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Our Take:

Redington India (Redington) has a strong market position in the IT products distribution within India and in the overseas markets such as Middle East, Turkey and Africa (META) and South Asia (SSA). Company derived 60% of its revenue and 72% of net profit from overseas markets and the balance from domestic market. Redington is a leader in providing end-to-end supply chain solutions for information technology products (computer hardware/software products with enterprise solution products) and consumer and lifestyle products (telecom, digital lifestyle products, entertainment products and digital printing machines) to over 230+ international brands. The company has 75 sales offices, over 215+ warehouses and more than 38,300 partners across 37 countries.

The company is fundamentally well poised to ride business tailwinds and investments in sunrise segments. We expect the company to reap the benefits of: 1) being leading player in the key regions; 2) strong pick up in IT products and mobility sales in the domestic business and 3) strong traction in third party logistics (3PL) business. In FY20, Redington’s consolidated revenues grew ~11% yoy supported by healthy double-digit growth in both India and overseas businesses. In terms of segments, mobility segment business grew 26% followed by Services and IT growing by 9% and 2%, respectively. The growth in the mobility segment outpaced the growth in the IT segment on the back of launch of new smartphone models, stable business ecosystem and attractive pricing, and affordability schemes offered by vendors. Operating margin remained at ~2% in the year, partly because of the higher provisioning in ProConnect Supply Chain Solutions Limited (ProConnect) impacted by risky trade advances. Despite low operating margins, PAT margin remained flat owing to reduced finance costs, lower corporate tax rates in India and strong growth in Turkey operations. Service business (~3% of revenue in FY20) focusses on warehousing, logistics and after sales service business, (including cloud services, digital printing and 3D printing). We believe, that the company has a strong moat of debt free cash rich balance sheet (as on Dec-2020) in a highly working capital intensive industry with huge entry barriers. Its strong market positioning has been mainly driven by its proven track record of identifying upcoming businesses and aggressively building scale.

Post-lockdown, demand has revived with the advent of work and learn from home model. Business is well poised for growth, particularly in the short to medium term. Demand is strong for products like PC, laptop and mobiles. Redington has managed the supply chain extremely well in the post lockdown period, resulting in higher efficiencies. Over the last two years, there has been a steady improvement in net working capital days driven by healthy receivable collections, extended credit period negotiated with vendors as well as lower inventory. The reasons behind increase in profitability are i) reduction in the number of distributors for a specific large brand; ii) higher throughput; iii) efficient Working Capital management and iv) cost reduction measures undertaken over the past few quarters.

View & Valuation: After being hit hard due to the lockdown, Redington has recovered swiftly led by solid demand and superior execution. While working capital days are likely to increase from the current record low levels, efficiency gains are likely to ensure that it remains well below precovid level. Management highlighted that margins are likely to inch up gradually as the contribution from strategic and emerging businesses starts scaling up. It is also open to suitable strategic M&A opportunities in the medium term. Gross debt increased to Rs 2,538cr as on March, 2020 from Rs 1,307cr as on March, 2019, while net debt declined to Rs 170cr from Rs 439cr during the same period, supported by incremental cash balances maintained by the company amidst the pandemic-led uncertainties. During 9M FY21, the company had net cash on balance sheet due to better working capital management.

We estimate 8% revenue CAGR led by strong ~10% growth in domestic revenues while overseas business may register ~7% CAGR over FY20-23E. We believe margin should remain in the range of 2-2.2% in the same period. We feel that Redington is poised to grow strongly in the medium term on the back of solid demand. Strong revenue, steady margin along with lower finance cost would lead to 14% PAT CAGR over the same period. Redington trades at 8x FY23E EPS, which is reasonable given healthy return ratios and strong visibility of growth in the coming years. We feel that investors’ can buy the stock on dips to Rs 147 and add more on dips to Rs 128 with base case fair value of Rs 162 (8.3x FY23E EPS) and bull case fair value of Rs 177 (9x FY23E EPS) over the next two quarters.

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