OEM Shifts With Apple And HP Will Strain Margins

Key Takeaways

• Disintermediation by OEMs, automation, and e-commerce platforms threaten Redington's core distribution business, risking revenue declines and margin pressures.
  
• Heavy reliance on major partners and rising sustainability, inventory, and regulatory risks may lead to increased costs, earnings volatility, and reduced competitiveness.
  
• Strong growth in higher-margin technology and cloud services, geographic diversification, and disciplined cost management are driving sustained profitability and resilience across markets.

Catalysts

Distributes information technology, mobility, and other technology products in India, the Middle East, Turkey, Africa, and South Asian countries.

• The increasing trend of global technology OEMs adopting direct-to-consumer and direct enterprise sales models threatens to bypass intermediaries like Redington, which would significantly erode future revenue streams and diminish Redington's long-term topline growth.
  
• Accelerated advancements in supply chain automation, AI-driven procurement, and platform-based e-commerce are likely to reduce reliance on traditional distributors, compressing Redington's addressable market and ultimately putting sustained pressure on both gross and net margins.
  
• Rising regulatory and consumer pressures for sustainability threaten to elevate costs and create compliance hurdles; failure to rapidly adapt Redington's supply chain and product lifecycle management could lead to higher operational expenses, diminished competitiveness, and margin erosion in coming years.
  
• Redington's heavy dependence on large OEM partners such as Apple and HP exposes the company to concentrated risk; the potential for contract losses or renegotiation on less favorable terms could result in abrupt declines in revenue and volatile earnings, particularly as OEMs focus on cost optimization or regional exclusives.
  
• Elevated working capital and inventory requirements, exacerbated by the rapid pace of product obsolescence in IT hardware and shorter device lifecycles, leave Redington vulnerable to higher write-downs, reduced cash flows, and negative impacts on return on capital employed as market disruptions become more frequent.

Redington Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Redington compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Redington's revenue will grow by 10.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 1.6% today to 1.2% in 3 years time.
• The bearish analysts expect earnings to reach ₹16.5 billion (and earnings per share of ₹21.06) by about July 2028, up from ₹16.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, down from 14.0x today. This future PE is lower than the current PE for the IN Electronic industry at 39.6x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.05%, as per the Simply Wall St company report.

Redington Future Earnings Per Share Growth

Risks

• Redington is experiencing sustained strong growth across major geographies-including India, UAE, and Africa-with revenue growth rates as high as 26 percent in India and significant momentum returning in Saudi Arabia, supporting long-term topline expansion.
  
• The company's value-added segments, such as Cloud Solutions (growing at 41 percent) and Technology Solutions (growing at 28 percent), are expanding faster than traditional hardware, indicating a successful transition toward higher-margin, recurring revenue streams that may support continued profit growth and margin expansion.
  
• Management is focusing on increasing the proportion of software, cloud, and subscription services in the overall product mix (already at 15 percent and expected to rise), which come with higher margins and better working capital efficiency, likely improving cash generation and return on capital employed over time.
  
• Geographic and sector diversification, with accelerated investments and growth in emerging regions such as Saudi Arabia and Africa, provides a broad customer base and limits overexposure to any one market or OEM, reducing revenue volatility risk and bolstering medium
• to long-term earnings stability.
  
• The company's high operational discipline-demonstrated in working capital and OpEx management, as well as strong relationships with strategic premium OEMs-drives ongoing cost efficiencies and could further boost net margins and earnings resilience as the business scales.

Valuation

• The assumed bearish price target for Redington is ₹170.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Redington's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹320.0, and the most bearish reporting a price target of just ₹170.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹1335.4 billion, earnings will come to ₹16.5 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 15.0%.
  
• Given the current share price of ₹287.9, the bearish analyst price target of ₹170.0 is 69.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.