Redington India : Strong Performance history, re-rating candidate

My calculation when Mcap was 7000cr odd.
They have done PAT of 750crs. Interest Payments 150cr. Debt free moving forward, make it 900cr. With growth phase coming up after last 5-8 years of restructuring and consolidation, can expect a PAT of 1200cr. Discount by 10% wacc also, you get 12000cr, add back cash 3000cr, gives you 15000crs mcap.

Still at a discount to be honest.

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Redington-Board Meeting for Bonus Shares.pdf (546.8 KB)

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Moreover, if decision of Bonus Shares,if any, is announced on 7th, that will be the first instance of Bonus by Redington since it’s IPO in 2007.
Redington has maintained revenue CAGR of 14.7% and profit CAGR of 13.3%. It also maintained a constant dividend payout of 20.0% of annual consolidated profits.

Bonus approved at 1:1 ratio with record date of 20th August and record date of dividends advanced to 19th July 2021.
Poised for another good quarter and the bonus shares to aid in improving liquidity / free float. Market seems to like the news - share price up by more than 5% today.
Bonus announcement
Dividend announcement

Also note the improvement in credit rating from AA Stable to AA Positive by both Crisil and ICRA.

Interesting observation from Crisil’s report :" The company is expected to sustain revenue growth over the medium term, supported by its solid market position in the IT and mobility products distribution businesses, improving product basket and increasing geographical diversification. Operating margins improved sharply to 2.43% (compared to 1.95% during fiscal 2020), driven by higher gross margins and better leverage of fixed expenses. REDIL’s operating margins are expected to remain range bound at almost similar levels over the medium term.
During fiscal 2021, REDIL generated net cash accruals of Rs463 crore post adjustments for dividend outflow of Rs.472 crores, higher than Rs 330 crore during fiscal 2020. REDIL’s cash accruals are expected to improve to over Rs. 600 crore over the medium term driven by healthy business performance, and a prudent dividend policy. REDIL does not have any long term debt on its balance sheet, nor is expected to raise any long term debt in the near term, given only modest annual maintenance capex spend of about Rs.50-75 crore. REDIL is expected to maintain liquid cash surplus of Rs 1000-1200 crore over the medium term."

Read the full report here.

AJ
Disclosure: Invested.

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After glancing through this thread, this company sure looks interesting though when I checked for insider activity, turns out there has been a lot of selling recently.
Anybody who has been researching this company in detail, do let know what to make of it?

Had a couple of doubts in the points you had mentioned there:

  1. NPM at 1.5% - A lot of the improvement in NPM is due to better working capital management. Now, that was aided a lot by inventory shortage, credit period by vendors etc., it could so easily go back to the 1-1.2% range as we don’t know how much is sticky. Mgmt also has indicated that WC is set to go up. How are you thinking about it? (Past 5 year CAGR excluding 2021 on PAT is just 5%

  2. Debt reduction has also occurred at Short Term Borrowings which are primarily used for WC management. Again, I don’t think its a structural improvement in business, and this will go up as situation normalizes. Don’t you think so

Yes I also think about your risk factors SLNo 4 & 5 it may not fully adverse on their business whatever it may be you gave a good note on the business I am also positive like you on this scrip.
Thank you.

Q1FY22 Key Highlights

  • Revenue grew by 26%, EBITDA grew by 58%, PAT grew by 167%
  • WC days -18 days
  • ROCE is 52.2% and ROE is 18.8%
  • Worldwide PC shipments grew 13% in Q1FY22 over Q1FY21 whereas we grew 35%
  • Enterprise business has been sluggish but has high potential. Going forth Double digit with cloud growing faster
  • Cloud business grew by 60% YoY in Q1FY22. The cloud industry expects to grow at about ~25%
  • Ebidta - 2.7% (expect it to be in the range of 2.5 to 2.6% in future)
  • Proconnect 36% revenue growth Revenue-110 cr. topline & PAT - 1.9cr(finally in the green) . Company is Doubling down on warehouse management services and investing in technology & systems.
  • GM have improved because of better inventory management (thus having less items to sell at discount)
  • Supply challenge with regards to Apple but we are getting more than competition.

My take I think Redington is a simple but clearly misunderstood business. Most market participants think of it as a mere distributor of consumer electronics and are worried about the business model becoming obsolete. They think most vendors would eventually just sell directly to Amazon. Also I feel they expect the current high growth to taper off once Work from home turns to Work from office. This is reflected in the valuation. However they have grown way faster than the industry growth and theres a place for them along with Amazon. Proconnect and cloud services though small right now have immense potential
For a Debt free company with a ROCE of 52% stock trades at PE of 14x. I feel the company will have to demonstrate it can grow Profits at 20% plus in a consistent and predictable manner for market to be convinced and then maybe re-rating can happen. Fingers crossed

Disc: Invested

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Results are out and rocking !

disc: invested

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Looks like something really big is brewing at Redington! Have a look at the weekly volume breakout - this kind of volumes are not seen ever in this share.


Disclosure: Invested and assume my views are biased.

Happy Makara Sankranthi!
AJ

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Bodes well for Redington…

image

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Redington Results as anticipated is excellent.
Currently, Marketcap < Sales.

Disc:invested

Financial Summary - EPS has doubled YoY. Also, check out the ROCE.

Disc:Invested

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A very rosy picture given the boom times (Sales of tech products are at all time high given festive season just ended - Diwali / Christmas) and markets are sky rocketing across the world - allowing people make more impulse and planned purchases (better affordability). In addition, WFH trend is enabling a lot of positivity across the world given no matter what industry, a camera / microphone / laptop / good phone is always needed for ability to work from home or just work remotely - not just from home.

A counter argument to WFH could be, even offices buy equipment, in fact they have more stringent obsoletion policies (renewed laptops once every 4-5 years for modern offices) as compared to individuals (Individuals might go longer with their devices and replace when its really required).

All this said, its very difficult to ascertain from numbers alone the growth path.

See screenshot (data source: screener.in)

In past 11 years, this business has seen more troughs than peaks.

E.g. Operating Profit growth during years ending Mar 13 - Mar 15 and then during years ending Mar 17 and Mar 18.

From limited analysis of numbers, I reckon all in all this is a cyclical business. There are downs when companies and individuals do not spend much on IT equipment and then there are times when obsoletion comes in picture, there’s too much money in the ecosystem, consumerism takes its heights and companies are on capex cycles.

If anything, I would want to buy this business for the long haul (say 15-20 years) assuming direct distribution (non online) is not going anywhere at least for the next couple of decades, but I would want to buy it during the bust cycles, when Mr. Market really punishes the valuations due to a trough in expense cycle of individuals / companies.

As for valuations:

  • With current numbers in mind Positive FCF of 296 Crores for 9MFY22, simple extrapolation to ~400 Crores of annual FCF, at market cap of 12717 Crores, this business is yielding 3.14% annually in cash.
  • One could get more than ~5% in annualised yield from Fixed Deposits. Considering 10 year GSEC rate of 6.8% as of 9 Feb 2022, the Free Cash yield at which this business is available is not at all appealing.

With good times (high sales, too much positivity) if the cash generation is not so exciting, I don’t think this is a candidate for re-rating (Reserve my right to be wrong).

Lastly, this is not my holding, I have been tracking developments for a while as I came across Redington when I purchased by Asus Router and have been seeing their sales/customer care office in my hometown with too many cartons of products always lying on the outside.

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Redington attempting a box breakout here. Watching to see if it shoots above ATH 179.2

Disc:Invested

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This is what i am seeing on the Redington chart:

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what is with the huge downmove since past 2 days…?

who is this investor buying at lower levels? Also stock strongly rebounding after last day’s closing low of 138.

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I am not sure which numbers you are referring, but FCF prev annum is about 3000 cr.

Sales and PAT are increasing continuously, though OPM & NPM are pretty much stagnant and increment in PAT is due to debt reduction.

ROCE, Inventory days, cash conversion cycle and working capital are also improved tremendously in previous few quarters, which seems a good sign for a capital intensive business like this.

As for the valuations, Mcap is almost 1/5th of the total sales. TTM P/E is about 9.5X which is below the global peers which generally trade at about 13-15X. EV/EBITDA also looks good at about 5.

In my opinion, fair value should be between 14000 Cr to 16000 Cr. Mcap.

Disc. - Invested

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ok, @Deep_Sukhwani is right about 9MFY22 FCF. It is 296Cr. It’s mentioned in the last con call.

1 thing I didn’t understand. How working capitol days last quarter would affect FCF this quarter as mentioned in the commentary?

Edit -
It is due to decrease in mobility business. As their sales have decreased, the inventory has increased, resulting into decrease in FCF.