Redington Research Report: Kotak Securities

Kotak Securities are bullish on Redington and have recommended a BUY with the following investment rationale:

Redington reported good set of Q2FY11 results which are inline with our estimates

– Remain positive on medium to long term growth prospects of Redington due to increase share of higher margin non IT business like mobile phones and consumer durables

– Redington is working closely with Nokia, Blackberry, LG, Whirlpool, Godrej Consumer

– Redington to acquire Turkey based IT distribution company – Arena – ~18% market share

– Redington‘s 1 lakh sq.ft. Dubai ADC operational, Kolkata ADC to be operational by March 2011

– Revise FY11 EPS of Redington to Rs.5.8 (up 0.3%)

– Introduce FY12 earning estimates with EPS of Rs.6.9 of Redington

– Due to 16% upside potential we upgrade Redington to BUY with increased price target of Rs.95 (Rs.70 earlier)

Growth in core IT business The aggressive pace of both the Central and State Governments to drive their egovernance projects and increased budgetary allocation for the education and health sector is expected to stimulate demand for IT products. We are also seeing strong traction in sale of personal computers and its related accessories due to continued consumer confidence and a revival in IT spend. It is expected when most budget announcements are translated into actual expenditure, it would trigger huge demand for IT products. We feel Redington is ideally poised to exploit all these opportunities to its advantage with a clear focus on growth areas.

Nokia business leading to growth in overseas market The volumes of Nokia mobile phone distribution have been scaled up significantly in Nigeria and Kenya through better reach and coverage. Redington has been honored with the No.1 distributor position for Nokia products in Sub-Saharan Africa and has also been awarded the best distributor for Nokia products in East and West Africa. It has also been successful in obtaining a new distribution contract from Nokia for Ghana market. Considering the expected growth in telecom market and association with strong brand like Nokia is expected to lead to increased revenues and profitability for Redington going forward.

Mobile phone distribution in India – Blackberry and LG India is now the second largest mobile market in the world after China, with about 400 million mobile users. According to Cellular Operators Association of India’s (COAI) projection, there will be 1240 Million mobile users in 2015, which means one phone for every Indian. The demand for Blackberry Smart phones has been encouraging and strong relationship with large retail store customers has enabled Redington to show consistent monthly growth both in terms of units sold and sales revenue. Redington has also tied up with LG electronics for distribution of their mobile phones in the Tamilnadu market. We feel that these two initiatives would give Redington an entry into the high growth mobile handset space in India.

Strong growth in consumer durables – ties up with large players Redington has successfully extended its experience in distribution of technology products to consumer electronics products as well. This is due to the fact that India is a vast market with a strong consumer base and a growing interest in life-style products. Within a short span from the start of consumer durable business it has already expanded its branch network for sale of consumer electronics products to 14 cities with a market base of about 2500 channel partners. With an objective to become a one-stop shop for retailers, Redington has also entered into partnerships with vendors like LG, Whirlpool, Godrej consumer appliances. We feel these partnerships with large players would help to substantially improve the revenues from this segment.