in the market we are growing faster than the industry. On the smart phones the Apple iPhone is doing extremely well. BlackBerry is soft at this point in time. Outside India we have the Samsung which is doing extremely well for us in both West and East Africa. So the momentum is extremely good. There are infrastructure projects and enterprises business in India which is looking very good and positive. Overall I think we are looking at the next few quarters as again growth quarters for Redington. The margins may come under pressure purely because in times like these everybody wants to rotate their cash flow so there is a tendency to drop prices, but barring that we see this current year to be a growth year from a sales point of view as well as from an earnings point of view. Q: Could you elaborate more about the pressure on the margins? They have already come down to levels of 2.16 percent with respect to EBITDA. Earlier it used to be at levels of 3 percent plus a few quarters back. Can it go even below 2 percent at the EBITDA level if there is going to be margin pressure?
A: While we grew top-line last quarter by 12.2 percent I just want to draw your attention to the fact that we grew gross margin by 14.8 percent. In other words we didn’t buy sales by compromising margin, we continue to grow the margins as well. The only aspect is that there are certain businesses, particularly like Apple where there is a certain amount of expense towards marketing which is provided in the form of margin. Therefore when you look at from a margin perspective it shows that we are in good shape, but then there is a certain amount of expense that we have to do which is quite substantial and hence you see that the Selling, General & Administrative Expense (SG&A) has gone up. This is more for the next one or two quarters, but again I repeat as the revenue continues to scale at 12.2 percent, the gross margin continues to grow faster at 14.8 percent and to your point about whether EBITDA will slide below 2 percent, that would not be the case in the coming quarters.