Redington (India) Ltd
(BSE Code: 532805) (CMP: Rs.93.45) (FV: Re.2) (TGT: Rs.125+)
Incorporated in 1961, Chennai based Redington (India) Ltd, together with its subsidiaries, provides supply chain solutions for information technology (IT), consumer and lifestyle products. It distributes IT hardware and software products and consumer and lifestyle products such as digital lifestyle, smart communications, telecom, consumer electronics and digital printing. It also provides hardware support services including warranty and post-warranty services through a network of 77 owned hardware support service centres and 266 franchise service centers. It’s hardware and support services include solution design and consulting, technical helpdesk, field engineering support, parts warehousing, forward and reverse logistics, imports and re-exports and asset recovery. In addition, it offers logistics services, which range from import, warehousing and stock movement across geographies to packing/repacking, order processing and delivery within its operating areas. Further, its warehousing and logistics services include thirdparty logistics such as forward and reverse logistics and IT enablement as well as operation of automated distribution centers. It operates in India, South Asia, the Middle-East, Africa and Turkey.
The management acknowledged the business challenges given the acute depreciation of the Turkey Lira (TRY). However, it expects the impact to be minimal in the medium-to-long term as: i) 82% of Turkey-based Arena’s receivables are in USD; ii) 52% of these are secured/ insured; and iii) given the low leverage, Arena is well placed to sail through the challenges sans external support due to the following reasons: a) Arena has generated positive free cash
flows even in years of sharp currency depreciation; b) provisions for inventory and doubtful receivables have remained in a narrow range despite the consistent currency depreciation; c) working capital days have risen steadily largely due to steady increase in receivables days, leading to a fall in ROCE (this trend has reversed in H1CY18); d) ROE has been impacted by high tax rate; e) debt has been low with comfortable debt:equity ratio (0.28x as on H1CY18); and f) revenue growth and margin have been impacted by TRY’s devaluation.
As per media reports, Apple is rationalising the number of distributors. While Ingram Micro and Redington will be retained, Brightstar, Rashi Peripherals and HCL Infosystems are expected to be phased out by March 2019. We expect this move to boost Redington’s margin, growth and return ratios.
We believe that the correction in its share price since the Turkish crisis broke out is overdone given its meager contribution to revenue. Also, USD being the functional currency provides a natural hedge. Its valuations look attractive at 7.8x FY19E EPS based on its growth prospects and returns profile.
Technical Outlook: The stock looks good on the daily chart for medium-term investment. It is making a higher high and higher low on the daily chart. The recent correction in its share price provides an opportunity to enter. The stock trades below all important moving averages like the 200 DMA level on the daily chart. Start accumulating at this level of Rs.93.45 and on dips to Rs.82 for medium-to-long term investment and a possible price target of Rs.125+ in the next 12 months.