Redington, India growth strong, Middle East in doldrums :: IIFL,

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India growth strong, Middle East in doldrums
Redington’s 2QFY11 revenue growth of 12.8% YoY was below our expectation. Revenues from
domestic business were up 21.5%, but those from the Middle East rose by only ~3.8% YoY. EBIDTA
margin expansion of 16bps YoY (largely due to the successful diversification into lucrative categories
such as smartphones) drove PAT growth of 20.7%. During the quarter, Redington acquired a 49.4%
stake in Turkey’s Arena Comp for US$42.5m at a P/E of ~8.5x. Since our downgrade on valuation
concerns in early June 2010, the stock has underperformed the Sensex by ~20%. Although current
valuations are now less stretched than they were (due both to time value and a small price
correction), earnings could surprise on the downside, owing to lack of momentum in the Middle East.
We retain REDUCE.
Strong domestic business: Redington’s standalone revenues grew 21.4% YoY in 1QFY11. Importantly,
there was no pressure on pricing power, as gross margin was stable YoY and there was actually a 4bps rise
in EBIDTA margin due to savings in staff costs. Standalone PAT growth was an impressive 28%.
Middle-East demand tepid: In constant currency terms, revenues from the Middle East grew about 8% YoY.
Management is not bullish about any immediate rebound in what it terms fairly sedate demand conditions.
That said, there is no immediate pressure on margins, as pricing discipline seems to be holding up.
Arena acquisition is a good fit: Arena, the second largest distributor of IT products in Turkey, has a
turnover of around US$451m and a PAT of ~US$10m. The company is reportedly fairly well-entrenched
across vendors, with HP as the largest vendor. The acquisition should prove EPS-accretive, in our view.
Diversification efforts on course: Redington has unique distribution rights for RIM products (Blackberry
smartphones) in India. The current monthly revenue from this business is Rs800m and is growing fast. In
this business, gross margin could potentially be much higher than in the company’s core business.