Rashi Peripherals to halve debt post listing: CEO & MD

Rashi Peripherals IPO

Rashi Peripherals, the information and communications technology products company backed by investor Madhuri Madhusudan Kela among others, plans to bring down its debt-to-equity ratio to less than 1 and halve its debt following its initial public offering (IPO), said Kapal Pansari, managing director, and Rajesh Goenka, CEO.

The IPO received a mixed response on the first day of the bidding process, across all categories of investors. The issue, bidding for which began on Wednesday, February 7, was not heavily booked on day one.

The company’s total borrowings as of H1FY24 stood at Rs 1,395 crore, and debt-to-equity ratio at 1.8 times. The funds the company is raising will be used for working capital requirements, besides reducing the debt-to-equity ratio to 0.8 on post-issue capital.

Speaking at an exclusive IPO interview to Moneycontrol, Pansari and Goenka that subsidiary company ZNet Technology, which has been reporting losses for the last three years, will turn profitable in next one to two years. while the company’s cash flows from operations will turn profitable over the next two years, or by FY26. Edited excerpts:

Let’s talk about your manufacturing business in detail. What kind of clients are you looking at? Where do you see your company’s growth vis-à-vis that of the industry?
Rajesh Goenka: We are a 34-year-young company. We are the largest and the fastest growing IT distribution company. We do not have our own manufacturing but we are into distribution. Currently in our portfolio, we have 52 global brands. Some of the brands which I can name include Dell, HP, Lenovo, Western Digital, Nvidia, Asus and Toshiba. The number of years we have been working with these brands is in the double digits. And we have been working with Asus for 25 years. We get these brands into India, either buying locally if they have a factory here or in cases where they do not, we import to make these products available for Indian consumers and companies. So basically, we are bringing IT penetration across the length and breadth of the country.

Yeah, so we are a pure IT distribution company. Typically, in distribution, there are many companies that work on mobile phones and other products also, but we have decided that we want to continue or maintain our strength in the IT space. During the two years of COVID, obviously, demand was super high. The market grew by 25-30 percent. But Rashi grew 2X the industry size. Post-COVID, there was a flip because there was an over-inventories kind of situation. But now that is also past, and in the current financial year the market is back to normal, which means that the IT industry in India will continue to grow for next few years at least in double digits. Even if we do not match that, we will grow at least by 10-12 percent.

In some of business segments like CPUs, motherboard, hard drives, keyboards, mice, which are our traditional businesses we’ve been into for 25-30 years, we are by far the number one. We have 40-50 percent of India's market share. There, we will continue to increase our market share.

We intend to foray into newer verticals. Today, everyone is talking about AI, data centres, and we have a larger opportunity of growth there We are one of the major suppliers for data centre servers, storage and networking devices. And you know, in the last three months, almost all the four or five big houses of India have announced that they are going to set up AI/cloud data centres. One data centre is expected to come up within this financial year, before March.

Do you think you will be able to replicate your past performance or perhaps even outperform? How much from the AI segment, the cloud services business, data services business?
Goenka: As I said, in the last 20 years, our revenue CAGR—in the two COVID years, it was above 50 percent—was more than 20 percent. Our aspiration is to capture similar growth. Our revenue pie from AI should be more than 20-25 percent.

Your revenue CAGR stood at 26 percent from FY21 to FY23. Your profit during the same period grew at 46 percent.
Kapal Pansari: This business has a very stable margin earning potential capacity. What we strive to do is to make sure that our return on equity continues to be in the direction it was in the last three years, I can tell you what is in RHP (red herring prospectus), it (earnings margin) is about 19 percent. Even in the first half of FY23, we've maintained a 20 percent ROCE (return on capital employed). During COVID period, it was higher because the demand for PCs was much, much higher and the supply was lower, because of which we were able to get capital efficiencies and ROIs (returns on investment) went up as high as 35 percent and 37 percent. But I think to the viewers, that is a blip and a once-in-a-lifetime opportunity. Post-COVID, the normal business scenario prevailed and we've come back to the industry average and our long-term historical average of our ROCE, which is at about 19 percent as of March 2023.

Your EBITDA (earnings before interest, taxes, depreciation and amortisation) margin has stood between 2.5 percent and 3.7 percent. Is this normal within your industry? Is the company looking at double-digit margin growth?

Pansari: This industry hinges on working capital cycles because we are into distribution. Our raw material for our businesses is capital and most of it is in the working capital cycle. There are three components of this. One is creditors, where we buy goods on credit. Rajesh (Goenka) said that we buy or import from local manufacturing or from international markets on credit from all these suppliers. That is an important piece. Similarly, since we are a B2B company, we also sell on credit. So we sell on credit to all our 8,000-odd customers. Both of them get offset. The range remains between 2.5 percent and 3 percent that you have just mentioned over the last three years. I think that's a long-term range, because the largest part, 95 percent, of our cost is just our cost of capital. Our gross margin remains around 5 percent, which is there in our RHP, in our books historically. So there is little room because it's a highly efficient industry.

Let's talk about your net debt to EBITDA ratio, which has grown from 3.8 times in FY20 to 4.2 times. What explains that? And what is a comfortable leverage level?

Pansari: Normally, our business is a function of equity to debt. The equity in the organisation is built based on the last three and a half decades of ploughing profits back into the business. The two founders, Kishan Chaudhary and Suresh Pansari, started the business back in 1989. And over three and a half decades, all the profits have been ploughed back.
Our debt is going to substantially reduce because with this IPO, when we raise Rs 600 crore plus Rs 150 crore that we've already raised pre-IPO, most of it will go to repay debt on the books. That will bring down the overall debt considerably. Currently, it is about 1:1.2 from debt to equity, it will reduce to less than 1:1.

The debt will be half of what it is at this point in time. Our comfort level has always ranged between 1 equity to 1.5 of debt. But we are looking at further substantially lowering that because it will give us the leverage and growth momentum on the working capital cycles. Because then there is capacity, and immediately after the capital raise, all the money will not go back into the business. It will take between the next one to two years to get more distribution, get more technologies into the country, so that we are able to service it. In the long run, we hope to maintain this range.

So no dividend to shareholders?

Pansari: Yeah, absolutely. We are a dividend-paying company. We've been paying dividends for 20 years. But we don't have a dividend policy. Because it was privately held, we did not need to have a policy in place. But going forward, in the interest of our stakeholders and our investors, we are going to make a dividend policy that is most appropriate for the business to grow, continue to grow and return some capital to the investor community.

Your cash flow from operations has been negative for the last three years. And in the first six months of the financial year it continues to be that way. What explains that?

Pansari: What happens is, the moment there is working capital and debt to this ratio, the moment we increase our revenues, our inventory, our creditors and our debt also increase in tandem. With a debt-equity ratio of 1:1.5, with every Re 1 ploughed back, we also borrow Re 1-1.50, which is why every incremental growth is backed by borrowing. Our operating cash flows remain positive, but with the debt on the books, it comes down to a negative cash flow.
In the next two to three years, our financial projections predict that we should eventually turn cash flow-positive.
Goenka: This is a very working capital-intensive business. This is a distribution business, not value-add, where our gross margin is between 5 and 5.5 percent only. Therefore, the capital requirement is very high. Even with the infusion of the IPO money, as Kapal mentioned, it will take at least two to three years for us to turn positive. At the same time, it's also a function of revenue growth year-on-year. If I have a very high annual growth year for the next three years, then becoming cash positive also will be a challenge. In distribution, typically, it's a rarity to be cash-positive. It's not easy. But at the same time, you should look at the ROC and ROWC (return on working capital) or ROI. I think that's paramount in the business.

The company’s exports to China apparently have increased from 5 percent to nearly 11 percent. What is the reason behind this? And of the five large markets you export to—Malaysia, Thailand, China, Hong Kong and Singapore—which seems more accretive when it comes to the margin profile, and what's next?

Goenka: I want to clarify here that Rashi Peripherals is an IT distribution company for India. We have a Singapore operation, but the major business is for India, customers in India who need dollar billing because of certain tax compliance issues. And there are a few Indian customers who have factories or third-party factories in Malaysia, Vietnam and other countries. So we actually supply them with components and parts. They make the complete unit and they give it to the Indian company…. So directly or indirectly, our ecosystem works for India and Indian customers only.

Which are the markets you intend to foray into with what products?

Goenka: As far as geography is concerned, we want to continue to expand within India. Right now we have 680. //Cannot understand what he is trying to convey here// Every year we want to expand our customer and city base. From our Singapore operations, we want to expand to SAARC countries. So at this moment, if you ask us, that's the only thing on the radar we have. As far as products and solutions are concerned, the overall IT market in India is more than Rs 1 lakh crore and we did business of Rs 9,400 crore last year. So we are actually just 10 percent. 90 percent is the pie available for us. So we got into enterprise, we are now getting into semiconductors, we are planning to do something else also in the near future. As time goes on, we will keep on adding new verticals and try and get a lion's share in them.
Currently, enterprise and semiconductors are the only two verticals we are working on.

The company's subsidiary, cloud services provider ZNet Technologies, has incurred losses in the last three financial years. When do you expect a turnaround?
Pansari: This company, when we took over in 2019, was a very small company. Since then, they have grown 3X. And revenue is so small, Rs 44 crore was the revenue last year, it is insignificant in our overall portfolio. They became our subsidiary with the intent that we will learn the software business and distribution of software and infrastructure as a service and the cloud service businesses. And that's the learning curve that we are going through. We could see a turnaround in the subsidiary over the next one or two years.