News Room

2012

29 / Sep

Redington India: Buy

 Well-entrenched partnerships with major technology vendors and an expanding product line have helped the company cater to demand.

The demand for information technology (IT) products such as desktops, laptops and printers continues to grow at a sedate pace in the developed markets. But in India, many countries in West Asia, and most parts of the African continent, there has been a rapid off-take of IT products as well as digital devices such as smartphones and tablets.

Redington India, one of the largest distributors of IT and digital lifestyle products in these regions, is well-positioned to take advantage of this trend. The company has managed good growth despite the global economic challenges that have affected these markets too.

Strong and well-entrenched partnerships with leading technology vendors and an expanding product line to include fast moving consumer goods such as mobile phones have ensured that the company has been able to ride the demand cycle welll.

At Rs 78, the Redington India stock trades at nine times its likely FY13 per share earnings, much lower than its historic double-digit valuations. This presents an attractive entry point for investors, especially in the light of the company’s growth rates and prospects.

In FY-12, Redington's revenues rose by around 27 per cent over the previous fiscal to Rs 21,222 crore, while net profits grew by almost 30 per cent to Rs 292.7 crore.

By increasing focus on distribution of high-margin products, the company has seen its operating margin (to nearly 3 per cent) and net margin (to 1.4 per cent) improve steadily over the past few years.

PENETRATING KEY MARKETS

Redington derives over 53 per cent of its revenues from overseas geographies, mostly from the MEA (West Asia and Africa) region. The rest of the sales is generated from India. This blend has allowed the company to be reasonably insulated from the vagaries of a depreciating rupee. Both the regions have grown at a healthy pace. The overseas geographies witnessed a 31.8 per cent growth in revenues. Despite the slowdown in India, Redington’s domestic growth was healthy at around 22 per cent in 2011-12.

With the Government announcing various policy measures in recent times and the US announcing further quantitative easing, the rupee is expected to appreciate against the dollar.

The demand for IT products such as computers, servers and networking devices continues to be quite robust in the company’s markets.

A recent report by research firm IDC states that, despite the economic volatility, IT spending in India will grow by 16.3 per cent to $43.6 billion in 2012.

Also, according to a recent report by industry research firm Gartner, PC shipments in India are expected to reach 12.5 million units in 2012, a 17 percent increase from 2011.

The growth has been led by the government, as it strives for efficiency in areas such as e-governance, financial services, power reforms, and in projects such as the delivery of unique identity (UID).

System integration players such as Wipro Infotech and CMC are witnessing demand in projects, such as IT enabling of state and central departments.

This, in turn, should benefit distributors of IT products such as Redington.

In West Asia and Africa, despite the political turmoil, there has not been any significant disruption of the company’s business. This is thanks to Redington's major operations being in the UAE, Saudi Arabia and Qatar, as well as stable African countries.

Many software companies such as Mahindra Satyam, Wipro and TCS are mining this region for expanding their client base, which is indicative of its potential for IT and technology related products and services.

Apart from corporates, Redington also has significant relationships with large retailers both in India and the MEA region.

STRONG PARTNERSHIPS

For IT hardware and software products distribution, Redington has tied up with several global players such as HP, IBM, Oracle, Cisco and Hitachi. Its top partner for both server shipments and personal computers — HP — continues to be a stable player with reasonably strong share in shipments.

With cloud computing and big-data management being talked about as the next important technology wave, Redington has tied up with EMC, a leading player in this space, for distributing the latter’s storage products.

Personal computer shipments, especially of high-margin laptops, continue to be robust for many of Redington's clients.

For digital lifestyle products such as mobile phones, Nokia is a key client of Redington. But while Nokia has been losing its market share in developed markets due to low market share in smartphones, there has been limited slippage in demand for medium to low-end phones in emerging markets such as India, where Nokia continues to be strongly placed.

Redington has also tied up with players such as Samsung, Apple and RIM (Blackberry). Again, even as it faces challenges in developed markets, Blackberry continues to experience interest in India. Also, distribution of Apple products (tablets, etc.) should aid Redington’s high-margin products business.

Technology products distribution is a margin-sensitive business. Pricing pressure due to competition from large players such as Ingram Micro, Tech Data and Synnex could affect Redington’s margins.

Source:Business Line