Information technology (IT) and consumer products distribution and services company, Redington India, is likely to benefit from the growing demand for such products in the country. It recently got exclusive rights to distribute the iPhone 5 in India, expanding the range of Apple products it distributes. Rising revenue contribution of Apple products (which enjoys high asset turnover and negative working capital days) augurs well for Redington’s working capital management, which in turn will result in healthy cash-flow generation, offsetting the relatively lower margins earned in Apple products. Among key companies, Redington distributes products of HP, Acer, Nokia, BlackBerry and Samsung.
Going ahead, the turnaround in its operations in Turkey will provide cushion to margins. Notably, the company (akin to its peers) earns very low margins, which renders its bottomline exposed to unprecedented events. But, since it can return all unsold inventories to its clients, the risk is significantly lower. Such a business model has helped the company earn high returns in the business. Analysts believe its return on capital will improve to over 18 per cent levels in FY14 from the 17 per cent prevailing. Addition of new vendors, products and geographies remains key growth drivers for Redington. It has recently added products such as Xbox and PS3 gaming titles to its kitty, while it signed a deal with Smartlink to distribute its motherboards in India.
At Rs 88.55, the stock trades at 6.9 times FY14 estimated earnings, which is significantly lower than its historical one-year forward average multiple of 11 times. Even in comparison to its global peers such as Synnex and Digital China, among others, it trades at a discount of 35-40 per cent. With valuations appearing undemanding and the stock offering a unique play in the consumer space, most analysts remain bullish and see an upside of 18-20 per cent from current levels.
| HEALTHY PROSPECTS | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Revenues | 21,193 | 24,162 | 28,037 |
| % change y-o-y | 21.3 | 14.0 | 16.0 |
| Ebitda margin (%) | 3.0 | 3.0 | 3.1 |
| Bps change y-o-y | 20 | - | 10 |
| Net profit | 324 | 395 | 511 |
| % change y-o-y | 29.2 | 22.0 | 25.6 |
| EPS (Rs ) | 8.1 | 10.2 | 12.8 |
| Return on equity (%) | 21.5 | 25.5 | 25.6 |
| E: Estimates Source: Analyst reports | |||
Redington is set to gain significantly from its recent deal to distribute Apple iPhones in India. Analysts believe the deal will add about Rs 1,100 crore to its topline this financial year. Further, given that Apple’s other products are also witnessing good traction in India, analysts expect its share in Redington’s domestic revenues to grow from five per cent in FY12 to 23 per cent by FY14. “We expect iPhone revenues to double in FY14 – in a year, when the full impact of the incremental product will be visible. Redington’s revenue from Apple products (excluding iPhone) has also been growing at above 50 per cent; this growth should remain strong in FY14,” believes Ankur Agarwal, analyst at Nomura Equity Research.
Analysts expect the company’s smart phone and tablet revenues to grow by 25 per cent over FY12-14.
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Going forward, its international business (distributes Samsung and Nokia products in certain countries) is also expected to witness good growth. “We expect growth rates to accelerate in the second half of this fiscal as Samsung is consistently gaining market share (16-17 per cent from 10 per cent in the last six months), increased focus on high-value IT products like Lenovo, Acer, Toshiba, and better traction at Arena along with stable currency,” write analysts at Enam Securities in a recent report on the company.
While demand so far has held on, any slowdown in the IT sector (which forms 79 per cent of revenues) or consumer spending, could hit its growth.