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Lehman Overweight on Redington India

October 31, 2007

Lehman Brothers equity research which was the first to boldly come out and downgrade the Indian IT Outsourcing companies is overweight on the prospects of Redington India Ltd. Redington is the second-largest IT distributor in India and the largest IT distributor in the Middle East. It has a very good Supply Chain expertise.

The company is poised to exploit the strong and secular growth of IT industry in India and Middle-East. Robust systems and stable management team have led to impressive track record in operating performance. Inventory write-downs have been only 0.03-0.04% for last couple of years whereas bad debts have averaged only 0.08% of sales in last five years. PC market in India is witnessing faster growth of branded computers. High value segments like storage & networking equipments are growing faster (47% growth in FY07) than the industry average (19% growth in FY07). The services business with much higher margins (OPM of around 15%) will continue to gradually increase its share of revenues.

The company has opportunities to expand its supply chain platform to goods like mobile handsets, consumer durables etc. It has initiated businesses in these areas which are pretty nascent. The company has registered revenue CAGR of 50% for FY05–07. EPS CAGR is expected to be around 31% during FY07–10. On DCF based valuation, Lehman sets a target price of Rs 455. The stock is trading at P/E multiple of 15.5x FY09E which compares well with international peers like Ingram Micro (11x CY08E), Synnex (19x CY08E) etc. especially given the high growth prospects and healthy ROE.

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