Redington India 25012013 Mosl

7/29/2019 Redington India 25012013 Mosl

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REDI to roll

Redington India

25 January 2013

Initiating Coverage | Sector: Logistics

Siddharth Bothra ([email protected]); +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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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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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...

Distribution of only IT products

in India Cash and carry model

No inventory, only back-to-back

orders

Distributor of IT, Telecom &

consumer durables

Third party logistics services

Door-to-door delivery

Credit to channel partners

Channel relationshipmanagement

Management of inventory

After sales support service

... To Supply Chain Management


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Similarly, the wide spectrum of products offered by multiple vendors helps the company

achieve economies of scale and provide customers a single sourcing point. Due to many

vendors and products, resellers often cannot establish direct purchasing relationships

with them. Hence, they often rely on wholesale distributors such as REDI who can

leverage purchasing costs across multiple vendors to satisfy a significant portion oftheir product procurement, logistics, financing, marketing and technical support needs.

SCM players - an indispensable link in IT supply chain

Source: GTDC Research

Role of SCM players like REDI to be critical, going forward

Given that India has significant under-penetration in IT and consumer goods,

increasing discretionary spending could lead to more on IT and consumer related

goods. Globally, majority of the supply chain is managed by dedicated 3PL players;

currently, their share in India is ~9%, which is expected to increase sharply post the

introduction of GST. Within 3PL services, IT distribution is one of the most attractive

segments. Thus, REDI is well-placed to benefit from these emerging opportunities

and increase its value-added sales, going forward.

Source: KPMG Analysis

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 Low3PL logistics to increase REDI present in most attractive segments


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Expect value-added services to increase sharply


The distributors model

The chart below shows that some distributors sell components to vendors and also

buy finished IT products from manufacturers. Certain manufacturers and distributors

sell directly to end-user businesses in addition to supplying resellers with their wares.

As there is no demarcation to distinguish one part of the supply chain from another,

a product could take multiple paths to the market. Since the industry has evolved

from a linear to non-linear marketplace, partnership and collaboration are now more

imperative. Successful manufacturers, distributors and resellers form and reform

teams and partnerships responding to market trends.

MANUFACTURER DISTRIBUTOR RESELLER END USER

Component

and Material

Suppliers

Electronic

Component

Distributors

Electronic

Contract

Manufacturers

Subsystems

andPeripherals

IT Original

Equipement

Manufacturers

(IT OBMs)

Software

IT Full-Line

Distributors

IT Specialty

Distributors

Government

Resellers

Corporate

Resellers

Direct

Marketers

VARs

Online

Resellers

Government/ Education

Fortune 1000

Businesses

Small and

Medium-sized

Businesses

Consumer

Retailers

DIRECT (%)

The distributors model

Source: Industry, MOSL

15%

4-6% 9-11%


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Leader in key markets

Domestic IT distribution industry is dominated by two players Ingram Micro and REDI

and control ~70% of the market, with a presence in similar product categories. Ingram isthe global leader in IT distribution industry with revenues of ~USD36b in FY12. However,

leading international players like Tech Data and Synnex are not present in the Indian

market. Other key players in the domestic market are Neoteric, Rashi Peripherals,

Compuage and Savex. In the Middle East and Africa market too REDI is the market

leader and has a higher share compared to the next two peers put together.

Key risks and mitigation strategies

Key business model risks Mitigation strategies

Low gross margins

- Business is characterized by narrow - Increasing value portfolio; New initiatives

gross operating margins.

- These narrow margins magnify the impact

of any change in operating results attributed

to variations in sales and operating costs

High vendor concentration

- HP accounts for ~35% of REDI 's overall sales - Broad-bas ing vendors; increas ing depth of product l ines

(20% of domestic and 44% of international)

Receivable risk

- As REDI se ll s i ts goods on cr edi t t o severa l - H is tori ca ll y bad debt , i nc ludi ng pr ov is ions , a s per cent age of sa les

fragmented re-sellers, there is has been less than 0.07%.

high receivable risk - As company has a wide portfolio, re-sellers dependence is high

High working capital intensity

- Working capital intens ity i s h igh as distr ibutors - Working capi ta l management discipl ineshave to keep inventory and sell on credit

Inventory risk

- REDI's business subjects it to the risk that - Market knowledge; forecasting ability and robust IT system

the value of inventory could be adversely - Obsolescence overcome by stock rotation policy supported by vendors

affected by suppl iers ' price reduct ions or by - Price erosion supported by vendor discounts

te chno logical ch ange s, th us affe cting Suppliers provide warranties on products that REDI distributes and

u se ful ne ss or de sir abi lit y o f p ro du ct s allow return of defective products, including those by customers

Source: MOSL

Competition and market mapping

Domestic International Consolidated

Sales INR99b INR112b INR212b

% 47% 53% 100%

-IT 79% 81%

-Non-IT 19% 16%

-Services 2% 3%

PAT INR1.8b INR1.1b INR2.9b

% 62% 38% 100%

Product range IT peripherals: PCs, PC components, IT peripherals, PCs, PC components,

UPS, net work ing product s, packa ged UPS, net work ing product s, packa ged

software, storage products, high-end software, storage products, high-end servers

servers

Non-IT: Telecom devices, consumer Non-IT: Telecom and Tablets

durables, digital printing press,

tablets and gaming consoles

Top vendors (FY12) HP -20%, RIM -18%, Microsoft - 7%, HP - 39%, Nokia - 14%, Dell - 9% andAcer/ Lenova -5% and Apple - 5%, Others 38%

Others -40%



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Extensive distribution network

REDI has a strong distribution network and wide range of brands, with a presence

across 25 countries. It has ~66 warehouses in India and 27 in the Middle East and

Africa. With a view on impending introduction of GST in India, REDI is proactively

building large ADCs in key business regions to capture emerging opportunities. It hastwo ADCs at Chennai and Dubai operational since July 2009 and September 2010 and

is working on three ADCs, which would be functional soon.

REDIs domestic and global distribution network

India Middle East & Africa

Channel partners 23,337 9,857 (present in 20 countries)

Sales office 56 21

Warehouses 66 27

Service centers 70 38

Partner centers 292 18

Product range 80 plus 50 plusSource: Company, MOSL

REDI has a wide Pan India presence



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A) Growth in existing product lines

REDI is likely to be a key beneficiary from the robust growth outlook of Indian IT

industry, which is forecasted to post a CAGR of 10% from ~USD66.4b in FY12 to~USD95.9b by FY16. Indias market offers significant opportunities to IT services

providers due to increasing demand.

Indian IT and Telecom industry to post a CAGR of ~10% over FY12-16E (USD b)

2012 2013 2014E 2015E 2016E CAGR (%)

(2012-2016)

Hardware 9.1 9.5 10.9 12.5 14.3 12.0

% of total 13.7 14.3 16.4 18.8 21.5

% Change 4.4 14.7 14.7 14.4

Software 3.5 4 4.5 5.2 6 14.4

% of total 5.3 6.0 6.8 7.8 9.0% Change 14.3 12.5 15.6 15.4

Services 9.2 10.3 11.9 13.8 16.1 15.0

% of total 13.9 15.5 17.9 20.8 24.2

% Change 12.0 15.5 16.0 16.7

Telecom 44.7 47.8 51.5 54.6 59.5 7.4

% of total 67.3 72.0 77.6 82.2 89.6

% Change 6.9 7.7 6.0 9.0

Total 66.4 71.5 78.9 86.2 95.9 9.6

% Change 7.7 10.3 9.3 11.3

Source: IDC

Company has six separate business units (SBU) in IT business such as components,

peripherals and consumer PC, system and commercial PC, software, networking and

enterprise.

Pursuing four-pronged growth strategy

Strategic initiatives to yield results

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

competitive advantage in IT distribution industry.

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.

REDIs global reach provides competitive advantage as suppliers eye worldwide market

penetration.

Four-pronged growth strategy

Source: MOSL

Growth in existing

product lines Partnering with

new vendors

Adding new

products

Foray into new

verticals andbusiness lines

ADC

Nook

Exploring new

regions andgeography/

inorganic

acquisitions

Entry into CIS

countries

Strategic

initiatives Lower stake in

NBFC

Asset-light plans

for the entity


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REDI has good 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. A key example is the addition of Apple iPhone, which has the potential to

contribute ~INR24b to REDIs top line by FY14.

Key initiatives across categories

Categories Initiatives/Triggers

Components Increasing brand affiliations

Peripherals and PCs Has affiliations with all key players

System and commercial PC Revival of government spending

Software Moving up the value chainNetworking New opportunities in the cloud space

Enterprise Revival of government spending

Source: MOSL

Breakup of Indian IT industry FY13 (%) REDI IT product-wise breakup

Legacy

Distribution

Deepar

Technical

Aptitude

Solutions-Based

Distribution

Core Value

Proposition

Expertise

Differentiators

Key Services

Pick, Pack, Ship

Operations,

Logistics, Scale

Credit, Account

Management,

Logistics

Product

Excellence

Technical

Specialization

Vertical Focus;

Professional

Services

Partner Enablement

and Development

Selling into Target

Markets

Analystics-Based

Marketing, Technical &

Sales Acumen

Developing a Knowledge

Base of Expertise

Potential to move up value chain


Line Card, Price,

Availability

Value

Distribution

Source: IDC


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Apple sales in India set to mimic RIM success


Vendor de-risking: Reliance on HP in the domestic revenues has declined (%)

FY07 FY08 FY09 FY10 FY11 FY12HP 44 40 38 34 22 20

RIM 0 0 0 5 15 18

Microsoft 9 9 10 10 8 7

Acer 3 2 3 5 5 5

Lenova 6 6 5 5 6 5

Apple 0 0 0 0 0 5

Others 38 43 43 41 44 40

Total 100 100 100 100 100 100


B) Foray into new verticals and business linesREDI is focusing on new revenue lines: 1) consumer durables, 2) ADC operations and

3) nook initiative. With a view to leverage its existing strengths in logistics business

and also to broad-base product offerings, company forayed into distribution of

consumer durable goods. It is mostly focused in South India and is increasing its

presence in the West; key clients include LG, Whirlpool, Voltas, Godrej etc.

Management expects this business to reach INR10b by FY15. Implementation of GST

could increase demand for 3PL players, thus benefiting this segment in particular and

REDI significantly.

C) Exploring new regions and geographyGeographical foray provides the company with a more balanced global portfolio to

manage and mitigate risk. REDIs global reach enables it competitive advantage, with

suppliers eyeing worldwide market penetration. It is the largest distribution company

in the Middle East and also has significant presence in Africa and Turkey. Around 54%

of revenues is derived from international operations, while 46% of revenues is from

domestic operations. Similarly, ~38% of net profit is derived from international

operations, while ~62% of net profit is from domestic operations.


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Growth of international business (INR m)

Source: MOSL

D) Successful strategic initiatives could be a key positive

We expect REDI to take strategic initiatives to 1) lower stake in the 100% NBFC byattracting strategic financial and operational partners and 2) possible corporate

restructuring to make it asset light. We believe successful implementation of REDIs

strategic plans could allay concerns on 1) its NBFC arm, 2) recovery in its subsidiary

Arena and 3) asset-heavy capex plans for ADCs.

NBFC contributes to REDIs success

REDI has a wholly-owned non-banking finance company (NBFC), Easyaccess Financial

Services Ltd (EFTL), which was set up in 2008 to cater to trade finance needs of domestic

IT industry. EFTL enables REDIs channel partners to transact large volumes of business

without being constrained for credit through a range of solutions like trade finance,enterprise finance and A/R management.

The NBFC also provides need-based financing to channel partners beyond the

distributor credit period. Till date it has no NPAs. Though currently it is a 100%

subsidiary of REDI, management has plans to lower stake to ~51% by divesting to a

strategic investor, PE fund etc. This we believe would be a key positive for REDI and

allay investor concerns on the NBFC.

ADCs to tap emerging opportunities

With a view on impending introduction of GST in India, REDI is proactively building

large automatic distribution centres (ADCs) in key business regions to captureemerging opportunities such as 3PL services, storage and warehousing etc. It has two

ADCs at Chennai and Dubai operational since July 2009 and September 2010 and is

working on three ADCs, which shall be functional soon.

Details of warehouses

Acres Status

Acquired Land

Chennai 11.56 Operational since Jul'09

Kolkata 13.76 2HFY13

New Delhi 13.32 2HFY14

Mumbai Yet to acquire land

Long term Lease

Dubai 5.16 Operational since Sep'10



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Chennai ADC

Dubai ADC



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Non-IT business gains momentum

With a view to leverage strengths in the logistics business and de-risk its business,

REDI forayed into distribution of consumer goods such as smart phones, tablets,

washing machines, refrigerators and other electronic consumer durables. Given lack

of quality 3PL players in India, it is well-placed to create a significant niche in this

segment. REDIs non-IT business has grown from ~5% of its overall revenues in FY07 to

~19% in FY12. Increasing share of non-IT products as a percentage of overall revenues

is a key positive for REDI as they have lower working capital requirements, enjoy

better margins and also de-risk it from any potential slowdown in the IT segment.

Share of non-IT business increases (% of total revenues)

Strategic diversifications aimed to de-risk model

Non-IT segment to be the key growth driver

To further leverage its existing strengths in the logistics business and to broadbase product

offerings, REDI forayed into distribution of consumer goods. Its non-IT business has grown

from ~5% of its overall revenues in FY07 to ~19% in FY12. Given lack of quality 3PL players

in India, REDI is well-placed to create a niche in this segment.

We expect its consumer goods business, which has key clients like LG, Whirlpool, Voltas,

Godrej, etc to increase from ~INR1.8b in FY12 to ~INR8.5b by FY15E.

Projections for smart phone sales (m) Blackberry, a key success story


REDI set to mimic its Blackberry success with iPhone

To broaden the basket of new brands, REDI recently tied up with Apple to distribute

iPhone range, which could be its next big success story. REDI had ventured into the

smart phone category in FY09, with the launch of Blackberry smart phones. This was a

huge success as within three years, Blackberry sales increased from ~INR162m in FY09

(m)('000)



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Revenue of consumer durable goods to increase by ~5x over FY12-15EWith a view to leverage its existing strengths in the logistics business and to broad-

base product offerings, REDI forayed into distribution of consumer goods. It is mostly

focused in South India and is increasing its presence in the West. Key clients include

LG, Whirlpool, Voltas, Godrej etc, and management expects the business to reach

INR8.5b by FY15E. Implementation of GST could increase the demand for 3PL players

and thus benefit the segment and REDI significantly.

Consumer goods sales to post strong growth (INR m)

to ~INR16b in FY12. Though growth rates for Blackberry have moderated, the strong

growth in smart phone category continues.

Industry estimates suggests the total iPhone market in India at ~1m. Currently, Apple

has two distributors in India - Ingram Micron and REDI. Management is confident ofgarnering a market share of 60-70% in this category, implying a potential market of

~INR24b for REDI. Though margins provided by Apple are lower than Blackberry, working

capital requirements are low-to-negative, given the high demand for Apple products

in India.

Apple products sale in India over 1HFY10 to 1HFY13



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Services business - one of the most profitable vertical

Though services account for only ~2% of REDIs revenues, it enjoys high gross margins

of ~30-40%. Almost 72% of services income is derived from international business

and 28% from domestic. REDIs services vertical not only provides it a mean to expand

the revenue stream, but also acts as a key differentiating factor compared tocompetitors. Company follows a unique model for its services business, whereby the

centers are neutral and not exclusive to REDI or any particular brand. It has two business

segments: 1) warranty period and 2) post warranty period. The table below depicts

various revenue streams for REDI under both formats.


Redington Service Model

Redington Service Model

Warranty Post-Warranty

Event Based Retainer Annuity

Vendor pays for

service

provided to

customer on

request

Paid monthly by

vendor to

maintain agreed

resources and

service level

agreements for

their products

Vendor pays

annual support

charges per

unit sold

during the

year

Event Based Infrastructure

Management

ServicesCustomers pay

as and when

they use the

services

Customer pays

for round the

clock support

for hardware

and application

maintenance


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Strong revenue and earnings growth outlook

Expect revenue CAGR of 17% over FY12-15E

We estimate REDI to report revenue CAGR of ~17% over FY12-15E, which would be

driven by ~18% CAGR in domestic revenues and 15% CAGR in international revenues.Domestic IT segment is likely to post ~16% CAGR, while non-IT segment is likely to

register 24% CAGR. In the international vertical, we expect IT segment to clock a CAGR

of 15.4%, while the non-IT segment would post a CAGR of 15%. The revenue mix

among IT, non-IT and services would be ~77%, 22% and ~2% respectively by FY15E.

The share of domestic revenues is likely to increase from ~46% in FY12 to ~48% by

FY15E.

Breakup of sales and key assumptions (INR m)

Y/E March 2010 2011 2012 2013E 2014E 2015E CAGR

(FY12-15)

Domestic 64,861 81,778 96,665 113,025 136,045 159,602 18.2

% Change 7 26 18 17 20 17

% of net sales 47 49 46 47 48 48

Non IT

Value 6,526 17,633 26,474 32,828 43,004 50,745 24.2

% Change 170 50 24 31 18

% of sales 5 11 12 14 15 15

IT

Value 54,486 61,782 69,175 78,997 91,637 107,215 15.7

% Change 13 12 14 16 17

% of sales 40 37 33 33 32 32Service

Value 913 723 1,017 1,200 1,404 1,642

% Change -21 41 18 17 17

International 69,245 86,531 112,976 129,089 148,616 173,312 15.3

% Change 5 25 31 14 15 17

Non IT

Value 12,099 12,134 14,216 16,348 18,964 21,619 15.0

% Change 0 17 15 16 14

% of sales 9 7 7 7 7 7

IT

Value 54,726 71,675 96,087 109,827 126,301 147,772 15.4

% Change 31 34 14 15 17

% of sales 40 43 45 45 44 44

Service

Value 2,420 2,723 2,674 2,914 3,352 3,921 13.6

% Change 12 -2 9 15 17

% of sales 2 2 1 1 1 1

IT 109,212 133,457 165,261 188,824 217,938 254,988 15.6

Non IT 18,626 29,766 40,689 49,175 61,968 72,363 21.2

Services 3,333 3,446 3,691 4,114 4,755 5,564 14.7

Net Sales 137,578 167,038 211,930 241,509 283,950 332,082 16.6

Change (%) 8.5 21.4 26.9 14.0 17.6 17.0

Source: MOSL


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Growth in domestic and international markets


Segment-wise revenue breakup Breakup among domestic and global business


Expect margins to remain stable

We estimate EBITDA to increase from INR6.2b in FY12 to ~INR9.8b in FY15E, a CAGR of

16.5%. While EBITDA margins to improve marginally from 2.9% in FY12 to ~3% in FY15E.

This would be driven by an increasing proportion of non-IT and services revenues,

which enjoy higher margins. In FY15, we expect domestic operations to account for

~64% of EBIT, while the international operations is likely to account for ~36% of EBIT.

EBITDA to post a CAGR of 16.5% over FY12-15E

Source: MOSL


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Expect net profit growth of ~20% over FY12-15E

We expect REDI's net profit to post a CAGR of ~20% over FY12-15E. This would primarily

be led by strong revenue growth, marginal improvement in EBIT margins and benefits

from lower leverage. We expect net profit margin to increase marginally from 1.4% in

FY12 to ~1.5% by FY15E. We expect domestic operations to contribute ~62% of profits

and the international operations to contribute ~38% of profits.

Net profit CAGR of ~20% over FY12-15E RoCE, RoE to remain strong


Working capital intensity to remain stable

IT product and services distribution industry is intensive in working capital and requires

significant levels in receivables and inventory, which to some extent is offset by

vendor trade account payables. Based on the timing of customer receipt and payment

to vendor, the actual level of net debt could vary significantly compared to actual

debt at a period's end. We expect REDI's net working capital to decline from ~46 days

in FY13 to ~44 days by FY15E. Typically working capital requirement for a distribution

company like REDI gets negatively impacted during economic downturn and improves

on the back of economic upturn.

EBIT margins in domestic and international markets



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Muted 1HFY13 performance, sharp recovery expected in 2HFY13

During 1HFY13, REDIs revenue growth was muted at ~10% (2% in domestic and 19.3%

in international). We expect REDI 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 REDIstop line by FY14 and 3) revival in subsidiary Arenas operations thus driving

international growth.

Share of international revenues has been increasing



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Valuation and view

REDI is the leading IT SCM player in India and the Middle East and is a strategic partner

to the world's leading technology companies. We expect REDI to post revenue CAGR

of 17% and net profit CAGR of ~20% over FY12-15E. Implementation of GST wouldunveil and increase new opportunities for the company, particularly in non-IT vertical.

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.

REDI recently tied up with Apple to distribute iPhone range. We estimate the iPhone

market in India at ~1m and expect REDI to garner ~60% market share, which implies a

potential new product category of ~INR24b for it in FY14E. We believe successful

implementation of REDI's strategic initiatives could allay concerns on 1) its NBFC arm,

2) outlook for its subsidiary 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 initiatecoverage with a Buy and a target price of INR103, based on intrinsic P/E of 8x its FY15E

earnings, an upside of ~27%.

Intrinsic P/E calculation for REDI

Current Earnings 3,404

Book value of equity 16,303 RoE = 21%

Revenues 209,086

Growth Period

Length of growth period (Years) 10

Growth rate during period (g) 15.4% Expected RoE = 21%

Payout ratio during period (%) 27%

Cost of Equity during period 14.55%

Stable/ Terminal Growth Period

Growth rate in steady state 4.6%

Payout ratio in steady state 50% Expected RoE = 18%

Cost of Equity in steady state 15.3%

Target Price (Based on FY15E EPS)

Current Price 81

Target Price 103

% Upside 27.0

PER (x) 8.1

Cost of Equity: Growth Period Cost of Equity: Stable Period

Rf 7.8% Rf 7.8%

Rmp 7.5% Rmp 7.5%

Beta 0.9 Beta 1.0

COE 14.6% COE 15.3%


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Impact of change in growth COE (INR)

Impact of change in terminal COE (INR)

Impact of change in both growth and terminal COE (INR)


Sensitivity to Cost of Equity


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Comparative Valuations

CMP MCap EPS Gr. (%) P/E (x) P/BV (x) EV/EBIDTA RoE (%)

(M) CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14

Avnet INC (USD) 34 4,721 -25.7 18.5 11.1 9.4 1.2 1.1 6.9 6.0 10.5 14.1

Arrow Electronics (USD) 39 4,156 0.4 11.2 9.2 8.2 1.0 0.9 6.6 6.1 11.0 10.6

Ingram Micro INC-CL A (USD) 18 2,758 17.4 9.7 8.7 7.9 0.7 0.7 3.5 3.4 8.6 8.8

Synnex Corp (USD) 36 1,359 6.2 10.3 8.8 8.0 1.0 0.8 5.0 4.5 11.2 11.9

Tech Data Cor (USD) 49 1,867 0.9 15.2 9.8 8.5 1.2 1.1 4.6 4.1 10.2 11.1

Synnex Technology (TWD) 59 91,616 16.7 11.3 13.4 12.1 10.0 - 15.4 -

FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15

Redington India (INR) 81 33,283 18.7 17.7 8.0 6.8 1.7 1.4 6.8 5.9 22.6 22.2

Digital China (HKD) 13 13,733 19.8 16.8 8.7 7.5 1.5 1.3 6.1 5.2 18.7 19.2

Source: MOSL

Redington India PE band Redington India PB band


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Company background

REDI is promoted by the Singapore-based Kewalram Chanrai Group that also owns

OLAM and Jaslok Hospital in Mumbai, India. In 1993, it began as a component distributor

and moved into completed products such as PCs, desktops etc and finally into value-

added products. It then positioned as a complete supply chain manager, with a focus

on value-added IT products.

In the past 3-4 years, REDI is slowly transitioning into a complete supply chain manager

to include non-IT products too, with a presence in India, Middle East, Africa and Turkey.

Company has organically grown its business to be the largest IT distributor in India

and the Middle East and Africa (MEA). REDI plans to slowly extend its reach to CIS

countries too. It aims to have a global footprint in developing countries.

Group structure

Source: Company


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Failure to adapt to IT industry changes

IT products industry is subject to rapid technological changes, new and enhanced

product specifications, evolving industry standards and changes in the manner

technology products are distributed and managed. If REDI fails to adopt these changing

dynamics, it may incur inventory loss or fail to sustain its leadership position.

Intense competition

Key competitors include local, regional, national and international distributors and

suppliers that employ a direct-sales model. Thus, competition is intense and often

price-based. Currently, some of the leading global distribution companies like Tech

Data and Synnex Taiwan are not present both in India and the Middle East. Hence,

their entry could increase competition.

High risk of clients concentration

A significant percentage of REDIs revenues relates to products sold by few suppliers.

Due to such concentration risk, terminations of supply or services agreements or a

significant change in the terms of business could adversely impact it. REDIs key clients

in the domestic market are HP (~20%) and RIM (~18%), while HP (~39%) and Nokia

(~14%) account for key international clients. However, the dependence on these

vendors is constantly reducing, given additions of new verticals and product categories.

HP accounted for 44% of its domestic sales in FY07 and 20% in FY12; globally, HP was

~60% of sales in FY07 and ~39% in FY12.

Exposed to risks of conducting business in multiple geographies

Company is exposed to the impact of foreign currency fluctuations, interest rate

changes and other macro risks due to its exposure to international markets.

Key risks


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Financials and Valuation

Income Statement (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 137,578 167,038 211,930 241,595 284,189 331,873

Change (%) 8.6 21.4 26.9 14.0 17.6 16.8Total Expenditure 134,118 162,294 205,718 234,678 275,852 322,050

% of Sales 97.5 97.2 97.1 97.1 97.1 97.0

EBITDA 3,459 4,744 6,212 6,916 8,336 9,823

Margin (%) 2.5 2.8 2.9 2.9 2.9 3.0

Depreciation 234 246 310 387 467 553

EBIT 3,225 4,499 5,902 6,530 7,869 9,269

Int. and Finance Charges 664 1,177 1,689 1,837 1,931 1,982

Other Income - Rec. 198 189 290 266 285 339

PBT bef. EO Exp. 2,759 3,510 4,503 4,958 6,223 7,627

EO Expense/(Income) 0 4 -1 0 0 0

PBT after EO Exp. 2,759 3,506 4,505 4,958 6,223 7,627

Current Tax 639 893 1,131 1,339 1,755 2,288

Deferred Tax 0 -31 -18 0 0 0

Tax Rate (%) 23.2 24.6 24.7 27.0 28.2 30.0

Reported PAT 2,120 2,644 3,392 3,619 4,468 5,339

PAT Adj for EO items 1,843 2,259 2,928 3,404 4,208 5,040

Change (%) 15.5 22.6 29.6 16.3 23.6 19.8

Margin (%) 1.3 1.4 1.4 1.4 1.5 1.5

Less: Mionrity Interest 276.9 387.7 463 215 260 299

Profit for the Year 1,843 2,259 2,928 3,404 4,208 5,040

Balance Sheet

Y/E March 2010 2011 2012 2013E 2014E 2015EEquity Share Capital 786 793 797 797 797 797

Total Reserves 9,971 11,761 12,428 15,505 19,014 23,214

Net Worth 10,757 12,553 13,225 16,303 19,811 24,011

Deferred Liabilities 0 36 11 11 11 11

Total Loans 11,486 16,128 20,917 22,317 24,217 24,717

Minority Interest 2,403 3,413 949 1,164 1,424 1,723

Capital Employed 24,646 32,130 35,102 39,795 45,463 50,462

Gross Block 1,271 3,309 3,858 4,708 5,603 6,558

Less: Accum. Deprn. 424 1,192 1,505 1,892 2,359 2,912

Net Fixed Assets 847 2,118 2,353 2,816 3,244 3,646

Capital WIP 121 14 87 0 0 0

Curr. Assets, Loans&Adv. 35,337 47,983 51,885 59,494 68,793 77,943

Inventory 9,829 15,833 17,000 20,519 24,137 28,186

Account Receivables 18,164 18,703 22,190 25,152 29,587 34,551

Cash and Bank Balance 5,826 4,806 4,834 5,218 4,948 4,295

Loans and Advances 1,519 8,642 7,860 8,605 10,122 10,911

Curr. Liability & Prov. 11,694 18,594 20,020 23,129 27,187 31,739

Account Payables 11,090 17,973 19,707 22,767 26,760 31,242

Provisions 604 621 313 362 426 498

Net Current Assets 23,644 29,389 31,865 36,365 41,606 46,204

Appl. of Funds 24,646 32,130 35,102 39,795 45,463 50,463

E: MOSL Estimates; * Adjusted for treasury stocks


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Financials and Valuation

Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

EPS 4.7 5.7 7.3 8.5 10.6 12.6

Cash EPS 5.3 6.3 8.1 9.5 11.7 14.0

BV/Share 27.4 31.7 33.2 40.9 49.7 60.2

DPS 1.0 1.1 0.4 0.7 1.5 1.8

Payout (%) 21.9 19.3 6.0 9.0 15.7 15.7

Valuation (x) *

P/E 10.8 9.3 7.5 6.3

Cash P/E 9.8 8.4 6.8 5.7

P/BV 2.4 1.9 1.6 1.3

EV/Sales 0.2 0.2 0.2 0.2

EV/EBITDA 7.8 7.1 6.2 5.4

Dividend Yield (%) 0.5 0.9 1.9 2.3

Return Ratios (%)

RoE 17.7 19.4 22.7 23.1 23.3 23.0

RoCE 16.3 18.4 19.7 18.7 19.7 20.7

Working Capital Ratios

Asset Turnover (x) 5.6 5.2 6.0 6.1 6.3 6.6

Inventory (Days) 26.1 34.6 29.3 31.0 31.0 31.0

Debtor (Days) 48 41 38 38 38 38

Leverage Ratio (x)

Current Ratio 3.0 2.6 2.6 2.6 2.5 2.5

Debt/Equity 1.1 1.3 1.6 1.4 1.2 1.0

* Adjusted for treasury stocks

Cash Flow Statement (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Oper. Profit/(Loss) before Tax 3,225 4,499 5,902 6,530 7,869 9,269

Interest/Dividends Recd. 664 1,177 1,689 1,837 1,931 1,982

Depreciation 234 246 310 387 467 553

Direct Taxes Paid 590 815 1,041 1,273 1,684 2,204

(Inc)/Dec in WC -2,460 -7,275 -2,642 -4,117 -5,511 -5,250

CF from Operations 409 -3,346 2,529 1,527 1,141 2,368

EO expense 0 -4 1 184 0 0

CF from Operating incl EO 409 -3,351 2,530 1,711 1,141 2,368

(inc)/dec in FA -323 -1,409 -619 -763 -895 -955

(Pur)/Sale of Investments 0 0 0 0 0 0

CF from investments -174 -1,267 -401 -563 -681 -700

Issue of Shares -961 642 -4,998 0 0 0

(Inc)/Dec in Debt 1,656 4,642 4,789 1,400 1,900 500

Interest Paid -664 -1,177 -1,689 -1,837 -1,931 -1,982

Dividend Paid -465 -509 -204 -326 -700 -839

CF from Fin. Activity -433 3,598 -2,101 -764 -731 -2,321

Inc/Dec of Cash -198 -1,020 28 384 -270 -839

Add: Beginning Balance 6,024 5,826 4,806 4,834 5,218 4,948

Closing Balance 5,826 4,806 4,834 5,218 4,948 4,108


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N O T E S


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Motilal Oswal Securities LtdM til l O l T L l 9 S i R d P bh d i M b i 400 025

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