Redington India : Strong Performance history, re-rating candidate


(Kumar Saurabh) #1

Company Background
Redington is a leading distributor of IT and non-IT products in India and Middle East.
It has progressively evolved from a single-product distribution company to an
integrated supply chains solution provider with capabilities across distribution,
logistics and after sales services. It services 100+ brands in India with channel
strength of 30,000+ partners and 88 warehouses. In the Middle East, Turkey and
Africa (META) region it services 80+ brands with channel strength of 11,000
partners with 22 warehouses. Geography wise, Redington derives 59% of revenues
from the overseas region, while 77% of the total revenues are from the distribution of
IT products.

Redington (India) Ltd. (Redington), which commenced operations in
1993 as a single product distributor has now evolved into an
integrated supply chain solutions provider. As of 2015, it is the
second largest distributor of IT and non-IT products in India. It has a
diversified product portfolio across 170+ brands in different
categories, with a strong distribution network spread across India,
South Asia, Middle East, Africa & Turkey supported with adequate
warehousing facilities.

Particulars 2014–15 2013–14 2012–13 2011–12 2010–11 2009–10 2008–09 2007–08 2006–07 CAGR
Total Revenue 31,622.67 28,005.09 24,210.38 21,222.02 16,722.66 13,277.65 12,375.99 10,542.53 8,853.90 17%
EBITDA 761.89 719.61 684.20 633.40 471.65 365.72 329.57 259.04 198.47 18%
PBT 555.46 485.11 462.41 450.33 351.00 275.92 219.02 177.06 127.25 20%
PAT @ 386.53 336.65 323.11 292.74 226.00 184.33 159.66 136.07 101.70 18%
Networth 2,374.17 2,021.29 1,640.68 1,322.48 1,255.32 1,075.72 1,002.20 721.49 625.61
Capital Employed 4,446.83 3,993.84 3,947.11 3,477.61 3,186.28 2,464.57 2,226.51 1,505.44 1,226.88
EBITDA / Revenue 2.41% 2.57% 2.83% 2.98% 2.82% 2.75% 2.66% 2.46% 2.19%
PAT / Revenue 1.22% 1.20% 1.33% 1.38% 1.35% 1.39% 1.29% 1.29% 1.12%
Return on Average
Capital Employed* 17.22% 17.23% 17.69% 18.44% 16.01% 14.59% 17.23% 18.86% 18.19%

Redington India
FY15 R: Rs 31,555 crores
Segment
India R: ₹12,937
crore RS: 41%
Overseas R: ₹18,617
crore RS: 59%
Middle
East RS:
~68%
Africa RS:
~8%
Turkey RS: ~19%
Others RS: ~5%
Geography Distribution Strength
IT R: ₹24,297
crore RS: 77%
Non- IT R: ₹6627
crore RS: 21%
Services R: ₹631
crore RS: 2%
India Overseas
Brands: 100+ Channel Partners:
30,428 Warehouses: 88
Service Centers:
70
Brands: 80+ Channel Partners:
11,000 No. of countries:
21Warehouses: 22
Service Centers:
30

Key Investment Highlights
 Leading distributor of IT and non-IT products
Redington’s revenues have grown at a 5 year CAGR of 18% to ₹31,555 crore driven
by consistent expansion in scope of operations through product and brand additions
and expansion to new geographies. The management has indicated that it will
continue to tap new verticals, product categories and geographies to fuel growth. We
expect Redington to clock a 2 year revenue CAGR of 15% to ₹41,524 crore in FY17
driven by:
 10% CAGR in the IT distribution segment on the back of steady demand for
laptops
 29% CAGR in the non-IT distribution segment driven by the rapidly increasing
demand for smart phones

In India, the IT distribution space is dominated by Ingram Micro and Redington,
which together account for ~70% of the total industry. The remaining players are
relatively small in size and lack pan-India distribution network. In Middle East too,
Redington Gulf FZE, the wholly owned subsidiary of Redington, is the largest player
in the IT distribution space.

a research report

I have done a basic DCF valuation. Please let me know how to attach excel.

The strengths I see in the business:

  1. Strong historical performance
  2. Market Leader
  3. Growth Options in few business segments
  4. Reducing debt leading to lower interest and hence better PAT margin
  5. Ability to grow without leveraging
  6. 13 Rs cash per share on books
  7. Benefit from e-commerce and GST (still not able to understand e-coommerce part, please check management address in annual report 20125)
  8. Local and assembled players falling market share
  9. Management guidance on loan reduction, using cash for capex for future growth
  10. 20% profit sharing as dividend
  11. No equity dilution in last 5 years

Risk:

  1. Working capital management is key to business and any issues with have strong impact on profit
  2. Middle east countries performance due to oil and terrorism
  3. Not sure but e-commerce may have some negative impact though management says it is favorable
  4. Apple opening its own stores for certain product lines
  5. Stagnant PC and desktop market

Currently trading at Rs 100, approx. 9.5 P/E


(yembee) #2

Great Pick Looks Good


(Kumar Saurabh) #3

HI yembee, What website you are using in the above figure?


(yembee) #4

I have an access stencil connected to excel data… which can perform these sort of calculations…

Input : Few years ( preferably more than 5 years ) Sales / Profit
Number of Public Shareholding
Percentage of Public Shareholding
Equity Capital
Current and Historical EOD Price

Remaining all parameters such as PE , EPS Profit Margins , Growth Earning estimate all can be calculated


(yembee) #5

Similar one stencil is there in Edelweiss :
https://www.edelweiss.in/tools/whatif.aspx


(Kumar Saurabh) #6

Thanks. Good to have tool but hope they would have given what if flexibility on balance shet and cashflow side also. Like for this company, I expect the long term loans and interest to com down which will improve PAT margin. but great quick analysis tool. Does stencil provide all the flexibility for whatif scenario? what are the charges?


(yembee) #7

I have formulated such that the Human Judgement will have a place… The stencil has Correction coefficients on PE rerating , Margin Expansion and Topline Growth… As knowledge expands the stencil also can be tweaked.

Like EPS there is one DPS ( Debt per share ) 3Yr to Current debt indicator to know debt is shrinking or expanding …


(aashish2137) #8

How much does Redington exactly derive from Apple’s sales in India and Middle East? Can we know this? A friend working closely with Redington said the sales team is spooked because they will lose Apple’s business altogether.


(Kumar Saurabh) #9

Yes, Asshish, That is a risk as apple is sizable with almost 20% share. The bigger risk is , this account has given 50% growth as traditional players HP,Dell are suffering. So, it puts a question not only on current revenue but also pace of future revenue growth rate


(Kumar Saurabh) #10

But can you find if this is with all apple business or only a part of it? Also, any idea why Applle being a product company, wants to get into its own distribution. This is a very low margin, working capital excellence business if i am not wrong


(aashish2137) #11

From what I’ve read, India is the fastest growing market for all smartphone makers and Apple wants to make the most of it. Besides Apple’s margins on its products are large and I believe they’re trying to maximize it. Their brand is suitably built and it only looks logical to take control of the supplies instead of going through resuppliers.


(weblinsolutions) #12

Apple is planning to open the stores here directly. Wouldn’t that affect Redington?


(nabilmoideen) #13

I work here in Middle East in IT. I can tell you that the IT market here is having tight competition & not much opportunity to scale up their operations.

Just a Heads Up to all.

Disc: Dont own or follow Redington.


(Bheeshma Sanghani, PhD) #14

Redington is a good buy at the current levels only if it manages to grow its sales. Historically, Its been a great business that has been growing at 14% & even if it grows at half that pace & margins remain stable it will certainly make a lot of money for its investors. I think its priced slightly below its fair value currently thats why i would stay away. Its not a compelling bargain. But otherwise its great.

Disc - dont hold


(valuehunt) #15

I have invested in this, but after that saw some not so positive developments. Morgan Stanley sold, one director resigned, promoters continued to sell. Any idea if everything is fine?


(aadhar.aggarwal) #16

We do not have any reasons for Morgan Stanley selling. Also, we do not have any reasons for the resignation of the non executive director.

What I am really worried about is that why is the promoter continuing to sell. The promoter is already not involved in the day to day running of the company. And he has been reducing equity consistently over the past few years.

Now the company is being run by professional managers.

Disclosure: Not invested.


(Kumar Saurabh) #17

I started this thread when i started learning basics of investment finance. Over last 6 months, few things, I realized about Redington, it is a highly working capital intensive and capex intensive business which does not generated enough free cash flow. Also, the stagnancy in PC market, being a commodity business, does make life interestig. So, the stock is out of my interest list. GST may have a positive impact on this company. However, WC intensive and CAPEX nature leading to -ve FCF does not make it worth inspecting further for me.


(valuehunt) #18

One positive news that i came across last week which was small confidence booster is that Standard Chartered private equity increased its stake in company. Seems like its initial buy was in 2014 at around 90 Rs. This with existing synnex strategic investment seems to be telling me that there may not be too many unknown behind screen issues. Beyond that as @suru27 mentioned , company inherently seems to be capital intensive. However, it appears to be doing well in its core business, the recent news being distribution of pixel phone of google, may not be necessarily big.I feel that this along with pure consumption and GST positives of country should give reasonable returns at current valuation.


(Alphin) #19

I saw iPhone 7 ads showing Reddington as distributor.


(Kumar Saurabh) #20

One more thing which may help this stock is fall in interest rate as they are both working capital n capex heavy , so, any fall in interest rate will ve a good impact on cash profit margins. However, this does not look a growth story by any means n no wonder valuations understand that . No expecting major surprises apart from GST n interest rate benefits