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Analysis: Redington is gaining on rising consumerism

Rising revenue contribution of Apple products, augurs well for Redington's working capital management

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IT and consumer products distribution and services’ company, India is likely to benefit from the growing demand for such products in the country. It recently got exclusive rights to distribute iPhone 5 in India, expanding the range of 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% levels in FY14 from about 17% 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 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, Digital China, amongst others, it trades at a discount of 35-40%. 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% from current levels.

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 fiscal. 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 5% in FY12 to 23% 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%; this growth should remain strong in FY14", believes Ankur Agarwal, analyst at Nomura Equity Research.

The company also expects its government purchases to pick up in the second half of FY13. It will execute one large UID-Aadhar project over the next 2-3 quarters. Analysts expect the company's IT business (laptops, printers, etc) to grow by 15% in the second half of FY13. Blackberry sales (which fell by 40% in this fiscal so far), have picked up in October and the upcoming BB10 launch (January 2013) should boost FY14 numbers, believe analysts.

Analysts expect the company’s smart phone and tablet revenues to grow by 25% over FY12-14. Going forward, its international business (distributes Samsung, 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% from 10% in 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 (forms 79% of revenues) or consumer spending could hit its growth.

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