Redington (India) Ltd shares have rallied 30% from September lows after the technology and hardware equipment distributor decided to sell an at least 90% stake in its non-banking finance subsidiary—Easyaccess Financial Services—and on expectations that strong growth in AppleiPhone sales will offset sluggish revenue growth for information technology (IT) products.
The sale of Easyaccess to the promoter at a price-to-book ratio of around one will help the company raise around Rs.280 crore, which could be used to retire debt, make strategic acquisitions or buy back shares. The stake sale is expected to be completed by March. Getting rid of the non-core non-banking finance company business will wipe out a major overhang on the stock, according to an analyst from a leading brokerage firm who did not want to be named. The stake sale will lower the debt-to-equity ratio to 0.6 in FY14 from 0.9 in FY13.
Strong revenues from the smartphone business will offset shrinking revenue in theBlackBerrybusiness, which, however, makes up less than 4% of India sales.Standard Chartered, in a research note dated 20 November, raised its FY14 and FY15 Apple revenue estimates by 18% and 33%, respectively, given the iPhone 5c and 5s launches in November and also revised down Blackberry revenue growth by 16% and 32% year-on-year.
The IT business, which contributes around 80% of the revenue, remains sluggish as companies are deferring capital expenditure on technology because of the slowdown, which is why brokerages have not upgraded the overall revenue growth. Standard Chartered expects revenue growth of 12% in FY14, slightly lower than FY13.
Redington is also expected to gain from a pick-up in distribution ofSamsung smartphones in the Middle East and Africa, which will aid overseas revenue growth.
The company reported better-than-expected results in the September quarter with consolidated net sales rising 14% year-on-year, slightly better than the previous quarter. Although net profit growth remained tepid, up 4% year-on-year, operating profit margins improved sequentially, up 2.4% on the back of lower advertisement spending. The stock is trading at 8 times FY14 earnings and investors are waiting to see strong growth in the smartphones business.