Stock Review: Redington India

 

Business diversification is improving Redington India's margins and profits. Investors can consider buying this stock as the valuations are reasonable

 

Investors can consider buying Redington India's stock as the company is expected to benefit from its high-growth-high-margin non-IT for smart phone and consumer durable businesses. Its partnership with BlackBerry has been successful and with 3G services being rolled out, sales of these smart phones will drive the future growth of the company. Its recent tie-up with Dell and Apple is an indicator of the strength of Remington's retail distribution business.

BUSINESS

Redington India along with its subsidiaries is in the business of end-to-end supply chain management of IT and non-IT products in various geographies of South Asia, Middle East and Africa. IT products include desktops, laptops, servers, software packages, peripheral comments, networking equipment and storage products, while non IT products include smartphones and consumer electronics such as televisions, washing machines, refrigerators, microwaves, ovens etc. IT product distribution accounts for around 80% of Redington's India's business. In FY11, the overseas business contributed almost 52% to its total revenues while the rest came from the Indian business. However, the Indian business is more profitable as 62% of earnings were contributed by the Indian business.

FINANCIALS

Redington's net sales have grown at a compounded annual growth rate (CAGR) of 21% and its earnings or net profit has grown at a CAGR of 29%. In FY11, net sales were 17,458.54 crore and net profit was 264.8 crore. The company's business model has a very thin operating and profit margins. In FY11, these margins were 2.7% and 1.5%, respectively.

   Given these low margins, a small improvement in margins can increase earnings growth dramatically. Margins have gradually increased over the years, supported by the company's rising diversification into non-IT business. The return on equity for FY11 was 16.6 while return on capital employed was 14.6. Its current debt to equity is 0.8.

INVESTMENT RATIONALE

The company has a strong distribution network and a good execution record. Redington is focusing on the smart phone and consumer electronic business. The market for these products is large and growing. Growing contribution of these non-IT businesses will help the company boost its overall topline. Also, as the contribution from these non-IT segments increases, overall margins will improve providing an even stronger earnings growth.

   Redington's tie up with BlackBerry has been a huge success. Its recent tie-ups with Dell and Apple indicates the faith these top brands have in Redington's distribution service. Given this, Redington could add more such clients in its basket as there are hardly few peers that can offer such services.

   This will help the company participate in India's consumption story. Also, Redington India along with Ingram Micro dominates the IT distribution market.
   The IT business which represents 80% of the total revenue will at least continue to grow at industry average of 12-15% as the personal computer affordability increases.

   Besides, the company has started financing operations to provide funding to its channel partners by leveraging its balance sheet. This will shorten the working capital cycle and thus raise the return on equity. But, this can also expose Redington to interest rate risks and increase the non-performing assets on its balance sheet.

VALUATIONS

Redington does not have any listed peer to compare its valuations. The company is currently trading at a price-to-earning multiple of 15 which is slightly higher than its three-year average of 13.6 and much lower than its three-year high of 21.75. Given this, at the current market price of 83, the Redington India's stock is fairly priced. Investors can buy at these levels.