The Hindu Business Line : Redington (India): Invest at cut-off

Investors can consider subscribing to the initial public offering (IPO) of Redington (India) being made in the price band of Rs 95 to Rs 113 per share.

This IPO, however, will be appropriate only for investors with a high risk appetite, aiming to broad-base their IT portfolio and with a medium-term investment horizon.

In the announced price band, the price-earnings multiple works out to 9-11 times the consolidated annualised first-half per share earnings on an expanded equity base. While we recommend investment at cut-off, our comfort and potential for capital appreciation will be greater if the final offer price is fixed at the lower end of the price band.

The company, which is an established distributor of IT products and peripherals in India, West Asia and Africa, recently expanded its portfolio to include mobile handsets and accessories in Nigeria and parts of India.

It also offers supply chain management solutions and support services. In India, its distribution reach is extensive, with 35 sales offices and 53 warehouses servicing relationships with over 30 vendors; many of these tie-ups are for more than 10 years.

Over the past three and half years, the company has grown its channel network from 6,359 to 10,474 partners across different regions.

With long-standing vendor relationships and superior logistic capabilities, Redington can scale-up revenues sharply in a buoyant demand environment for IT products. It recently also forayed into distribution of digital presses, consumer durables and gaming consoles.

Despite this, the company will remain a predominantly ``high-volume, low-margin'' player in the IT distribution space. Using its experience in the West Asia and African markets, it may be able to make a dent into other low-penetrated IT markets such as Central Europe and CIS in the medium term. As one of the few key national distributors (Ingram Micro being the one ahead of Redington in revenue terms), it has created sufficient entry barriers in this line of business.

On the flip side, however, the company remains exposed to the risks of low gross margins, which may get magnified with limited visibility of demand. If competition fuelled by consolidation (of the Ingram Micro-Tech Pacific genre) intensifies, the scope for improvement in margins will be limited.

Since Redington also depends to a large extent on a limited set of vendors for generating its revenues, any deterioration in relationship with any vendor can affect business volumes and, in turn, the financial performance.

The company also generated negative operating cash flows of Rs 134 crore and Rs 154 crore in 2004-05 and 2005-06 on account of higher receivables and inventory. Finally, Redington remains exposed to the risk of technological obsolescence on inventory carried on hand at any point in time.

Demand push

Going by demand projections from IDC India — the IT research outfit — the demand for IT products (comprising systems such as PCs /notebooks, peripherals, components, networking products and packaged software) is likely to be robust.

The IDC projections are that the domestic IT products market is likely to grow at a compounded growth rate of 17.5 per cent between 2005 and 2010, with systems, peripherals and networking products expected to grow at 15-20 per cent.

With a compounded annual growth in revenues of 49 per cent (at Rs 6,790 crore for 2005-06) and post-tax earnings by 63 per cent (at Rs 71.9 crore), Redington has displayed its ability to manage a five-fold growth in revenues, with a sharp step-up in post-tax earnings in the past two years.

Domestic revenues accounted for 54 per cent of the total in 2005-06 and international incomes the rest.

However, by virtue of being a high-volume business with intense competition, its operating and net profit margin have been locked between 1.8-2 per cent and 1.1-1.3 per cent respectively over the past four years.

The competition is likely to intensify further in the coming years as Ingram Micro, which was weighed down by its integration with Tech Pacific so far, is likely to get more aggressive. And the impact of this competition will be watched closely for its impact on operating margins.

Offer details: Redington is making this offer to set up four automatic redistribution centres in India, and 68 service and repair centres, as also to make investments in its wholly-owned subsidiaries.

This IPO is expected to raise Rs 149.5 crore. Enam Financial is the book running lead manager. The offer opens on January 22 and closes on January 25.

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