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Spark Capital - Redington: Tough times ahead; Initiate coverage with Sell




Spark Capital Advisors(India) Private Limited


15 Jul 2013





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Tough times ahead We initiate coverage on Redington (REDI) with a SELL recommendation arriving at target price of Rs. 65. Our counter consensus recommendation is based on weakening demand environment in India especially, no large growth opportunities similar to Apple in FY13, some of the key international markets continuing to be in political unrest and falling RoE. Though REDI is best-in-class and market leader in both India and in its International business, a low growth market provides limited scope of growth for a market leader. Further the recent depreciation in many of the emerging market currencies would lead to an increase in the price of IT hardware resulting in demand weakness. Given the high financial leverage we prefer to use EV/EBITDA to value REDI and attach 5.5x on FY15E EBITDA to arrive at our price target. Slowing revenue growth: REDI’s growth has come from combination of: entering new markets; market growth and market share gains. REDI’s is the market leader in India and Middle East and in an environment of low to no-growth, market share gains alone would not suffice. The growth outlook for REDI was aptly summarised by Mr. R. Srinivasan, MD Redington in his FY13 letter to share holders “The outlook for the coming year is at best cloudy”. India business suffers from macro economic weakness, especially with corporate capex in abeyance. With no new addition such as Apple, FY14 revenues from India would be under pressure. International business growth would hinge on Samsung , however overall shipment data indicates stagnation of mobile phone and IT Hardware sale. Diversification underway: Over the last three years REDI has diversified into a number of contiguous business such as micro-distribution, 3PL service, NBFC and consumer durable distribution. We are positive on 3PL services and expect REDI to be a beneficiary if and when the GST becomes a law in India. Recent RBI regulation’s on factoring would result in REDI not growing its NBFC business Easy Access materially. Leverage integral to growth: Revenue and operating profit growth of REDI is closely linked to their ability to borrow at low rates. RoE’s have expanded on the back of low-cost international borrowing and with scheduled repayment of US$ 78mn over the next four years we expect RoE’s decline. Initiate with a Sell: Multiple headwind’s for growth, declining RoE and potential for estimate downgrade (our FY14 EBITDA is 10% below consensus) drives our Sell recommendation. We prefer to value REDI on EV/EBITDA as this measure captures the leverage in the balance sheet. We value REDI at 5.5x FY15E EV/EBITDA on par with the trading multiple of its global peers to arrive at price target of Rs. 65. We initiate coverage with a SELL recommendation.

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