Management Speak: Redington India (Outperformer) - Bidding to transform into a solutions play!

We attended Redington India’s (REDI) analyst meet where the company outlined its future roadmap. For the first time, REDI exposed investors to its entire senior management team. Alongside Mr. Raj Shankar (MD) and Mr. SV Krishnan (CFO), REDI was also represented by Mr. Ramesh Natarajan (Joint COO – India), Mr. E.H. Kasturi Rangan (MD – ProConnect), Mr. Rawad Ayash (SVP – Mobility/Middle East) and Mr. Serkan Celik (CEO, Arena Turkey). Following are the key takeaways:

• CY22E Targets: Through higher focus on enterprise IT business (especially in India), and controlling working capital (especially in Mobility business), REDI is targeting a 3% point improvement in RoCE by 2022 (FY19 RoCE at ~15%). Within IT Enterprise, REDI is targeting ~200-300bps gross margin expansion over 2019-22, while in Consumer IT, it would target to reduce opex by ~20 bps over this period. These are expected to come in the backdrop of double-digit revenue/earnings growth over 2019-2022E as it works to transform from a pure-play distributor to a more solutions oriented company.
• India – Key growth driver: India business, and especially IT Enterprise and Mobility, would continue to drive REDI’s overall growth in the medium term. Increased focus on the lucrative services portion of this business (Cloud/3PL/Support Services) is also expected to drive profitable growth over FY19-23E. Services already contributes ~28% of India PAT for REDI as of FY19 (vs targeted 20% by FY21E earlier).
• Overseas – Growth potential remains strong in Africa/Middle East: REDI’s Africa/Middle East markets have grown 16%/12% CAGR over FY15-19 respectively (#1 in MEA market). However, plenty of growth headroom remains. Technology opportunity here is expected to touch ~USD56bn by 2022 (vs ~USD48bn in 2018). REDI targets doubling revenue/earnings over next 6/5 years respectively. Turkey market is expected to stay flat over 2018-22 (~USD9bn), but REDI will seek to increase market-share here (#2 player currently).

Outlook & Valuation

Improving India growth trajectory, decent growth overseas and strong control on WC (both India/Overseas) are setting the foundations in place for the company to aim for its CY22E targets. After a lacklustre 7.6% earnings CAGR over FY15-18 (and just 3.8% growth in FY18), FY19 adj. earnings grew by 15% yoy led by strong performance in Overseas, India IT Enterprise segment and increasing contribution of services. We expect REDI to deliver 12.5% adj. earnings CAGR over FY19-21E and after attending the analyst meet we are more confident of our projections. Despite the recent run-up, the stock is at attractive valuations (6.8x FY20E P/E). Maintain OP with a target price of Rs129 (8x FY20E EPS).