Redington – Riding digital wave

Updated: 19 hours ago


Company Name – Redington India Limited (Redington)


Current Share Price – INR 143 (May 20, 2022)


Market Cap – INR 11,190 cr


 

[Updated for Q4FY22/FY22 results]

1. What is interesting about the stock?

Redington India Limited commenced its business operations in 1993 as a distributor for HP Printers in India and slowly started foraying into the distribution of other PC components. Company has established partnerships with around 250 global brands spread across 37 emerging markets. Humble beginnings!


Company is a leading distributor of IT and mobility products and a provider of supply chain management solutions and support services in India, the Middle East, Turkey, and Africa. Company procures IT and mobility products from vendors handles distribution logistics and sell the same to resellers and dealers. The company has periodically added new products to its portfolio and continues to provide ancillary services like after-sales, and third-party logistics through the subsidiary companies. Currently, Redington has three automated distribution centers (ADCs)—in Chennai and Kolkata in India and Dubai. Company derived 56% of its revenue and 61% of net profit in FY22 from overseas markets and the balance from the domestic market.


The offerings include PC, Notebooks, Tablets, Printing Solutions, Servers, Storage, Software, Networking Solutions, Security Solutions, Smart Phones, and Cloud. Company is a distributor for c. 250 global technology vendors, the company has a network of c. 34,000 channel partners.


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 64% of revenue in FY22

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

  • Strong balance sheet – net cash position of c. INR 2,825 cr (as of March 31, 2022)

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 66% 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

  • EBITDA margin has expanded from 2.1% in FY19/20 to 2.9% in FY22

  • Business is cyclical with Q3 being the strongest quarter in the year (maybe due to festival season)

  • 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 FY22 at 55%

  • Net cash balance of ~ INR 2,825 cr as of March 31, 2022

  • Healthy ROCE/ROE at 29/25% in FY22 - expanded in FY22

3. What is my view on company valuation?


Redington currently trades at an EV/EBITDA (TTM) ratio of c. 4.5x and a P/E (TTM) ratio of c. 8.5x.


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 2.7% - marginally lower than the interest rate provided by most banks on the savings account. Additionally, the company has a cash balance of c. 25% of the market capitalization providing comfort in the valuation. Private equity (Affirma Capital) has been holding a stake in the company for the last 10 years and hence company may look for a strategic buyer (to partly provide an exit to the PE investor) – such transactions normally provide a good premium to the equity shareholders.


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 partner by one of the key brands like Apple could lead to a major impact on company financials – especially when the EBITDA margin is c. 2.5% (wafer-thin margins)

 

About the Author


I have over 15 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 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.




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