After its listing, Redington has seen quite a run this year. Operating in the IT sector the company, along with Ingram Micro, controls around 70% of the domestic IT distribution market, which includes selling package software, hardware and peripherals. And this market is slated to grow at a 20% rate and is expected to maintain this pace as India expands its IT infrastructure.
So for a low margin company (around 2.5% operating margins) volume growth creates the opportunity to impact its profitability. Redington is well placed to gain from these volume surges. It has an extensive distribution network in India and also in the Middle East and Africa. But it is the nature of its business, where the company buys out products from its vendors with cash and carries the inventory on its books and customers gain from the credit that makes it risky. However, here analysts point out that the credit management system of the company has been impeccable with around 0.09% of sales in India and 0.03% of sales in the Middle East rendered bad. And the company intends to acquire an NBFC to augment its credit offerings. This is expected to boost margins and even create a strong entry barrier for competition.
The company also has plans to diversify into other verticals as a slowdown in the IT sector could directly impact its revenue growth. It will also be looking at verticals which are not as ‘working-capital’ intensive as the current line of business, reckon analysts. It can ride on the existing distribution network to roll out new lines, and this would mean lower fixed costs in creating new infrastructure. It has been trading at the higher spectrum of valuation, and this is because of the expected volume growth that investors are looking.
Source : Finance Express dated, 25th Dec 2007