Redington India 25012013 Mosl

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    REDI to roll

    Redington India

    25 January 2013

    Initiating Coverage | Sector: Logistics

    Siddharth Bothra (Siddharth.Bothra@MotilalOswal.com); +91 22 3029 5127

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    Redington India

    25 January 2013 2

    Redington India: REDI to roll

    Page No.

    Summary ........................................................................................................ 3-4

    An indispensable link in IT supply chain ...................................................... 5-9

    Pursuing four-pronged growth strategy .................................................. 10-14

    Strategic diversifications aimed to de-risk model ................................... 15-17

    Strong revenue and earnings growth outlook ........................................ 18-21

    Valuation and view .................................................................................... 22-24

    Company background and key risks ......................................................... 25-26

    Financials and valuation ........................................................................... 27-28

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    Redington IndiaCMP: INR81 TP: INR103 Buy

    Bloomberg REDI IN

    Equity Shares (m) 398.6

    M.Cap. (INR b)/(USD b) 32.3/0.6

    52- Week Range (INR) 94/65

    1,6,12 Rel. Perf. (%) -11/-3/-16

    25 January 2013

    Initiating Coverage | Sector: Logistics

    BSE SENSEX S&P CNX

    19,924 6,019

    REDI to rollDiversification beyond IT supply chain - a shot in the arm

    Redington India (REDI) is the leading IT SCM player in India and Middle East and a strategic

    partner to some of the worlds leading technology companies.

    Its efforts to diversify across the supply chain industry are paying off, with non-IT segment,

    as a percentage of revenues, increasing from ~5% in FY07 to ~19% in FY12. We estimate

    a further increase to ~22% by FY15E.

    During 1HFY13, REDIs revenue growth was muted at ~10% (2% in domestic and 19% in

    international). We expect the company to benefit from 1) pent up government demand

    based on implementation of Goods and Services Tax (GST), 2) iPhone distribution to

    boost domestic non-IT growth and has the potential to contribute ~INR24b to REDIs topline by FY14 and 3) revival in subsidiary Arenas operations.

    We believe execution of REDIs strategic initiatives could allay concerns on 1) its NBFC

    arm, 2) recovery in Arena and 3) asset-heavy capex plans for automatic distribution

    centers (ADCs).

    REDI trades at 7.5x/6.3x FY14E/FY15E EPS and EV of 6.2x/5.4x FY14E/FY15E EBITDA. We

    initiate coverage with a Buy and a target price of INR103, based on intrinsic P/E of 8x its

    FY15 earnings, an upside of ~27%.

    An indispensable link in IT supply chain

    Over the years, REDI has evolved as an end-to-end supply chain management

    (SCM) solutions and strategic partner to the worlds leading technology

    companies. As India has significant under-penetration in IT and consumer goods,

    increasing discretionary spending would change this and lead to more spending

    in IT related products and consumer durables. Company is not only the largest

    and leading IT SCM player in India but also leads in international markets like

    Middle East and Africa.

    Pursuing successful four-pronged growth strategy

    REDI is pursuing a four-pronged strategy to achieve strong growth and sustain

    the competitive advantage in IT distribution industry: 1) growth in existing product

    lines, 2) foray into new verticals and business lines, 3) explore new regions and

    geography/inorganic acquisitions and 4) strategic initiatives. As Indias market

    offers significant opportunities to IT services providers due to increasing demand,

    company has scope to add new products to its existing verticals and move up the

    value chain. A diversified portfolio enables it to manage vendor risks and growth

    effectively. Also, REDIs global reach gives a competitive advantage, with suppliers

    eyeing worldwide market penetration.

    Strategic diversifications aimed to de-risk model

    To leverage existing strengths in IT logistics business and broadbase its product

    offerings, REDI forayed into distribution of consumer goods. Non-IT business

    has grown from ~5% of overall revenues in FY07 to ~19% in FY12. Given lack of

    quality third party logistics (3PL) players in India, REDI is well-placed to create a

    25 January 2013

    Stock performance (1 year)

    Shareholding pattern (%)

    As on Sep-12 Jun-12 Sep-11

    Promoter 21.1 21.1 21.1

    Dom. Inst 9.0 9.4 8.9

    Foreign 63.3 63.3 63.4

    Others 6.7 6.3 6.6

    Investors are advised to refer

    through disclosures made at the end

    of the Research Report.

    3

    Valuation summary (INR b)

    Y/E March 2013E 2014E 2015E

    Sales 241.6 284.2 331.9EBITDA 6.9 8.3 9.8

    NP 3.4 4.2 5.0

    EPS (INR) 8.5 10.6 12.6

    EPS Gr. (%) 16.3 23.6 19.8

    BV/Sh. (INR) 40.9 49.7 60.2

    RoE (%) 23.1 23.3 23.0

    RoCE (%) 18.7 19.7 20.7

    Payout (%) 9.6 16.6 16.7

    Valuations

    P/E (x) 9.3 7.5 6.3

    P/BV (x) 1.9 1.6 1.3

    EV/EBITDA (x) 7.1 6.2 5.4

    Div Yield 0.9 1.9 2.3

    EV/Sales (x) 0.2 0.2 0.2

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    Redington India

    25 January 2013 4

    niche in this segment. We model its consumer goods business, consists of key clients

    like LG, Whirlpool, Voltas, Godrej, etc, to increase from ~INR1.8b in FY12 to ~INR8.5b

    by FY15E.

    Initiate coverage with a Buy and target price of INR103We expect REDI to post revenue CAGR of 17% and net profit CAGR of 20% respectively

    over FY12-15E. Implementation of GST would unveil and increase significant

    opportunities for the company, particularly in non-IT verticals. We believe execution

    of REDIs strategic initiatives could allay concerns on 1) its NBFC arm, 2) recovery in

    Arena and 3) asset-heavy capex plans for ADCs. REDI trades at 7.5x/6.3x FY14E/FY15E

    EPS and EV of 6.2x/5.4x FY14E/FY15E EBITDA. We initiate coverage with a Buy and a

    target price of INR103, based on intrinsic P/E of 8x its FY15 earnings, an upside of

    ~27%.

    SCM players - an indispensable link in IT supply chain

    Source: GTDC Research

    As compared to developed

    nations, 3PL contribution

    remains at a nascent stageRetail

    Infrastructure

    Equipment

    Pharmaceuticals IT HardwareTelecom

    Automotive

    Chemicals and

    Industrial products

    LOW MEDIUM HIGH

    LOW

    HIGH

    MEDIUM

    GrowthofSector

    Profitability of 3PL

    Consumer

    products

    Current 3PL penetration High Neutral Low

    3PL logistics to increase REDI present in most attractive segments

    Source: KPMG Analysis

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    Redington India

    25 January 2013 5

    An indispensable link in IT supply chain

    Market leader in a fast growing industry

    Over the years, REDI has evolved into an end-to-end supply chain management (SCM)

    solutions and strategic partner to the worlds leading technology companies.

    The outlook for Indian IT and telecom industry is promising, with IDC forecasting it to post

    a CAGR of 10% over FY12-16, from ~USD66b in FY12 to ~USD96b by FY16. As India has

    significant under-penetration in IT and consumer goods, increasing discretionary spending

    would change this and lead to more spending in IT related products and consumer durables.

    Company is not only the largest and leading IT SCM player in India but also leads in

    international markets like Middle East and Africa.

    Emerging as a complete SCM player

    REDI creates value in the market by extending the reach of its technology partners,

    capturing market share for resellers and suppliers, creating innovative solutions and

    offering credit. It is engaged in the business of selling high-volume, low-marginproducts like laptops, servers and smart phones to consumer resellers and retailers.

    REDI is not only the the largest IT distributor in India but also the leading SCM player

    in the Middle East and Africa.

    Over the years, REDI has evolved from a distributor to an end-to-end supply chain

    management (SCM) vendor and a strategic partner to the worlds leading technology

    companies. The scale of operations and business volume ensure tremendous

    bargaining power with various product manufacturers and resellers. The value added

    through integrated business model, vast geographic reach, efficient working capital

    management, deep-rooted relationships with vendors and channel partners and

    economies of scale create significant entry barriers for new players in this business.

    REDI has transformed from a distributor to total SCM player

    Source: Company, MOSL

    Well-proven business model

    The wholesale distribution model has proven to be well-suited for both manufacturers

    of technology products and resellers. The large number of resellers makes it cost-

    efficient for vendors to rely on wholesale distributors to serve this diverse and highly

    fragmented customer base. An SCM player like REDI adds value by 1) reducing

    manufacturers inventory and improving its time-to-market, 2) enhancing

    manufacturers go-to-market strategies and 3) providing efficient market engine for

    manufacturers.

    From Distribution...