Analyst Reports 2

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Rpt. 21419451 REDINGTON INDIA LTD-INITIATING COVERAGE 2 - 2006-Feb-2013 IIFL

- SINGLA, MANOJ, ET AL

Rpt. 21398796 REDINGTON INDIA LTD 21 - 2804-Feb-2013 MOTILAL OSWAL SECURITIES, LTD

- BOTHRA, SIDDHARTH, ET AL

Rpt. 21364061 REDINGTON INDIA LTD-INITIATING COVERAGE 29 - 5828-Jan-2013 MOTILAL OSWAL SECURITIES, LTD

- BOTHRA, SIDDHARTH, ET AL

Rpt. 21273150 REDINGTON INDIA LTD 59 - 7209-Jan-2013 FIRST CALL INDIA EQUITY ADVISORS PVT LTD

- KHABEER, ABDUL, ET AL

Rpt. 21107436 REDINGTON INDIA LTD 73 - 8422-Nov-2012 NOMURA INTERNATIONAL (HONG KONG) LTD.

- AGARWAL, ANKUR, ET AL

Rpt. 20481923 REDINGTON INDIA LTD 85 - 12205-Aug-2012 WRIGHT INVESTORS SERVICE

- WRIGHT REPORTS, ET AL

Rpt. 20598621 REDINGTON INDIA LTD 123 - 13503-Aug-2012 FIRST CALL INDIA EQUITY ADVISORS PVT LTD

- KUSHWAHA, ASHISH, ET AL


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Institutional Equities

Company DescriptionRedington is the largest IT distributor in India, the Middle East,Africa, and second largest in Turkey. The company commencedoperations in 1993 and has graduated from a small IT distributor in

India to an end-to-end supply chain provider across South Asia.Further, the company has diversified from purely IT products to non-IT products such as smartphones, gaming consoles, consumerappliances, and digital press.

Redington buys the products from vendors for cash/credit and sellsthem to sub-distributors. Hence, the business model involves takinginventory and receivables risk. Thus, managing working capitalbecomes a key variable.

Figure 1: Distribution supply chain

SystemIntegrator

Corp. Reseller

Dealer

Retail Chain

Retailer

SystemIntegrator

Corp. Reseller

Dealer

Retail Chain

Retailer

Government

Corporate

SMB

End User

Government

Corporate

SMB

End User

ProcurementWarehousing

Logistics &Distribution

Credit toresellers

After SalesServices

BrandOwner

LocalSupplies

Manufacturer OverseasSupplies Market Risk

Inventory Risk

15%

4~6% 9~11%

BusinessIndia forms ~47-48% of tMiddle East, Africa, and international revenue, ~65-7

Africa, Redington distributesThough Indias contributiocontribution from India is higin India. This is because of a

IT products contribute the lioIT products contributing ~16

ShareholdingSynnex, a leading global diStandard Chartered Privatcompany in July 2011 at Rs9

Figure 2: Redington: Mix of r

0%10%20%

30%40%50%60%70%80%90%

100%

FY07 FY

IT

Source: Company, IIFL Research


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Figure 3: Redington: Geographic revenue mix

0%

20%

40%

60%

80%

100%

FY07 FY08 FY09 FY10 FY11 FY12 1HFY13

India Interna tiona l


Figure 4: Redington: Geographic net profit mix

0%

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40%

60%

80%

100%

FY07 FY08 FY09 FY10 FY11 FY12 1HFY13

Indi a Internati onal



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Investment positives 1) Market Size andgrowthIndian IT hardwareIndian IT hardware sales at ~US$ 10-11billion form majority of thedomestic IT spend, accounting for 4050% of the market. Thisincludes desktops, notebooks, servers, printers, networkingequipment, storage, and other peripherals. The market grew ~15%in FY12E, on the back of increasing investment from government inIT backbone, corporates, and SMEs adopting IT and low PCpenetration. The Indian hardware industry is expected to maintain astrong mid-teens growth (~14-15%) over the next few years, as PCpenetration continues to improve, in both retail and the corporates.This would directly benefit IT distributors such as Redington.

Figure 5: Domestic IT revenues (US$ in billions)

04

81216202428

3236

FY08 FY09 FY10 FY11 FY12E

0.0

0.1

0.1

0.2

0.2

0.3Domestic IT (LHS) Growth (RHS)(bn) (%)

Source: Nasscom

Figure 6: Domestic IT revenue

0

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200

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400

500

600

700

Hardware

FY11 ((Rs bn)

Source: Nasscom

India handsets

The Indian handset market inext few years, driven by incMedia, handset sales (shipm11.2m comprised smartphosmartphones). According to will increase from 221 milli2013. With ~18% of revebenefit from this massive inc


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Figure 7: India: Mobile subscribers and PCs installed base

0

200

400

600

800

1000

FY08 FY09 FY10 FY11 1HFY12

Mobile s ubs cri bers PC installed base(m)

Source: Nasscom

Middle East IT spending and handsets

Middle East IT spending has been growing in low double digits and isexpected to maintain 8-10% growth in the next few years. Growth inhandsets is in the 5-7% range, with smartphones growing at a muchfaster pace. We estimate ~30% of Redingtons consolidated revenueto come from Middle East. We expect growth in the Middle East ITmarket to help Redington maintain high-single-digit growth in thisgeography, over the next 2-3 years.

Figure 8: Middle East: Handsets and Smartphones Middle East & Africa mobile phone 2008 2009 2010 2011 2012 2013Handsets (mn) 176 202 224 240 260 272Growth (%) 15% 11% 7% 8% 5%Smartphones (mn) 8 12 16 38 78 98Growth (%) 50% 33% 138% 105% 26%Source: Industry, IIFL Research

Figure 9: IT Spending Middle

048

1216202428

32364044

2008 2009

Reve(bn)

Source: Industry, IIFL Research


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Investment positives- 2) Distribution networkand size key edgeRedington has a strong and extensive distribution network that hasbeen built and nurtured over years. We believe, this lends acommendable competitive advantage and is the key differentiator forthe company. Redington sells products of over 100 manufacturers,with 80+ brands in India, and 50+ in international operations. Somebrands and products include: IT products PCs, peripherals, UPS, networking products,

packaged software, storage products, high-end servers Telecom devices, tablets, and smart-phones Consumer durables - LG Digital printing press - HP Gaming consoles - Xbox

Figure 10: Redington Supply Chain Reach India MEA

Channel partners 23337 9857Sales offices 56 21Warehouses 66 27Service Centres 70 38Partner Centres 292 18Source: Company, IIFL Research

We believe Redingtons reach provides a unique competitive edgethat is tough to replicate. In addition to the logistic challenge oftying up with several channel partners, building relationships taketime. Further, wafer-thin margins in the business mean that scale isessential for earning revenue and hence, a new entrant would needto incur losses for quite a few years.

Redingtons size is its other key competitive advantage it is nowIndias largest IT distributor and the largest in the Middle East bysome margin. This provides the company a better reach and

bargaining power compared large OEM is left with littledistributors.

Figure 11: Redington: LargestIndia revenues in Rs millionRedington India Ingram Micro HCL Infosystems Savex Computers Compuage Source: Company, IIFL Research

Figure 12: Redington: LargestMiddle East revenues in USRedington Metra Computer FZCO Jumbo It distribution Aptec Holdings FDC International Source: Company, IIFL Research


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Investment positive 4) Weakness in severalsegments might be behind Apple ramping up and Blackberry stabilised

One of the key opportunities for Redington is utilising thedistribution reach for newer products. This was evinced inRedingtons capturing of the Blackberry opportunity, deal signed inFY09, as Blackberry ramped up from Rs 162 million in FY09 to Rs16,174 million in FY12.

However, Blackberry started seeing a sharp drop in sales in 1HFY13,leading to a significant drop in growth rate in India revenue Indiarevenue was down 1% Y/Y in 1HFY13. Though, Redington wasselling most Apple products, it did not have iPhone (Apple wasselling it in-house). Now, Redington has been able to get the iPhonedistribution contract and revenue has started coming in from

November 2013. Further, Blackberry sales have stabilised albeit at alower level. This should drive a revival in India revenue. We expect2HFY13 India revenue to grow 12% Y/Y, and FY14 to see 14%growth in India revenue.

Figure 14: Redington: Blackberry and Apple revenues

0200040006000800010000

12000140001600018000

FY10 FY11 FY12 1HFY13

Blackberry Apple(Rs m)


Figure 15: Redington: Growth

0500

10001500200025003000350040004500

1HFY10 2HFY

(Rs m)


Consumer durables dRedington has tied up withLG, Whirlpool, and Godrejdistributing durables only in to West India. In terms of sizRs 1,770 million in FY12, strong growth in this segmengrowth of Redington in the n

Weakness in MiddleRedington saw weak growtwith growth rebounding inSharp market share loss for HNokia breaking ties with RUganda after it tied up with has begun to see stabilisationwas fully absorbed in 2Qnegative impact from the sam


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FinancialsRevenue growth to reviveWe expect Redingtons revenue to grow 13% Cagr over FY13-15E,driven by a sustained momentum across the India and overseas

business. Also, ramp-up of Apple iPhone sales, stabilisation inBlackberry sales, and good traction in Samsung sales in MiddleEast/Africa would lead to a near-term uptick in growth in 2HFY13.

Figure 19: Redington: India and International revenues and growth

0

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100000150000

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300000

350000

FY09 FY10 FY11 FY12 FY13E FY14E FY15E0

5

1015

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India International TotalIndia grth Intl grth Total grth


Ebitda margins to show some expansionRedington should continue to see slight expansion in Ebitda margins,both on India and international business. This is due to:

Higher contribution from services, which would drive margins up,as services business has double-digit Ebitda margin. Proportion of high value added products, which is on the rise,

especially in international business. The management continues to explore efficiencies and has a

good track record of showing an upward margin trajectory. Revival in sales growth would lead to some operating leverage.

Figure 20: Redington: India an

2.38% 2.33

0.0%

0.5%

1.0%

1.5%

2.0%2.5%

3.0%

3.5%

4.0%

FY09 FY10

In


EPS growth to be strong

With working capital impr18%/22% EPS growth in FY

Figure 21: Redington: Net pro

1,000

2,000

3,000

4,000

5,000

FY09 FY1

(Rs million)



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ROE/ROCEROE of the business has continued to move up due to a sharpcontrol on working capital.

Figure 22: ROE and ROCE

0

5

10

15

20

25

FY09 FY10 FY11 FY12 FY13E FY14E FY15E

ROE ROCE(%)


Figure 23: Redington: Working capital management

0

10

20

30

40

50

FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Cash conversion cycl e Recei vabl e days Inventory days


Figure 24: Redington: Cash fl

CFO before WC changes WC changes (CFO (Capex FCF (Net Debt Equity Net Debt / Equity Source: Company, IIFL Research

Credit management and Bad Redington has a strong credithem to maintain bad debaverage). A dedicated crethrough integrated IT systempost-dated cheques), has hdebts at low levels.

Figure 25: Redington: Provisio

(0)

(0)

0

0

0

0

FY08 FY0

For recei(% of sales)



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Valuation and risksWe are valuing the stock at 12-month forward P/E of 11x, slightlyahead of global peers. Redingtons metrics are superior to most ofits global peers on margins, ROEs consistency of delivery, and

growth. With Indias under-penetrated IT market promising a highergrowth than most other markets, we believe that Redington wouldget some valuation premium compared with other global players.Our 12-month forward target price is Rs 125/share.

Figure 27: Comparison across Global Distributors 1HCY12 Redington Ingram Tech data Synnex TechRevenues in US$ m 2091 17418 11772 4961Gross margin % 6.50% 5.30% 4.60% 4.90%EBIT % 3.10% 1.20% 0.50% 2.60%WC days 42 25 23 62Source: Company, IIFL Research

Figure 28: Valuation comparison across Global Distributors

Mcap (Mn) Mcap (Mn)

EPS PE

BBG Ticker Price Curr. Local Curr. US $ FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15REDI IN Equity 87.9 INR 35,066 658 7.2 8.4 10.0 12.1 12.3 10.4 8.8 7.3IM US Equity 18.1 USD 2,724 2,724 1.8 2.1 2.3 NA 10.0 8.6 7.8 NATECD US Equity 51.2 USD 1,935 1,935 5.1 5.1 5.8 6.0 10.1 10.1 8.8 8.52347 TT Equity 62.3 TWD 98,238 3,322 3.8 4.5 4.9 NA 16.3 13.9 12.7 NAARW US Equity 39.3 USD 4,164 4,164 4.3 4.3 4.8 NA 9.2 9.2 8.3 NASource: Bloomberg

Risks to thesisKey risks to our thesis are: HP continues to be the largest vendor for Redington accounting

for 21% of India and 34% of International revenue. HP has beenfacing difficult times in the recent past, especially in the

international business. ARedington in the short te

Increase in bad debts remain a key area of risktrack-record in managing

Working capital intensitrisk. Redington also takthe short-term if a specif

Sharp fluctuations in curis able to pass on the sam

Figure 29: Redington: 12 mon

(30)

10

50

90130

170

210

250

Feb 08 Feb 09

(Rs/share)



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Annexure I: Redington Logistics Facilities


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Annexure III: Vendor Relationships



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Redington IndiaCMP: INR87 TP: INR102 BuyBSE Sensex S&P CNX19,781 5,999

Bloomberg REDI INEquity Shares (m) 398.6

M.Cap. (INR b)/(USD b) 35/0.652-Week Range (INR) 94/651,6,12 Rel. Perf. (%) 0/10/-5

2 February 2013

3QFY13 Results Update | Sector: Logistics

Financials & Valuation (INR b)Y/E March 2013E 2014E 2015E

Sales 238.3 277.4 324.4EBITDA 6.6 8.1 9.6NP 3.3 4.1 5.0EPS (Rs) 8.3 10.4 12.5EPS Gr. (%) 12.5 26.0 20.4

BV/Sh.(INR) 40.6 49.4 59.8RoE (%) 22.4 23.1 22.9RoCE (%) 18.1 19.4 20.3Payout (%) 9.9 15.7 16.8ValuationsP/E (x) 9.6 7.6 6.3P/BV (x) 2.0 1.6 1.3EV/EBITDA (x) 7.8 6.5 5.7Div Yield 0.9 1.8 2.3EV/Sales (x) 0.2 0.2 0.2

Results marginally below expectations: REDI's 3QFY13 results were marginally

below expectations, with revenue up 11% YoY at INR61.2b (v/s our estimateof INR63.5b), EBITDA up 14% YoY at INR1.7b (v/s our estimate of INR1.8b) andnet profit up 21% YoY at INR819m (v/s our estimate of INR824m). Domesticrevenue grew 15% YoY and 6% QoQ to INR28.2b, while international revenuewas up 8% YoY and 2% QoQ at INR33.1b. Domestic revenue was boosted bystrong growth in the non-IT segment, primarily due to Apple iPhone launch.Moderates growth expectations: The management moderated growthexpectations and noted that consumer demand outlook remains weak; theanticipated recovery is not yet visible. Nonetheless, the management wasoptimistic of de-freezing of government project demand. It guided for IT

growth rate of ~10% for the domestic and international markets. It evenlowered its Apple iPhone guidance for FY13 from INR11b to INR8b.FCF generation of INR2.7b in 3QFY13: In 3QFY13, REDI generated FCF of ~INR2.7b (~INR2.3b for 9MFY13), primarily due to lower working capitalrequirements, on favorable working capital terms in case of Apple iPhonesales. REDI's net debt-equity stood at ~1x.Valuation and view: REDI is the leading IT SCM player in India and the MiddleEast 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 FY12-15. Implementation of GST would unveil and increase new

opportunities for the company, particularly in the non-IT vertical. We arerevising our revenue estimates by -1.3%/-2.4%/-2.2% for FY13/FY14/FY15 andPAT estimates by -3.3%/-1.4%/-0.9% for FY13/FY14/FY15. REDI trades at 7.6x/6.3x its FY14/FY15E earnings and EV of 6.5x/5.7x FY14/FY15E EBITDA. Wemaintain Buy with a target price of INR102 (based on intrinsic P/E of 8x FY15E)- an upside of ~17%.


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Redington India

Results marginally below estimatesREDI's 3QFY13 results was marginally below estimate with Revenues up 11% YoY atINR61.2b vs. est. of INR63.5b, EBITDA up 14% YoY at INR1.7b vs. est. of INR1.8b and netprofit up 21% YoY at INR819m vs. est. of INR824m. Domestic revenue stood at INR28.2b

(up 15% YoY/ 6% QoQ), while international revenues stood at INR33.1b (up 8% YoY/ 2%QoQ). Domestic revenues were boosted by strong growth in the non-IT segment,primarily due to Apple iPhone launch.

Moderates growth expectations: Management moderated growth expectations andnoted that consumer demand outlook remained weak, as the anticipated recovery isnot yet visible. Nonetheless, management was optimistic of de-freezing of Government project demand. Management guided for IT growth rate of ~10% for thedomestic and international markets. It even lowered its Apple iPhone guidance forFY13 from INR11b to INR8b.

Segmental Analysis: Domestic demand rebounds; EBIT margins improve22bp QoQ

Domestic revenue stood at INR28.2b (up 15% YoY/ 6% QoQ), while internationalrevenues stood at INR33.1b (up 8% YoY/ 2% QoQ).The share of domestic revenues as percentage of overall revenues stood at 46%(44% in 2QFY12), while share of international revenues as percentage of overallrevenues stood at 54% (56% in 3QFY12).Domestic revenues were boosted by strong growth in the non-IT segment, primarilydue to Apple IPhone launch.

EBIT margins stood at 3.4% for domestic operations and 2.1% for internationaloperations, overall EBIT margins 2.5bp YoY and 22bp QoQ.

Consolidated Segment wise data (INR m)1QFY12 2QFY12 3QFY12 4QFY12 FY12 1QFY13 2QFY13 3QFY13

RevenueIndia 23,891 27,052 24,516 24,136 99,596 25,190 26,608 28,152Overseas 26,207 24,983 30,645 31,113 112,948 28,702 32,357 33,153Total 50,099 52,035 55,161 55,250 212,544 53,892 58,966 61,305Inter-segment 155 145 157 98 555 176 368 50Net Sales 49,943 51,890 55,004 55,152 211,989 53,716 58,597 61,255EBITIndia 809 864 822 1,186 3,680 885 868 943

Overseas 509 441 651 743 2,344 515 587 712Total 1,318 1,305 1,473 1,929 6,024 1,399 1,455 1,656EBIT 1QFY12 2QFY12 3QFY12 4QFY12 FY12 1QFY13 2QFY13 3QFY13India 3.4% 3.2% 3.4% 4.9% 3.7% 3.5% 3.3% 3.4%International 1.9% 1.8% 2.1% 2.4% 2.1% 1.8% 1.8% 2.1%Total 2.6% 2.5% 2.7% 3.5% 2.8% 2.6% 2.5% 2.70%Capital EmployedIndia 6,132 6,641 7,051 6,878 6,878 7,345 7,757 8,179Overseas 10,453 10,998 12,385 7,296 7,296 8,113 8,028 8,868

Total 16,585 17,640 19,436 14,174 14,174 15,458 15,785 17,047Source: Company, MOSL


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Redington India

Key updates 3QFY13: Moderates expectations; RIM sales down 50% YoYManagement moderated growth expectations and noted that consumer demandoutlook remained weak, as the anticipated recovery is not yet visible. Nonetheless,management was optimistic of de-freezing of Government project demand. Inthis regard, it expects to win a UID order of ~INR2b in 4QFY13.Management mentioned that in the domestic market it is close to achieving alimited break-through (for bulk corporate sales) with Samsung, the largest handsetplayer in India (~50% market share). If this materializes than it could potentiallyopen up a huge non-IT market for REDI in the domestic market (including consumergoods) as REDI currently has no distribution agreements with Samsung in India.Though currently the acope of agreement if it materializes is small managementis hopeful of building up on the same. However, REI already distributes Samsunghandsets in the African markets.Management guided for IT growth rate of ~10% for the domestic and internationalmarkets. It even lowered its Apple iPhone guidance for FY13 from INR11b to INR8b.RIM run rate has now come down to INR500m/month (RIM revenues in FY12 was16b). The new BB10 line launched by RIM is slated to hit the domestic market bymid Feb and could potentially arrest this fall.REDI continued to de-risk its vendor risk with share of HP declining to 19% in the

domestic market and ~32% in the international market, during 3QFY13.REDI is also eyeing a limited execution role in a 1.5m PC order that HP has wonfrom the UP Government as it does not want to take on the risk of delay in State

EBIT margins QoQ Revenue growth across domestic and international operations

Sales break-up geography-wise

Source: Company, MOSL


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REDI is close to disposing the IT real estate of ~INR1.5b, which it has been stuckwith in its NBFC arm. Management is hopeful of concluding this deal sometimewithin FY13. Post which it plans to move fast with regard to its plans to sell minoritystake in its NBFC arm to strategic and financial investors.

Apple iPhone guidance loweredDuring 3QFY13, REDI started distribution of Apple iPhone towards the end of October'13 and clocked sales of ~INR4b, during the quarter. REDI's overall revenuesfrom all Apple products stood at INR6.4b for 3QFY13.Nonetheless, given the weak consumer demand outlook, management hasdowngraded their FY13 revenue guidance from Apple iPhone from ~INR11b to INR8b.While the margins for Apple iPhone are lower, REDI currently enjoying very favorableworking capital terms, with credit period of ~30days and receivable period of ~15days,which has allowed REDI to lower its working capital requirement in 3QFY13.Consequently, during 3QFY13, REDI generated FCF of ~INR2.7b (~INR2.3b for9MFY13), primarily due to lower working capital requirements.

Trend of overall Apple sales over FY10-9MFY13 (INR m)


Valuations and viewREDI is the leading IT SCM player in India and the Middle East and is a strategicpartner to the world's leading technology companies. We expect REDI to postrevenue CAGR of 17% and net profit CAGR of ~20% over FY12-15E. Implementationof 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 payingoff, with non-IT segment as a percentage of revenues increasing from ~5% in FY07to ~19% in FY12.During 3QFY13, REDI generated FCF of ~INR2.7b (~INR2.3b for 9MFY13), primarilydue to lower working capital requirements. REDI's net debt equity stood at ~1x.We believe successful implementation of REDI's strategic initiatives could allayconcerns on 1) its NBFC arm, 2) outlook for its subsidiary Arena and 3) asset-heavycapex plans for ADCs.We are revising our revenue estimates by -1.3%/-2.4%/ -2.2% for FY13/ FY14/ FY15and PAT estimate by -3.3%/-1.4%/ -0.9% for FY13/14/15.

REDI trades at P/E of 7.6x/ 6.3x its FY14/FY15 earnings and EV of 6.5x/ 5.7x its FY14/FY15 EBITDA. We maintain Buy with a target price of INR102, based on intrinsic P/


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Redington India

Company descriptionREDI is promoted by the Singapore-based Kewalram

Chanrai Group that also owns OLAM and Jaslok Hospitalin Mumbai, India. In 1993, it began as a componentdistributor and moved into completed products such asPCs, desktops etc and finally into value added products.It then positioned as a complete supply chain manager,with a focus on value-added IT products. In the past 3-4years, REDI is slowly transitioning into a complete supplychain manager to include non-IT products too, with apresence in India, Middle East, Africa and Turkey. REDIplans to slowly extend its reach to CIS countries too. It

aims to have a global footprint in developing countries.

Key investment argumentsAn indispensable link in IT supply chainPursuing successful four-pronged growth strategyStrategic diversifications aimed to de-risk model

Key investment riskFailure to adapt to IT industry changesIntense competition

High risk of clients' concentrationExposed to risks of conducting business in multiplegeographies

Shareholding Pattern (%)Dec-12 Sep-12 Dec-11

Promoter 21.1 21.1 21.1

Domestic Inst 8.4 9.0 8.8

Foreign 64.1 63.3 63.3

Others 6.5 6.7 6.8

Redington India: an investment profile

Stock performance (1 year)

Target price and recommendationCurrent Target Upside Reco.Price (INR) Price (INR) (%)

87 102 17.2 Buy

Recent developmentsLowered iPhone sales guidance from INR11b in FY13

to INR8bRIM sales fell 50% YoY in 3QFY13FCF generation of INR2.7b in 3QFY13 (INR2.3b in9MFY13)

Valuation and viewWe are revising our revenue estimates by -1.3%/-2.4%/ -2.2% for FY13/ FY14/ FY15 and PAT estimateby -3.3%/-1.4%/ -0.9% for FY13/14/15.REDI trades at P/E of 7.6x/ 6.3x its FY14/FY15 earnings

and EV of 6.5x/ 5.7x its FY14/ FY15 EBITDA.We maintain Buy with a target price of INR102, basedon intrinsic P/E of 8x its FY15E earnings, an upside of ~17%.

Sector viewREDI is likely to be a key beneficiary from the robustgrowth outlook of Indian IT industry, which isforecasted to post a CAGR of 10% from ~USD66.4b inFY12 to ~USD95.9b by FY16.

India's market offers significant opportunities to ITservices providers due to increasing demand.REDI has good scope to add new products to itsexisting verticals and move up the value chain.

EPS: MOSL forecast v/s Consensus (INR)MOSL Consensus Variation

Forecast Forecast (%)

FY13 8.3 8.5 -2.4

FY14 10.4 10.1 3.0


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Financials and Valuation


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28/135Motilal Oswal Securities LtdMotilal Oswal Tower Level 9 Sayani Road Prabhadevi Mumbai 400 025

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Redington India

25 January 2013

Initiating Coverage | Sector: Logistics


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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


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Redington IndiaCMP: INR81 TP: INR103 Buy

Bloomberg REDI IN

Equity Shares (m) 398.6

M.Cap. (INR b)/(USD b) 32.3/0.6

52- We ek Range (INR) 94/65

1,6,12 Rel. Perf. (%) -11/-3/-16

25 January 2013

Initiating Coverage | Sector: Logistics

BSE SENSEX S&P CNX19,924 6,019

REDI to rollDiversification beyond IT supply chain - a shot in the arm

Redington India (REDI) is the leading IT SCM player in India and Middle East and a strategicpartner 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 estimatea further increase to ~22% by FY15E.During 1HFY13, REDIs revenue growth was muted at ~10% (2% in domestic and 19% ininternational). We expect the company to benefit from 1) pent up government demand,2) implementation of Goods and Services Tax (GST), 3) iPhone distribution to boost

domestic non-IT growth and has the potential to contribute ~INR24b to REDIs top lineby FY14 and 4) revival in subsidiary Arenas operations.We believe execution of REDIs strategic initiatives could allay concerns on 1) its NBFCarm, 2) recovery in Arena and 3) asset-heavy capex plans for automatic distributioncenters (ADCs).REDI trades at 7.5x/6.3x FY14E/FY15E EPS and EV of 6.2x/5.4x FY14E/FY15E EBITDA. Weinitiate coverage with a Buy and a target price of INR103, based on intrinsic P/E of 8x itsFY15 earnings, an upside of ~27%.

An indispensable link in IT supply chainOver the years, REDI has evolved as an end-to-end supply chain management

(SCM) solutions and strategic partner to the worlds leading technologycompanies. As India has significant under-penetration in IT and consumer goods,increasing discretionary spending would change this and lead to more spendingin IT related products and consumer durables. Company is not only the largestand leading IT SCM player in India but also leads in international markets likeMiddle East and Africa.

Pursuing successful four-pronged growth strategyREDI is pursuing a four-pronged strategy to achieve strong growth and sustainthe competitive advantage in IT distribution industry: 1) growth in existing product

lines, 2) foray into new verticals and business lines, 3) explore new regions andgeography/inorganic acquisitions and 4) strategic initiatives. As Indias marketoffers significant opportunities to IT services providers due to increasing demand,company has scope to add new products to its existing verticals and move up thevalue chain. A diversified portfolio enables it to manage vendor risks and growtheffectively. Also, REDIs global reach gives a competitive advantage, with supplierseyeing worldwide market penetration.

Strategic diversifications aimed to de-risk modelTo leverage existing strengths in IT logistics business and broadbase its product

offerings, REDI forayed into distribution of consumer goods. Non-IT businesshas grown from ~5% of overall revenues in FY07 to ~19% in FY12. Given lack of

Stock performance (1 year)

Shareholding pattern (%)As on Sep-12 Jun-12 Sep-11

Promoter 21.1 21.1 21.1

Dom. Inst 9.0 9.4 8.9

Foreign 63.3 63.3 63.4

Others 6.7 6.3 6.6

Investors are advised to referthrough disclosures made at the end

Valuation summary (INR b)Y/E March 2013E 2014E 2015E

Sales 241.6 284.2 331.9EBITDA 6.9 8.3 9.8NP 3.4 4.2 5.0EPS (INR) 8.5 10.6 12.6EPS Gr. (%) 16.3 23.6 19.8BV/Sh. (INR) 40.9 49.7 60.2RoE (%) 23.1 23.3 23.0RoCE (%) 18.7 19.7 20.7Payout (%) 9.6 16.6 16.7ValuationsP/E (x) 9.3 7.5 6.3P/BV (x) 1.9 1.6 1.3EV/EBITDA (x) 7.1 6.2 5.4Div Yield 0.9 1.9 2.3EV/Sales (x) 0.2 0.2 0.2


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Redington India

niche in this segment. We model its consumer goods business, consists of key clientslike LG, Whirlpool, Voltas, Godrej, etc, to increase from ~INR1.8b in FY12 to ~INR8.5bby FY15E.

Initiate coverage with a Buy and target price of INR103We expect REDI to post revenue CAGR of 17% and net profit CAGR of 20% respectivelyover FY12-15E. Implementation of GST would unveil and increase significantopportunities for the company, particularly in non-IT verticals. We believe executionof REDIs strategic initiatives could allay concerns on 1) its NBFC arm, 2) recovery inArena and 3) asset-heavy capex plans for ADCs. REDI trades at 7.5x/6.3x FY14E/FY15EEPS and EV of 6.2x/5.4x FY14E/FY15E EBITDA. We initiate coverage with a Buy and atarget 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

As compared to developednations, 3PL contribution

remains at a nascent stageRetail

InfrastructureEquipment

Pharmaceuticals IT HardwareTelecom

Automotive

Chemicals andIndustrial products

LOW MEDIUM HIGH

L O W

H I G H

M E D I U M

G r o w t h o f S e c t o r

Profitability of 3PL

Consumerproducts

Current 3PL penetration High Neutral Low

3PL logistics to increase REDI present in most attractive segments


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Redington India

An indispensable link in IT supply chainMarket 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 posta CAGR of 10% over FY12-16, from ~USD66b in FY12 to ~USD96b by FY16. As India hassignificant under-penetration in IT and consumer goods, increasing discretionary spendingwould 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 ininternational markets like Middle East and Africa.

Emerging as a complete SCM playerREDI 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-marginproducts 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 playerin the Middle East and Africa.

Over the years, REDI has evolved from a distributor to an end-to-end supply chainmanagement (SCM) vendor and a strategic partner to the worlds leading technologycompanies. The scale of operations and business volume ensure tremendousbargaining power with various product manufacturers and resellers. The value addedthrough integrated business model, vast geographic reach, efficient working capitalmanagement, deep-rooted relationships with vendors and channel partners andeconomies of scale create significant entry barriers for new players in this business.

REDI has transformed from a distributor to total SCM player


Well-proven business modelThe wholesale distribution model has proven to be well-suited for both manufacturersof technology products and resellers. The large number of resellers makes it cost-efficient for vendors to rely on wholesale distributors to serve this diverse and highlyfragmented customer base. An SCM player like REDI adds value by 1) reducingmanufacturers inventory and improving its time-to-market, 2) enhancingmanufacturers go-to-market strategies and 3) providing efficient market engine for

From Distribution...

Distribution of only IT products

in IndiaCash and carry modelNo inventory, only back-to-backorders

Distributor of IT, Telecom &consumer durablesThird party logistics servicesDoor-to-door deliveryCredit to channel partners

Channel relationshipmanagementManagement of inventoryAfter sales support service

... To Supply Chain Management


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Redington India

Similarly, the wide spectrum of products offered by multiple vendors helps the companyachieve economies of scale and provide customers a single sourcing point. Due to manyvendors and products, resellers often cannot establish direct purchasing relationshipswith 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 forwardGiven that India has significant under-penetration in IT and consumer goods,increasing discretionary spending could lead to more on IT and consumer relatedgoods. 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 theintroduction of GST. Within 3PL services, IT distribution is one of the most attractivesegments. Thus, REDI is well-placed to benefit from these emerging opportunitiesand increase its value-added sales, going forward.

As compared to developednations, 3PL contribution

remains at a nascent stageRetail

InfrastructureEquipment

Pharmaceuticals IT HardwareTelecom

Automotive

Chemicals andIndustrial products

LOW MEDIUM HIGH

L O W

H I G H

M E D I U M

G r o w t h o f S e c t o r

P fi bili f 3PL

Consumerproducts

Current 3PL penetration High Neutral Low3PL logistics to increase REDI present in most attractive segments


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Redington India

Expect value-added services to increase sharply


The distributors modelThe chart below shows that some distributors sell components to vendors and alsobuy finished IT products from manufacturers. Certain manufacturers and distributorssell 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 evolvedfrom a linear to non-linear marketplace, partnership and collaboration are now moreimperative. Successful manufacturers, distributors and resellers form and reformteams and partnerships responding to market trends.

MANUFACTURER DISTRIBUTOR RESELLER END USER

Componentand Material

Suppliers

ElectronicComponentDistributors

ElectronicContract

Manufacturers

Subsystems

andPeripherals

IT OriginalEquipement

Manufacturers(IT OBMs)

Software

IT Full-LineDistributors

IT SpecialtyDistributors

GovernmentResellers

CorporateResellers

DirectMarketers

VARs

Online

Resellers

Government/ Education

Fortune 1000Businesses

Small andMedium-sized

Businesses

Consumer

Retailers

DIRECT (%)

The distributors model

15%

4-6% 9-11%


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Redington India

Leader in key marketsDomestic 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 isthe 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 Indianmarket. 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 marketleader and has a higher share compared to the next two peers put together.

Key risks and mitigation strategiesKey business model risks Mitigation strategies

Low gross margins

- Business is characterized by narrow - Increasing value portfolio; New initiativesgross operating margins.

- These narrow margins magnify the impactof any change in operating results attributedto variations in sales and operating costs

High vendor concentration

- HP accounts for ~35% of REDI 's overa ll sales - Broad-bas ing vendors ; inc reas ing dep th of p roduct l ines(20% of domestic and 44% of international)

Receivable risk

- As REDI se ll s i ts goo ds on cr edi t t o se ve ra l - H is to ri ca ll y b ad de bt , i nc lu di ng pr ov is io ns , a s p er ce nt age of sa le sfragmented re-sellers, there is has been less than 0.07%.high receivable risk - As company has a wide portfolio, re-sellers dependence is high

High working capital intensity

- Working cap ital in tens ity i s h igh as d is tr ibutors - Working capi ta l management d iscipl ineshave to keep inventory and sell on credit

Inventory risk

- REDI's business subjects it to the risk that - Market knowledge; forecasting ability and robust IT systemthe value of inventory could be adversely - Obsolescence overcome by stock rotation policy supported by vendorsaffec ted by suppl ie rs ' p rice reduct ions or by - Price e rosion suppor ted by vendor d iscountste chno logical ch ange s, th us affe cting Suppliers provide warranties on products that REDI distributes andu se ful ne ss or de sir abi lit y o f p ro du ct s allow return of defective products, including those by customers

Source: MOSL

Competition and market mappingDomestic International Consolidated

Sales INR99b INR112b INR212b% 47% 53% 100%-IT 79% 81%-Non-IT 19% 16%-Services 2% 3%PAT INR1.8b INR1.1b INR2.9b% 62% 38% 100%Product range IT peripherals: PCs, PC components, IT peripherals, PCs, PC components,

UPS, net wo rk in g p ro du ct s, pac ka ge d UPS, net wo rk in g p ro du ct s, pac ka ge dsof tware, storage products, high-end sof tware, storage products, high-end se rversserversNon-IT: Telecom devices, consumer Non-IT: Telecom and Tabletsdurables, digital printing press,tablets and gaming consoles

Top vend ors (FY12) HP -20%, RIM -18%, Microsoft - 7%, HP - 39%, Nokia - 14%, Dell - 9% andAcer/ Lenova -5% and Apple - 5%, Others 38%Others -40%


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Redington India

Extensive distribution networkREDI has a strong distribution network and wide range of brands, with a presenceacross 25 countries. It has ~66 warehouses in India and 27 in the Middle East andAfrica. 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 hastwo ADCs at Chennai and Dubai operational since July 2009 and September 2010 andis working on three ADCs, which would be functional soon.

REDIs domestic and global distribution networkIndia Middle East & Africa

Channel partners 23,337 9,857 (present in 20 countries)Sales office 56 21

Warehouses 66 27Service centers 70 38Partner centers 292 18

Product range 80 plus 50 plusSource: Company, MOSL

REDI has a wide Pan India presence



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Redington India

A) Growth in existing product linesREDI 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 servicesproviders due to increasing demand.

Indian IT and Telecom industry to post a CAGR of ~10% over FY12-16E (USD b)2012 2013 2014E 2015E 2016E CAGR (%)

(2012-2016)Hardware 9.1 9.5 10.9 12.5 14.3 12.0

% of total 13.7 14.3 16.4 18.8 21.5% Change 4.4 14.7 14.7 14.4

Software 3.5 4 4.5 5.2 6 14.4

% of total 5.3 6.0 6.8 7.8 9.0% Change 14.3 12.5 15.6 15.4

Services 9.2 10.3 11.9 13.8 16.1 15.0% of total 13.9 15.5 17.9 20.8 24.2% Change 12.0 15.5 16.0 16.7

Telecom 44.7 47.8 51.5 54.6 59.5 7.4% of total 67.3 72.0 77.6 82.2 89.6% Change 6.9 7.7 6.0 9.0

Total 66.4 71.5 78.9 86.2 95.9 9.6% Change 7.7 10.3 9.3 11.3

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

Pursuing four-pronged growth strategyStrategic initiatives to yield results

REDI is pursuing a four-pronged strategy to achieve strong growth and sustain thecompetitive advantage in IT distribution industry.Indias market offers significant opportunities to IT services providers due to increasingdemand.Company has scope to add new products to its existing verticals and move up the valuechain. A diversified portfolio enables it to manage vendor risks and growth effectively.REDIs global reach provides competitive advantage as suppliers eye worldwide marketpenetration.

Four-pronged growth strategy

Source: MOSL

Growth in existing

product linesPartnering withnew vendorsAdding newproducts

Foray into new

verticals andbusiness lines

ADCNook

Exploring new

regions andgeography/inorganicacquisitions

Entry into CIScountries

Strategic

initiativesLower stake inNBFCAsset-light plansfor the entity


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Redington India

REDI has good scope to add new products to its existing verticals and move up thevalue chain. A diversified portfolio enables it to manage vendor risks and growtheffectively. A key example is the addition of Apple iPhone, which has the potential tocontribute ~INR24b to REDIs top line by FY14.

Key initiatives across categoriesCategories Initiatives/TriggersComponents Increasing brand affiliationsPeripherals and PCs Has affiliations with all key playersSystem and commercial PC Revival of government spending

Software Moving up the value chainNetworking New opportunities in the cloud spaceEnterprise Revival of government spending

Source: MOSL

Breakup of Indian IT industry FY13 (%) REDI IT product-wise breakup

LegacyDistribution

Deepar

TechnicalAptitude

Solutions-BasedDistribution

Core ValueProposition

Expertise

Differentiators

Key Services

Pick, Pack, Ship

Operations,Logistics, Scale

Credit, AccountManagement,

Logistics

ProductExcellence

TechnicalSpecialization

Vertical Focus;Professional

Services

Partner Enablement

and Development

Selling into TargetMarkets

Analystics-BasedMarketing, Technical &

Sales Acumen

Developing a KnowledgeBase of Expertise

Potential to move up value chain

Source: Industry, MOSL

Line Card, Price,Availability

ValueDistribution

Source: IDC


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Apple sales in India set to mimic RIM success


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

FY07 FY08 FY09 FY10 FY11 FY12HP 44 40 38 34 22 20RIM 0 0 0 5 15 18Microsoft 9 9 10 10 8 7Acer 3 2 3 5 5 5Lenova 6 6 5 5 6 5Apple 0 0 0 0 0 5Others 38 43 43 41 44 40Total 100 100 100 100 100 100


B) Foray into new verticals and business linesREDI is focusing on new revenue lines: 1) consumer durables, 2) ADC operations and3) nook initiative. With a view to leverage its existing strengths in logistics businessand also to broad-base product offerings, company forayed into distribution of consumer durable goods. It is mostly focused in South India and is increasing itspresence in the West; key clients include LG, Whirlpool, Voltas, Godrej etc.Management expects this business to reach INR10b by FY15. Implementation of GSTcould increase demand for 3PL players, thus benefiting this segment in particular andREDI significantly.

C) Exploring new regions and geographyGeographical foray provides the company with a more balanced global portfolio tomanage and mitigate risk. REDIs global reach enables it competitive advantage, withsuppliers eyeing worldwide market penetration. It is the largest distribution companyin 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 fromdomestic operations. Similarly, ~38% of net profit is derived from internationaloperations, 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 byattracting strategic financial and operational partners and 2) possible corporaterestructuring to make it asset light. We believe successful implementation of REDIsstrategic plans could allay concerns on 1) its NBFC arm, 2) recovery in its subsidiaryArena and 3) asset-heavy capex plans for ADCs.

NBFC contributes to REDIs successREDI has a wholly-owned non-banking finance company (NBFC), Easyaccess FinancialServices Ltd (EFTL), which was set up in 2008 to cater to trade finance needs of domesticIT 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 thedistributor 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 astrategic investor, PE fund etc. This we believe would be a key positive for REDI andallay investor concerns on the NBFC.

ADCs to tap emerging opportunitiesWith a view on impending introduction of GST in India, REDI is proactively building

large automatic distribution centres (ADCs) in key business regions to captureemerging opportunities such as 3PL services, storage and warehousing etc. It has twoADCs at Chennai and Dubai operational since July 2009 and September 2010 and isworking on three ADCs, which shall be functional soon.

Details of warehousesAcres Status

Acquired LandChennai 11.56 Operational since Jul'09Kolkata 13.76 2HFY13New Delhi 13.32 2HFY14Mumbai Yet to acquire landLong term Lease

Dubai 5.16 Operational since Sep'10


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Redington India

Non-IT business gains momentumWith 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 lackof quality 3PL players in India, it is well-placed to create a significant niche in thissegment. 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 revenuesis a key positive for REDI as they have lower working capital requirements, enjoybetter margins and also de-risk it from any potential slowdown in the IT segment.

Share of non-IT business increases (% of total revenues)

Strategic diversifications aimed to de-risk modelNon-IT segment to be the key growth driver

To further leverage its existing strengths in the logistics business and to broadbase productofferings, REDI forayed into distribution of consumer goods. Its non-IT business has grownfrom ~5% of its overall revenues in FY07 to ~19% in FY12. Given lack of quality 3PL playersin 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.

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


REDI set to mimic its Blackberry success with iPhoneTo broaden the basket of new brands, REDI recently tied up with Apple to distributeiPhone range, which could be its next big success story. REDI had ventured into thesmart phone category in FY09, with the launch of Blackberry smart phones. This was ahuge success as within three years, Blackberry sales increased from ~INR162m in FY09

(m)('000)


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Revenue of consumer durable goods to increase by ~5x over FY12-15EWith a view to leverage its existing strengths in the logistics business and to broad-base product offerings, REDI forayed into distribution of consumer goods. It is mostlyfocused in South India and is increasing its presence in the West. Key clients includeLG, Whirlpool, Voltas, Godrej etc, and management expects the business to reachINR8.5b by FY15E. Implementation of GST could increase the demand for 3PL playersand thus benefit the segment and REDI significantly.

Consumer goods sales to post strong growth (INR m)

to ~INR16b in FY12. Though growth rates for Blackberry have moderated, the stronggrowth 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, workingcapital requirements are low-to-negative, given the high demand for Apple productsin India.

Apple products sale in India over 1HFY10 to 1HFY13



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Services business - one of the most profitable verticalThough services account for only ~2% of REDIs revenues, it enjoys high gross marginsof ~30-40%. Almost 72% of services income is derived from international businessand 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 tocompetitors. Company follows a unique model for its services business, whereby thecenters are neutral and not exclusive to REDI or any particular brand. It has two businesssegments: 1) warranty period and 2) post warranty period. The table below depictsvarious revenue streams for REDI under both formats.


Redington Service Model

Redington Service Model

Warranty Post-Warranty

Event Based Retainer Annuity

Vendor pays forserviceprovided tocustomer onrequest

Paid monthly byvendor to

maintain agreedresources andservice levelagreements for

their products

Vendor paysannual supportcharges perunit soldduring theyear

Event Based InfrastructureManagement

ServicesCustomers payas and whenthey use theservices

Customer paysfor round theclock supportfor hardwareand applicationmaintenance


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Strong revenue and earnings growth outlook

Expect revenue CAGR of 17% over FY12-15EWe 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 toregister 24% CAGR. In the international vertical, we expect IT segment to clock a CAGRof 15.4%, while the non-IT segment would post a CAGR of 15%. The revenue mixamong 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% byFY15E.

Breakup of sales and key assumptions (INR m)Y/E March 2010 2011 2012 2013E 2014E 2015E CAGR

(FY12-15)Domestic 64,861 81,778 96,665 113,025 136,045 159,602 18.2% Change 7 26 18 17 20 17% of net sales 47 49 46 47 48 48Non ITValue 6,526 17,633 26,474 32,828 43,004 50,745 24.2% Change 170 50 24 31 18% of sales 5 11 12 14 15 15ITValue 54,486 61,782 69,175 78,997 91,637 107,215 15.7% Change 13 12 14 16 17

% of sales 40 37 33 33 32 32ServiceValue 913 723 1,017 1,200 1,404 1,642

% Change -21 41 18 17 17International 69,245 86,531 112,976 129,089 148,616 173,312 15.3% Change 5 25 31 14 15 17Non ITValue 12,099 12,134 14,216 16,348 18,964 21,619 15.0% Change 0 17 15 16 14% of sales 9 7 7 7 7 7ITValue 54,726 71,675 96,087 109,827 126,301 147,772 15.4

% Change 31 34 14 15 17% of sales 40 43 45 45 44 44Service

Value 2,420 2,723 2,674 2,914 3,352 3,921 13.6% Change 12 -2 9 15 17% of sales 2 2 1 1 1 1IT 109,212 133,457 165,261 188,824 217,938 254,988 15.6Non IT 18,626 29,766 40,689 49,175 61,968 72,363 21.2Services 3,333 3,446 3,691 4,114 4,755 5,564 14.7Net Sales 137,578 167,038 211,930 241,509 283,950 332,082 16.6Change (%) 8.5 21.4 26.9 14.0 17.6 17.0

Source: MOSL


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Redington India

Growth in domestic and international markets


Segment-wise revenue breakup Breakup among domestic and global business


Expect margins to remain stableWe 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


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Redington India

Expect net profit growth of ~20% over FY12-15EWe expect REDI's net profit to post a CAGR of ~20% over FY12-15E. This would primarilybe led by strong revenue growth, marginal improvement in EBIT margins and benefitsfrom lower leverage. We expect net profit margin to increase marginally from 1.4% inFY12 to ~1.5% by FY15E. We expect domestic operations to contribute ~62% of profitsand the international operations to contribute ~38% of profits.

Net profit CAGR of ~20% over FY12-15E RoCE, RoE to remain strong


Working capital intensity to remain stableIT product and services distribution industry is intensive in working capital and requiressignificant levels in receivables and inventory, which to some extent is offset byvendor trade account payables. Based on the timing of customer receipt and paymentto vendor, the actual level of net debt could vary significantly compared to actualdebt at a period's end. We expect REDI's net working capital to decline from ~46 daysin FY13 to ~44 days by FY15E. Typically working capital requirement for a distributioncompany like REDI gets negatively impacted during economic downturn and improveson the back of economic upturn.

EBIT margins in domestic and international markets



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Redington India

Impact of change in growth COE (INR)

Impact of change in terminal COE (INR)

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


Sensitivity to Cost of Equity


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Redington India

Comparative ValuationsCMP MCap EPS Gr. (%) P/E (x) P/BV (x) EV/EBIDTA RoE (%)

(M) CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY

Avnet INC (USD) 34 4,721 -25.7 18.5 11.1 9.4 1.2 1.1 6.9 6.0 10.5 14.1Arrow Electronics (USD) 39 4,156 0.4 11.2 9.2 8.2 1.0 0.9 6.6 6.1 11.0 10.6

Ingram Micro INC-CL A (USD) 18 2,758 17.4 9.7 8.7 7.9 0.7 0.7 3.5 3.4 8.6 8.8Synnex Corp (USD) 36 1,359 6.2 10.3 8.8 8.0 1.0 0.8 5.0 4.5 11.2 11.9Tech Data Cor (USD) 49 1,867 0.9 15.2 9.8 8.5 1.2 1.1 4.6 4.1 10.2 11.1Synnex Technology (TWD) 59 91,616 16.7 11.3 13.4 12.1 10.0 - 15.4 -

FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY1Redington India (INR) 81 33,283 18.7 17.7 8.0 6.8 1.7 1.4 6.8 5.9 22.6 22.2Digital China (HKD) 13 13,733 19.8 16.8 8.7 7.5 1.5 1.3 6.1 5.2 18.7 19.2

Source: 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 ownsOLAM 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 value-added products. It then positioned as a complete supply chain manager, with a focuson value-added IT products.

In the past 3-4 years, REDI is slowly transitioning into a complete supply chain managerto 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 Indiaand the Middle East and Africa (MEA). REDI plans to slowly extend its reach to CIScountries too. It aims to have a global footprint in developing countries.

Group structure

Source: Company


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Redington India

N O T E S


58/135Motilal Oswal Securities LtdMotilal Oswal Tower Level 9 Sayani Road Prabhadevi Mumbai 400 025

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Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 049318


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Firstcall India Equity Research: Email [email protected] PharmaU. Janaki Rao Capital GoodsA.Nagaraju Cement, Reality & Infra, Oil & Gas

Ashish.Kushwaha IT, Consumer Durable & BankingK. Jagadhishwari Devi DiversifiedAbdul Khabeer DiversifiedAnil Kumar DiversifiedA.Ravi Diversified

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Corporate Finance Offerings include Foreign Currency Loan Syndications,Placement of Equity / Debt with multilateral organizations, Short Term Funds

Management Debt & Equity, Working Capital Limits, Equity & DebtSyndications and Structured Deals.

Corporate Advisory Offerings include Mergers & Acquisitions(domestic andcross-border), divestitures, spin-offs, valuation of business, corporate

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