Earnings Call Transcript - XNSE:REDINGTON 2026-11-04

Operator

Ladies and gentlemen, good day and welcome to Wellington Limited Q2 FY27 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 on date of this call. These statements are not the guarantee of future performance and involves risk and assertiveness that are difficult to predict. As a reminder, all participants' lines will be in listener-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand over the conference to Mr. V. S. Hariharan from Reddington Ltd. Thank you. And over to you, sir.

V. S. Hariharan, CEO

Thank you so much. Good afternoon and a warm welcome. Thank you for being with us today. This quarter marks another important milestone for Reddington. 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 F527 was $43,002 crores, up 48% year-on-year. Profit after tax, excluding exceptional items, rose 50% to $581 crores. 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 2017, consolidated revenue reached 77,967 crores, a growth of 41% year-on-year, While Profit After Tax, excluding exceptional items, reached 1,067 crores. Growing at 61 percent. Both are the highest Reddington has recorded in any first half. 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%. 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, 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. Across the Middle East and Africa, our teams adapted quickly to the logistics disruption, longer collection cycles, and tighter liquidity. The region never plus produce strong growth, particularly in value-led categories. We are encouraged by the opportunity despite the 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 a very good double digit during the quarter. More importantly, the mix of growth shows that Reddington is participating across the full technology stack, from devices to data centers and from cloud consumptions to software-led solutions. 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 selective price increases supported the quarter. Sisa 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. On the technology solutions group, it was a standout performance this quarter. Revenue increased 91%, taking TSG 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, TSG grew by 33%, giving us confidence in the depth of the underlying opportunity. Software Solutions Group grew 39% and contributed 15% of revenue. 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, 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 Cloud Quarks 2.0 has been rolled out to all of Middle East Africa, and cloud lifecycle management tools such as TrackMyCloud and Rheonix has become, has found better adoption by partners, and these will hold a lot of good stead 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 Q4 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 Eddington. It's the beginning of a journey on being able to get use cases from customers and partners and find solutions from ISVs. Together, these capabilities position us to connect multiple technologies, brands, ISPs, and customer requirements become more complex. We also rolled .5 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. Reddington'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 35 days at the lower end of our 35-40-day guidance range that we provide every quarter. Return on equity improved to 21.6% and net growth rate to 22.7%. Excluding ARENA, these measures were even stronger at 24.4% and 28% 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 SSG Software Solutions Group, TSG Technology Solutions Group, and AI, but each investment will be assessed against its ability to create durable returns. Arena remains the principal area requiring corrective action. Revenue was lowered by 37% year-on-year. If you remember, the arena subsidiary exited the VDF contract and the resizing of the Turkey operations since happened, exiting from the Lira business. Rediction share of the loss this quarter was 115 crores. This loss comprises of a business loss and a Lira business transition loss and an exceptional impairment of intangibles of 40 crores. Arena has a totally new management team in place who is now steering the company through. Our priorities remain restructuring, portfolio choices, and development of a turkey-specific dollar-denominated growth revenue. Stepping back, Q2 demonstrates the shape of Reddington'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. The record H1 outcome gives us momentum, but it also raises the standard of execution we set for ourselves. Our position in India across MEI creates a powerful platform that gives vendors reach, partners access, and customers ability to source and integrate technologies across brands. As AI increases the intent dependence of infrastructure, devices, cloud, and software, this ability to orchestrate ecosystems will matter more than ever. Behind every number are Reddingtonians 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. 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 because of our markets. Our task is to capture that opportunity responsibly, turn growth into returns, and keep building a stronger Reddington. Thank you for your continued trust and support. We will now be happy to take your questions.

Krishnan, CFO

Just one add-on for all of your information. Hari 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.

Speaker 8

Thanks.

Operator

Thank you very much.

Operator

We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 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.

Operator

The first question is from the line of Nitin from Investec. Please proceed with your question.

Speaker 8

Hello, hi, am I audible? Apologies.

Operator

Yeah, sir, you're audible now.

Nitin, Analyst — Investec

Yeah, yeah, yeah, yeah. Hi, thank you for the opportunity. A 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? 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.

V. S. Hariharan, CEO

Okay, I will start off on TSC and ESC, and Krishnan, if you can just jump in on gross margin right after that. So, TSC, 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 big jump up of ASPs, and that's happening. And it's almost 4x in most cases. From a perspective of this adoption continuing, assuming people continue to be motivated by GPU and what it's going to achieve 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 this is not just a short-term pricing phenomenon of something of constraint and components driving it, et cetera. 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 the trend continues. The unit volumes on the consumer side are declining, and the prices, 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, etc. And we, we from whatever we hear, there will be some price increases will continue for a few more quarters. But at some point, the volume demand elasticity is going to 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 you take quarter, the same quarter as the previous year, it will 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 are clear about that. On the TLC side, it's a bit different because of the transition of CPU to GPU. Over to you, Krishna, on the cross margin.

Krishnan, CFO

Yeah. See, when compared to the previous quarter, the cross 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, that very similar to what it was in the last year, similar the same same quarter. And you need to also understand that this includes Thank you.

Operator

Thank you. The next question is from the live of Pratik Qutari from Unique DMS. Please proceed with your question.

Pratik Qutari, Analyst — Unique DMS

Hi, good evening, sir. And first of all, congratulations to the team. So if you can just help us reconcile the kind of growth that we are posting and also in few recent interactions with media, etc. I mean, this is not something which is short term, you see this for at least two, three years, if not five. And on the other side, we read anecdotally, this reports about Apple cutting down on some phone production, Intel cutting down on some PC production, volume shipments, etc. A lot of this is rising driven when volumes have either started to get hit or maybe we'll see over next year or two. So just if we can still, I mean, on ground, where are you getting this confidence from for the higher trend line and 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.

V. S. Hariharan, CEO

Yeah, I mean, I'll try and answer that. It's not a straightforward answer. Clearly, as prices go up, the people migrating from non-premium smartphones to premium smartphones, they will delay some of that. But the premium segment of the smartphone segment has introduced a lot of interesting new models as well. So, if you look at 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 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. Both the credit pieces and two-thirds of our premium smartphone in India is connected with an AMI kind of a picture. And so both the wealth and the, and we are 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, et cetera, is a hot in demand. And then on top of that, the camera features, the AI features, all of those. So, consumers' share of the wallet on some of these things are going up over the years, and that's one that gives us the confidence, but it's definitely not at the same rate that we would see the last few years that it has grown. So, definitely, we're going to hit a wall somewhere, and truly, the entry level in the mid-range of the market is seeing some of those.

Speaker 8

Okay, correct.

Pratik Qutari, Analyst — Unique DMS

And second on Arena, right? So from X of 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 X of provision?

V. S. Hariharan, CEO

Yeah, 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 Lira 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 not fully aligned. And so some of that came in as provisions. 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 Christian, you want to add some more narrative on that?

Krishnan, CFO

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 proper and if they have a challenge and we need to support them. So, those are some of the hits and these are primarily on account of the discontinued businesses.

Pratik Qutari, Analyst — Unique DMS

Correct. And lastly, on this debt equity at 0.5, 0.6, I mean, where would our comfort be or historically, I mean, or globally, I mean, what would that benchmark be? I mean, until what can we go up to?

Krishnan, CFO

Let's see. The distribution business which is working capital intensive, you tend to have normally debt equity of beyond one is to one. And this is what you will see across many constituents, but globally it is on the, I mean, it would be about 0.6 to 0.8 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 trials, we will come back to the market at the right time.

Speaker 8

Great. Thank you and all the rest. Thank you.

Operator

The next question is from the line of Hitesh Goel from Origin Capital. Please proceed with your question.

Hitesh Goel, Analyst — Origin Capital

Thanks a lot, and congratulations to you for a good set of results. My question is actually on this, you know, the laptops, PCs, and smartphones, on a YOY basis, how much of the growth is driving length, and how much has volume deterioration we have seen in the market, and has Reddington actually gained market share during this period in the distribution business? Can you shed some light there?

V. S. Hariharan, CEO

Okay. It's very hard to separate out the value-led versus the price-led because, 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're 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.

Hitesh Goel, Analyst — Origin Capital

Same in smartphones. So, if you can also say on a life-for-life basis, there's been 30-40% inflation, right, in smartphones and PCs and all. Is that right?

V. S. Hariharan, CEO

I mean, the price increases have been anywhere between 30-50%. Yeah.

Hitesh Goel, Analyst — Origin Capital

Yeah, and so basically when you're saying AI-like PCs, it is more enterprise-driven because, I mean, consumer side, we are not, the proportion of AI-like PCs will be very low, right?

V. S. Hariharan, CEO

Correct, correct. Absolutely. So it will be the adoption of AI PCs is more than 40% in the commercial PC segment in what we enter prices, whereas the consumer is still around hovering around 10%.

Hitesh Goel, Analyst — Origin Capital

Okay. And do you see the same trend continuing in October in third quarter, basically? Or because we have like, you know, previous participants 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 the momentum continuing in your business at least?

V. S. Hariharan, CEO

I mean, we can definitely see the volumes are, as I said, the consumer volumes are declining, the unit volume shipments, and we can also see activations in PC's Microsoft activation data is negative 20-30%, and whereas in commercial, as I said, it's right now still between 0 and 5%, 0 and 7%, something like that, and the ASP should drive on top of that revenue growth. So, 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-year life cycle. So, we see that continuing. Again, Will, 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 minus 10, minus 20 percent type demand softening on commercial.

Hitesh Goel, Analyst — Origin Capital

Great. And final clarification, how much of distribution business in the enterprise and consumer split in your business?

V. S. Hariharan, CEO

Actually, 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. 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. But we have not lost market share. We would have gained a little. Great.

Krishnan, CFO

Thank you. Just to clarify one point on the commercial versus consumer. When Hari said two-thirds consumer, it's because we have PC segment, we also have mobility segment, which are broadly equal. If you take only IT, you need to look at it as half-half. And basis our own business, it's about two-thirds, one-third.

Hitesh Goel, Analyst — Origin Capital

So, two-third is consumer, two-third is enterprise. I think Harish has said two-third is enterprise.

V. S. Hariharan, CEO

Yeah, on the PC's day, two-third is enterprise, correct, somewhat, yeah, in that direction. Okay, okay, thank you.

Operator

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 take 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 AJ Slakhani from UniCAMC. Please proceed with your question.

AJ Slakhani, Analyst — UniCAMC

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 remark that some of it is transition provisioning in regards to rebates and discounts. So, Krishna, sir, could you just call out if there is a number, what is the sustainable steady-state OPEX that you are looking at, and also could you call out the receivable and inventory provisioning that you have taken for the quarter?

Krishnan, CFO

See, OPEX has three important elements which you need to look at when you do the comparison. One, we have already spoken about this AR related provisioning and that is something that is on the higher side and this is both in ARENA as well as in the case of India. 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 on account of insurance, etc.

AJ Slakhani, Analyst — UniCAMC

Understood. And so, going forward, what is the sustainable OPEX number that you can sort of lean us in the direction of?

Krishnan, CFO

We should track anywhere between 950 to 1000 crores a quarter.

AJ Slakhani, Analyst — UniCAMC

Understood. And so, could you just call out specifically what was the receivable and provisioning numbers for the quarter?

Krishnan, CFO

It's about 213 crores, which includes about 67 crores in CESA, and in ARENA about 135 crores.

AJ Slakhani, Analyst — UniCAMC

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?

Krishnan, CFO

That is not significant, that is not material it is. In this situation, we are not concerned about our inventory when the price keeps going up. So, I mean the concern will be on AR and particularly in Turkey, the general conditions, the liquidity conditions in the market is not Not that very great.

AJ Slakhani, Analyst — UniCAMC

Understood, sir. And so my second question is on the capital intensity of the business. And given the very strong revenue optics 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? You know, where, how should, as you mentioned earlier, the 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, you know, So, intensity of growth we are seeing.

Krishnan, CFO

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. The levers, there are additional debt that is possible, like we spoke, there are opportunities to modulate the dividend or to raise capital. At this point in time, we are able to manage with the debt and the other levers 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 a strong trend, definitely the capital raise will become The requirement.

AJ Slakhani, Analyst — UniCAMC

Understood, sir. And, sir, any call-outs on how we should expect growth across segments or regions for the second half? Because, you know, each segment has, you know, the Middle East has the affections, etc. So just any perspective on growth across regions and segments?

Pranav, Analyst — MK Global

So, it is similar.

V. S. Hariharan, CEO

What you see, I think, 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 will depend on the geopolitical disruption. This is a bit of an unknown. So, I've reserved 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 way. So second half, we continue to see TSD being a very strong number one in terms of growth driver, followed by SSD. So the value segments will be good for the second half. Typically, they've always been strong in the second half, and the CPU-GPU migration as well as the SSD work will drive that. PSG 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, TSD and SSG being strong, India, GCCL and Africa being strong.

AJ Slakhani, Analyst — UniCAMC

Understood. So, thanks and all the best. Thank you.

Ashish, Analyst — Leo Capital

The last part, he said India,

AJ Slakhani, Analyst — UniCAMC

not India, mobile ESG and MSG.

Operator

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 restrict 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 Vijay Menon from Monarch Capital. Please proceed with your question.

Vijay Menon, Analyst — Monarch Capital

Hi, sir, and congratulations on your great side of the numbers, and how are you suggesting your parents? A 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. So, how do we now look at Apple sales because, you know, Apple is a hugely heavy quarter for us because September and typically the new phone launch. So, will we see that now across in two parts and then should we not take the decline in volumes too seriously right now because some of it will be recovering too soon?

V. S. Hariharan, CEO

Yeah, I mean, there is a very interesting question and asked in an interesting way. I think that absolutely you are absolutely right. There is a lot of background noise. Can everyone mute their lines? So, I'll try and 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 ProProMax, now the base model coming later. 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 laptops. So, there is a lot to deal with. Clearly, if I look at... What is going to 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 beginning to buy pro pro max. So you're absolutely right. When the base model launches in Q4, you'll see a better unit volume kicking in. And 18 does have some good set of features. So those are all things that will happen. But normally we would have a Q2, Q3 grade, but we might have a good Q2, Q3, Q4. We have a series of NPS. We are looking at it a bit differently. And volumes could come back in Q4. 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 because 17 is still in the market or they go for 18? All of that will have to wait and see.

Vijay Menon, Analyst — Monarch Capital

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 Q3 and maybe that's where the inventory pileup has also happened?

V. S. Hariharan, CEO

I think I missed the first part of the question. It is a bit muted.

Vijay Menon, Analyst — Monarch Capital

No, no, I'm thinking there was a, like, there is, like, festival season, you know, is a little late compared to, you know, last year. So, are we seeing some of that demand to kind of come into Q3, and is that the reason for the inventory pileup also?

V. S. Hariharan, CEO

The first half of Q3, yeah, go ahead, test question.

Krishnan, CFO

Sorry, sorry, Hari. See, you also need to while partly as Vinay, it is mainly to do with the Middle East situation where supply chains are still under stress. I mean, completely, I mean, state of farmers is closed, and we need to find alternate routes of receiving the materials. So, everything has increased the tact of doing the business. And that's one of the key, I mean, key reasons why inventory is on the high side.

Vijay Menon, Analyst — Monarch Capital

Okay, okay. And one last question in terms of the large deals, you know, data centers you mentioned is a larger part. So are these orders from Neoclouds or are these maybe to private enterprises, government? If you can just give me some call around that, that would be helpful.

V. S. Hariharan, CEO

It's almost all Neoclouds.

Vijay Menon, Analyst — Monarch Capital

Okay, all Neoclouds. Okay. Thank you so much and all the best to the team. Thanks.

Operator

Thank you. The next question is from the line of Pranav from MKGlobal. Please proceed with your question.

Pranav, Analyst — MK Global

Yeah, hi. Thanks for the opportunity. I would like to ask a question about TSG. So, TSG, 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 a little lumpy in nature? And, you know, hence can cause some, you know, challenges in terms of managing the working capital. 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.

V. S. Hariharan, CEO

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, etc., they're just going for the newer category of products, which cost more, and it's available, 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 street market. 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.

Pranav, Analyst — MK Global

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?

Krishnan, CFO

For the current quarter, roughly about 3,800 crores is a large deal size. If you eliminate everything else is BAU.

Speaker 8

Okay. Okay. Thank you so much.

Operator

Thank you. The next question is from the line of Chirag from Murtilal Oswal. Please proceed with your question.

Chirag, Analyst — Motilal Oswal

Yeah, hi, congratulations on a great set of numbers. 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, H2 is better or H1 for the business, X of arena and all.

V. S. Hariharan, CEO

Normally, H2 has always been better than H1, and it is because our Q3 is normally Q4 and year-end for a lot of brands and a lot of countries, not India, and so that has a budget, spending a budget, and similarly, Q4 has the India impact of spending budget, so normally our second half is always bigger than the first half. But this year is a bit different because the whole shortage and the price increases. I think has pulled forward some of the consumption and purchase cycle forward, both on the PCs and even on the TST side, definitely smartphones. It could be this year's second half, we are not seeing that much of a seasonality, and we see still a good Q3 and a good Q4, but we won't see that much of a seasonality, is our opinion.

Chirag, Analyst — Motilal Oswal

Okay. So, let's say in a normal circumstance, it should be assumed because the growth is on year-on-year, particularly in 2Q and somewhat in 1Q has become very large on year-on-year. So, considering the current order book and the commentary which you mentioned for the segment specific outgrowth, is it fair to assume like, you know, the growth will be north of, let's say, 25% at overall business level in H2? That experience.

V. S. Hariharan, CEO

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, I'm just going to delay my work. We will never be able to assess that till it actually hits you. But so that is a bit of an unknown unknown. We are not seeing of that yet, but we could see that, especially post-Diwali season, the consumption of smartphones, consumption of consumer PCs, those kinds of things. And the second thing is the West Asia crisis and how much of that impact could be felt in UAE, KSA, and some of these issues. Those are the two caveats, but otherwise, yes, you are right, there is no reason to disbelieve that it will be north of 25.

Chirag, Analyst — Motilal Oswal

Just one final question from my end. In past 15 days, somewhat the noise around AI and the capex behind AI, be it on the hardware side or on the software side, somewhat, you know, the desk is trying to settle down, and also the geopolitical changes, which may happen considering the detection hotline and all in the U.S. Let's say if in a case the AI-related spend I think those

V. S. Hariharan, CEO

will affect your question is valid when it comes to TSG and the data centerpiece. SSG consumption, while there is an AI element, I think that piece is still outside of pure AI reset back because the cloud security and software has been growing at one pace, and we believe that will continue. Similarly, smartphones, there is not that much of an impact on AI. So, it will be TSG for sure, and somewhat on the PCs, these two spaces, there could be an impact of that if there is a pullback. But I think it will rationalize, I believe, with the other two. Yeah.

Chirag, Analyst — Motilal Oswal

Thank you so much, and best wishes for your time.

Speaker 8

Thank you.

Operator

Thank you. The next question is from the line of Sia from MK Global. Please proceed with your question.

Sia, Analyst — MK Global

Yeah, hi, good evening to the management team. Hi, best wishes for your family and parents. My first question relates to more on the AI exchange. You know, what sort of action are you seeing? And is it just an update on, you know, some of the higher activities which you're seeing in the past few days in this quarter, just since we've done these one and a half to two months of its launch? And just a small follow-up on, you 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.

V. S. Hariharan, CEO

I actually was not able to get the question fully.

Sia, Analyst — MK Global

First was on the traction and the AI exchange which is created.

V. S. Hariharan, CEO

Okay, okay, okay. So see, We all know, and I'll answer the first question and maybe tackle the second one after that. We all know that the AI adoption, especially the commodity adoption on things like on the frontier models like Chanty, PT, Cloud, etc. is very high. Both in consumer and enterprise space, there's a lot of discussion on Asian TKI. 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. So, an AI exchange type of a platform must 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 ISPs. And early days, I mean, we've launched it about a couple of quarters back. We are engaging hundreds of 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 years back. And we're encouraged by what we see, but clearly this has to work for customers and this has to have a replication, multiplication model by partners. That's what we're trying to do. So then it doesn't become like an every use case or a new use case. Somebody has to go in and develop an AI solution for it. So it will take, it will be a long journey, clearly. It is not going to catapult overnight.

Sia, Analyst — MK Global

And the second question was, On Google as coming in the top five vendor base, you know, in terms of some color over there, because that's on our H1 basis, if I look, has grown 183%. I know the base could be lower, but, you know, it could violate it on a very high growth since it's trying to get some color over there.

V. S. Hariharan, CEO

Yeah, so Google for us has two parts to it. It has got a smartphone piece and it's got an office and cloud piece. So put together, it's grown very well for us. But definitely, we play hard in Google Cloud in India, but we don't have partnership with Google in all places. Google is becoming very interesting because their growth, if you look at overall, Google's growth on cloud is very, very high. They're catching up with the bigger voice, and as long as they are in a very distribution-centric model, we think it will be very interesting to work with them.

Sia, Analyst — MK Global

Sure, sure. Thanks so much. I'm wishing you all the best in the past recovery to your parents. Thank you.

Operator

Thank you. The next question is from the line of Ashish from Leo Capital. Please proceed with your question.

Ashish, Analyst — Leo Capital

Congratulations on a good set of numbers, sir. My question is, are we seeing a big pipeline of opportunities from the Neocloud 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?

V. S. Hariharan, CEO

I think, again, I think we have shared some of this before also. As the whole NeoCloud, 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 150,000 crore opportunity. Now, where does distribution play a role? One, obviously, in the hardware deal, sourcing, working with our brands and working with the NeoCloud 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 NeoCloud operators for the U.S. So we ought to see how this plays out between the smaller NeoClouds locally set up in India and the NeoClouds 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 work with multiple server storage, networking, and cooling system and power players, sticking those solutions. Working this whole ecosystem orchestration, being able to play a role in filling capacity, bringing mid-market customers, and bringing in professional services, all of that. And 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 4.5 and 5. But the Rosé, we are very clear about picking up deals and partnering, especially on the hardware side. There is a Rosé target we have. We don't fall below that. And we try to do this with less incremental OPEX. So the leverage 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 managed services and filling capacity.

Ravi Shankar, CFO

Just to add Hari, Ravi here, Ravi Shankar from Reddington, India. I am the CFO of Reddington, India. The capital investment on the funded portion is almost nil. We only have a non-funded portion being utilized for the purpose of large bill. So, in that sense, if you see the return, it is almost infinite.

Speaker 8

Got it. Got it.

Ashish, Analyst — Leo Capital

Sir, if I could squeeze in one more question. On the Turkey Arena business, when do we expect a turnaround in that business?

V. S. Hariharan, CEO

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. There is a new issue on the funds in the market. There has been all kinds of things beyond interest rate and inflation that has happened, which is what is making us challenged and struggling. I think, see, what we have done clearly on Arena, the subsidiary, they have exited from the 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 good are they in terms of going forward. So we need to really closely watch the market, but we have taken all steps to eliminate Good morning, everyone, and welcome to the call. 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.

Ashish, Analyst — Leo Capital

Got it. Thank you. Thank you for taking my questions. Best of luck. Thank you.

Operator

The next question is from the line of Srinara and Mishra from Baroda B, MP, Paripas, AMT. Please proceed with your question.

V. S. Hariharan, CEO

Thank you for the opportunity. My first question is on ESG. Last quarter we had highlighted there were above normal channel inventories in anticipation 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 can make more money, that continues to be a challenge. So there is a little bit more than comfortable level of inventory in CF2. I would say that.

AJ Slakhani, Analyst — UniCAMC

Okay, okay. And in TSG, if you can quantify, what would be the contribution from large deals this quarter?

V. S. Hariharan, CEO

Yeah, I think that was called also 3800 crores was the contribution. Yeah. Growth without those large deals would have been 33% for TSG. Obviously, the 90% growth has come from the large deal portion.

Speaker 8

Got it. Okay. Thank you.

Operator

Thank you.

Operator

The next question is from the line of Akshat Shetty from family office. Please proceed with your question.

Operator

Mr. Akshid, can you please speak?

Akshat Shetty, Analyst — SS Family Office

Hello, am I audible now?

Operator

Yes, you're audible now.

Akshat Shetty, Analyst — SS Family Office

Yeah, sorry. 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 91% and 39% YY in the second quarter of 27. As Reddington expands its cloud cybersecurity and enterprise technology business. So do you see this changing the company's traditional distribution leader business model? And over the next three to five years, can we expect a structural improvement in the gross margin and EBITDA margin and ROCE?

V. S. Hariharan, CEO

Yeah, I think we've 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 compared to the overall Reddington average. And as Reddington moves its role from pure distribution to orchestration, which cuts across TSC, SSG business, there will be a lot more solutioning, a 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 Cloud Quarks 2.0, the marketplace, the automation tools, the management of lifecycle, 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 SHG and TST business combined, the whole ecosystem orchestration.

Akshat Shetty, Analyst — SS Family Office

Okay, understood. Thank you for answering my first question. My second question is related to working capital and cash generation. I see in the second quarter of 27, free cash flow was negative 1,871 crores, whereas the first half of the 27, free cash flow was positive 583 crores. As Reddington 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?

V. S. Hariharan, CEO

Do you want to take that question?

Krishnan, CFO

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 being chosen. Working capital, we are controlling the overall working capital in terms of number of days. But because of growth, higher growth, obviously, 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.

Akshat Shetty, Analyst — SS Family Office

Okay, got it, got it. And thank you for explaining both the question thoroughly. Yeah, thank you.

V. S. Hariharan, CEO

Thank you.

Operator

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.S. Hariharan for closing comments. Thank you and over to you, sir.

V. S. Hariharan, CEO

Thank you for a good set of questions and thank you for the interest in the Reddington journey. We are definitely committed to make Q3 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 to be probably for you. For everyone in India.

Speaker 8

Thank you.

Operator

Thank you. Thanks.

Krishnan, CFO

Happy Diwali to all of you.

Operator

Thank you. On behalf of Reddington Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines. Thank you.