25 January 2013 Initiating Coverage | Sector: Logistics

Redington India

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

Redington India

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

25 January 2013

25 January 2013 Initiating Coverage | Sector: Logistics

Redington India
BSE SENSEX S&P CNX

19,924

6,019

CMP: INR81 REDI to roll

TP: INR103

Buy

Diversification beyond IT supply chain - a shot in the arm

Bloomberg Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) REDI IN 398.6

M.Cap. (INR b)/(USD b) 32.3/0.6 94/65 -11/-3/-16

Valuation summary (INR b)

Y/E March 2013E 2014E 2015E Sales 241.6 284.2 331.9 EBITDA 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

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 top line 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.

Shareholding pattern (%)

As on Sep-12 Promoter 21.1 Dom. Inst 9.0 Foreign 63.3 Others 6.7 Jun-12 Sep-11 21.1 21.1 9.4 8.9 63.3 63.4 6.3 6.6

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.

Stock performance (1 year)

Strategic diversifications aimed to de-risk model

Investors are advised to refer through disclosures made at the end of the Research Report. 25 January 2013

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
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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 INR103

We 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

3PL logistics to increase

As compared to developed nations, 3PL contribution remains at a nascent stage

REDI present in most attractive segments

Current 3PL penetration
HIGH

High

Neutral

Low

Retail

Infrastructure Equipment

Growth of Sector MEDIUM LOW

Chemicals and Industrial products

Pharmaceuticals

IT Hardware Telecom

LOW

Consumer products MEDIUM Profitability of 3PL

Automotive HIGH

Source: KPMG Analysis 25 January 2013 4

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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-margin products 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
... To Supply Chain Management

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 relationship management Management of inventory After sales support service 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 costefficient 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.
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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 of their 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.
3PL logistics to increase
As compared to developed nations, 3PL contribution remains at a nascent stage

REDI present in most attractive segments

Current 3PL penetration
HIGH

High

Neutral

Low

Retail

Infrastructure Equipment

Growth of Sector MEDIUM LOW

Chemicals and Industrial products

Pharmaceuticals

IT Hardware Telecom

LOW

Consumer products MEDIUM Profitability of 3PL

Automotive HIGH

25 January 2013

Source: KPMG Analysis 6

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Expect value-added services to increase sharply

Source: Company, MOSL

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.
The distributors model
MANUFACTURER DISTRIBUTOR 4-6% RESELLER 15% 9-11% Government Resellers Corporate Resellers IT Full-Line Distributors Direct Marketers VARs IT Specialty Distributors Retailers Online Resellers DIRECT (%) Source: Industry, MOSL 25 January 2013 7 Government / Education Fortune 1000 Businesses Small and Medium-sized Businesses END USER

Subsystems and Peripherals

Component and Material Suppliers

Electronic Component Distributors

Electronic Contract Manufacturers

IT Original Equipement Manufacturers (IT OBMs)

Software

Consumer

Redington India

Key risks and mitigation strategies

Key business model risks Low gross margins Business is characterized by narrow 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 (20% of domestic and 44% of international) Receivable risk As REDI sells its goods on credit to several fragmented re-sellers, there is high receivable risk High working capital intensity Working capital intensity is high as distributors have to keep inventory and sell on credit Inventory risk REDI's business subjects it to the risk that the value of inventory could be adversely affected by suppliers' price reductions or by technological changes, thus affecting usefulness or desirability of products Mitigation strategies Increasing value portfolio; New initiatives

Broad-basing vendors; increasing depth of product lines

Historically bad debt, including provisions, as percentage of sales has been less than 0.07%. As company has a wide portfolio, re-sellers dependence is high Working capital management disciplines

Market knowledge; forecasting ability and robust IT system Obsolescence overcome by stock rotation policy supported by vendors Price erosion supported by vendor discounts Suppliers provide warranties on products that REDI distributes and allow return of defective products, including those by customers Source: MOSL

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 is the 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.
Competition and market mapping
Sales % -IT -Non-IT -Services PAT % Product range Domestic INR99b 47% 79% 19% 2% INR1.8b 62% IT peripherals: PCs, PC components, UPS, networking products, packaged software, storage products, high-end servers Non-IT: Telecom devices, consumer durables, digital printing press, tablets and gaming consoles HP -20%, RIM -18%, Microsoft - 7%, Acer/ Lenova -5% and Apple - 5%, Others -40% International INR112b 53% 81% 16% 3% INR1.1b 38% IT peripherals, PCs, PC components, UPS, networking products, packaged software, storage products, high-end servers Non-IT: Telecom and Tablets Consolidated INR212b 100%

INR2.9b 100%

Top vendors (FY12)

HP - 39%, Nokia - 14%, Dell - 9% and Others 38% Source: Company, MOSL

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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 has two 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 Channel partners Sales office Warehouses Service centers Partner centers Product range 23,337 56 66 70 292 80 plus Middle East & Africa 9,857 (present in 20 countries) 21 27 38 18 50 plus Source: Company, MOSL

REDI has a wide Pan India presence

Source: Company, MOSL

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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

Growth in existing product lines Partnering with new vendors Adding new products Foray into new verticals and business lines ADC Nook Exploring new regions and geography/ inorganic acquisitions Entry into CIS countries Strategic initiatives Lower stake in NBFC Asset-light plans for the entity

Source: MOSL

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 Hardware % of total % Change Software % of total % Change Services % of total % Change Telecom % of total % Change Total % Change 9.1 13.7 3.5 5.3 9.2 13.9 44.7 67.3 66.4 2013 9.5 14.3 4.4 4 6.0 14.3 10.3 15.5 12.0 47.8 72.0 6.9 71.5 7.7 2014E 10.9 16.4 14.7 4.5 6.8 12.5 11.9 17.9 15.5 51.5 77.6 7.7 78.9 10.3 2015E 12.5 18.8 14.7 5.2 7.8 15.6 13.8 20.8 16.0 54.6 82.2 6.0 86.2 9.3 2016E 14.3 21.5 14.4 6 9.0 15.4 16.1 24.2 16.7 59.5 89.6 9.0 95.9 11.3 CAGR (%) (2012-2016) 12.0

14.4

15.0

7.4

9.6 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.
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Key initiatives across categories

Categories Components Peripherals and PCs System and commercial PC Software Networking Enterprise Initiatives/Triggers Increasing brand affiliations Has affiliations with all key players Revival of government spending Moving up the value chain New opportunities in the cloud space Revival of government spending Source: MOSL

Breakup of Indian IT industry FY13 (%)

REDI IT product-wise breakup

Source: IDC

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.
Potential to move up value chain
Legacy Distribution Value Distribution Deepar Technical Aptitude Product Excellence Solutions-Based Distribution Partner Enablement and Development

Core Value Proposition

Pick, Pack, Ship

Expertise

Operations, Logistics, Scale

Selling into Target Markets

Differentiators

Line Card, Price, Availability

Technical Specialization

Analystics-Based Marketing, Technical & Sales Acumen Developing a Knowledge Base of Expertise

Key Services

Credit, Account Management, Logistics

Vertical Focus; Professional Services

Source: Industry, MOSL

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Apple sales in India set to mimic RIM success

Source: Company, MOSL

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

HP RIM Microsoft Acer Lenova Apple Others Total FY07 44 0 9 3 6 0 38 100 FY08 40 0 9 2 6 0 43 100 FY09 38 0 10 3 5 0 43 100 FY10 34 5 10 5 5 0 41 100 FY11 FY12 22 20 15 18 8 7 5 5 6 5 0 5 44 40 100 100 Source: Company, MOSL

B) Foray into new verticals and business lines

REDI 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 geography

Geographical 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 by attracting 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 capture emerging 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 Acquired Land Chennai Kolkata New Delhi Mumbai Long term Lease Dubai 11.56 13.76 13.32 Status Operational since Jul'09 2HFY13 2HFY14 Yet to acquire land Operational since Sep'10 Source: Company, MOSL 13

5.16

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Chennai ADC

Dubai ADC

Source: Company, MOSL

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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.

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)

Source: Company, MOSL

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

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Source: Industry, MOSL 15

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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 of garnering 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

Source: Company, MOSL

Revenue of consumer durable goods to increase by ~5x over FY12-15E

With a view to leverage its existing strengths in the logistics business and to broadbase 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)

Source: Company, MOSL

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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 to competitors. 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 Vendor pays for service provided to customer on request

Retainer Paid monthly by vendor to maintain agreed resources and service level agreements for their products

Annuity Vendor pays annual support charges per unit sold during the year

Event Based Customers pay as and when they use the services

Infrastructure Management Services Customer pays for round the clock support for hardware and application maintenance

Source: Company, MOSL

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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 Domestic % Change % of net sales Non IT Value % Change % of sales IT Value % Change % of sales Service Value % Change International % Change Non IT Value % Change % of sales IT Value % Change % of sales Service Value % Change % of sales IT Non IT Services Net Sales Change (%) 2010 64,861 7 47 6,526 5 54,486 40 913 69,245 5 12,099 9 54,726 40 2,420 2 109,212 18,626 3,333 137,578 8.5 2011 81,778 26 49 17,633 170 11 61,782 13 37 723 -21 86,531 25 12,134 0 7 71,675 31 43 2,723 12 2 133,457 29,766 3,446 167,038 21.4 2012 96,665 18 46 26,474 50 12 69,175 12 33 1,017 41 112,976 31 14,216 17 7 96,087 34 45 2,674 -2 1 165,261 40,689 3,691 211,930 26.9 2013E 113,025 17 47 32,828 24 14 78,997 14 33 1,200 18 129,089 14 16,348 15 7 109,827 14 45 2,914 9 1 188,824 49,175 4,114 241,509 14.0 2014E 136,045 20 48 43,004 31 15 91,637 16 32 1,404 17 148,616 15 18,964 16 7 126,301 15 44 3,352 15 1 217,938 61,968 4,755 283,950 17.6 CAGR (FY12-15) 159,602 18.2 17 48 50,745 18 15 107,215 17 32 1,642 17 173,312 17 21,619 14 7 147,772 17 44 24.2 2015E

15.7

15.3

15.0

15.4

3,921 13.6 17 1 254,988 15.6 72,363 21.2 5,564 14.7 332,082 16.6 17.0 Source: MOSL

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Growth in domestic and international markets

Source: Company, MOSL

Segment-wise revenue breakup

Breakup among domestic and global business

Source: Company, MOSL

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 25 January 2013 19

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EBIT margins in domestic and international markets

Source: Company, MOSL

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

Source: Company, MOSL

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.

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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 REDIs top line by FY14 and 3) revival in subsidiary Arenas operations thus driving international growth.

Share of international revenues has been increasing

Source: Company, MOSL

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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 would unveil 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 initiate coverage 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 Book value of equity Revenues Growth Period Length of growth period (Years) Growth rate during period (g) Payout ratio during period (%) Cost of Equity during period Stable/ Terminal Growth Period Growth rate in steady state Payout ratio in steady state Cost of Equity in steady state Target Price (Based on FY15E EPS) Current Price Target Price % Upside PER (x) 3,404 16,303 209,086 10 15.4% 27% 14.55% 4.6% 50% 15.3% 81 103 27.0 8.1 RoE = 21%

Expected RoE =

21%

Expected RoE =

18%

Cost of Equity: Growth Period Rf Rmp Beta COE

7.8% 7.5% 0.9 14.6%

Cost of Equity: Stable Period Rf Rmp Beta COE

7.8% 7.5% 1.0 15.3%

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Sensitivity to Cost of Equity

Impact of change in growth COE (INR)

Impact of change in terminal COE (INR)

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

Source: Company, MOSL

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Comparative Valuations
CMP Avnet INC (USD) Arrow Electronics (USD) Ingram Micro INC-CL A (USD) Synnex Corp (USD) Tech Data Cor (USD) Synnex Technology (TWD) Redington India (INR) Digital China (HKD) 34 39 18 36 49 59 81 13 MCap (M) 4,721 4,156 2,758 1,359 1,867 91,616 33,283 13,733 EPS Gr. (%) CY13 CY14 -25.7 0.4 17.4 6.2 0.9 16.7 FY14 18.7 19.8 18.5 11.2 9.7 10.3 15.2 11.3 FY15 17.7 16.8 P/E (x) CY13 CY14 11.1 9.2 8.7 8.8 9.8 13.4 FY14 8.0 8.7 9.4 8.2 7.9 8.0 8.5 12.1 FY15 6.8 7.5 P/BV (x) CY13 CY14 1.2 1.0 0.7 1.0 1.2 FY14 1.7 1.5 1.1 0.9 0.7 0.8 1.1 FY15 1.4 1.3 EV/EBIDTA CY13 CY14 6.9 6.6 3.5 5.0 4.6 10.0 FY14 6.8 6.1 6.0 6.1 3.4 4.5 4.1 FY15 5.9 5.2 RoE (%) CY13 CY14 10.5 11.0 8.6 11.2 10.2 15.4 FY14 22.6 18.7 Source: 14.1 10.6 8.8 11.9 11.1 FY15 22.2 19.2 MOSL

Redington India PE band

Redington India PB band

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Redington India

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 valueadded 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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Redington India

Key risks
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.

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Financials and Valuation

Income Statement
Y/E March Net Sales Change (%) Total Expenditure % of Sales EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT bef. EO Exp. EO Expense/(Income) PBT after EO Exp. Current Tax Deferred Tax Tax Rate (%) Reported PAT PAT Adj for EO items Change (%) Margin (%) Less: Mionrity Interest Profit for the Year 2010 137,578 8.6 134,118 97.5 3,459 2.5 234 3,225 664 198 2,759 0 2,759 639 0 23.2 2,120 1,843 15.5 1.3 276.9 1,843 2011 167,038 21.4 162,294 97.2 4,744 2.8 246 4,499 1,177 189 3,510 4 3,506 893 -31 24.6 2,644 2,259 22.6 1.4 387.7 2,259 2012 211,930 26.9 205,718 97.1 6,212 2.9 310 5,902 1,689 290 4,503 -1 4,505 1,131 -18 24.7 3,392 2,928 29.6 1.4 463 2,928 2013E 241,595 14.0 234,678 97.1 6,916 2.9 387 6,530 1,837 266 4,958 0 4,958 1,339 0 27.0 3,619 3,404 16.3 1.4 215 3,404

(INR Million)
2014E 284,189 17.6 275,852 97.1 8,336 2.9 467 7,869 1,931 285 6,223 0 6,223 1,755 0 28.2 4,468 4,208 23.6 1.5 260 4,208 2015E 331,873 16.8 322,050 97.0 9,823 3.0 553 9,269 1,982 339 7,627 0 7,627 2,288 0 30.0 5,339 5,040 19.8 1.5 299 5,040

Balance Sheet
Y/E March Equity Share Capital Total Reserves Net Worth Deferred Liabilities Total Loans Minority Interest Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Curr. Assets, Loans&Adv. Inventory Account Receivables Cash and Bank Balance Loans and Advances Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates; * Adjusted 25 January 2013 2010 786 9,971 10,757 0 11,486 2,403 24,646 1,271 424 847 121 2011 793 11,761 12,553 36 16,128 3,413 32,130 3,309 1,192 2,118 14 2012 797 12,428 13,225 11 20,917 949 35,102 3,858 1,505 2,353 87 51,885 17,000 22,190 4,834 7,860 20,020 19,707 313 31,865 35,102 2013E 797 15,505 16,303 11 22,317 1,164 39,795 4,708 1,892 2,816 0 59,494 20,519 25,152 5,218 8,605 23,129 22,767 362 36,365 39,795 2014E 797 19,014 19,811 11 24,217 1,424 45,463 5,603 2,359 3,244 0 68,793 24,137 29,587 4,948 10,122 27,187 26,760 426 41,606 45,463 2015E 797 23,214 24,011 11 24,717 1,723 50,462 6,558 2,912 3,646 0 77,943 28,186 34,551 4,295 10,911 31,739 31,242 498 46,204 50,463

35,337 47,983 9,829 15,833 18,164 18,703 5,826 4,806 1,519 8,642 11,694 18,594 11,090 17,973 604 621 23,644 29,389 24,646 32,130 for treasury stocks

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Financials and Valuation

Ratios
Y/E March Basic (INR) * EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) * P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Leverage Ratio (x) Current Ratio Debt/Equity * Adjusted for treasury stocks 2010 4.7 5.3 27.4 1.0 21.9 2011 5.7 6.3 31.7 1.1 19.3 2012 7.3 8.1 33.2 0.4 6.0 2013E 8.5 9.5 40.9 0.7 9.0 2014E 10.6 11.7 49.7 1.5 15.7 2015E 12.6 14.0 60.2 1.8 15.7

10.8 9.8 2.4 0.2 7.8 0.5

9.3 8.4 1.9 0.2 7.1 0.9

7.5 6.8 1.6 0.2 6.2 1.9

6.3 5.7 1.3 0.2 5.4 2.3

17.7 16.3

19.4 18.4

22.7 19.7

23.1 18.7

23.3 19.7

23.0 20.7

5.6 26.1 48

5.2 34.6 41

6.0 29.3 38

6.1 31.0 38

6.3 31.0 38

6.6 31.0 38

3.0 1.1

2.6 1.3

2.6 1.6

2.6 1.4

2.5 1.2

2.5 1.0

Cash Flow Statement

Y/E March Oper. Profit/(Loss) before Tax Interest/Dividends Recd. Depreciation Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO expense CF from Operating incl EO (inc)/dec in FA (Pur)/Sale of Investments CF from investments Issue of Shares (Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 2010 3,225 664 234 590 -2,460 409 0 409 -323 0 -174 -961 1,656 -664 -465 -433 -198 6,024 5,826 2011 4,499 1,177 246 815 -7,275 -3,346 -4 -3,351 -1,409 0 -1,267 642 4,642 -1,177 -509 3,598 -1,020 5,826 4,806 2012 5,902 1,689 310 1,041 -2,642 2,529 1 2,530 -619 0 -401 -4,998 4,789 -1,689 -204 -2,101 28 4,806 4,834 2013E 6,530 1,837 387 1,273 -4,117 1,527 184 1,711 -763 0 -563 0 1,400 -1,837 -326 -764 384 4,834 5,218

(INR Million)
2014E 7,869 1,931 467 1,684 -5,511 1,141 0 1,141 -895 0 -681 0 1,900 -1,931 -700 -731 -270 5,218 4,948 2015E 9,269 1,982 553 2,204 -5,250 2,368 0 2,368 -955 0 -700 0 500 -1,982 -839 -2,321 -839 4,948 4,108

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N O T E S

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Disclosures
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