Redington Ltd – Big Leap Coming for the Future?

One of the biggest IT distributors in India with access to major global markets, maybe poised for its next phase of growth.

Introduction

Founded in 1993, Redington India Ltd has emerged as a leading supply chain solutions provider in the technology and telecom sectors. With its headquarters in Chennai, India, the company has established itself as a prominent player in the distribution and services space. Redington’s core focus lies in distributing an extensive range of IT products, mobile devices, and consumer electronics to a diverse network of resellers, retailers, and corporate clients across India and other countries.

It is currently an $8.4 billion technology solutions provider with more than 290 international brands in its distribution network in more than 38 markets.

In this brief research report, we will focus on Redington’s fundamentals, SWOT analysis, recent performance and the possible reason for a fall in stock price (which gives us a great buying opportunity).

Fundamentals

The company has impressive financials, with a very attractive PE ratio of 8.65 and a PB ratio of 1.61. This means that the company is valued very close to its actual book value and the earnings are very much in line with its stock price. In addition, Redington has been a consistently dividend-paying company throughout its history, with a latest yield of 4.8%. The latest dividend payment was on 7 Jul 2023 with INR 7.2/- paid for every share. Redington also has a very attractive debt profile with net debt to equity at a heathy ratio of 0.6.

Financial Trend of Redington (courtesy Zerodha/Ticker Tape)

If you have listened to my podcasts, and my Udemy course then you will know that I really love companies with low debt, and in fact most of the companies in my Indian portfolio are either zero-debt or low debt companies.

Let us look at the shareholding pattern of Redington now. There is some very interesting data there:

Redington Shareholding Pattern

The company has no promoters. That’s right, it is owned by various shareholders with foreign ownership at a whopping 59%! The Synnex Technology Corporation (NYSE: SNX) is an American company that is also an IT distributor in the US and the rest of the world. I have observed that any company having a significant ownership from FIIs and FPIs are always much better in quality. Another such a stock is SHRIRAM FINANCE (which we will talk about in detail, stay tuned). So, this also reinforces the excellent fundamentals that Redington has and makes it a good stock to invest in.

Since listing the company has created enormous wealth for its shareholders with almost 800% growth in stock price. The company has also maintained a high rate of profitability which has started accelerating in the past 5 years. The ROE of the stock over the past 10 years has been an impressive 18% and ROCE at 26%. These are great fundamental returns for a stock with the market cap of Redington and this means that the growth and expansion stage has just started.

Strengths

Current Market Position

Redington has a strong market position in the IT products distribution within India along with Ingram Micro Pvt Ltd (another major player in this industry) garnering the major share of the market in domestic IT distribution. The company is also the market leader in the Middle East and Africa (MEA) markets through its step-down subsidiary, Redington Gulf FZE, while its step-down subsidiary, Arena Bilgisayar Sanayi ve Ticaret A.S. (Arena), is one of the largest players in Turkey. It has strong relationships with leading vendors such as HP, Dell, Samsung, Lenovo, Cisco, and Microsoft in the IT products business, and has over time consolidated its position as a leading distributor for these vendors.

Revenue Streams and Diversification

REDIL’s revenue stream is highly diversified in terms of the IT, mobility, and service business verticals, as well as geographically with REDIL present in 38 markets. The IT consumer segment handles the distribution of personal computers (PCs), laptops and other consumer lifestyle products, while the IT enterprise segment caters to networking, software, server storage, cloud services. In the mobility vertical, REDIL primarily focuses on smartphones. The company has gradually enhanced the proportion of mobility revenue in its overall revenue supported by the rapid penetration of smartphones in the domestic market as well as overseas market leading to share of mobility revenue increasing to 32% in fiscal 2023 compared to 27% in fiscal 2018.

Liquidity Position and Risk Management

Redington has been doing a great job at generating cash (which is one of the most attractive things about a company to invest in) and also maintaining a good risk management profile in its business. These two are very important in my opinion, because even the great Warren Buffett has said that some of the best companies he has invested in, have been amazing cash-generating businesses.

The company enjoys strong liquidity, with cash surpluses of about Rs. 1951 crore as on March 31, 2023, and bank lines of Rs.2800 crores which has been utilized on an average at 12% over the past 12 months ended April 2022. Now this means that, even though Redington had a credit line to the tune of Rs. 2800 crores, only 12% or Rs. 336 crores have been utilized by them. Imagine having a credit card with a limit of Rs. 2800 but using only Rs. 336 because you that’s all you need! This means they are using their credit lines very judiciously. Another green flag.

During fiscal 2023, Redington generated net cash accruals of over Rs.1000 crore (post adjustments for dividend outflow of Rs 515 crore). The company’s cash accruals are expected to remain healthy and is expected to be sufficient to meet capex and working capital requirements.

Most Recent Performance – Q1 2024

Redington has had a really good Q1 2024 performance, that is evident from their earnings results where the company reported a 26% higher revenue than the corresponding quarter in FY23. Also, this is the highest ever quarterly revenue in the history of the company at 21,250 crores. Let’s take a look at the numbers:

Redington Q1FY24 performance – Highest Quarterly Revenue Ever

So, what is the reason behind its fall in stock price recently?

In addition to the existing market downturn that has been triggered due to the US interest rate scenarios, one of the major reasons has been the stepping down of its Managing Director Mr. Rajiv Srivastava for personal reasons. You see, the markets do not like it when stable companies’ top management resigns for unclear reasons. This is one of the triggers for a sell for most investors as there could be impending issues that are flagged by such a resignation.

Most top management officials either “retire” or move on to better opportunities and announce the same publicly, so as to not create panic in the markets or minds of investors. Mr. Srivastava has been with Redington since April 2021 in the capacity of Joint Managing Director and then was elevated to Managing Director in April 2022. Now, Mr. Srivastava has had a stellar career – he was formerly the MD and CEO of Indian Energy Exchange, and during his stint at IEX, he transformed the publicly listed company into a diversified business enterprise that significantly improved shareholder value. If you have been following us on Twitter or Instagram, then you would know that IEX is part of my Indian portfolio.

So, the departure of such an eminent professional at such short notice has definitely dented the confidence of the investors. From my point of view, this could be because of a genuine personal reason and does not pose any serious challenge to the performance of the company. Instead, this depression in stock price can be a valuable opportunity to buy.

So, there you have it – a quick brief on this amazing company and why I’m invested in it for the long term. With its strong fundamentals, this one is a pick for the future.

Disclaimer: The above article is for informational purposes only. The author has long positions in the stock mentioned above. Please consult your certified financial advisor before investing.

Optimizing Investment Portfolio Diversification for Better Returns

Your portfolio will continue to beat the market if you keep in mind these simple, important diversification rules.

Introduction

Investing is a powerful tool for building wealth, but it comes with its fair share of risks. One of the key strategies to manage these risks and potentially enhance returns is by optimizing investment portfolio diversification. In this blog post, we’ll delve into the concept of diversification, its benefits, and practical steps to create a well-diversified investment portfolio.

Understanding Diversification

Diversification is the practice of spreading your investments across different asset classes, industries, geographic regions, and types of securities. The rationale behind diversification lies in the principle of not putting all your eggs in one basket. By allocating your investments across various categories, you can reduce the impact of poor performance in any single asset on your overall portfolio.

Check out how I diversified my personal portfolio to get 21.3% CAGR on my returns here.

The Benefits of Diversification

1. Risk Reduction: Diversification minimizes the impact of market volatility on your portfolio. When one asset class underperforms, others may still provide positive returns, helping to offset losses.

2. Consistent Returns: Different asset classes have varying levels of sensitivity to market changes. By holding a mix of assets that react differently to economic conditions, you can potentially achieve more stable and consistent returns over time.

3. Potential for Higher Returns: While diversification doesn’t eliminate risk, it can help you strike a balance between risk and reward. A well-diversified portfolio may allow you to capture growth opportunities in various sectors while managing potential downsides.

Steps to Optimize Portfolio Diversification

1. Define Your Investment Goals: Before diversifying your portfolio, clarify your financial goals, risk tolerance, and investment horizon. Your objectives will guide the level of diversification that’s appropriate for you.

2. Asset Allocation: Determine the allocation of your investments among different asset classes, such as stocks, bonds, real estate, and commodities. The right allocation depends on your risk appetite and time horizon.

3. Broaden Your Horizons: Look beyond domestic markets and consider international investments. Different economies and regions may perform differently under various conditions, offering additional diversification benefits.

4. Choose Different Sectors: Within each asset class, select investments from various sectors. For example, in the stock market, consider industries like technology, healthcare, finance, and consumer goods.

5. Explore Various Investment Vehicles: Don’t limit yourself to just stocks and bonds. Explore exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), and other investment vehicles that offer exposure to different assets.

6. Regularly Rebalance: Over time, the performance of different assets will cause your portfolio to deviate from its original allocation. Periodically rebalance your portfolio by selling overperforming assets and investing in underperforming ones to maintain your desired diversification.

Monitoring and Fine-Tuning

It’s important to note that diversification is not a one-time task. Regularly review your portfolio’s performance and reassess your investment goals. As your financial situation and market conditions change, your diversification strategy may need adjustments to ensure it remains aligned with your objectives.

And to summarize, optimizing investment portfolio diversification is a fundamental step towards managing risk and potentially enhancing returns. By spreading your investments across different assets and sectors, you can create a more resilient portfolio that can weather market fluctuations while seeking growth opportunities. Remember that while diversification can’t eliminate all risks, it’s a strategy that can help you achieve a more balanced and rewarding investment journey.

BRICS Currency: An Alternative to the Mighty Dollar?

BRICS nations are planning to formulate a new global reserve currency to replace the dollar.

Introduction

The global financial landscape has been dominated by the United States Dollar (USD) for decades, serving as the world’s primary reserve currency and a benchmark for international trade and finance. However, the emergence of the BRICS (Brazil, Russia, India, China, and South Africa) economies as significant players on the global stage has prompted discussions about the possibility of these nations launching their own common currency. This essay aims to explore the potential impact of such an event on the USD and the broader global financial system.

The Signing of the Bretton-Woods Agreement led to the global reserve currency status of the US Dollar.

Historical Context: The Dominance of the USD

The USD’s supremacy as the world’s primary reserve currency traces back to the Bretton Woods Agreement of 1944. Under this system, currencies were pegged to the USD, and the USD itself was backed by gold. Though the gold standard eventually collapsed in 1971 after the historic 15 Aug speech by Richard Nixon, the USD retained its preeminent status due to the size and stability of the US economy, as well as the trust engendered by the institutions that underpin the currency.

In addition, the global oil market, which was generally dictated by the geopolitical considerations put forth by the United States, adopted the US Dollar as the currency of choice for trade. As oil became the most valuable and largest-traded commodity in the world, the status of the US Dollar rose along with it, further reinforcing its status as the primary currency of choice by the rest of the world.

The Petrodollar keeps the US economy afloat.

The Birth of BRICS and Its Implications

BRICS is a grouping of five emerging economies that, collectively, represent a significant portion of the world’s population, land area, and economic output. These nations have grown both economically and politically, leading to discussions about the possibility of launching their own currency as a challenge to the USD’s dominance. Such a move could stem from a desire to reduce dependency on the USD and increase their influence in global financial affairs.

BRICS countries represent around 40% of the world’s population and a large proportion of resources.

Potential Advantages of a BRICS Currency

The BRICS countries are currently working on formulating a currency equivalent that resembles Special Drawing Rights (SDRs) of the International Monetary Fund (IMF), which is essentially a basket of currencies with a specific value that can be used for transactions across countries. It has been called the R5, which stands for the five currencies of BRICS – Ruble, Renminbi, Rupee, Real and the Rand.

There could be a crucial announcement regarding this during the BRICS summit that is slated for later this month, even though most of the foreign ministers of the alliance, especially Dr. S Jaishankar of India, have been downplaying the formulation of the currency.

1. Economic Sovereignty: A common BRICS currency could empower member nations with more control over their economic policies and trade relations. This could lead to reduced susceptibility to external economic shocks and the whims of global financial markets.

2. Trade Facilitation: A BRICS currency might streamline trade among member nations, eliminating currency conversion costs and exchange rate uncertainties. This could foster increased intra-BRICS trade and cooperation.

3. Geopolitical Influence: Launching a new currency could boost the collective geopolitical influence of BRICS nations, allowing them to exert greater influence in global financial institutions and negotiations.

Challenges and Considerations

1. Economic Divergence: One of the primary challenges for BRICS in launching a common currency is the considerable economic diversity among its member nations. Varying inflation rates, growth trajectories, and fiscal policies could complicate the formulation of a coherent monetary policy.

2. Trust and Credibility: Building trust and credibility for a new currency would be a significant hurdle. Investors and international markets have long regarded the USD as a stable and secure reserve. Convincing the global community of the stability of a BRICS currency would be an intricate task. In addition, there is a trust deficit between countries in the grouping too – like India and China. Having fought a major war in 1962, and further skirmishes as recent as 2022, it is difficult to imagine India giving way to a stronger weightage to Renminbi of China, which is already being used as reserve currency in many countries and even SDR baskets.

3. Potential for Fragmentation: Launching a new currency could also raise questions about the unity of the BRICS bloc. Disagreements over monetary policy, exchange rates, and economic priorities could strain the cooperation required to sustain a common currency.

Impact on the USD

The launch of a BRICS currency would likely have profound implications for the USD and the global financial system as a whole.

The Federal Reserve, US Central Bank, will have to bring in extensive reforms and frugal policies to rein in a major blow to the US Dollar if BRICS decides to launch their own reserve currency.

1. Reserve Currency Status: The most immediate impact would be on the USD’s reserve currency status. If the BRICS currency gained traction as a viable alternative, central banks around the world might diversify their reserves away from the USD, leading to a decline in its value and significance. This could lead to a catastrophic fall in the value of the US Dollar and USD-dominated instruments like Treasury Bonds and Oil futures. Such an event would lead to a severe depression not only in the US, but also the rest of the world. It could also impact trade transactions and other currencies.

2. Trade and Finance: The USD’s use as the primary currency for international trade and finance might diminish if BRICS nations opt to use their own currency for transactions among themselves. This could lead to a reduction in demand for USD and, consequently, a potential weakening of its value.

3. Interest Rates and Debt: The USA’s ability to borrow at lower interest rates, a privilege associated with the USD’s status, could be affected. As demand for USD decreases, borrowing costs might rise, impacting the US government’s ability to manage its debt.

4. Geopolitical Implications: A significant shift away from the USD could impact the USA’s geopolitical influence. The use of the USD as a tool for sanctions and diplomacy might be curtailed, reshaping global power dynamics.

Responses and Adaptations

1. USD Devaluation Mitigation: To mitigate the devaluation of the USD, the USA could adopt prudent fiscal and monetary policies. Ensuring a strong and stable economy would help maintain investor confidence in the USD.

2. Reforming International Institutions: The launch of a BRICS currency might stimulate discussions about reforming international financial institutions like the International Monetary Fund (IMF) and the World Bank. These discussions could lead to more inclusive decision-making processes and the reevaluation of voting rights, reflecting the changing global economic landscape.

3. Enhanced Cooperation: Instead of solely perceiving the BRICS currency as a challenge, the USA could choose to engage in closer economic cooperation with BRICS nations. Collaborative efforts might lead to the development of new financial instruments and mechanisms that benefit all parties involved.

A secure global economy needs a reserve currency that cannot be manipulated by one player.

What Next?

The launch of a BRICS currency has the potential to significantly impact the USD and reshape the global financial landscape. While there are challenges and uncertainties surrounding such an endeavor, it is clear that the USD’s status as the world’s primary reserve currency is not guaranteed in perpetuity. The rise of the BRICS economies and their pursuit of economic and geopolitical influence could trigger a paradigm shift, forcing the international community to adapt and evolve in response to a changing world order. How nations navigate this complex terrain will play a pivotal role in determining the future trajectory of global finance.