We attended the analyst meet of Redington India (REDI) and came back impressed by its consistent growth across three verticals (distribution/ logistics/ support services) and broad-based management team. Management cited five instances in last 6 years where REDI delivered growth y-o-y despite growth challenges in high-concentrated vendors:
HP de-growth in MEA (REDI grew 7% y-o-y), HP restructuring in India (REDI grew 26% y-o-y), Nokia exit in Africa (REDI grew 14% YoY), Blackberry (REDI grew 14% YoY) and iPhone change in distribution (REDI grew 12% y-o-y). We believe unmatched bouquet of brands, extensive footprint, apt investments in infrastructure/systems/process-es and domain professionals with strong industry knowledge remain its key differentiators for gaining market share.
Double-digit earnings growth in India and Overseas operations (over 3-5 years) to continue led by multiple growth engines: India (enterprise/smartphones), supernormal growth prospects in logistics subsidiary, Overseas operations (outlined focus markets across regions, value added distribution, mobility and support services). Management expects double digit earnings growth to continue and RoE/RoCE to improve through enterprise segment and smartphones. The logistics subsidiary Proconnect has strong growth prospects. Management has chartered growth plans across markets and business segments to continue its double digit earnings growth over next 3-5 years and reduce working capital days by one week.
Focus Markets: Middle East (UAE, KSA, Qatar, Kuwait in short term and Iran, Iraq and Levant in the medium-to-long term ), Africa (Tanzania, Kenya, Ethiopia, Ghana, Senegal in short term and Nigeria, Morocco in the medium-to-long term) and CIS (Kazakhstan in the short term and Uzbekistan, Turkmenistan, Georgia in the medium-to-long term).
Mobility: Across smartphone categories. Support Services: Repair Services in ME in short term and IMS/Solutions in the medium-to-long term. Logistics Services: UAE in the short term and Saudi Arabia/ Qatar/Kuwait in the medium-to-long term.
GST benefits: They include reduction in number of warehouses, lower Supply Chain Management (SCM) cost, lower inventory days (3-5 days), better return ratios, higher business opportunities, additional ADCs and improved demand environment. Reduction in WC days being targeted.
IT: Valued Added Distribution (VAD) in the short term and VAD/IoT/Connected Devices in the medium-to-long term. Mobility: Across smartphone categories. Support Services: Repair Services in ME in short term and IMS/Solutions in the medium-to-long term. Logistics Services: UAE in the short term and Saudi Arabia/Qatar/Kuwait in the medium-to-long term. GST benefits: They include reduction in number of warehouses, lower Supply Chain Management (SCM) cost, lower inventory days (3-5 days), better return ratios, higher business opportunities, additional ADCs and improved demand environment.
We expect 13%/14% CAGR in revenue/EPS over FY16-18. Our TP of R195 (14x FY18e EPS) implies 94% upside from CMP of R101. The stock trades at 8x/7x FY17E/ FY18E EPS of R12/14.
India IT business: Overall addressable market size stands at R450 bn (56% of total IT market of R800 bn). REDI continues to post growth which is higher than the industry (7% vs. industry’s 3%). FY14-16 growth engines were networking (16%), servers (24%), commercial/enterprise storage (38%), and security software/appliances (33%).
Future growth drivers include: Digital India and Smart City projects; brand and acquisition and channel expansion in T3/T4 cities; market share increase in targeted volume vendors.
Redington poised to capitalise on Cloud business opportunity: Cloud segment will stage 50% CAGR over FY16-FY20. Redington’s addressable cloud business will be $1.3 bn and the company expects its share at 7-10% in FY20.
Smartphone market segment: Globally, smartphone shipments are expected to stage 5% CAGR over CY15-18, whereas India is expected to post a much stronger growth at 17%. REDI has a multi-pronged strategy in place which includes increase in portfolio (from Blackberry/Apple to a bouquet of brands of Indian, MNC and Chinese origin), platform agnostic approach (BB, iOS, Android), presence in all GT channels, geographic expansion, market share increase across brands, and becoming a preferred vendor as online players move to offline distribution channels.
Logistics 3PL business opportunity: 3PL market is expected to post 12% CAGR to reach $19 bn by 2020 with warehousing expected to cost 15-35% of total logistics spend. E-commerce remains a promising market and is expected to grow 3x to 4x to $44 bn in 2018.
Redington’s logistics subsidiary ProConnect will leverage this market opportunity through multiple sub-segments. Targeted revenue break-up to be: warehousing (30%), e-commerce including last mile (20%), transportation (25%), mission critical (10%) and others (15%).