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UBS Investment Research
Redington India
D istribution powerhouse [EXTRACT]
�� Initiate coverage with a Buy rating
Redington India (REDI) is a leading IT distributor with a presence in key highgrowth
emerging markets—it was the second-largest distributor in India and
Turkey, and the largest in the Middle East and Africa in terms of revenue in FY11.
REDI has also expanded beyond IT products; non-IT products contributed
14%/18% of revenue in FY10/11. We expect the company’s strong growth and
robust ROE to continue in this highly consolidated industry.
�� Smartphones, tablet PCs and new geographies should drive growth
REDI’s non-IT business recorded a 111%/28% revenue CAGR in India/the Middle
East over FY08-11 (IT business CAGR was 6%/21%). BlackBerry drove revenue
growth over the past two years in the non-IT segment, and REDI expects
smartphones and tablet PCs to drive growth in the future. It also plans to expand
Arena (Turkey’s second-largest IT distributor in terms of revenue, and in which it
has a stake) beyond Turkey and into the non-IT product segments.
�� High ROE and robust growth are underappreciated; potential re-rating
We believe REDI’s robust growth and high 29% core ROE in FY11 are
underappreciated by the market. We expect the share price to rise on improving
return ratios and strong revenue growth.
�� Valuation: Rs120.00 price target
We value REDI on 12.5x FY13E PE. This is supported by 24% consolidated ROE
and 29% ex-cash ROE in FY11, and our 25% EPS CAGR forecast over FY12-15.
Our PE multiple is in line with REDI’s three-year historical average, and in line
with Synnex Technology International’s (Synnex) 2012E PE
Investment Thesis
REDI is one of the top two IT distributors in India and the leading IT distributor
in the Middle East and Turkey. In November 2010, it acquired a 49.4% stake in
Arena, Turkey’s second-largest IT distributor. We believe REDI’s revenue and
earnings have risen due to the following.
�� Its presence in new markets. REDI entered the Middle East in 1997—it is
now the largest IT distributor in these regions in terms of revenue, larger
than the second- and third-largest companies combined. REDI is also the
only international IT distributor with presence in the Middle East-Turkey-
Africa (META) region after Tech Data’s (second-largest IT distributor
globally) exit from the Middle East in July 2007.
�� Strong distribution, which helps it enter new product categories and
establish leadership. REDI was originally a distributor of IT products. It
later entered the non-IT product segments (telecommunication and digital
lifestyle products as well as digital printers, which the company categorises
as non-IT), which have grown faster than IT products. Over FY08-11, its
IT/non-IT product segments posted a CAGR of 6%/111% in India and
21%/28% internationally.
�� Margin and ROE improvements. REDI’s India/international gross margins
have risen from 4.3%/4.6% to 5.5%/5.3% over FY07-11. Over the same
period, its consolidated EBITDA margin rose from 2.15% to 2.61%, while
core ROE (ex-cash ROE) increased from 23% to 29%.
�� Good management of working capital risks across business cycles; lower
working capital. IT distribution is a low-margin business. Thus, working
capital risk management is critical. During the peak of the credit crisis in
FY09, its inventory/credit provisioning peaked at 11/10bp compared to its
five-year average of 6/9bp. REDI’s working capital for India also improved
from 38 days of revenue in FY07 to 26 days in FY11. We expect this trend to
continue.
As a result of margin and working capital improvements, REDI’s core ROE has
increased from 23% in FY07 to 29% in FY11. We estimate this will rise to 35%
in FY16.
Our price target implies 15.9x/12.5x FY12/13E PE. Our target PE is in line with
its historical three-year average—we believe this is conservative given REDI’s
improving margin and return ratios as well as its stable earnings, which could
drive a stock re-rating.
Key catalysts
�� Growth in non-IT segments from telecom and tablet PC products. REDI
entered the non-IT product space in FY06. Over FY08-11, non-IT products
recorded a CAGR of 111%/28% in India/internationally, significantly above
IT products’ 6%/21%. We believe continued growth in smartphones (RIM’s
BlackBerry and others) will continue to drive its non-IT expansion (REDI
has distribution relationships with LG, Huawei and other smartphone
vendors). Tablet PCs (which REDI categorises as non-IT products) could
also drive rapid growth in the non-IT category as REDI has a distribution
relationship with Apple. Given REDI’s strong distribution network in India,
we believe other vendors will use REDI as one of their key distribution
partners.
�� Accelerated growth in IT products. Non-IT products have grown faster
than IT products and this is likely to continue. However, we think
government spending on IT products will reignite IT growth. REDI is
participating in various government tenders in partnership with other vendors
and system integrators. Our expectation of above-industry growth rates
factor into our IT revenue growth assumptions for the company.
�� Improved mix of higher-margin ‘value’ products in the international
segment). In META/India, higher-margin ‘value’ products contributed to
8%/30% of its revenue and 11%/50% of profit before tax in FY11. REDI has
a portfolio of 29 brands in META compared with 80 in India. In META,
REDI has a set up separate team focusing on adding lower-volume, highermargin
products (brands) to its portfolio, which it plans on expanding to 55-
60 products within the next two to three years.
�� Continued margin and ROE improvements. We expect continued margin
and ROE improvements to be driven by: 1) improvement in its product mix
from volume products to higher-margin ‘value’ products; 2) operating
efficiencies driven by automated distribution centres (ADC); and 3) its
efforts in working capital optimisation. This should improve operating cash
flow and help re-rate the stock, in our view.
�� Increased investor awareness and comparability to Synnex. Synnex is a
leading distributor of IT products in Taiwan and the second-largest in China by
revenue; it also has a 23.9% stake in REDI (with two members on REDI’s
board). However, we think REDI has better revenue and net income growth
prospects than Synnex, on top of its higher ROE. Over time, we believe
investors will start comparing REDI with Synnex. This should help REDI rerate
to comparable multiples. Our target PE multiple for REDI is in line with
Synnex’s 2012E PE multiple.
Risks
�� A macroeconomic slowdown. We believe the key perceived risks for REDI
is in inventory write-downs and credit. However, we believe credit and
inventory risks will not materially impact P&L or ROE, similar to the last
credit crisis. During the peak of the credit crisis in FY09, REDI’s
inventory/credit provisioning peaked at 11/10bp compared to its five-year
average of 6/9bp.
— Credit risks. REDI provides credit to its channel partners and minimises
its risk in this area by: 1) accepting post-dated cheques from the channel
partners it provides credit to; and 2) having long-standing relationships
with its channel partners.
— Inventory write-down risks. IT distributors play a vital role in the IT
vendors’ go-to-market strategies. There are two large IT distributors in
India, with industry dynamics and historical precedence suggesting that
IT vendors provide inventory support to their distributors. Given REDI’s
2.6% EBITDA margin, we do not think inventory/credit provisioning
losses present a significant risk.
— A macroeconomic slowdown could hurt revenue growth. REDI’s
India/international business grew 6%/11% YoY in FY10 compared to its
FY07-11 YoY average of 15.3%/20.4%.
�� Exposure to the Middle East. REDI derives around 50% of its revenue
from the META region. Further political turbulence there could hurt REDI’s
revenue and profitability. While REDI has no exposure to the countries with
political turmoil, uncertainty could delay its entry into countries such as
Tunisia.
Valuation and basis for our price target
We use a comparable valuation approach and a target PE multiple to value
REDI. REDI has few directly comparable companies; global IT distributors and
those in the emerging markets trade at significantly different multiples due to
their different growth profiles and return ratios. IT distributors in the developed
markets are estimated to post a net income CAGR of 5% over FY11-13, while
those in the emerging markets will record a 20% CAGR.
Synnex is an IT distributor focused on the China and Taiwan markets (it is also
a major shareholder and strategic partner of REDI). We believe Synnex is a
meaningful comparable company for REDI.
Synnex is trading at 12x 2012E PE (December financial year-end). We value
REDI at 12.5x FY13E PE (March financial year-end, in line with Synnex’s
2012E PE multiple). This is supported by our estimates of 24% for consolidated
ROE, 29-30% for ex-cash ROE, and a 25% EPS CAGR over FY12-15. Our
valuation is in line with REDI’s 12.4x three-year historical average PE.
�� Redington India
Redington India is a leading IT distributor in India, the Middle East and Africa.
It derives around 50% of its revenue from India and the rest internationally. It
also has presence in the non-IT segments such as smartphones, consumer
durables and printers, with plans to enter the tablet PC space.
�� Statement of Risk
We believe Redington faces two key risks—the risk of inventory losses and
credit risk on its channel receivables. However, historically (and even during the
previous downturn), each of these risks were limited to 10-11bp of revenue, with
an average of 9.25bp/6.25bp.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Redington India
D istribution powerhouse [EXTRACT]
�� Initiate coverage with a Buy rating
Redington India (REDI) is a leading IT distributor with a presence in key highgrowth
emerging markets—it was the second-largest distributor in India and
Turkey, and the largest in the Middle East and Africa in terms of revenue in FY11.
REDI has also expanded beyond IT products; non-IT products contributed
14%/18% of revenue in FY10/11. We expect the company’s strong growth and
robust ROE to continue in this highly consolidated industry.
�� Smartphones, tablet PCs and new geographies should drive growth
REDI’s non-IT business recorded a 111%/28% revenue CAGR in India/the Middle
East over FY08-11 (IT business CAGR was 6%/21%). BlackBerry drove revenue
growth over the past two years in the non-IT segment, and REDI expects
smartphones and tablet PCs to drive growth in the future. It also plans to expand
Arena (Turkey’s second-largest IT distributor in terms of revenue, and in which it
has a stake) beyond Turkey and into the non-IT product segments.
�� High ROE and robust growth are underappreciated; potential re-rating
We believe REDI’s robust growth and high 29% core ROE in FY11 are
underappreciated by the market. We expect the share price to rise on improving
return ratios and strong revenue growth.
�� Valuation: Rs120.00 price target
We value REDI on 12.5x FY13E PE. This is supported by 24% consolidated ROE
and 29% ex-cash ROE in FY11, and our 25% EPS CAGR forecast over FY12-15.
Our PE multiple is in line with REDI’s three-year historical average, and in line
with Synnex Technology International’s (Synnex) 2012E PE
Investment Thesis
REDI is one of the top two IT distributors in India and the leading IT distributor
in the Middle East and Turkey. In November 2010, it acquired a 49.4% stake in
Arena, Turkey’s second-largest IT distributor. We believe REDI’s revenue and
earnings have risen due to the following.
�� Its presence in new markets. REDI entered the Middle East in 1997—it is
now the largest IT distributor in these regions in terms of revenue, larger
than the second- and third-largest companies combined. REDI is also the
only international IT distributor with presence in the Middle East-Turkey-
Africa (META) region after Tech Data’s (second-largest IT distributor
globally) exit from the Middle East in July 2007.
�� Strong distribution, which helps it enter new product categories and
establish leadership. REDI was originally a distributor of IT products. It
later entered the non-IT product segments (telecommunication and digital
lifestyle products as well as digital printers, which the company categorises
as non-IT), which have grown faster than IT products. Over FY08-11, its
IT/non-IT product segments posted a CAGR of 6%/111% in India and
21%/28% internationally.
�� Margin and ROE improvements. REDI’s India/international gross margins
have risen from 4.3%/4.6% to 5.5%/5.3% over FY07-11. Over the same
period, its consolidated EBITDA margin rose from 2.15% to 2.61%, while
core ROE (ex-cash ROE) increased from 23% to 29%.
�� Good management of working capital risks across business cycles; lower
working capital. IT distribution is a low-margin business. Thus, working
capital risk management is critical. During the peak of the credit crisis in
FY09, its inventory/credit provisioning peaked at 11/10bp compared to its
five-year average of 6/9bp. REDI’s working capital for India also improved
from 38 days of revenue in FY07 to 26 days in FY11. We expect this trend to
continue.
As a result of margin and working capital improvements, REDI’s core ROE has
increased from 23% in FY07 to 29% in FY11. We estimate this will rise to 35%
in FY16.
Our price target implies 15.9x/12.5x FY12/13E PE. Our target PE is in line with
its historical three-year average—we believe this is conservative given REDI’s
improving margin and return ratios as well as its stable earnings, which could
drive a stock re-rating.
Key catalysts
�� Growth in non-IT segments from telecom and tablet PC products. REDI
entered the non-IT product space in FY06. Over FY08-11, non-IT products
recorded a CAGR of 111%/28% in India/internationally, significantly above
IT products’ 6%/21%. We believe continued growth in smartphones (RIM’s
BlackBerry and others) will continue to drive its non-IT expansion (REDI
has distribution relationships with LG, Huawei and other smartphone
vendors). Tablet PCs (which REDI categorises as non-IT products) could
also drive rapid growth in the non-IT category as REDI has a distribution
relationship with Apple. Given REDI’s strong distribution network in India,
we believe other vendors will use REDI as one of their key distribution
partners.
�� Accelerated growth in IT products. Non-IT products have grown faster
than IT products and this is likely to continue. However, we think
government spending on IT products will reignite IT growth. REDI is
participating in various government tenders in partnership with other vendors
and system integrators. Our expectation of above-industry growth rates
factor into our IT revenue growth assumptions for the company.
�� Improved mix of higher-margin ‘value’ products in the international
segment). In META/India, higher-margin ‘value’ products contributed to
8%/30% of its revenue and 11%/50% of profit before tax in FY11. REDI has
a portfolio of 29 brands in META compared with 80 in India. In META,
REDI has a set up separate team focusing on adding lower-volume, highermargin
products (brands) to its portfolio, which it plans on expanding to 55-
60 products within the next two to three years.
�� Continued margin and ROE improvements. We expect continued margin
and ROE improvements to be driven by: 1) improvement in its product mix
from volume products to higher-margin ‘value’ products; 2) operating
efficiencies driven by automated distribution centres (ADC); and 3) its
efforts in working capital optimisation. This should improve operating cash
flow and help re-rate the stock, in our view.
�� Increased investor awareness and comparability to Synnex. Synnex is a
leading distributor of IT products in Taiwan and the second-largest in China by
revenue; it also has a 23.9% stake in REDI (with two members on REDI’s
board). However, we think REDI has better revenue and net income growth
prospects than Synnex, on top of its higher ROE. Over time, we believe
investors will start comparing REDI with Synnex. This should help REDI rerate
to comparable multiples. Our target PE multiple for REDI is in line with
Synnex’s 2012E PE multiple.
Risks
�� A macroeconomic slowdown. We believe the key perceived risks for REDI
is in inventory write-downs and credit. However, we believe credit and
inventory risks will not materially impact P&L or ROE, similar to the last
credit crisis. During the peak of the credit crisis in FY09, REDI’s
inventory/credit provisioning peaked at 11/10bp compared to its five-year
average of 6/9bp.
— Credit risks. REDI provides credit to its channel partners and minimises
its risk in this area by: 1) accepting post-dated cheques from the channel
partners it provides credit to; and 2) having long-standing relationships
with its channel partners.
— Inventory write-down risks. IT distributors play a vital role in the IT
vendors’ go-to-market strategies. There are two large IT distributors in
India, with industry dynamics and historical precedence suggesting that
IT vendors provide inventory support to their distributors. Given REDI’s
2.6% EBITDA margin, we do not think inventory/credit provisioning
losses present a significant risk.
— A macroeconomic slowdown could hurt revenue growth. REDI’s
India/international business grew 6%/11% YoY in FY10 compared to its
FY07-11 YoY average of 15.3%/20.4%.
�� Exposure to the Middle East. REDI derives around 50% of its revenue
from the META region. Further political turbulence there could hurt REDI’s
revenue and profitability. While REDI has no exposure to the countries with
political turmoil, uncertainty could delay its entry into countries such as
Tunisia.
Valuation and basis for our price target
We use a comparable valuation approach and a target PE multiple to value
REDI. REDI has few directly comparable companies; global IT distributors and
those in the emerging markets trade at significantly different multiples due to
their different growth profiles and return ratios. IT distributors in the developed
markets are estimated to post a net income CAGR of 5% over FY11-13, while
those in the emerging markets will record a 20% CAGR.
Synnex is an IT distributor focused on the China and Taiwan markets (it is also
a major shareholder and strategic partner of REDI). We believe Synnex is a
meaningful comparable company for REDI.
Synnex is trading at 12x 2012E PE (December financial year-end). We value
REDI at 12.5x FY13E PE (March financial year-end, in line with Synnex’s
2012E PE multiple). This is supported by our estimates of 24% for consolidated
ROE, 29-30% for ex-cash ROE, and a 25% EPS CAGR over FY12-15. Our
valuation is in line with REDI’s 12.4x three-year historical average PE.
�� Redington India
Redington India is a leading IT distributor in India, the Middle East and Africa.
It derives around 50% of its revenue from India and the rest internationally. It
also has presence in the non-IT segments such as smartphones, consumer
durables and printers, with plans to enter the tablet PC space.
�� Statement of Risk
We believe Redington faces two key risks—the risk of inventory losses and
credit risk on its channel receivables. However, historically (and even during the
previous downturn), each of these risks were limited to 10-11bp of revenue, with
an average of 9.25bp/6.25bp.
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