Redington India:: In-line Q2, strong growth outlook for H2:: Nomura

Redington’s Q2 results were broadly in line with our estimates at the
EBITDA level, but the key positive that emerged from the conference call
was a solid outlook of “12-15%” growth at the consolidated level for
FY13 (we are building in 11.9% for FY13F currently). Management’s
guidance, implies significant growth in the ~35-40% range in H2FY12F
for the India business, driven mainly by: 1) iPhone sign up with Apple,
where it expects to do ~INR11,000mn in the second half; 2) a pickup in
government orders (has a UID-Aadhar project in Q3 which will get
executed over the next 2-3 quarters) in the IT business; and 3) a pickup
in the Blackberry business, boosted by the launch of Blackberry 10 in
January 2013.

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Results broadly in line at the EBITDA level, top-line beat
 Consolidated sales at INR58,597mn (y-y growth of 12.9%) were 7%
ahead of our expectation driven by solid ~21% growth in the overseas
business (constant currency growth of 9%), the result of strong
performances at Lenovo, Toshiba and Acer in the Middle Eastern
markets. This offset a muted top line in the India business which
declined by 3.9% in the quarter (while the IT business grew at 2%,
non-IT declined by 16% owing to a 40% decline in Blackberry sales.
 EBITDA including other income (which is a better metric than EBITDA
before other income, in our view, as other income includes discounts
that Redington gets from vendors) was INR1553mn, in line with our
expectation of INR1575mn. EBITDA margin at 2.65% was lower than
our expectation of 2.85% owing to relatively lower margins in the India
business (we believe the miss was owing to a decline in the highermargin
Blackberry business).
 Profit before tax at INR1014mn was in line with our estimate of
INR1019mn.
 Net income at INR729mn was ahead of our expectation of INR66.7mn
primarily owing to a lower tax rate of 23.8% vs our expectation of 30%.
Strong growth outlook for the second half, management confident
of a significant contribution from Apple iPhone sales
We are currently at the lower end of management guidance of 12-15%
sales growth for FY13, which would imply 14-20% growth in H2 (H1FY13
sales growth was 10.3% y-y). Management has indicated that India’s
contribution in H2 will be ~52% versus ~46% in H1. In our view,
management is suggesting a significant pickup in growth in the India
business in the second half (implied growth of~35-40%) driven by:
 Incremental contribution of ~INR11000mn from Apple in the next 5
months owing to the addition of iPhone (~35-40% of its distribution
agreement with Redington). While this is lower margin than
Blackberry, returns are expected to be higher on account of low
working capital days ( receivable days are around 15 while they get a
credit of around 30 days). This essentially suggests that they the

company expects the ex-Apple business in India to growth between
11-18%.
 Blackberry sales per month picked up from a run-rate of 60-70K in Q2
as per management to 80-90K in October. Management is also
positive about an expected substantial pick up post the Blackberry 10
launch in January 2013. This, we believe, could mean that the decline
will taper off in the second half (ex of a big pickup in sales post
Blackberry 10, current run-rate would suggest a decline of ~18%)
 Management indicated that they have a large UID-Aadhar project in
Q3 which will get executed over the next 2-3 quarters and should
benefit the IT business. We expect the IT business to grow at 15%+ in
2HFY13F.
 The implied growth rate for the international business for 2HFY12F is
in the range of -3% to 2%, to which we see upside potential given that
the Samsung sales ramp up will be visible in the second half plus
Redington has witnessed solid momentum in the Middle Eastern
business on the back of strong performances at Lenovo, Toshiba and
Acer.
Improvement in working capital, FCF, expect net debt to decline or
stabilize
We estimate that working capital days came down by at least 2 days to
~44 days in 1HFY13 versus 1HFY12, driven primarily by a decrease in
receivable days by around 11 days. Free cash flow improved
significantly in 1HFY13 as it was negative INR340mn versus negative
INR2490mn in 1HFY12. Management guided for net debt to come down
or stabilize at ~INR17000mn (current level at INR18260mn, translates to
a net debt/equity of ~1.23x; we are expecting this to come down to
~INR15127mn by end-FY13F).
Expect the stock to react positively as we foresee at least midsingle-
digit upgrades in consensus EPS estimates
We believe that on the back of these numbers, consensus EPS FY13F
estimates will likely move up by ~5% and inch towards our estimates,
which are currently slightly higher than consensus.
Reiterate Buy on India’s largest distributor of IT and electronics
products
We reiterate our Buy rating on India’s largest distributor of IT and
electronic products. In our view, the potential of the Indian market should
be seen in the context of a doubling of the middle-class population in the
next 10 years (source: Dell), which is likely to mean increasing average
disposable income and should drive IT/electronic penetration rates in
India. The company has end-to-end coverage of the distribution value
chain (procurement, warehousing, non-banking financial corporation’s
[NBFC] and after-sales services). It has impressive 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 we
consider key to success in the distribution business. Average provisions
for inventory and receivables were 0.04% and 0.1% over FY08-FY12 for
India and overseas business over the same period, respectively. The
current valuation at 7.1x FY14F EPS (8.95x FY13F EPS) is a 39%
discount (23% discount on FY13F) to its discount to its six-year average
of 11.7x and is an attractive entry point, in our view.