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Redington provides an end-to-end supply coverage chain, has an able and
conservative management team and a strong track-record of risk management. All
these make it a distinctive supply-chain specialist. We initiate coverage of
Redington with a BUY rating and price target of INR104, based on an expected
28% EPS CAGR and attractive valuations of 11x one-year forward P/E.
Catalysts
The consumer goods business has doubled over the past one year and we expect
it to grow at 50-60% pa over the next few years.
Anchor themes
India has marked under-penetration of IT and consumer goods. This is likely to
change due to the growth of discretionary spending, which will lead to increased
spending on PCs, laptops, mobile phones and other consumer durables.
Distinctive supply-chain play
Ideally placed to cash in on IT spending in India
Redington is the second-biggest distributor in India; along with Ingram,
it has a combined market share of more than 70%. The company is
set to capitalise on the increase in IT spending in India due to underpenetration
of personal computers (PC), servers, and networking
equipment, in our view.
Consumer goods distribution is a big opportunity
Leveraging its expertise and strong network in IT distribution, the
company has moved into the distribution of consumer goods such as
smartphones, mobile phones, washing machines, refrigerators, and
the like. This business is a significant opportunity considering the
under-penetration and lack of good supply-chain specialists. Revenue
growth has been more than 100% pa in this business in the past few
years.
End-to-end supply chain coverage & risk management
The company captures the entire value chain of distribution from
procurement to financing, and has a creditable history of managing
inventory and credit risk, which are key to success in the distribution
business. Average provisions were 0.05% and 0.08% of sales for
inventory and receivables, respectively, over FY08-FY10. The
company has been able to diversify its vendor, product and
geographical base over the years.
Initiate coverage with a BUY and PT of INR104
In our view, Redington is a distinctive and secular growth story, given
its market position and distinct business model. The stock currently
trades at an inexpensive one-year forward P/E of 9.5x, compared to
past four-year average P/E of 11.9x. We initiate coverage of
Redington with a BUY rating and a PT of INR104 based on 11x
one-year forward P/E.
Ideally placed to cash in on IT spending in India
The company is the second-biggest distributor in India, with a market share of more
than 70%, combined with Ingram (IM US, not rated). With an expected increase in IT
spending in India due to under-penetration of personal computers (systems which
include PCs, laptops, entry-level servers, etc. contribute more than 25% of revenue),
the company is well-positioned to cash in on IT spending in India by corporates and
the government.
Non-IT product distribution business gaining momentum
Leveraging its expertise and strong network in IT distribution, the company has moved
to the distribution of non-IT products like mobile phones, washing machines,
smartphones, refrigerators, video-game devices, etc. This could be a key catalyst for
rapid growth in revenues for the company. According management, the Blackberry
business is expected to grow at 100% in FY11F and grow at a CAGR of more than
50% over the next two to three years.
End-to-end coverage of distribution value chain
The company has end-to-end coverage of the distribution value chain (procurement,
warehousing, non-banking financial corporations [NBFC] and after-sales services). It
has excellent processes in place and a strong conservative management team, in our
view. The company has a credible history of managing inventory and credit risk, which
are key to success in the distribution business. Average provisions for inventory and
receivables were 0.05% and 0.08% over FY08-FY10, respectively. Average provisions
for bad debt were 0.06% and 0.1% for India and overseas business over the same
period, respectively. The company has been able to diversify its vendor, product and
geographical base.
Growth with improving profitability
With an increase in the proportion of value-based offerings, and an increased
contribution of non-IT business (having ~0.5% higher margin than IT business),
margins are likely to increase by 20bps per year over the next three to four years,
according to our estimates. Entry into service businesses, such as after-sales service
& third-party logistics (3PL) and the building of automated distribution centres (ADC)
will add to margins, in our view. The company is also negotiating better credit terms
with new vendors; entry into new business with lower working capital days (WCD) such
as in the Blackberry business (WCD < 15 days) or negative WCD should lead to an
increase in ROCE.
Wide vendor base and strong distribution network
The company has a strong distribution network and wide range of brands with a
presence across 18 countries. The company, along with its subsidiaries, has more
than 75 brands, 23,600 channel partners, 78 warehouses and 68 sales offices.
Such a strong distribution network attracts many vendors, for example Dell, which
earlier followed an “All Direct” business method (selling directly to dealers). By
increasing its vendor base, the company’s objective of providing a one-stop shop has
become an attractive proposition for resellers.
NBFC – financial flexibility
The distribution business is very working-capital intensive, as the company gives credit
periods to resellers. Cheap and easy access to capital is a significant value proposition
to resellers by the company. The company acquired Easyaccess, an NBFC in FY08,
which provides credit to channel partners and capital to companies on account
receivables. This has enabled the company to expand rapidly. Providing loans to
resellers has become a point of attraction for resellers.
The company is also involved in other business lines of sales service and 3PL. Foray
into this business is leading to increased margin, low working capital and
diversification in revenue.
Valuation and price target
In our view, Redington is a secular growth story and is a good play on the growth of
both IT and consumer durables goods in India and the Middle East.
The company has a distinctive business model, conservative management and
extremely process-oriented approach to its business. In our view, the consumer
durable business is likely to act as a catalyst for growth in the next few years, and this,
along with steady growth in IT business, is likely to result in a 28% EPS CAGR over
the next three years.
The stock has underperformed the Sensex by 10% in the past six months and trades
at a one-year forward P/E of around 9.5x, compared to its past four-year average P/E
of 11.9x. We have valued the stock at 11x one-year forward P/E, which is a 10%
discount to the historical average. We set our price target at INR104. We initiate
coverage of Redington with a BUY rating.
Risks to our investment view
Slowdown in IT sector
Redington derives around 80% of its revenue from the IT sector. Any slowdown in the
IT sector would impact Redington and our estimates.
Currency risk
The company has a presence across 18 countries, mainly in the Middle East and
Africa. Overseas earnings constitute ~ 53% of total earnings. Fluctuations in the
exchange rate of the INR vs local currencies of geographies in which the company
operates, and the US dollar is a risk to our estimates.
Interest rate
The company is involved in a working capital-intensive business and has significant
debt of INR14bn (mainly short term) on its balance sheet. The company’s current net
D/E ratio is 0.73. Any hike in interest rates would impact interest expenses and our
earnings estimates.
Impact of GST in India
India has complicated rules and regulations on sales tax on the movement of goods
between states. GST implementation in India (expected in 2012), may encourage
other distribution models, such as a direct distribution model.
Loss of relationships with major vendors
The company derives ~55% of total revenue from its top five vendors, with the top
three vendors being HP (33%), with Nokia and Research in Motion (RIM) contributing
~5% each. Any loss or deterioration in relationship with these major vendors could
impact earnings. HP is the single largest IT products company globally, with an
emphasis on an indirect direct distribution model; it contributes the major share of
revenue (27-39%) of other Indian distribution players, including Ingram, Tech Data and
Synnex. HP does 36% of its global sales through Redington. The companies have
been associated with each other for the past 20 years, forming a bilateral relationship.
The adoption of direct sales to dealers by vendors could also impact our estimates.
Secular growth story
In our view, Redington is a secular growth story and is a good play on the growth of
both IT and consumer durables goods in India and the Middle East.
The company has a distinctive business model, conservative management and is
extremely process-oriented in its approach to business. Also, the consumer durables
business is likely to act as a catalyst for growth in the next few years and this, along
with steady growth in the IT business, is likely to result in a 28% revenue CAGR in next
three years.
The stock has underperformed the Sensex by ~10% in the past six months and trades
at a one-year forward P/E of around 9.6x, compared to past three average P/E of
11.9x. We have valued the stock at 11x one year forward P/E, a 10% discount to its
historical average. Our price target is INR104 and we initiate coverage with a BUY
rating.
In our view, only two international companies Synnex Technology International,
Taiwan and Digital China are comparable to Redington in terms of revenue growth,
revenue profile, margins and return ratios.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action
Redington provides an end-to-end supply coverage chain, has an able and
conservative management team and a strong track-record of risk management. All
these make it a distinctive supply-chain specialist. We initiate coverage of
Redington with a BUY rating and price target of INR104, based on an expected
28% EPS CAGR and attractive valuations of 11x one-year forward P/E.
Catalysts
The consumer goods business has doubled over the past one year and we expect
it to grow at 50-60% pa over the next few years.
Anchor themes
India has marked under-penetration of IT and consumer goods. This is likely to
change due to the growth of discretionary spending, which will lead to increased
spending on PCs, laptops, mobile phones and other consumer durables.
Distinctive supply-chain play
Ideally placed to cash in on IT spending in India
Redington is the second-biggest distributor in India; along with Ingram,
it has a combined market share of more than 70%. The company is
set to capitalise on the increase in IT spending in India due to underpenetration
of personal computers (PC), servers, and networking
equipment, in our view.
Consumer goods distribution is a big opportunity
Leveraging its expertise and strong network in IT distribution, the
company has moved into the distribution of consumer goods such as
smartphones, mobile phones, washing machines, refrigerators, and
the like. This business is a significant opportunity considering the
under-penetration and lack of good supply-chain specialists. Revenue
growth has been more than 100% pa in this business in the past few
years.
End-to-end supply chain coverage & risk management
The company captures the entire value chain of distribution from
procurement to financing, and has a creditable history of managing
inventory and credit risk, which are key to success in the distribution
business. Average provisions were 0.05% and 0.08% of sales for
inventory and receivables, respectively, over FY08-FY10. The
company has been able to diversify its vendor, product and
geographical base over the years.
Initiate coverage with a BUY and PT of INR104
In our view, Redington is a distinctive and secular growth story, given
its market position and distinct business model. The stock currently
trades at an inexpensive one-year forward P/E of 9.5x, compared to
past four-year average P/E of 11.9x. We initiate coverage of
Redington with a BUY rating and a PT of INR104 based on 11x
one-year forward P/E.
Ideally placed to cash in on IT spending in India
The company is the second-biggest distributor in India, with a market share of more
than 70%, combined with Ingram (IM US, not rated). With an expected increase in IT
spending in India due to under-penetration of personal computers (systems which
include PCs, laptops, entry-level servers, etc. contribute more than 25% of revenue),
the company is well-positioned to cash in on IT spending in India by corporates and
the government.
Non-IT product distribution business gaining momentum
Leveraging its expertise and strong network in IT distribution, the company has moved
to the distribution of non-IT products like mobile phones, washing machines,
smartphones, refrigerators, video-game devices, etc. This could be a key catalyst for
rapid growth in revenues for the company. According management, the Blackberry
business is expected to grow at 100% in FY11F and grow at a CAGR of more than
50% over the next two to three years.
End-to-end coverage of distribution value chain
The company has end-to-end coverage of the distribution value chain (procurement,
warehousing, non-banking financial corporations [NBFC] and after-sales services). It
has excellent processes in place and a strong conservative management team, in our
view. The company has a credible history of managing inventory and credit risk, which
are key to success in the distribution business. Average provisions for inventory and
receivables were 0.05% and 0.08% over FY08-FY10, respectively. Average provisions
for bad debt were 0.06% and 0.1% for India and overseas business over the same
period, respectively. The company has been able to diversify its vendor, product and
geographical base.
Growth with improving profitability
With an increase in the proportion of value-based offerings, and an increased
contribution of non-IT business (having ~0.5% higher margin than IT business),
margins are likely to increase by 20bps per year over the next three to four years,
according to our estimates. Entry into service businesses, such as after-sales service
& third-party logistics (3PL) and the building of automated distribution centres (ADC)
will add to margins, in our view. The company is also negotiating better credit terms
with new vendors; entry into new business with lower working capital days (WCD) such
as in the Blackberry business (WCD < 15 days) or negative WCD should lead to an
increase in ROCE.
Wide vendor base and strong distribution network
The company has a strong distribution network and wide range of brands with a
presence across 18 countries. The company, along with its subsidiaries, has more
than 75 brands, 23,600 channel partners, 78 warehouses and 68 sales offices.
Such a strong distribution network attracts many vendors, for example Dell, which
earlier followed an “All Direct” business method (selling directly to dealers). By
increasing its vendor base, the company’s objective of providing a one-stop shop has
become an attractive proposition for resellers.
NBFC – financial flexibility
The distribution business is very working-capital intensive, as the company gives credit
periods to resellers. Cheap and easy access to capital is a significant value proposition
to resellers by the company. The company acquired Easyaccess, an NBFC in FY08,
which provides credit to channel partners and capital to companies on account
receivables. This has enabled the company to expand rapidly. Providing loans to
resellers has become a point of attraction for resellers.
The company is also involved in other business lines of sales service and 3PL. Foray
into this business is leading to increased margin, low working capital and
diversification in revenue.
Valuation and price target
In our view, Redington is a secular growth story and is a good play on the growth of
both IT and consumer durables goods in India and the Middle East.
The company has a distinctive business model, conservative management and
extremely process-oriented approach to its business. In our view, the consumer
durable business is likely to act as a catalyst for growth in the next few years, and this,
along with steady growth in IT business, is likely to result in a 28% EPS CAGR over
the next three years.
The stock has underperformed the Sensex by 10% in the past six months and trades
at a one-year forward P/E of around 9.5x, compared to its past four-year average P/E
of 11.9x. We have valued the stock at 11x one-year forward P/E, which is a 10%
discount to the historical average. We set our price target at INR104. We initiate
coverage of Redington with a BUY rating.
Risks to our investment view
Slowdown in IT sector
Redington derives around 80% of its revenue from the IT sector. Any slowdown in the
IT sector would impact Redington and our estimates.
Currency risk
The company has a presence across 18 countries, mainly in the Middle East and
Africa. Overseas earnings constitute ~ 53% of total earnings. Fluctuations in the
exchange rate of the INR vs local currencies of geographies in which the company
operates, and the US dollar is a risk to our estimates.
Interest rate
The company is involved in a working capital-intensive business and has significant
debt of INR14bn (mainly short term) on its balance sheet. The company’s current net
D/E ratio is 0.73. Any hike in interest rates would impact interest expenses and our
earnings estimates.
Impact of GST in India
India has complicated rules and regulations on sales tax on the movement of goods
between states. GST implementation in India (expected in 2012), may encourage
other distribution models, such as a direct distribution model.
Loss of relationships with major vendors
The company derives ~55% of total revenue from its top five vendors, with the top
three vendors being HP (33%), with Nokia and Research in Motion (RIM) contributing
~5% each. Any loss or deterioration in relationship with these major vendors could
impact earnings. HP is the single largest IT products company globally, with an
emphasis on an indirect direct distribution model; it contributes the major share of
revenue (27-39%) of other Indian distribution players, including Ingram, Tech Data and
Synnex. HP does 36% of its global sales through Redington. The companies have
been associated with each other for the past 20 years, forming a bilateral relationship.
The adoption of direct sales to dealers by vendors could also impact our estimates.
Secular growth story
In our view, Redington is a secular growth story and is a good play on the growth of
both IT and consumer durables goods in India and the Middle East.
The company has a distinctive business model, conservative management and is
extremely process-oriented in its approach to business. Also, the consumer durables
business is likely to act as a catalyst for growth in the next few years and this, along
with steady growth in the IT business, is likely to result in a 28% revenue CAGR in next
three years.
The stock has underperformed the Sensex by ~10% in the past six months and trades
at a one-year forward P/E of around 9.6x, compared to past three average P/E of
11.9x. We have valued the stock at 11x one year forward P/E, a 10% discount to its
historical average. Our price target is INR104 and we initiate coverage with a BUY
rating.
In our view, only two international companies Synnex Technology International,
Taiwan and Digital China are comparable to Redington in terms of revenue growth,
revenue profile, margins and return ratios.
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