Redington India: Buy

Investors with a three-year horizon may buy the shares of Redington India, an IT hardware and software distributor.

The company has potential for scaling up its sales in high growth markets of India, West Asia and Europe, even in a slowing global economy. Given the sharp rise in markets, investors may consider buying the stocks in a phased manner to capitalise on declines linked to broader markets. At Rs 230, the stock trades at 11 times its likely 2009-10 per share earnings.

In the recent March quarter, Redington’s revenues grew by 7.7 per cent over the same period in 2007, while net profits grew by 18.5 per cent over the same period.

Improving trends in IT hardware shipments, diversification from sales of electronic goods, and expanding after-sales services offer scope for revenue growth, while helping margin expansion. After three successive quarters of decline in hardware shipments around the world, sales growth is just starting to revive in the March quarter, especially in India, West Asian and African regions.

According to a recent IDC report, personal computer shipments in India have increased by 8 per cent sequentially in the recent March quarter. Further, hardware and software sales are likely to be to the tune of Rs 60,703 crore (7.1 per cent growth over 2008) and Rs 11,300 crore (17.4 per cent growth) in 2009.

This is expected to be led by Government spending on IT enablement, especially in schools and colleges, e-governance projects, and banking sectors. With the new Government in place, a continuity of policies is expected in these areas. IDC pegs the Middle-East and African IT markets to be worth $80 billion by 2013, up from $51 billion in 2008. Other research agencies such as TPI also point out the increasing average contract values in the West Asian region.

The company has also diversified into selling non-IT products such as cameras, consumer-durables, and mobile-phones. Redington has tied up with Nokia to distribute the latter’s mobile phones in Africa and Australia. Given the relatively under-penetrated African market and the interest shown by several operators such as Bharti Airtel, Vodafone and several Chinese operators in having a larger footprint there, this partnership could be quite fruitful.

Competition from well-entrenched distributors such as Ingram Micro and the resulting pricing pressure is a key risk to this recommendation. Given the capital intensive nature of business, interest costs have increased by 36.8 per cent for the company in 2008-09, but due to margin expansion, the interest cover has been stable.