Redington (NSE:REDINGTON) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to Redington Limited Q2 FY 'twenty seven Earnings Conference Call. Before we begin, a brief disclaimer. This conference call will contain forward looking statements about the company, which are based on beliefs, opinions, and expectations of the company as of date of this call. These statements are not the guarantee of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participants' lines will be in listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded.

0:48 I now hand over the conference to Mr. V. S. Hariharan from Redington Limited. Thank you. And over to you, sir. Thank you so much. Good afternoon, and a warm welcome. Thank you for being with us today. This quarter marks another important milestone for Redington. We delivered the strongest quarterly revenue and profit after tax in our history, not in a benign environment, but against a backdrop of geopolitical disruption, changing component prices, and continued supply chain complexity. The outcome says as much about the quality of our execution as it does about the strength of demand across our markets. We are in like a multiverse phenomenon. Consolidated revenue for Q2 FY 'twenty seven was INR 43,002 crores, up 48% year on year. Profit after tax, excluding exceptional items, rose 50% to $5.81 crores.

1:46 Excluding Arena, this looks even better. Revenue expanded 54% and profit after tax increased 55% to 657 crores. Growth remained broad, and the core business converted that growth into stronger earnings. For the first half of 'twenty seven, consolidated revenue reached INR 77,967 crores, a growth of 41% year on year, while profit after tax, excluding exceptional items, reached 1,067 crores, growing at 61%. Both are the highest Redington has recorded in any first half. Some This Yeah. Can everyone else move their lines, please?

2:36 Let's hear some background noise. These results are not built around a single brand, market, or technology cycle. They reflect a portfolio designed for resilience, scale businesses that generate reach, value businesses that deepen relevance, and emerging capabilities that prepare us for the next phase of technology adoption over the next few years. Let me begin with a little bit more deep dive into our markets. India continued to lead growth with the distribution business growing 67% year on year during the quarter, while the rest of the world, excluding Arena, grew 38. Contributions by GCCL, these are the GCC countries in the Levant countries outside of UAE and Saudi, grew 121%.

3:22 UAE grew 39%, and Africa grew 35%. The Middle East grew 41% despite the geopolitical uncertainty. The breadth of this performance demonstrates the relevance of our portfolio across these markets. India benefited from several growth vectors working together. Premium mobility continues to be a key play for us in the mobility segment, the smartphone segment backed by NPIs, hires... And higher PC selling prices in the PC segment, substantial data center wins, and sustained expansion in software, cloud, and security. Our routes to market are also becoming more effective. The direct to retail motion in India. Other technology enabled models are increasing our reach while giving partners a more responsive distribution platform.

4:13 Across The Middle East and Africa, teams adopted... Adapted quickly to the logistics dis... Disruption, longer collection cycles, and tighter liquidity. The region limitless produced strong growth, particularly in value led categories. We are encouraged by the opportunity despite these situations in these markets. While remaining deliberate about credit inventory and cash discipline. Now turning to our business engines and giving a little bit of narrative around that. Every vertical grew very good double digit during the quarter. More importantly, the mix of growth shows that Redington is participating across the full technology stack from devices to data centers and from cloud consumptions to software led solutions.

5:01 Mobility grew 40% and accounted for 34% of the consolidated revenue. As I mentioned before, premiumization, especially in India, new product launches across the world, and selected selective price increases supported the quarter. CISA geography grew 70% with healthy momentum across both Apple and Android. In the rest of the world, mobility grew 34%, excluding Arena. Endpoint Solutions grew 38% and represented 30% of revenue. Higher average selling prices were the principal driver, supported by a sequential increase in commercial PC volumes. The business delivered its highest quarterly revenue to date, demonstrating the device demand remains relevant even as the market shifts towards higher performance and AI capable PCs.

5:55 On the technology solutions group, it it was a standout performance this quarter. Revenue increased 91%, taking PSE to 20% of the consolidated mix. Server storage and networking all contributed. However, the AI servers, the GPUs with richer configurations and dramatically higher ASPs, in many cases, ForEx, are driving the growth. Large deals exceeded 3,800 crores and accounted for roughly 9% of the group's revenue. A good chunk of the large deals in India came from data centers. Excluding these large deals, TSC grew by 33%, giving us confidence in the depth of the underlying opportunity. Software solutions grew grew 39% and contributed to 15% of revenue.

6:46 All SBUs grew under SSG with strong growth in cybersecurity and cloud. Cybersecurity sprung back very nicely with all the efforts and focus in the last few quarters. We are widening our access to leading OEMs and brands and hyperscalers, hyperscalers, taking existing partnership into new market and combining products into more complete customer solutions. The objective is straightforward, moving from fulfillment towards orchestration and earn a larger role in the customer's technology agenda. Our professional services business registered strong growth with many enterprise and SMB wins. Our new CloudQuarks 2.0 has been rolled out to all of Middle East Africa, and cloud life cycle management tools such as TrackMyCloud and Rionics has become...

7:34 Has found better adoption by partners, and these will hold a lot of good set in terms of stickiness to customers and partners to our cloud platform. AI is becoming a common thread across the businesses. Our participation spanning infrastructure, workstation, devices, cloud software, professional services, AI is across all of them. Specific initiatives like AI exchange, which was created in q four of last year, has moved from concept to commercial activity. And the launch of AI COE in Singapore, the physical experience center, also combined with the virtual COE that we are building during the quarter is going to be very important and critical for Redington. It's the beginning of the journey on being able to get use cases from customers and partners and find solutions from ISVs.

8:30 Together, these capabilities position us to connect multiple technologies, brands, ISVs as customer requirements become more complex. We also rolled out five AI learning centers over the last two quarters, now in place in India, executed as part of our CSR program. Again, adds to the entire AI focus. Our OEM ecosystem remains central to the strategy. Redington's advantage lies not only in scale, but in the ability to bring hardware, networking, software, cloud, a whole range of product portfolios across markets. That breadth allows us to open new routes to market for vendors and assemble more relevant solutions for partners and customers. Operational quality remains equally important. Working capital was at thirty five days at the lower end of our thirty five to forty day guidance range that we provide every quarter.

9:20 Return on equity improved to 21.6% and net proceeds to 22.7%. Excluding Arena, these measures were even stronger at 24.428%, respectively. We also retained operating leverage. Revenue grew 48% while operating expenses increased at a lower rate of 40. We will continue investing in the people, platforms, and capabilities required for SST Software Solutions Group, ESG Technology Solutions Group, and AI, but each investment will be assist... Assessed against its ability to create durable returns. Arena remains the principal area requiring corrective action. Revenue was lower by 37% year on year. If you remember, the the Arena subsidiary exited the VDF contract, and the the resizing of the Turkey operations since happened, exiting from the LIRA business.

10:15 Redington's share of the loss this quarter was $11.05 crores. This loss comprises of a business loss and a LEDA business transition loss and an exceptional impairment of intangibles of 40 crores. Arena has a totally new management team in place who's now steering the company through. Our priorities remain restructuring, portfolio choices, and development of a Turkey specific dollar demand... Denominated growth revenue. Stepping back, q two demonstrates the shape of Redington's next chapter. Our scale businesses are expanding. Our value portfolio is gaining weight, and our investments in cloud service security and AI and digital routes to market are beginning to connect.

11:01 The record h one outcome gives us momentum, but it also raises the standard of execution we set for ourselves. Our position in India across MEA creates a powerful platform. It gives vendors reach, partners access, and customers the ability to source and integrate technologies across brands. As AI increases the interdependence of infrastructure, devices, cloud, and software, this ability to orchestrate ecosystems will matter more than ever. Behind every number are Redingtonians who kept customer supplied, partner supported, and operations moving. I want to especially recognize colleagues working in sensitive and conflict affected markets. Their professionalism under difficult conditions has protected business continuity and reinforced the trust we have built with our stakeholders.

11:49 We enter the second half alert to geopolitical liquidity and market risk, but with confidence in the breadth of our portfolio and the discipline of our model. Technology adoption remains a structural opportunity across our markets. Our task is to capture that opportunity responsibly, turn growth into returns, and keep building a stronger Redington. Thank you for your continued trust and support. We will now be happy to take your questions. Just one one add on for all of your information. Harry is attending this call from the hospital. His parents are not well. He may not be there for the full call. Just keep the... I mean, the questions brief, please. Thanks. Thank you very much.

12:39 We will now begin with the question and answer session. Anyone who wishes to ask a question may press 1 on their touch tone telephone. If you wish to remove yourself from the question queue, you may press 2. 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 from Investec. Please proceed with your question. Hello. Hi. Am I audible? Apologies.

13:34 Yes, sir. You're audible now. Yes. Yes. Hi. Thank you for the opportunity. Solid quarter. Congrats on that, and best wishes to your family, Hari. A couple of questions. So one is on the gross margins, just your thoughts on despite the mobility mix having come down year on year, still the gross margins seem to be trending down. There's some context there as to why that's happening. Second, on TSG, from a large deal perspective, this quarter was extremely solid, I think, more than what you did the whole of last year, if I'm right. In that context, how does the pipeline look? And do you see this sort of sustaining sort of going forward, or do you think this will be quite lumpy?

14:25 And apart from that is, I think last quarter, you had indicated some concerns on ESG in the context of inventory stocking. Great if you could give some context here as to how it looks at the moment. And maybe I have a few more, but maybe I'll get back into the queue for that. Okay. I will start off on TSC and ESC. And, Tristan, if you can just jump in on gross margin right after that. So TSG, as I mentioned, it's not really a pricing phenomenon as a lot of people think. There is a real transition happening from CPUs to GPUs, and this is based on enterprises adopting GPUs and migrating GPUs. And we are seeing... If you see... And this is a global phenomenon, not just unique to our markets. That is a a big jump up of ASPs, and that's happening. And it's almost four x in most cases.

15:26 And from a perspective of this adoption continuing, assuming people continue to be motivated by GPU and what is gonna be achieved and AI because there's always a mixed bag of what you hear and how people get into that emotion of should I continue to adopt AI or not. We think this will continue because... So this is not just a short term pricing phenomenon of something of constrained and components driving it, etcetera. It's a CPU to GPU migration. So that's what is happening the last two, three, four quarters. And on the ESG side, clearly, that... The trend continues. The unit volumes on the consumer side are declining, and the prices...

16:15 Increased prices are giving us that revenue growth. Commercial PCs are flattish to small growth for now, and that multiplied with the larger ASP is giving us that. There's still speculation in tier two in terms of pricing, etcetera, and we we... From whatever we hear, there will be some price increases. We'll continue for a few more quarters. But at some point, the volume demand elasticity is gonna come in is what we feel because the unit volumes are clearly... If I... There were some questions even previously. If I look at the unit volumes on PCs, there is... Year on year, if we take quarter...

17:01 The same quarter the previous year, it'll be flattish to a slight decline on volumes, consumer a lot more, and commercial holding up, and the ASP contributing to the growth. Again, I think at some point, these price increases will slacken the actual unit consumption. So that we're clear about that. On the TSC side, it's a bit different because of this transition of CPU to GPU. Over to you, Krishna, on g... The gross margin. Yeah. See, when compared to the previous quarter, the gross margins are broadly similar. But having said that, if we eliminate the large deal... I mean, on account of large deals, this moves up to about some 5.13%, very similar to what it was in the last last year, similar...

17:51 The same same quarter. And you need to also understand that this includes Arena where we have been doing till this in q t and... I mean, q two and part of q three last year, their local currency business, which have had better margins. Perfect. That's very helpful. Thank you so much, all the best. I'll get back into the queue. There are a lot of questions. We'll get back. Thank you. Thank you. The next question is from the line of from Unique BMS. Please proceed with your question. Hi. Good evening, sir. And first of all, congratulations to the team. So, one, if you can just help us reconcile the kind of growth that we are posting and also in few recent interactions with media, etcetera. I mean, this is not something which is short term. You see this for at least two, three years, if not five.

18:50 And on the other side, we read anecdotally these reports about Apple cutting down on some phone production, Intel cutting down on some PC production, volume shipments, etcetera. And a lot of this is pricing driven where volumes have either started to get hit or maybe will see over next year or two. So just if you can reconcile... I mean, on the ground, where are you getting this confidence from for the higher trend line in growth that we have been seeing for last few quarters and maybe possibly more for the next few years? Because the news we hear is very different, and that's sometimes confusing. Yeah. I mean, I'll try and answer that. It's not a straightforward answer. Clearly, as prices go up, the people migrating from nonpremium smartphones to premium smartphones, they will delay some of that.

19:45 But the premium segment of the smartphone segment has introduced a lot of interesting new models as well. So if you look at every... Quite a lot of fold phones now. Apple has and Samsung has and a few others. It's a very new category, and people want to upgrade to those. And as we look at the market on this smartphone market, we'd say there are three segments in the market. One is where people buy from wealth, their own wealth. Second is people buy from credit, and third is people buying from wages. And the one that we see migrating slower or transitioning slower to premium would be wages. What the credit pieces and two thirds of our premium smartphone in India is connected with an AMI kind of a picture. And so what the wealth and the...

20:40 And we... We're seeing that phenomenon actually because when we... When the premium phones are launched, the one with unique features, the one with the newer form factors, etcetera, is a hot end demand. And then on top of that, the camera features, the AI feature, all of those... So consumers share of the wallet on some of these things that are going up over the years, and that's one that gives us the confidence. But it's definitely not not at the same rate that we would see the last few years that it's grown. So definitely, we're gonna hit a wall somewhere. And truly, the entry level in the mid range of the market is seeing some of those. Got it. And okay. Correct. And second on Arena. Right? So from...

21:28 It stopped this provisioning that we had to do. I mean, we went from $20.30 crores of losses a quarter to almost 70 this quarter. Anything specific to call out? Exerc provision. Yeah. I I... As I called out in my narrative, there were three parts to it. Like, there's a business provision, and there is a transition provision. So the transition of the lead up business, there were a number of things that were both in terms of rebates and discounts given to partners that should have been available from vendors were were not fully aligned. And so some of that came in as provisions.

22:15 And then on top of that, we took an impairment of our intangibles. That's why it all added up. But if you look at just the business loss this quarter was much smaller. And, Krishna, you wanna add some more narrative on that? Yeah. See, these are the three splits. So just to elaborate what Hari said, the businesses where we exited, we had to... I mean, we had to also make sure that our customer relationships are are are are proper. And if they have a challenge and we need to support them, so those are some of the hits, and and these are primarily on account of the discontinued businesses. Correct. And and lastly, on this debt equity at point five, point six, I mean, where would our comfort be? Or historically...

23:03 I mean... Or globally, I mean, what would that benchmark be? I mean, until what can we go through? See, the distribution business, which is working capital intensive, you tend to have normally the equity of beyond one is to one. And this is what you will see across across many constituents. But globally, it's on... I mean, it would be about point six to point eight times. So we are quite comfortable in where we are, and this is primarily on account of the higher growth that we see in the business. But like we had mentioned in the past, when we see the requirement for additional capital price, we will we will come back to the market at the right time.

23:49 Right. Great. Thank you, and all the best. Thank you. Thank you. The next question is from the line of Hitesh Goel from Origin Capital. Please proceed with your question. Thanks a lot, and congratulations team for good set of results. My question is actually on this, you know, the laptops, PCs and smartphones. On a Y o Y basis, how much of the growth is pricing length and how much has volume deterioration we have seen in the market? And has Redington actually gained market share during this period in the distribution business? Can you shed some light there? Okay. It's very hard to separate out the value led versus the price led because...

24:38 See, what happens is a lot of the PCs that are shipping now are AI capable PCs and higher tops and things like that. And the entry level PCs have become smaller and smaller. So it's a phenomenon of what is supply and demand. And so is it actually customers trying to adopt AI capable PCs versus they're just going for the higher priced PCs and they are upgrading or enhancing, especially enterprises. It's somewhat hard to determine. My assumption, there'll be a combination of both, but the exact split will be very hard. And the second question was... I'm sorry. I missed. Same in smartphones. So if you can also say on a like for like basis, there's been 30, 40% inflation, right, in smartphones and PCs and all. Is that right?

25:29 Mean, price increases have been anywhere between 30 to 50%. Yeah. Yeah. And on that. Yeah. Yeah. And so, basically, when you're saying AI like PC, it is more enterprise driven because, I mean, consumer side, we are not... The proportion of AI like PC will be very low. Right? Correct. Correct. Absolutely. So it will be... The adoption of AI PCs is more than 40 in the commercial PC segment and what by enterprises, whereas the consumer is still around hovering around 10%. Okay. And do you see the same trend continuing October in in the third quarter, basically? Or because we have, like, you know, previous participants have said that recently we saw many companies saying that we are doing a production cut in, you know, smartphones and PCs and all that. So is there momentum continuing in your business at least?

26:20 I mean, we can definitely see the the volumes are... As I said, the consumer volumes are declining, the unit volume shipments, and we can also see activations in PCs, Microsoft activation data. It's negative 20, 30%. And whereas in commercial, as I said, it's right now still between 05%, 07%, something like that. And the ASP should drive on top of that revenue growth. Now I think enterprises will need PCs, and enterprises will need to transition, and they need to transition because they are probably post COVID when they refresh, they were in the three, four, five years life cycle. So we see that continuing. Again, we'll... Even on the commercial side, will there be a demand softening because of the price increases? We'll have to wait and see. We've not seen a a minus 10, minus 20% type demand softening on commercial.

27:15 Great. And final clarification, how much of distribution business is enterprise and consumer split in your business? I think two third, one third, you can say. Two third is enterprise and one third is consumer. And I think you talked about market share as well. Yeah. And I think we have gained some market share in some of the brands, and I would say, largely, we are flat to a slight gain in market share is what we think in our markets we are in, not a whole lot. And... But we have not lost market share. We would have gained a little bit. Great. Thank you, guys. Just to clarify one point on the commercial versus consumer. When Harry said two thirds consumers, it's because we have PC segment. We also have mobility segment, which which are broadly equal.

28:04 So if you take only IT, you need to look at it as half half. And this is our own business. It's about two third, one third. So two third is consumer, two third is enterprise. I think I said for two third enterprise. Yeah. On the PC, said two third is enterprise. Correct. Somewhat. Yeah.. Okay. Okay. Thanks. Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in this conference, please just state your question to one per participant. Should you have a follow-up question, please rejoin the queue. The next question is from the line of from UniFiMC.

28:51 Please proceed with your question. Yeah. Hi, team. Congrats on a very stellar quarter. Congrats to the entire management team. Sir, I have two questions. The first is that could you call out, sir, the sharp rise in OpEx that we have seen? And you mentioned in the earlier remarks that some of it is transition provisioning in regards to rebates and discounts. So, Krishna, could you just call out if there is a number, what is the sustainable steady state OpEx that you're looking at? And also, would you call out the receivable and inventory provisioning that you have taken for the quarter? See, OpEx has three important elements which you need to look at when you do the comparison. One, we've already spoken about this AR related provisioning, and that's something that's on the higher side, and this is both in arena as well as in the case of India.

29:50 Second, the investments that we are making and primarily in the SSG related space, which is also there as part of the current topics. The third is very specific to Middle East where on account of war related situation, there are some increase in cost and primarily is an account of insurance, etcetera. Understood. And, sir, so going forward, what is the sustainable OpEx number that you can sort of lean us in the direction of? We should track anywhere between $9.50 to thousand crores a quarter. Understood. And, sir, could you just call out specifically what was the receivable and provisioning numbers for the quarter?

30:42 It's it's about 213 crores, which which includes about 67 crores in CISA, and in Arena, about 135 crores. 135 in ARENA. Okay, sir. Understood. And sir, this is the receivable provisioning number. Is there any inventory provisioning that we have done for the quarter? And could you call out the number? That's not significant. That's not material, Hajj. It's the not Understood. In this situation, we we are not concerned about our our inventory when the price keeps going up. Right? So, I mean, the concern will be on AR and particularly in in Turkey. The general conditions, the liquidity conditions in the market is not that very great.

31:37 Understood, sir. And sir, my second question is on the capital intensity of the business. And given the very strong revenue upticks that you're seeing, I'm trying to understand the capital consumption for the business incrementally. So how do you intend to fund such growth? Where how should you mentioned earlier that debt to equity, you're still comfortable. How should we see that? Are there levers on the dividend side that you're planning to pull back on given the intensity of growth we are seeing? See, like I had mentioned in the previous question, we are very conscious, and this is one of the priority areas that we keep looking at today, primarily because of the higher growth, which is something very positive.

32:25 The levers, there are additional debt that's possible, like we spoke. There are opportunities to modulate the dividend or to raise capital. So at this point in time, we are we are we are able to manage with the debt, and the other levers we'll... We will bring in when there is a requirement. But all depends on how this trend is foreseen into the future. If this is a strong... I mean, this is strong trend, definitely, the capital raise will become a requirement. Understood, sir. And, sir, any any callouts on how we should expect growth across segments or regions for the second half? Because each segment has The Middle East had the affections, etcetera.

33:13 So just any perspective on growth across regions and segments? So I... It is similar. What what you see, think, you'll... On a geography perspective, I think India, GCCL, and Africa will continue to be very strong growth drivers. We still see growth in UAE and KSA to come back. It'll depend on the geopolitical disruption. This is a bit of an unknown. So I've reserve... I reserve my comments on these two geographies based on what happens there. Then when you look at segments, you know, we talked about SSD being the strongest growth driver, and SSD is now... The other three business units are growing faster than SSD in some ways. So second half, we continue to see TSE being a very strong number one in terms of growth driver, followed by SSE.

34:09 So the value segments will be good for the second half. Typically, they are... They've always been strong in the second half, and the CPU GPU migration as well as the SSD work will drive that. ESG and MSG, we are a little bit more cautious because of the price volume elasticity and the volume dampening of demand because of the price increases. So we would be a bit more cautious on those two. But we've had some NPIs on mobility, so that looks interesting as well. But definitely, TSC and SSE being strong, India, GCCL and Africa being strong. Understood, sir. Thanks and all the best. Thank you. In the last part, he said India, not India.

34:57 Mobile. Mobile, ESC and MSC. Thank you. Ladies and gentlemen, in order to The The next question is from the line of Vijay Menon from Monarch Capital. Please proceed with your question. Few questions on my side, you know, this time with Apple, we saw that, you know, they launched the Pro and Pro Max and not the base model, and that is scheduled for, you know, spring.

35:49 So how do we now look at active sales? Because, you know, Apple is a hugely heavy quarter for us because September end typically the new phone launch. So will we see that now across the two parts? And then should we not take the decline in volumes too seriously right now because some of it will be recovered in Q4? Yeah. I mean, that is a... That's a very interesting question and asked in an interesting way. I think that... Absolutely, you're absolutely right. There are... Sorry. There's a lot of background noise. Can can everyone mute their lines? Yeah. So I'll try to answer this into three parts. See, there's a series of NPIs that happens with Apple, and normally, it's only once a year. This year, we saw ProPro Max now, the base model coming later.

36:42 They've also introduced the Duo separately. Then they've also introduced a new set of products on iPad minis as well as on the computing side, the touchscreen laptop. So there is there is a lot to deal with. Clearly, if I look at what is gonna happen overseas, in our Middle East markets, the premium models are always slightly higher proportion. India has been... The base model has been higher proportion even though there are more people now being to buy ProPro Max. So you're absolutely right. When the base model launches in q four, you'll see a better unit volume kicking in, and '18 does have some... A good set of features.

37:30 So those are all things that'll happen. But normally, we would have a q two, q three grade, but we might have a good q two, q three, q four. We have a series of NPS. We are looking at it a little bit differently. And volumes could come back in q four if the base model really helps being a hit. But, again, prices have increased across everything, so that can be a dampener. Will people continue to buy 17? The 17 is still in the market, or they go for 18. All of that, we'll have to wait and see. The strongest quarter for distributors because, you know, it's the quarter before Diwali. But this time, because there is a bit of a delay in Diwali, are we seeing some demand of that also coming in q three, and maybe that's where the inventory pile up has also happened?

38:22 I think I missed the first part of the question. There... It is a bit muted. No. No. I'm saying there was a like, a... There is, like, festive season, you know, is a little late compared to, you know, last year. So are we seeing some of that demand to kinda come into q three? And is that the reason for the inventory pile up also? The first half of Q3 Yeah. Go ahead. Take this one. Sorry. Sorry, Hari. See, also need to... While partly, yes, Vinay, it's mainly to do with the Middle East situation where supply chains are are still under stress. I mean, completely... I mean, straight of commerce is closed, and we need to find alternate routes of receiving the materials. So everything has increased the path of doing the business, and that's that's one of the key, I mean, key reasons why inventory is on the high side.

39:22 Okay. Okay. And one last question. In terms of the large deals, in, you know, data centers you mentioned is a larger part. So are these orders from Neo Clouds or are these maybe to private enterprises, government? If you can just give me some color on that, that would be helpful. Right. All... It's almost all Neo Cloud. Okay. All new cloud. Okay. Thank you so much, and all the best for the team. Thanks. Thank you. The next question is from the line of Pranav from MK Global. Yeah. Hi. Thanks for the opportunity. I would like to ask a question about PSG. So PSG, I'm just trying to understand, you know, since, you know, a fair bit of this revenue will be coming from AI related, you know, demand, do you think that this will be little lumpy in nature and, you know, hence can cause some, you know, challenges in terms of managing the working capital?

40:29 And secondly, I would also like to understand, you know, how do you see the growth runway for this business? Can this become very, very big, you know, considering it is growing very, very fast? Thank you. See, the way we looked at it is... I think customers are... As they're transitioning their whole server space from being a CPU to a GPU and the associated storage networking, etcetera, they're just going for the newer category of products which cost more. And it's avail... It's limited in demand today, and so it's priced like that. Again, this is a run rate business as I see it. It's not lumpy because as long as enterprises continue to transition migrate from CPU to GPU, we will see it happening over the over three months.

41:24 So it will not be lumpy. The data center business could be lumpy in terms of getting the orders and getting the recognition, but the TSG server business will not be as lumpy. And how much of this TSG business, you know, currently would be from data center and non data center? I mean, you know, to get a sense of recurring numbers. For the current quarter, roughly about 3,800 crores is our large deal size. If you eliminate everything else is BAU. Okay. Okay. Thank you so much. And at least from my side. Thank you.

42:11 The next question is from the line of Chirag from. Please proceed with your question. Yeah. Hi. On great set of numbers. I I just want to understand directionally that from seasonality point of view, putting, you know, all the moving variables like war related impact aside, generally, I mean, h two is better or h one for the business, x of and all? Yeah. See, normally, h two has always been better than h one. And it is... Because q... Our q three is normally q four and year end for a lot of brands and a lot of countries, not India.

42:58 And so that has a budget... Spending a budget. And similarly, q four has the India impact of spending budgets. And, normally, our second half is always bigger than the first half. But this year is a bit different because the the whole shortage and the price increases, I think, pulled forward some of the consumption and purchase cycle forward, both on the PCs and even on the DSG side, definitely smartphones. It could be... This year, second half, we are not seeing that much of a seasonality. And we just... We we we see still a good q three and a good q four, but we we won't see that much of a seasonality is our opinion.

43:45 Okay. So in, let's say, in a normal circumstance, it should be a thing because the growth is on year on year, particularly in 2Q and somewhat in 1Q has become very large on year on year. Considering the current order book and the commentary which you mentioned for the segment specific outlook, is it bad one, assume like the growth will be north of, let's say, 25% at overall business level in h two. Is that excellent? It should be. I mean, there is no reason to pull back. The only caveat I would say is... Two caveats. First caveat is how much of a demand contraction that happens because of the price thing finally settling in and people saying, yeah, I'm just gonna delay my work. If we... We we will never be able to assess that till it actually hits you. But... So so that is a bit of an unknown unknown. We are not seeing on that yet, but we will... We could see that, especially post the value season, the consumption of smartphones, consumption of consumer PCs, those kinds of things. And second thing is the domestic share prices and how much of that impact could be felt in UAE, KSA, and some of these.

45:01 Those are the two caveats. And, otherwise, yes, you're right. There is no reason to disbelieve that it'll be not worth... Not of 25%. Just one final question from my end. In past fifteen days, the noise around AI and the CapEx behind AI beat on hardware side or on software side, Somewhat, you know, the rest is trying to settle down. And, also, the geopolitical changes, which may happen considering the detection and all the individuals. Let's say if in a case, the AI related spend incrementally come down or some of the proposed project take a back seat due to any reason, will it any way impact our outlook of FY twenty nine or thirty weeks we have given for SST or or above at product level for the business. Yeah.

45:54 See, those will affect... Your question is valid when it comes to TST and the data center piece. SSD consumption, while there is an AI element, I think that piece is still outside of pure AI reset back. Good. The the cloud security and software has been growing in one phase, and we believe that it continue. Similarly, smartphones, there is not that much of an impact on AI. So it will be TSC for sure and somewhat on the PC. These two spaces, there could be an impact of that if there is a pullback. But I think it'll rationalize that, I believe, with the other two. Thank you so much, and best wishes for your time. Yeah. Thank you.

46:44 Thank you. The next question is from the line of Sia from MK Global. Please proceed with your question. Yes. Hi. Good evening to the management team. Hi. Best wishes for Sami and Adam. My first question relates to more on the AI exchange. Now what sort of traction are you seeing? And if you just dovetail on some of the higher activities which you're seeing in the past few days in this quarter, just to see them done in one and a half to two months of its launch? And just a small follow-up on, know, Google becoming among the top five. I mean, how broad based would this be? Or is it more related to cloud related revenues and this could only increase going forward?

47:35 Actually, I was not able to get the question fully. First one on the traction in the AI AI exchange, which is. Okay. Okay. Okay. So, see, we all know... And I'll answer the first question, maybe tackle the second one after that. We all know that the AI adoption, especially the commodity option on things like... On the frontier models like,, etcetera, is very high. You... Both in consumer and enterprise space, there's a lot of discussion on agent AI. There is no doubt of that. The real challenge people are finding is how do I convert it into an ROI model. And increasingly, people are getting a little bit disenchanted and disappointed in terms of getting that to happen.

48:25 So an AI exchange type of a platform was to solve that gap where we bring in a platform where there are ready made products that are working for some customers, and these agents have been delivered for some customers, and some of the customers can look at it and say, hey. I like this model for the BFSI segment used by 10 BFSI customers and developed by digital natives or ISVs. And early days, I mean, we've launched it about a couple of quarters back. We are engaging hundreds of our partners with this... Talking to their customers, and we've had many ISVs engage this model. This is a completely change of a go to market model. We are seeing traction in small bits and bytes and a good funnel. It's somewhat like what cloud was 10 back.

49:14 And we're encouraged by what we see, but, clearly, this has to work for customers, and this has to have a replication replication model by partners. That's what we're trying to see. So then it doesn't become, like, an every use case or a new use case if somebody has to go in and develop a... An AI solution for it. So it will take... It'll be a long journey, clearly. It is not gonna catch up for overnight. And the second question was? On Google Ads coming in the top five vendor base, you know, in terms of some color over there. Because that's on our h one basis, if I look at low 109, the base could be lower. But, you know, it's it's could pilot it on a very high growth. So I'm just trying to get some color over there. Yeah. So Google, for us, has two parts to it, has got a smartphone piece, and it's got a office and cloud piece.

50:08 So put together, it's grown very well for us. But we... Definitely, we play hard in Google Cloud in India, but we are. We don't have partnership with Google in all places. Google is becoming very very interesting because their growth... If you look at overall Google growth and cloud is very, very, very high. They're catching up with the bigger voice. And as long as they are in every distribution centric model, we we think it'll be very interesting to work with them. Sure. Sure. Thanks thanks so much. I'm wishing you all the best. With the past degree to your parents. Thank you. Thank you. The next question is from the line of Ashish from LEO Capital. Please proceed with your question.

51:01 Congratulations on a good set of numbers, sir. My question is, are we seeing a big pipeline of opportunities from the Neo Cloud data center build out in India? How large could the potential size be for the distribution industry on that? And what sort of margin profile and return on capital do we expect on those contracts? I think, I think we have shared some of this before also. As the whole Neo Cloud, specifically to India, goes from one and a half gigawatts to seven and then to 12, Clearly, there is an opportunity for distribution as well. We see... You know, we talk about the next four years as a 150,000 crore opportunity.

51:50 Now where does distribution play a role? One, obviously, in the hardware deal sourcing, working with our brands, and working with the new cloud operators. Obviously, the big conglomerates in India are getting into it and trying to bring in their own capital and creating their own partnerships with the new cloud operators for The US. So we are to see how this plays out between the smaller new clouds locally set up in India and the new clouds coming in from The US partnering with conglomerates in India. So that will be an important play to understand that. And distribution and distributors like us, we have to see value adds in multiple places. One, obviously, sticking contracts because we have... We worked with multiple server storage, networking, and cooling system and power players, sticking those solutions.

52:43 Working this whole ecosystem orchestration, being paid... Able to play a role in filling capacity, bringing bringing mid market customers, and the... Bringing in professional services, all of that. And from a... If there are smaller players, we may be able to play a role in capital stitching. The larger players will do it on their own. So this is an evolving space. Clearly, huge numbers, but we will play where our value is. And you asked about margins. Definitely, margins are not as interesting as normal business unit run rate margins that we have between four point five and five. But the ROCE, we are very clear about picking up deals and partnering, and especially on the hardware side, there is a ROCE target we have. We don't fall below that, and we try to do this with less incremental OpEx. So the leverage is is definitely good for us, and it's a starting point of working in the data center space to be able to play into the value add space, like manage services and billing capacity, etcetera.

53:53 Yeah. Just just to add, Hari, Ravi here. Ravi Shankar from Redington India. I... I'm the CFO of Redington India. The capital investment on the funded portion is almost full. We only have a nonfunded portion being utilized for the purpose of last year. So in that sense, if you see the return, it is almost infinite. Got it. Got it. So if I could squeeze in one more question on the Turkey arena business, by when do we expect a turnaround in that business? I know this has been a question every quarter and every time we have tried to answer. There are new sets of vectors and things that happen in the Turkey market.

54:39 There is a new issue on the funds in the market. There has been all all kinds of things beyond interest rate and inflation that has happened, which is what is making us challenge and struggling. I think... See, what we have done clearly on Arena, the subsidiary, they have exited from the high high interest rate working capital business, and we believe we are towards the end of that piece. But there are other things looming in the horizon in terms of, you know, our existing partners that we work with, how how good are they in terms of going forward. So we need to really close... Closely watch the market, but we have taken all steps to eliminate all the negatives we had. And we believe we are getting a cleaner business and a completely new leadership team that gives us encouragement, but we really cannot estimate all the new curveballs that are coming up in the Turkey market. That's the challenge.

55:46 The next question is from the line of Shneurayan Mishra from Baroda B and P, Pareepaz A and P. Please proceed with your question. Thank you for the opportunity. My first question is on ESG. Last quarter, we had highlighted there were a more normal channel inventory in anticipation of of price hikes. So how is the situation currently, inventory levels? I think it is similar. I think this kind of trying to take some inventory so that they they can make more money, that that continues to be a challenge. So there is a little bit more than comfortable level of inventory in tier two. I would say that.

56:43 Okay. Okay. And in TSC, if you can quantify what would be the contribution from large deals this quarter? Yeah. I think that is called out also 3,800 crores Okay. Was the contribution. Yeah. Okay. Okay. Without those large deals would have been 33% for TSC. So, obviously, the 90% growth has come from the large deal portion. Got it. Okay. Thanks. Thank you. The next question is from the line of from Family Office. Please proceed with your question. Mr. Can you please speak?

57:39 Hello? Am I audible now? Yes. You're audible now. Yeah. Sorry. Yeah. Okay. First of all, congratulations on the strong performance. My first question is related to business transformation and profitability. I see that the TSG and SSG grew 9139% Y o Y in the second quarter of twenty seven as Redington expanded its cloud cybersecurity and enterprise technology business. So do you see this changing the company's traditional distribution near business model? And over the next three to five years, say, can we expect a structural improvement in the gross margin and EBITDA margin and ROCE?

58:29 Yeah. I think we again shared this good question. Clearly, if you see SSG gross margin this quarter, it's higher than six. And the profitability from the SSG business is also higher than the average PAT in... Compared to the overall Redington average. And as Redington moves its role from pure distribution to orchestration, which cuts across DSCSSC business, there will be a lot more solutioning, lot more services that will be enabled. And that is the expectation that we are driving, that all the capability building that's going on on CloudQuarks two point o, the marketplace, the automation tools, the management of life cycle, all of that should result in greater value for the customer, greater value for the partner, and getting greater gross margin. So the expectation of what we are trying to do in the next three to five years is clearly getting better gross margin on SSG and TSC business combined, the whole ecosystem of Okay. Understood. Thank you for answering my first question. My second question is relating... Is related to working capital and cash generation.

59:46 I see in the second quarter of twenty seven, free cash flow was negative 1,871 crores, whereas the first half of the twenty seven, free cash flow was positive $5.83 crores. As Redington expand into larger enterprise and data center projects, could working capital requirement increase structurally? Going forward, can the company sustain the earning growth without a proportionate increase in working capital? Do you wanna take that question? Yeah. See, the free cash flow may not be a right metric when you see a growth rate of this nature in a working capital intensive business. So it is purely to do with higher growth, and that's the trade off that's that's being chosen.

1:00:40 Working capital, we are we are controlling the overall working capital in terms of number of days. But because of growth, higher growth, obviously, the... I mean, the quantum of working capital as well as the debt is expected to go up, and we have spoken about it earlier. I mean, currently, we see levers in terms of higher debt. But if you see a requirement for more capital, we will take the decision at that point in time. Okay. Got it. Got it. Thank you. Thank you for explaining both the question thoroughly. Yeah. Thank you. Good. Thank you. Thank you. Ladies and gentlemen, due to interest of time, that was the last question for today. I now hand over the conference to Mr. V.

1:01:30 S. Hariharan for closing comments. Thank you, and over to you, sir. Thank you for a good set of questions, and thank you for the interest in the Redington journey. We we are definitely committed to make q three and second half a success too. We continue to watch out for the trends on the geopolitical disruptions and the potential softening of demand because of the price increases. But we'll do our best as always and come back to you with good results and look forward and happy for for everyone in India. Thank you. Thank you. Thanks. Happy Diwali to all of you.

1:02:19 Thank you. On behalf of Redington Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.