Redington India: Buy

In India, many countries in West Asia, and most parts of the African continent, there has been a rapid offtake of IT products such as desktops, laptops, servers and routers as well as digital devices such as smart phones 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, given its entrenched presence especially in India and West Asia.

The stock has corrected significantly as Blackberry, one of its key products in India, has witnessed declining fortunes. Redington is trying to compensate by increasing focus on the more successful Samsung and Apple range of smart phones in India.

The concerns over increase in interest costs on dollar denominated debt too dragged the stock. The company has refinanced its debt at lower rates (reduced interest by 200 basis points). Its interest cover, at nearly four times, should allow it to service the interest on debt comfortably.

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

At Rs 50, the Redington India stock trades at six times its likely FY14 per share earnings, much lower than its historical valuations of 10-11 times. This presents an attractive entry point for investors, in light of the company’s growth prospects.

In FY13, Redington’s revenues rose by around 14 per cent over the previous fiscal to Rs 24,210 crore, while net profits grew 10.4 per cent to Rs 323 crore.

Steady across geographies

Redington derives over 55 per cent of its revenues from overseas geographies, mostly from West Asia and Africa This has allowed the company to be reasonably insulated from the vagaries of a depreciating rupee.

Both the domestic and overseas markets have grown at a healthy pace. But given the general slowdown in the Indian economy, overseas revenues have witnessed stronger growth. The demand for IT products such as computers, servers and networking devices remains robust in the company’s markets. A recent report by the research firm IDC states that, despite the economic weakness, IT spending in India will grow 12.4 per cent from $38.4 billion in 2013 to $44.8 billion in 2014. Recent industry reports also indicate that PC shipments have revived in the recent quarters.

Segments such as healthcare, utilities and education are expected to lead the growth. Along with SMEs, the government is also expected to be a big spender 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). 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 in 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 and TCS are mining this region to expand their client base. This is indicative of its potential for IT and technology-related products and services. Apart from corporates, Redington also has strong relationships with large retailers in India, West Asia and Africa.

Global Tie-UPS

For IT hardware and software products distribution, Redington has tied up with several global players such as HP, Dell, IBM, Oracle, Cisco and Hitachi.

Its top partner for both server shipments and personal computers — HP — continues to face competition from Dell on the PC front, but Redington has enhanced its partnership with the latter too in recent times.

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, to distribute 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.

While Nokia has been losing its market share in developed markets 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 the developed markets, Blackberry continues to see interest in India. The distribution of Apple products such as tablets should aid Redington’s high-margin products business.

Risks

The distribution of technology products 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.

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