5 JUN 2017 Quarterly Update

REDINGTON INDIA BUY

IT - SERVICES Target Price: Rs 167

Services to leapfrog; core business to sustain

CMP : Rs 131
Redingtons 2017 annual analyst meet was insightful,providing strategic
Potential Upside : 28%
direction to growth with profitability and cash flow generation:
Core business: To drive double-digit growth&sustainable margins
Emerging businesses:To drive incremental growth, margin, and MARKET DATA
RoCE. Foray into rooftop solar, and medical and health equipment No. of Shares : 400 mn
Services, higher margin, less WC intensive businesses:To contribute Free Float : 92%
20% to PAT in FY20E. Proconnect profits to triple in 5 years. PAT of Market Cap : Rs 52 bn
52-week High / Low : Rs 138 / Rs 78
Ensure Support to double every 3 years
Avg. Daily vol. (6mth) : 620,513 shares
India growth to be faster, focus on overseas market would be on Bloomberg Code : REDI IB Equity
consolidation and profitability.Positive FCF generation to continue. Promoters Holding : 8%
Multiple benefits from GST: Structural growth trigger (details on FII / DII : 30% / 22%
page 6). To be a digitalized company in next 3 years.

Focus on growth, profitability FCF generation

Core business:Focus remains on driving (double-digit) revenue growth and sustaining margins.
We have highlighted how REDI has diversified brand mix,delivered strong shift towards non-IT/ mobility segment
(FY17 contribution at 27% vs. 18% in FY11), improved WC from 53 days in FY11 to 41 days in FY17 (Q4FY17:
38 days) and turned FCF positive (FY17 at ~Rs 9 bn on better inventory management and lower receivable days;
FY16 FCF was negative ~Rs 5 bn).Key growth drivers in the core distribution include increased enterprise spending
on IT infrastructure, governmentsIT spending, increasing PC and internet penetration, additions of new brands in
smartphone segment etc.
(Continued on page 2)

Financial summary (Consolidated) Key drivers (% share)

Y/E March FY16 FY17 FY18E FY19E Q4FY16 Q3FY17 Q4FY17
Sales (Rs mn) 354,296 411,147 460,466 516,701 India Rev. 35 39 38

EBITDA (Rs mn) 7,709 8,248 9,362 10,507 Overseas Rev. 66 61 63

India PBIT 49 49 47
Adj PAT (Rs mn) 4,262 4,642 5,268 6,052
Overseas PBIT 51 51 53
Con. EPS* (Rs) - - 13.0 13
EPS (Rs) 10.7 11.6 13.2 15.1
Change YOY (%) 9 9 13 15 Price performance
140
P/E (x) 12.3 11.3 9.9 8.6 Sensex Redington India
120
RoE (%) 16.0 15.2 15.7 16.0
100
RoCE (%) 15.5 15.1 17.1 17.3
80
EV/E (x) 9.5 7.7 6.9 6.2
60
Source: *Consensus broker estimates, Company, Axis Capital
Apr-16 Jul-16 Oct-16 Jan-17 Apr-17

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IT - SERVICES

(Continued from page 1)

Exhibit 1: Core distribution growth drivers

IT infrastructure spending in India

Government it spending in India

USD 2.2 bn ICT spending in META

USD 7.8 bn Smartphone sales - India

1.5%
USD 243 bn PC shipments - India
9.5%
125 mn
3.6% units 9 mn
units
15%
5%
Source: Company

Emerging businesses:To drive incremental growth, margin, and RoCE.These

include foray into rooftop solar market and mid-size health and medical
equipment market. The aggregate opportunity for these markets is likely to be
Rs 323 bn by 2021
Rooftop solar marketconstitutes 10-12% share of overall solar capacity and
offers substantial growth potential. 11.9 GW of new rooftop solar capacity
is expected to be added over 2017-2021

Exhibit 2: Solar equipment

System
Supply Chain Vendor Distributor End user
Integrators

Indias rooftop solar market Product focus Major brands

Solar PV Panels
2021
2017 Solar On Grid Inverters Trina
SolarDC Cables REC
Rs. 12,250 crs Panel Mounting Structures Growatt
Rs.4400 crs
Solar Batteries Renewsys
Solar Junction Boxes

Source: Company

Health and medical equipment:REDI will focus on mid-size segment.

Equipment and instruments constitute 53% of total medical device and
equipment sector

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IT - SERVICES

Exhibit 3: Health & medical equipment

Equipment & Instruments 53% of total Indian Medical Device and Equipment sector

System
Supply Chain Vendor Distributor End user
Integrators

Indias rooftop solar market Product focus Major brands

2021 Ultrasound
2016 X-Ray Siemens
Respiratory Phillips
Rs.20,000+ crs
Rs.10,000+ crs BP machines Omron
Personal care
Rs.3,100 crs
Rs.1,900 crs

Source: Company

Services: Focus on high margin and less working capital intensive segments.
Services to contribute 20% to PAT in 2020.Include Proconnect, Ensure Support,
Digital Printing, Cloud, and 3D services

Exhibit 4: Transformation journey

Supply chain End-to-End

Trader Distributor
consolidator service provider

Digital printing
Logistics services Support services Cloud services 3D Services
services

20%
PAT CONTRIBUTION OF
SERVICES IN 2020
Source: Company

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Proconnect: Profits to triple in 5 years

Proconnect offers multiple services including warehousing, transportation, mission
critical services, 3PL to e-commerce, import and IOR services, reverse logistics and
cold storage. From a vertical perspective, share of IT/ telecom & infrastructure/
e-commerce/ others stands at 38%/13%/12%/36%. Share of
warehousing/transportation/others stands at 66%/26%/8%. Return rations remain
encouraging at 21% RoA, 34% RoE, and 53% RoCE.

Exhibit 5: Transformation journey

Redington Outside Biz
Warehouses SKUs TONS Pincodes
100%
24% 29%
80% 49%
65%
60%
Current 192 60,000 1,50,000 36,000 40% 76% 71%
20% 51%
35%
0%

2013-14

2014-15

2015-16

2016-17
Beginning 45 39,876 94,567 26,875

Source: Company

Exhibit 6: Delivered > 50% earnings growth; we see upsides from GST
CAGR
(Rs mn) FY14 FY15 FY16 FY17
FY14-FY17
Revenue 652 773 1122 1840 41%
EBITDA 73 98 177 351 69%
PBT 65 89 147 297 66%
PAT 44 60 96 199 65%

Margins
EBITDA 11% 13% 16% 19%
NPM 7% 8% 9% 11%
Source: Company, Axis Capital

Growth drivers include GST rollout, industrial growth, Make in India initiatives and
Digitalization road map, infrastructure improvement, and e-commerce as a growth
industry.

Focus areas are opportunities from GST consolidation and transportation,

expansion into FMCG/ pharmaceuticals and cold storage, grow mission critical
services and M&A for new market reach and acquiring capabilities.

Ensure Support Services: Profits to double every three years

Ensure Support Services provides warranty and post warranty services with
240+ service centres across India/ MEA, 75K repairs per month in India, and
1,000+ cities serviced per month in India.

Cloud business
REDI focuses on emerging as a premium cloud solution provider and leverage the
Indias public cloud market of USD 4.1 bn in 2020.

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IT - SERVICES

Exhibit 7: Cloud business

VISION To become a premium cloud ORACLEs
solution provider
Cloud(IaaS/PaaS)
Transformation Partner of
the Year 2016

INDIAS PUBLIC CLOUD MARKET

Partner
Digital
Enablement
2020 Platform
Program
2016
USD 4.1 bn
USD 1.3 bn
Managed OUR CLOUD Business
USD 0.72 bn
USD 0.02 bn Services PRACTICE Development

OUR MAJOR ASSOCIATIONS

Cloud ISV
Consulting Marketplace

Source: Company

3D Printing: Focus is on 3D printing and parts manufacturing.Market opportunity

expected is Rs 5.2 bn by 2020.

Exhibit 8: 3D printing
Focus 3D Printing & Parts Manufacturing

Digital parts manufacturing facility through

Supply Chain Vendor Distributor End user

Indias 3d printing products & services market Products & services focus Major brands

2020
2015 3D Printers
3D Systems
3D Scanners
Zeiss
Rs.520 crs Parts Manufacturing
Rs.65 cr

Source: Company

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IT - SERVICES

GST:Structural growth trigger

In line with our expectations, the management remains upbeat on growth prospects
from GST both for the companys distribution business and logistics subsidiary
Proconnect. Management sounded teething troubles in H1 due to compliance
requirements, dealers initial apprehension to purchase, and operational challenges
of GSTN.

Exhibit 9: GST implications for the business

Possible reduction in No. of warehouses from 56 to 30

Probable reduction in Logistics cost 10%

Redington
Delivery timings expected to improve by 1-3 days

Potential reduction on Inventory holding days by 3-4 days

GST Credit available for domestic customers Pricing advantage

Consolidation of Warehouses to offer 10-20%reduction via

Proconnect Reduced Warehouse rentals

Improved operational & manpower efficiency
Reduction in Inventory & Holding Cost
Bigger shared facility to offer competitive advantage

Increased transportation requirements to increase revenue by 10-15%

Source: Company

E-commerce:A complementary growth channel

REDI sees e-commerce as a complementary rather than a competing channel
and sees opportunities for channel partners to sell in marketplace. All the major
e-commerce players are its clients, with 16% of Indias FY17 mobility revenue
coming in from e-commerce
For logistics business, Proconnect derives 12% of its FY17 revenuefrom major e-
commerce players. Opportunities seen in fulfillment services/ cross-selling/
deep selling

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IT - SERVICES

Maintain BUY
We forecast revenue/ EPS CAGR of ~12% /14% over FY17-19E. With sustainable
earnings growth (CAGR: ~14%) and 16% RoE, we value REDI at 11x FY19E.
Our target price stands at Rs 167, implying an upside of 28% from CMP of Rs 131.
The stock trades at 9.9x FY18E and 8.6x FY19E P/E of ~Rs 13 and Rs 15
respectively.

Exhibit 10: Corporate milestones

Years Milestones
2008 Commenced distribution of Blackberry
2009 ADCs in Chennai, Dubai
2010 Investment in Turkey via Arena
Logistics services under ProConnect&
2012
Commenced distribution of Apple iPhone
Support Services under Ensure
2014
& ADC in Kolkata
2015 Investment in Turkey via LinkPlus
2016 Commenced Cloud biz & distribution of Google Pixel
Source: Company

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Financial summary (Consolidated)

Profit &loss (Rs mn) Cash flow (Rs mn)
Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E
Net sales 354,296 411,147 460,466 516,701 Profit before tax 5,946 6,545 7,593 8,655
Other operating income - - - - Depreciation & Amortisation 433 547 615 689
Total operating income 354,296 411,147 460,466 516,701 Chg in working capital (9,712) 6,962 (4,244) (4,540)
Cost of goods sold (333,724) (388,245) (435,452) (488,514) Cash flow from operations (3,071) 13,881 3,405 4,093
Gross profit 20,572 22,902 25,014 28,187 Capital expenditure (2,662) (193) (803) (1,059)
Gross margin (%) 5.8 5.6 5.4 5.5 Cash flow from investing (2,864) (478) (789) (1,247)
Total operating expenses (12,864) (14,653) (15,652) (17,680) Equity raised/ (repaid) - - - -
EBITDA 7,709 8,248 9,362 10,507 Debt raised/ (repaid) 5,041 (7,238) 1,620 1,427
EBITDA margin (%) 2.2 2.0 2.0 2.0 Dividend paid (996) (2,029) (1,238) (1,422)
Depreciation (433) (547) (615) (689) Cash flow from financing 2,248 (10,836) (1,224) (1,699)
EBIT 7,276 7,702 8,748 9,819 Net chg in cash (3,688) 2,566 1,391 1,147
Net interest (1,797) (1,570) (1,606) (1,704)
Other income 467 413 451 540 Key ratios
Profit before tax 5,946 6,545 7,593 8,655 Y/E March FY16 FY17 FY18E FY19E
Total taxation (1,464) (1,778) (2,165) (2,415) OPERATIONAL
Tax rate (%) 25 27 29 28 FDEPS (Rs) 10.7 11.6 13.2 15.1
Profit after tax 4,482 4,767 5,428 6,240 CEPS (Rs) 11.7 13.0 14.7 16.9
Minorities (220) (125) (160) (188) GROWTH
Profit/ Loss associate co(s) - - - - Net sales (%) 12 16 12 12
Adjusted net profit 4,262 4,642 5,268 6,052 EBITDA (%) 10 7 14 12
Adj. PAT margin (%) 1.2 1.1 1.1 1.2 Adj net profit (%) 9 9 13 15
Net non-recurring items (5) - - - FDEPS (%) 9 9 13 15
Reported net profit 4,257 4,642 5,268 6,052 PERFORMANCE
RoE (%) 16.0 15.2 15.7 16.0
Balance sheet (Rs mn) RoCE (%) 15.5 15.1 17.1 17.3
Y/E March FY16 FY17 FY18E FY19E EFFICIENCY
Paid-up capital 800 800 800 800 Asset turnover (x) 8.1 8.8 10.2 10.3
Reserves & surplus 28,694 30,679 34,710 39,249 Receivable days 55 45 47 48
Net worth 29,494 31,479 35,509 40,049 Inventory days 40 31 33 32
Borrowing 22,396 15,158 16,778 18,206 Payable days 52 45 51 51
Other non-current liabilities 622 692 742 792 FINANCIAL STABILITY
Total liabilities 56,185 50,944 56,804 63,008 Total debt/ equity (x) 0.8 0.4 0.5 0.4
Gross fixed assets 7,864 8,195 8,993 10,047 Net debt/ equity (x) 0.6 0.2 0.2 0.2
Less: Depreciation (2,888) (3,435) (4,050) (4,738) Current ratio (x) 2.0 1.9 1.8 1.8
Net fixed assets 4,976 4,760 4,944 5,309 Interest cover (x) 4.0 4.9 5.4 5.8
Add: Capital WIP 143 5 10 15 VALUATION
Total fixed assets 5,119 4,765 4,954 5,324 PE (x) 12.3 11.3 9.9 8.6
Total Investment - - - - EV/ EBITDA (x) 9.5 7.7 6.9 6.2
Inventory 37,682 33,746 40,563 44,167 PB (x) 1.8 1.7 1.5 1.3
Debtors 53,445 50,873 59,419 67,454
Cash & bank 5,506 7,260 8,651 9,708
Loans & advances 2,434 2,635 4,415 4,829
Current liabilities 49,063 49,718 62,617 70,131
Net current assets 50,003 44,795 50,431 56,027
Other non-current assets 1,064 1,383 1,419 1,657
Total assets 56,185 50,944 56,804 63,008
Source: Company, Axis Capital Source: Company, Axis Capital

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IT - SERVICES

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12-18 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%
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