Redington – Riding Digital Wave

Company Name – Redington Limited (Redington)

Current Share Price – INR 174 (May 30, 2023)

Market Cap – INR 13,612 cr

---

1. What is interesting about the stock?

Back in 1993, Redington Limited started out as a distributor for HP Printers in India. But as time went on, they grew their business to include other PC components and hooked up with about 300 global brands in 37 up-and-coming markets. It's pretty incredible how far they've come since those early days!

Redington is a company that sells IT and mobility products in India, the Middle East, Turkey, and Africa. They get their products from vendors, manage deliveries, and sell to resellers and dealers. They have three automated distribution centers in Chennai, Kolkata, and Dubai and offer after-sales support and logistics through subsidiaries. Company derived 46% of its revenue and 43% of its net profit in FY23 from Singapore, India & South Asia, and the balance from the rest of the world.

PCs, notebooks, tablets, printing solutions, servers, storage, software, networking solutions, security solutions, smartphones, and cloud are some of the products distributed by the Company. With a network of around 43,000 channel partners, Redington serves as a distributor for about 300 international technology providers.

I expect the company to be a direct beneficiary of the increase in digital sales (PC, Notebooks, Mobile Phones, Tablets, etc). Distribution is a low-margin business with high working capital requirements – this acts as an entry barrier in the industry apart from the strong relationship with the channel partners.

Strengths and Weaknesses of Redington

Key strengths of Redington are:

• Leading market position in the distribution of IT and mobility products – number 1 or 2 players in most of the geographies

• Tie-ups with leading vendors across IT, mobility, and electronics space – Company has tie-ups with Apple, HP, Dell, Lenovo, and Samsung contributing to 63% of revenue in FY23

• Experienced management team – MD has more than 25 years of experience with Redington. The Company has good risk management (esp credit risk) policies shown by stable margins over the last 10 years

• Strong return ratios (ROCE and ROE)

Key weaknesses of Redington are:

• Low-margin business – Company has exposure to geopolitical and forex currency risk with large overseas revenue and this can quickly eat away the margins

• High dependence on top 5 vendors (contributing 63% of revenue) – company had faced challenges in the past when Chinese players increased their market share in the Indian mobile market leading to the loss of market share of a dominant player like Samsung

2. Key Historical Financials

• Company has been delivering steady growth of 10-11% on the revenue front in FY20-22 but the growth has accelerated to ~25% in FY23

• EBITDA margin has expanded from 2.1% in FY19/20 to 2.9% in FY22 while falling back to 2.7% in FY23

• Lower EBITDA margin and higher interest cost led to lower PAT in Q4FY23

• Working capital has reverted back to normal as work has shifted from home to office (project-driven business). Management does not expect working capital days to further rise significantly

• Redington had strong cash flow convertibility (CFO/EBITDA) in FY21 at 251% as the working capital days came down from 30 to 11 but the cash flow convertibility has been poor in FY23 at -153% as the working capital has normalized back to 35 days

• Healthy ROCE/ROE at 25/23% in FY23 - reduced vis-à-vis FY22

3. What is my view on company valuation?

Redington currently trades at an EV/EBITDA (TTM) ratio of c. 6.6x and a P/E (TTM) ratio of c. 9.8x.

I expect the company to grow by 10% at both revenue and net profit level for the next few years. With a strong balance sheet, high CFO/EBITDA, and ROE, the PEG ratio can be expected to be around 1.5x implying a PE ratio of 12x (after a 20% margin of safety).

A key competitor to Redington in many markets is Ingram Micro. Platinum Equity acquired Ingram Micro from HNA Holdings (China) at an equity value of USD 5.9 billion (net profit for 2020 was USD 644 million) implying a PE multiple of 9.2x. The transaction was announced in December 2020 and closed in July 2021.

Company has a dividend yield of 4.1% - marginally lower than the interest rate provided by most banks on the savings account.

On an overall basis, the Company looks interesting for investment from a long-term perspective and should be explored further by investors.

4. What are the risks to the investment analysis?

Risks to the analysis are:

• Geo-political risk esp due to the Russia-Ukraine conflict can impact the business

• Change in distribution partners by one of the key brands like Apple could lead to a major impact on company financials – especially when the EBITDA margin is c. 2.7% (wafer-thin margins)

---

About the Author

I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.

Disclosure

I do have the stock, options, or similar derivative position in any of the companies mentioned for the last 30 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.