Management Speak: Redington India (Outperformer) - India IT Enterprise pick-up key to consol growth

Key takeaways of our interaction with the senior management of Redington India Ltd. (REDI):

India IT enterprise business could pick up pace: India Enterprise business (high margin) slowed down during GST implementation, as clients needed time to migrate to the new compliance systems as well as due to lack of clarity on taxation issues in the new regime. Management believes India IT enterprise spending has bottomed out and a strong pick up led by private capex and government focus on initiatives like Digital India/Smart Cities is expected.

Change in leadership at Apple India would be positive: We expect the recent senior management rejig at Apple India to be positive for the top two distributors (Ingram & REDI), as Apple is looking to streamline its India distribution (ensure discount and territorial discipline). We see this hurting Apple’s smaller distributors. REDI does not see much scope for cut in Apple’s distributor margins from the current level.

India business to be driven by Enterprise/non-Apple Mobility: REDI expects its India business to be driven by a revival in Enterprise spending and Mobility (largely through non Apple brands, as it is aggressively scouting for new tie-ups), as the company would prefer to reduce its dependency on individual brands. Over FY19E/20E, REDI estimates 10-12% CAGR in its India business.

India Working capital (WC) to improve; Overseas WC not sustainable: WC has improved drastically from ~59 days in FY16 to ~39 days as of 9MFY18, mainly on cutbacks in overseas business. REDI expects overall WC levels to sustain, as India WC improves from current levels while overseas WC could deteriorate if growth in key stressed markets in the Middle East fizzles out.

Scaling up a priority for ProConnect versus listing: ProConnect’s growth has exceeded REDI’s expectations ever since its demerger in 2012. REDI remains open to listing ProConnect on exchanges, but the immediate priority remains to scale up the company.

Valuation & View

We remain positive on REDI and believe that its dominant position as a bridge between brands and end-customers in the IT/Mobility space coupled with its strong execution and risk management capabilities remains unappreciated by the market. We maintain our Outperformer rating on REDI with a target price of Rs224 (13x FY20E EPS).