Tuesday, February 2, 2010


Redington’s Q3FY10 performance is a confirmation of our view that the demand environment in India and MEA technology markets has staged a strong turnaround. The company reported revenue growth of 13.4% YoY as compared to 5.3% in the preceding quarter, which was marginally ahead of our estimates. Net profit grew at a faster rate of 25.4% YoY as interest expenses decreased 43% due to a favourable interest rate environment. We are revising our earnings estimates and increasing our target price for the stock to Rs 375. Maintain Buy.

No way but up from here

Revenue recovery gets stronger: Redington’s revenues continued to gain momentum in Q3FY10, increasing 13.4% YoY to Rs 35.4bn, 3.5% higher than our estimate. Revenue growth was balanced between India and overseas SBUs at 13.4% YoY each. In volume terms, MEA continued to witnessed higher growth because of geographical and product expansion; however, in reported terms, growth in the region was affected by a 4.4% YoY appreciation of the rupee against the dollar.

Net profit up 25.4% YoY: Net profit growth for Q3FY10 outpaced revenue growth at 25.4% YoY to Rs 447mn – in line with our estimate. This is despite a decline of 13bps YoY in EBITDA margin to 2.3%. Interest expenses declined 43% YoY to Rs 163mn due to better working capital management and favourable short-term interest rates, thus supporting net profits.

Chennai ADC now fully-operational: The 100,000sq ft automated distribution centre (ADC) in Chennai has become fully operational in Q3FY10. The ADC will allow Redington to offer third-party logistic (3PL) services to companies like Cadbury, Sonciwall and Vodafone, besides catering to in-house needs. Three more ADCs are being planned which would lead to rationalisation of warehouses, thus saving on rent expenses (currently ~10% of EBIT).

Infused Rs 1.4bn in Easyaccess NBFC: During the quarter, Redington infused Rs 1.4bn as equity in its 100% non-banking finance (NBFC) subsidiary, Easyacess, taking the latter’s book value to ~Rs 2.3bn. The infusion aimed to comply with RBI norms on minimum equity requirements. With loan assets of ~Rs 4bn and a debt/equity ratio of 0.9x, there is plenty of room for Easyaccess to grow.

Raising estimates and target price: We are increasing our revenue estimate for FY11 by 3.3% while trimming our FY10 and FY11 margin forecast on stronger rupee assumptions. However, earnings estimates for these years stand increased by 0.8% and 6.9% respectively on expectations of a reduced interest burden. We are also introducing FY12 estimates. Our target price has been raised to Rs 375 (from Rs 335) due to the estimate revision and an increase in target P/E multiple from 11x to 11.5x (3-year average FTM) on FY11E. We maintain a Buy rating on the stock.

To read the full report: REDINGTON