We recently spoke with the management of Redington.
On account of the slowdown in the economy and slowdown in the consumer demand there is liquidity crunch faced by Redington’s resellers and channel partners.
We have also accounted for the increased interest cost on account of significant increases in interest rates and higher working capital requirements. Thus we have incorporated higher interest cost of Rs1 billion in FY09E as against our earlier estimate of Rs950 million.
In November 2008, Investcorp Gulf Opportunity Fund Company, a private equity investor, has invested $98 million for a 36% stake in the Redington’s Middle East and Africa (MEA) business. The deal values the company’s MEA business at $272 million.
We feel the above step is positive as it would help the company to aggressively grow its MEA business which has good growth prospects.
At the current market price of Rs.112, the stock trades at 1.0x P/BV, 6.0x earnings and 5.5x cash earnings based on consolidated FY09E earnings estimates.
In view of the expected temporary slowdown in economy and slowdown in consumer demand we had downgraded the stock to Accumulate at Rs175 on 29 October 2008. Since then the stock has corrected by ~ 34% in one and half months.
We feel that such a sharp fall provides an opportunity for medium-to-long term investor to invest in the stock as we continue to remain positive on the long term growth prospects of the company.
We feel that Redington is poised to handle a greater share of the business in supply chain solution space with its unique business model, proven execution capabilities and its presence in potential markets.
In view of sharp correction in stock price, good growth potential and attractive current valuations, we are upgrading the stock of Redington to BUY with a revised price target of Rs185 (Rs.250 earlier). This provides 65% upside potential form current levels.