{"id":1086,"date":"2021-03-02T20:06:00","date_gmt":"2021-03-02T20:06:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1086"},"modified":"2021-03-02T20:06:00","modified_gmt":"2021-03-02T20:06:00","slug":"redington-india-ltd-imperfection-is-not-incompleteness","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1086","title":{"rendered":"Redington India Ltd: Imperfection is not Incompleteness"},"content":{"rendered":"

Stock Idea: Redington
\nIndia.<\/span><\/u><\/b><\/p>\n

<\/span><\/u><\/b><\/p>\n

(This business study of Redington India Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021)<\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n
\n

Stock:
\n Redington India Ltd<\/b><\/p>\n<\/td>\n

\n

Financial
\n Performance (Fig in Cr)<\/b><\/p>\n<\/td>\n<\/tr>\n

\n

Description<\/b><\/p>\n<\/td>\n

\n

(Amt)<\/b><\/p>\n<\/td>\n

\n

Description<\/b><\/p>\n<\/td>\n

\n

Up to
\n Dec-20<\/b><\/p>\n<\/td>\n

\n

FY-2019-20<\/b><\/p>\n<\/td>\n<\/tr>\n

\n

CMP (On 28.01.2021)<\/p>\n<\/td>\n

\n

135<\/p>\n<\/td>\n

\n

Sales (Inc other income)<\/p>\n<\/td>\n

\n

41500<\/p>\n<\/td>\n

\n

51500<\/p>\n<\/td>\n<\/tr>\n

\n

Market Value <\/p>\n<\/td>\n

\n

5240<\/p>\n<\/td>\n

\n

Net Profit<\/p>\n<\/td>\n

\n

483<\/p>\n<\/td>\n

\n

534<\/p>\n<\/td>\n<\/tr>\n

\n

PE Ratio (Annualized)<\/p>\n<\/td>\n

\n

7<\/p>\n<\/td>\n

\n

Cash<\/p>\n<\/td>\n

\n

3100<\/p>\n<\/td>\n

\n

2368<\/p>\n<\/td>\n<\/tr>\n

\n

Net worth (Sep-2020)<\/p>\n<\/td>\n

\n

4500<\/p>\n<\/td>\n

\n

Purchases-Stock in Trade<\/p>\n<\/td>\n

\n

39200<\/p>\n<\/td>\n

\n

48600<\/p>\n<\/td>\n<\/tr>\n

\n

Dividend Yield<\/p>\n<\/td>\n

\n

3.00%<\/p>\n<\/td>\n

\n

Purchases\/Sales <\/p>\n<\/td>\n

\n

94%<\/p>\n<\/td>\n

\n

94%<\/p>\n<\/td>\n<\/tr>\n

\n

\n<\/td>\n

\n

\n<\/td>\n

\n

Debt<\/p>\n<\/td>\n

\n

827<\/p>\n<\/td>\n

\n

2537<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

More than the perfection of the
\nmarket (stock market), it is its imperfection which is more beneficial and
\nattractive. I usually say this and someone questioned me why more value in
\nnegativity. But I told him that Imperfection is not
\nincompleteness…negativity…deficit as is generally taken. It is not the absence of creativity and
\nskill but closeness to these. Perfection lies with the Almighty. When we move
\ninto a garden…there is no perfect order…leaves are scattered all over…not
\nperfect but it is not incompleteness or disorder or chaos because the garden
\nlooks beautiful…in fact this imperfection makes it look more beautiful.
\nPerfection may not be that perfect from the perspective of enjoying or living.
\nSo the market is imperfect because it is its basic nature and it is beautiful,
\nlively and creative only because it is imperfect. As they say-Best is the enemy
\nof the Good and this is not more relevant elsewhere than in the stock market.<\/p>\n

<\/a><\/div>\n

So perfect stocks are those
\npicked imperfect and amid imperfection. Redington I feel is one of the best
\nfit in this category- It has done perfect to improve its business, margins
\nand balance sheet but as of now lying in a corner ignored and so at low
\nvaluation due to market imperfection but it is a great investment opportunity only
\nbecause of this imperfection.<\/p>\n

<\/p>\n

<\/p>\n

\n

Redington India is a global IT products distribution giant just behind Ingram Micro. It is an investor owned, Board managed and
\nprofessionally run company as promoters have exited by selling their entire
\nstake. At present, Synnex group which is a global giant in IT product distribution is having 24.2% stake, Affirma capital
\n15.8% (an arm of Standard chartered PE), MF 11.5% and FIIs\/FPIs having 3.3% stake in it. Its turnover is massive
\nRs. 51500 cr with 40% business coming from India but India is going to be their
\nfastest market. Its top 5 vendors are-Apple, Dell, HP, Samsung and Lenovo. Distribution is a high volume low margin business which makes it one of the toughest business with high entry barriers as it is very tough to create large scale supply chain, managing inventory of countless products, offering credit\/financing to promote growth, long term relationships with suppliers and vendors, logistics, market making, technical support. And amid all this complexity they have to keep an eye on working capital management so as to ensure a reasonable level of margins (ROE). In distribution business, working capital is the plant and machinery and so the success and viability of distribution depends upon how well they manage this as higher levels of inventory and debtors blocks huge amount of capital straining returns and growth. <\/p>\n

This year they have improved
\ntheir working capital massively and generated large free cash flows as
\ntheir working capital days have been improved to 14 days from 38 days last year.
\nBut this was due to significant collections due to covid and so this will stay around 30 days which is the normal practice in industry of
\ngiving credit period of 1 month. I remember this figure was in high 60-70 days
\nsome 3-4 years back so they have done massive improvements in their working
\ncapital. Working capital is like plant and machinery for a distributor. In 9
\nmonths this year they have improved EBITDA by 11% in spite of the Covid
\nlockdowns across the globe and generated Free cash flows of staggering 2761 cr
\n(this will cool down to some extent next year). Its ROE stands around 17% but I
\nthink this will see huge jump this year and very soon we will see this touching
\n25%. <\/p>\n

But
\nin spite of making massive improvements in working capital management in last
\n3-4 years it is still trading at low PE of 7-8 while Ingram Micro is trading at
\n25-30 PE during this period. Somehow, I feel market is not being able to value
\nand understand its high entry barrier business because it requires huge
\nresources and planning for building this gigantic supply chain in low margin
\ndistribution business. <\/span><\/p>\n

Distribution business is very tough
\nas they have to establish their relevancy in the present era of cost cutting
\nwhere some product channels see them as not adding any value to the product
\nchain. But it is not\u2026.distribution is a very complex function, needing huge
\nresources for keeping inventory, giving credit to resellers, market knowledge,
\nproviding after sales servicing and training etc. Just imagine how big
\nresources Producers would need to block in these activities if not for
\ndistributors like Redington. Distributors earn their bits by achieving
\nefficiency in the supply chain and economy of scale. Distributors like Ingram
\nMicro and Redington, in order to fight another war of relevancy, have entered
\ninto the distribution of Cloud computing business. Earlier some suppliers were
\ndoubtful but then they see the value addition and now most of the cloud
\ncomputing suppliers are having distributors. Redington is distributing the
\ncloud products of Microsoft in India.<\/p>\n

Distribution is one of the most
\nimportant functions in the entire value chain of a product from production to
\nfinal consumption. And when we talk about value chain then it implies that
\ndistribution function adds \u201cvalue\u201d to the product. How? Distributors adds value
\nin the form of creating market for the product, bulk procurement and redistribution,
\nfinancing, inventory management and logistics, after sales services, knowledge
\nof the local markets etc. Distribution is inherent in the entire value chain
\nbecause the function like financing, storing large quantities, market creations
\netc. are very important in order for a product to get demanded and sold. People
\nthink that the likes of Flipkart, Amazon will eliminate the distributors but
\nthey are wrong because then they will become the distributors itself because
\nsomebody has to perform these distribution and marketing functions so if Amazon
\nholds the inventory, provide credit, ensure delivery then they are playing the
\nrole of distributors. If they are not doing then it is sure that either the
\nproducers themselves or someone else is doing this function. Retailers keep
\nsmall quantities of many products from different producers so they need the
\nservices of distributors to procure these small quantities whenever they need.<\/p>\n

Producers want and need to focus
\non the designing, innovation, production and branding functions and these
\nrequire a lot of capital. So blocking further capital in the distribution
\nchannel will be very risky for them as they can only afford to take that much
\nrisk hence they need the services of distributors in placing and managing the
\nproduct and supply chain. So distribution needs large investments and lack of
\nproper distribution strategy can make or break a product in the tough market
\nconditions. Apart from the need for big investments, one can gauge the value
\naddition by distribution function on its own from the fact that if retailers or
\nconsumers try to arrange for self-procurements of goods from producers then
\nthis will render them very costly\u2026in fact unaffordable. So Distributors
\nhas independent value addition in the form of lowering the cost of product and
\nthat\u2019s why new disruptions like ecommerce will in most optimistic case will
\nonly transform (not eliminate) the distribution function and may result in cost
\nsavings and better efficiency. In traditional product distribution,
\ndistributors with their immense value addition result in the creation\/enabling
\nof a transaction which without them could not have been possible (Like without
\ndistributors a new product can\u2019t be sold to customers as who will create the
\nawareness of the product by market making).<\/p>\n

Take
\nthe case of Cloud computing where people were expecting the death of IT
\ndistributors. But as I have said distribution is inherent in the entire supply
\nchain of a product from production to the final sale to the ultimate consumer. When
\ninternet came many expected the death of middlemen as they felt the producers
\nwould sell directly to consumers but the result was the emergence of much
\nbigger Distributors\/Retailers in the form of Amazon\/Alibaba. Cloud computing
\nhas in fact widened the market of IT products as many small firms can now afford
\ncostly IT systems which earlier were too expensive for them. But reaching these
\nmillions of new firms who are prospective clients of cloud computing need the
\nsupport from IT distributors like Ingram\/Redington in the form of financing,
\ntechnical support, market making, logistics etc. These distributors have long
\nterm relationships with these firms and they can impact or motivate them to
\nlook at Cloud computing as a low cost option for their IT system requirements
\nbecause in the end Cloud providers are competing with many other similar vendors
\nso they need the help of these \u201cmarket gurus\u201d and as they can rely upon the
\nexpertise of these distributors so they can focus on their core work which is
\noffering new services\/products under cloud.<\/span><\/p>\n

Redington\u2019s third party logistic
\nbusiness \u201cproconnect\u201d is growing very fast. Proconnect is having one of the
\nbiggest logistic capacities in India with 155 warehouses covering 6.7 m Sq
\nfeet. In 2015, it was getting some 70% revenue from Redington but now the same
\nis just 13%. Total revenue is around 500 cr and the same is growing fast and
\nthis one is going to be a big contributor in the future growth and valuation of
\nRedington.<\/p>\n

Some Critical
\nEvents and Decisions to put Redington into High Growth<\/span><\/u><\/b><\/p>\n

But
\napart from low valuation in high growth sector, there are some other very
\ncritical factors which can catapult this one into another high growth orbit and
\nthat is the coming growth of local electronics goods manufacturing in India. Indian
\nGovt. is promoting the local manufacturing by offering Production linked
\nIncentive (PLI) schemes. Indian Govt has launched a Rs. 50000 cr
\nproduction-linked incentive (PLI) scheme to boost the electronics goods
\nmanufacturing in India. Global giants like Samsung, Nokia, Foxconn, Wistron
\netc. are already going to ramp up their Indian manufacturing to benefit from
\nthe PLI scheme. I think local manufacturing will increase the demand for its
\nservices big time and this is going to be a big catalyst event for it. Second,
\nI feel as Redington has good cash reserves so time is ripe for it to do some
\ngood acquisition in technology space or logistics space and I think we may see
\nsomething on this very soon. Third, the demand of Data centers\/cloud will grow
\nmuch faster with 5G and Redington is already a big force in it and it will see
\nhigh growth in this vertical and I think it may even increase the services
\noffered in relation to Data centers\/Cloud.<\/span><\/p>\n

Summary of Analysis levels Involved in the
\nstudy of Redington India:<\/span><\/u><\/b><\/p>\n

1.
\nLevel 1 (Lower relative valuation)<\/span><\/u><\/b> \u2013
\nLow valuation (7 PE) keeping in view the scale, low debt, high entry barrier,
\nsignificant improvements in working capital (Plant and machinery).<\/span><\/p>\n

2.
\nLevel 2 ( Industry level growth and restructuring)<\/span><\/u>–<\/span><\/b> IT products
\ndemand is going to see high growth in India and across the globe and
\nRedington <\/span>is nicely poised to
\nparticipate in this growth. Another massive industry level event is local
\nelectronics goods manufacturing in India.<\/span><\/p>\n

3.
\nLevel 3 (Forecasting of management decisions which may result in massive future
\ngrowth and value unlocking)<\/span><\/u> \u2013 <\/span><\/b>They have already done the great work in last 3-4 years
\nwhich is not rewarded by the market. However, its management still has the
\nscope for another round of decision making to lead it to massive growth. The
\ndecision to be taken by management for doing some acquisition in technology or
\nlogistic space and then to capture market share in high growth cloud and
\nincreasing their service offerings are the key strategic actions to be taken by
\nthe management.<\/span><\/p>\n

(This study is a business analysis of the company under consideration. Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).<\/span>

\n<\/span><\/p>\n

<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Stock Idea: Redington India. (This business study of Redington India Ltd is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021) Stock: Redington India Ltd Financial Performance (Fig in Cr) Description (Amt) Description Up to Dec-20 FY-2019-20 CMP (On 28.01.2021) 135 Sales (Inc other income) 41500 51500 Market Value 5240 Net Profit 483 534 PE Ratio (Annualized) 7 Cash 3100 2368 Net worth (Sep-2020) 4500 Purchases-Stock in Trade 39200 48600 Dividend Yield 3.00% Purchases\/Sales 94% 94% Debt 827 2537 More than the perfection of the…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1086","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1086","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1086"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1086\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1086"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1086"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1086"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}