Redington to cash in on Apple's success

Rising share of Apple in its revenues, healthy traction in IT business should drive growth

The launch of Apple’s iPhone 7 smartphone, sales will begin on October 7 in India, will boost Redington, which distributes Apple products in India, UAE and Nigeria. It started distribution in UAE and Nigeria in the quarter ended December 2015 and, hence, these are relatively smaller markets. Apple’s contribution to Redington’s revenues has been rising —22 per cent in the June quarter, up from 15 per cent in financial year 2015-16 (FY16). Though Apple has added one more vendor in India, Redington continues to be its top vendor.

“Redington’s growth momentum will accelerate with improving IT spends by corporates/government in India and increasing smartphone penetration due to new launches by Apple, new vendor signings by Redington,” say analysts at Axis Securities in a recent report. Higher growth in its logistics subsidiary Proconnect and market share gains in India and abroad will also aid growth, they add.

Another positive was a growth of seven per cent in the company’s IT business, despite fall in the global PC market. Though Apple will continue to drive revenue growth, it could marginally weigh (20 basis points over two years) on earnings before interest, tax, depreciation and amortisation (Ebitda) margins, believe analysts, as other businesses are more profitable.

In Q1, Redington’s working capital reduced by seven days because of lower debtor days as well as inventory turnaround days. This was fuelled by higher share of Apple in revenues. “Due to working capital improvement to 51 days, the company generated free cash flows of Rs 210 crore versus negative flows of Rs 240 crore in Q1FY16,” says Nimit Shah, analyst at ICICI Securities. Redington’s interest costs fell 7.4 per cent year-on-year (y-o-y) to Rs 37.5 crore in Q1. The management is hopeful of improving its working capital further as it is negotiating with vendors for longer credit periods. The government’s focus on smart cities and pickup in growth should push demand for IT products and services, which augurs well for Redington. At current levels, Redington trades nine times FY17 estimated earnings. Most analysts remain positive on the stock and their average target price of Rs 142 indicates upside potential of about 30 per cent. The key risk is Apple’s high revenue contribution, and also if promoter holding, which fell to 8.2 per cent in June quarter, declines further.