Results Update: Redington India

Redington India: It has given great set of numbers in spite of the Volatility  prevailing everywhere. Although it is not an exception for Redinton as it is showing steady growth in all recent quarters when market conditions were tough. Apart from market volatility, there is another danger that cloud computing may prohibit large IT spending of organizations…but it is still growing by diversifying into new horizons. Distribution business is very tough as they have to establish their relevancy in the present era of cost cutting where some product channels see them as not adding any value to the product chain. But it is not….distribution is a very complex function, needing huge resources for keeping inventory, giving credit to resellers, market knowledge, providing after sales servicing and training etc. Just imagine how big resources Producers would need to block in these activities if not for distributors like Redington. 

Distributors earn their bits by achieving efficiency in the supply chain and economy of scale. Distributors like Ingram Micro and Redington, in order to fight another war of relevancy, have entered into the distribution of Cloud computing business. Earlier some suppliers were doubtful but then they see the value addition and now most of the cloud computing suppliers are having distributors. Redington is distributing the cloud products of Microsoft in india.

Anyhow, in this quarter, turnover of Redington has grown from 7570 cr to 9633 cr, operating margins are at 161 cr vs 145 cr while NP is at 93 cr vs 82 cr. But still it was down after the results. I don’t understand what market wants from it without giving it anything as it is trading at a PE ratio of just 8. Some analysts were worrying for the slight decline in the margins which I think is normal as Redington is venturing into new products and geographies. But it is not trading at a PE of 30-40 which can make us feel worried of these slight declines. Like Ingram Micro, the global Giant in the business ( although Chinese giant HNA bought it for 6 billion USD), is trading at a PE of 30 with market cap of $ 5 Billion. Ingram and Redington are the leaders in india with Ingram slight ahead of Redington. Ingram is earning around 1400 Cr NP on turnover of around 3 lac cr. While NP of Redington is around 500 cr.

Also the fact, Redington is working in the Indian market which is going to see huge growth in IT product usage whereas Ingram’s most of the markets are matured so Ingram is also looking for growth opportunities in Asia. Redington is the biggest in Middle east.

Redington’s third party logistic business “proconnect” is growing very fast, around 50-60% growth. It has another arm “Ensure” which is into multi brand warranty and after sales service business. This is the area where I feel it can achieve huge growth. India needs these branded after sales service centers as now we have crores of costly IT products and smartphones with huge data storage. we can't afford to throw them at a slight wear and tear. So we need to move beyond street repairing shops. HCL Infosys is also into this business big time and they are having around 300 centers in india with brand “Touch”. Warranty outsourcing will also be a big business as these smartphone and IT product manufacturers can’t afford to spend big in opening warranty centers in india and this crucial service will also be outsourced to players like Redington, HCL and TVS-E. TVS-E has already given great returns as it is at 105 from 45, for earlier study on TVS-E Click here (Touched 150 in between).

So I feel market isn’t recognizing the strength of business model of Redington. Redington will gain big with the approval of GST all over India as the same will reduce the logistics cost and Redington will need to invest lesser for inventory and warehousing leading to big savings in working capital etc. CMP is 103. Just stay here to witness the re-rating.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)