Redington India: Buy

As one of the largest distributors of IT products such as desktops, laptops, servers and routers as well as digital devices such as smart phones and tablets, Redington India is well-positioned to take advantage of its entrenched presence in growing markets including India, West Asia, Singapore and Africa.

Deep and long-term partnerships with leading technology vendors have ensured that the company has been able to ride the demand cycle in these geographies quite well.

At ₹94, the stock trades at 10 times its likely per share earnings for 2014-15, a little lower than its historical average. This valuation level presents a reasonably attractive entry point for investors in the light of the company’s growth prospects.

In 2013-14, Redington’s revenue rose 15.7 per cent over the previous fiscal to nearly ₹28,000 crore, while its net profit grew 4 per cent to almost ₹337 crore.

The lower profit growth was on account of increased manpower costs as the headcount had been increased significantly during the fiscal. A loss on the sale of its NBFC business also reduced profits.

Redington derives over 57 per cent of its revenue from overseas geographies and the rest from India. This geographic mix means that the company has remained reasonably insulated from the vagaries of a fluctuating rupee vis-à-vis the dollar.

While the domestic market grew slowly as a result of a relatively weak economy in 2013-14, the overseas markets have grown at a healthy pace. The demand for IT products such as computers, servers and networking devices remains robust in the company’s markets.

A report by research firm Gartner says that IT spending in India will be $71.3 billion in 2014, up nearly 6 per cent over 2013. It has also indicated that the devices market would grow at an equal pace to $23.5 billion in 2014. Segments such as banks, healthcare, utilities and education are expected to lead the growth. Along with SMEs, the Government is expected to be a big spender as it strives for efficiency in areas such as e-governance, financial services and power reforms. This, in turn, should benefit distributors of IT products such as Redington.

In West Asia and Africa, despite the political turmoil, there has not been any significant disruption in the company’s business. This is thanks to Redington’s major operations being in the UAE, Saudi Arabia, Turkey and Qatar, as well as stable African countries. Many software companies such as Tech Mahindra, TCS and Wipro are looking to expand their client base in this region.

This indicates its potential for IT and technology-related products and services. Apart from corporates, Redington also has strong relationships with large retailers in India, West Asia and Africa. The company’s top partner for server shipments and personal computers — HP — has a reasonably strong presence domestically as well as in West Asia.

As competition intensifies for HP from Dell in the PC segment, Redington has also enhanced its partnership with Dell in recent times. Recently, Dell emerged as the top player in the PC market in India by market share. Redington has also tied up with other global players such as IBM, Oracle, Cisco and Hitachi.

With cloud computing and big data management being talked about as the next important technology wave, Redington has tied up with EMC, the leading player in this space, to distribute the latter’s storage products.

Personal computer shipments, especially of high-margin laptops, continue to be robust for many of Redington’s clients.

For digital lifestyle products such as mobile phones, Nokia is a key client of the company.

Nokia has been losing market share in developed markets in smart phones. But Redington is insulated since it has also tied up with players such as Samsung and Apple which are well-placed in this market.

The company has also tied up with Motorola in West Asia for smart phone distribution. Motorola experienced huge success with its releases in India (Moto G and Moto E).

Pricing pressure due to competition from large players such as Ingram Micro, Tech Data and Synnex could affect Redington’s margins.