Redington India

Investors willing to bet on the strong domestic and Middle-East’s IT (hardware and software) adoption story can consider buying the shares of Redington India, a hardware, software products and digital products distributor. At Rs 192, the stock trades at 10 times its likely 2008-09 earnings.

In the absence of listed peers and its strong positioning in the domestic IT market, the stock is attractive at these levels. The stock has come down from 27 times its historic earnings in January this year to the current levels.

Redington is the distributor for a range of IT products such as personal computers, laptops, servers, networking products and packaged software. It has vendor relationships with all the major names in this segment such as HP, HCL Infosystems, Acer, IBM, Intel and Cisco. This segment contributes over 85 per cent of its revenues.

The company has also started distributing products such as mobile handsets of Nokia, Microsoft X-Box, Apple iPods, Mac and consumer electronic products.

Redington’s revenues have grown at a compounded annual rate of 39 percent over the three years to Rs 10,883 crore in 2007-08, while net profits grew at a CAGR of 47.5 per cent to Rs 136 crore. The business is reliant on volumes and offers wafer-thin margins.

Though they remain narrow, Redington’s net profit margins have improved (from 0.69 per cent to 1.25 percent in the last five years) due to the reselling of better margin products such as networking products, lifestyle gadgets and contributions from improved after-sales and post-warranty service.
IT Products drive growth

Redington generates 53 per cent of its revenues domestically, and the rest from South East Asia, West Asia and Africa. The company’s customer base is now at 14,458 corporate clients, spread across as many as 44 brands and caters to a wide range of sectors.

Players such as HP and HCL Infosystems, and Wipro that dominate the domestic PC market, have continued to have strong relationship with Redington, thus assuring it of sustained volume growth.

According to a recent IDC report, the domestic IT hardware market is set to grow at an annual rate of 14.6 per cent to Rs 96,558 crore by 2012, while the packaged software segment is set to grow at a rate of 20.9 per cent to Rs 21,129 crore, representing a huge opportunity for players such as Redington. Increased Governmental spending on IT-enablement across the country is another important growth driver for the company.

The prospects are especially good for the better margin laptops, which have outpaced desktops in terms of sales growth in India and West Asia. The growth prospects for West Asia and the African region are equally impressive for IT hardware and software.

Redington, with its relationship with all the big names in the IT business, would be well placed to tap this opportunity.

In addition to hardware, the company has begun to resell packaged software as well and has tied up with players such as Adobe to distribute their products in India. This could usher in better margins, as does the expansion into networking and data storage products.

The company has also diversified into distribution of non-IT products such as mobile handsets of Nokia in Africa and other digital and consumer electronic products across India and West Asia. This segment contributes less than 10 per cent of the current revenues and may serve as a good diversification strategy over the long run.
Services business and other ventures

Redington has also added to its offerings, high-end repair, warranty and post-warranty services. These are aimed at capturing annuity-based revenues, in addition to hardware sales. This apart, Redington has leveraged on its existing distribution network to venture into third-party logistics and has acquired spaces in Chennai, Delhi and Kolkata and Dubai.

This division already has a few clients and hopes to target manufacturing companies for transporting their goods to retailers/other distributors. The company has already automated its distribution centres and additional clients may help the company optimise costs by better utilisation of space.

Both these ventures are at a nascent stage and do have the potential to scale up in the future.

Earlier this year, the company also started its NBFC operations to finance its channel partners. The division has already disbursed around Rs 477 crore and has reported profits for 2007-08. Given the long association with channel partners, Redington would be well aware of the credit quality of its borrowers, reducing the risk of default.
Risks

Competition from other bulk distributors such as Ingram Micro and Synnex Corporation is a threat. The company’s interest costs are going up. But the interest coverage has improved in 2007-08 compared to the previous fiscal (2.5 times compared to 2 times).

But in the light of the high interest rate scenario, maintaining effective working capital management could be a challenge.