Rising IT spend, iPad, smartphone sales lifting Redington fortunes

Redington India Ltd, one of the leading distributors of IT hardware and software products in India, is expected to benefit from the resurgence in IT spend by corporates and higher growth in non-IT products such as smartphones and iPads.

Business: Redington along with its subsidiaries is in the business of providing end-to-end supply chain management of IT and non-IT products in India and abroad. The company is a distributor for a range of IT products, such as networking, storage and enterprise products, as well as servers and software solutions. Since 2004 it has also started distributing non-IT related products that include digital lifestyle, telecom, digital printing and consumer electronics. In addition, the company provides infrastructure management, remote service management, facility management outsourcing, third-party logistics and repair/warranty services.

The company distributes a wide range of products from over 75 leading manufacturers that include top vendors like IBM, Lenovo, Microsoft, Dell, Apple, HP, Cisco, Fujitsu, Nokia and BlackBerry among others. The company operates in over 18 countries across South Asia, Middle East and Africa supported by a wide and well connected distribution network of more than 23,600 channel partners, 78 warehouses and 68 sales offices. Redington is the second-biggest IT distribution player in India from where it generates close to 50% of its consolidated revenues and 62% of its operating profits. The company holds top position in Middle East and the African region with strong presence in UAE and Saudi Arabia from where it generates 40% of its revenues.
Redington also provides financial support to its channel partners through its subsidiary Easyaccess Financial Services, enabling them to transact more business.  This initiative helps in developing strong relationship with the channel partners, increasing revenue growth and generating other income.

Investment  rationale: IT spending by corporates in services sector has picked up as they look to expand and increase their workforce. Also, government’s focus on e-governance projects and increased budgetary allocation towards education and health sector is expected to support demand for IT products. Along with IT products, the growth has been much higher in non-IT products led by sales of smart phones, iPad and other lifestyle digital and consumer products as the penetration of these products in India is still low.

The growth is evident from Redington’s sales numbers in the first nine months wherein it has clocked over 30% growth.
Redington has strong relationship with its key vendors, which makes it a single source for a complete range of products. Redington’s foray into new products like digital printing machines, navigational devices, telecom wireless devices, gaming consoles, etc has helped it gain additional revenues while protecting the company in the event of potential slowdown in IT spends.
Also, the company has been focusing on adding more value added products to its portfolio, helping it to improve overall margins.
Redington which has been distributing Dell’s smart phones and tablets till date has recently been appointed as national distributor for Dell’s commercial products such as laptops, desktops and servers. This would provide additional impetus to its sales growth as Dell commands market leadership in notebook category in India.

Increasing penetration of telecom services along with large number of corporates setting up offices and plants in African region would help to drive Redington’s revenues from these regions.

Also, Redington would benefit from its inorganic growth as the revenues from its acquisition of Arena — Turkey’s second-largest IT distributor would get fully reflected in current year’s earnings.
The company is looking to enter new markets such as South Africa to further increase its revenue growth.
Redington’s after-sales support and services and its financing facility for channel partners lend it a distinct advantage in highly competitive distribution business.  With IT spending in India expected to grow at over 20% over the next few years (as per Gartner’s report), Redington is well poised to grow at a steady pace in coming years. 

Concerns: Any economic slowdown leading to cut in IT spending by corporates, government and individuals would affect the company’s revenues. The company being in highly capital intensive distribution business faces risk of inventory management and increasing interest rates. In its overseas business, Redington would face geopolitical risks if the ongoing Middle East crisis spreads to UAE/ Saudi Arabia apart from forex related risks.

Valuations: Driven by higher sales of non-IT products along with steady growth in IT hardware and software sales, Redington’s revenues are expected to grow at a compounded annual growth rate (CAGR) of 20% over fiscals 2010 to 2012 while the net profits are expected to rise at a CAGR of 26% during the same period driven by high margin value added products. At current market price of `87.85, the stock trades at 15.46 times its expected fiscal 2011 earnings and 11.90 times its expected fiscal 2012 earnings per share. Investors with medium-term horizon can consider the stock on declines.
 

Disclaimer: The writer does not hold any shares in the company.