Redington India

Investors with a two-year horizon may buy the shares of Redington India, an IT hardware and software distributor.

The company has potential for scaling up its sales in high growth markets of India, West Asia and Europe, even in a slowing global economy. Given the sharp rise in markets, investors may consider buying the stocks in a phased manner to capitalise on declines linked to broader markets. At Rs 230, the stock trades at 10 times its likely 2009-10 per share earnings.

In the recent March quarter, Redington’s revenues grew by 7.7 per cent over the same period in 2008, while net profits grew by 18.3 per cent over the same period.

Improving trends in IT hardware shipments, diversification from sales of electronic goods, and expanding after-sales services offer scope for revenue growth, while helping margin expansion. After two successive quarters of decline in hardware shipments around the world, sales growth is just starting to revive in the March quarter, especially in India, West Asian and African regions.

According to a recent IDC report, personal computer shipments in India have increased by 7 per cent sequentially in the recent March quarter. Further, hardware and software sales are likely to be to the tune of Rs 63,703 crore (7.1 per cent growth over 2008) and Rs 11,300 crore (17.4 per cent growth) in 2009.

This is expected to be led by Government spending on IT enablement, especially in schools and colleges, e-governance projects, and banking sectors. With the new Government in place, a continuity of policies is expected in these areas.

IDC pegs the Middle-East and African IT markets to be worth $80 billion by 2012, up from $51 billion in 2008. Other research agencies such as TPI also point out the increasing average contract values in the West Asian region.

Redington with a near 50-50 revenue split between India and the EMEA region, given its partnership with all global majors in the IT hardware and packaged software space, appears well placed to capture a substantial share of the pie.

The company has also diversified into selling non-IT products such as cameras, consumer-durables, and mobile-phones. Redington has tied up with Nokia to distribute the latter’s mobile phones in Africa. Given the relatively under-penetrated African market and the interest shown by several operators such as Bharti Airtel, Vodafone and several Chinese operators in having a larger footprint there, this partnership could be quite fruitful to the company.

Redington also has also started a chain of after-sales service and repair centres to capture revenues from services as well.

Competition from well-entrenched distributors such as Ingram Micro and the resulting pricing pressure is a key risk to this recommendation. Given the capital intensive nature of business, interest costs have increased by 35.8 per cent for the company in 2008-09, but due to margin expansion, the interest cover has been stable.