Technology Solutions Group's Cloud And AI Focus Will Drive Success In Emerging Markets

Key Takeaways

• Strategic focus on cloud and AI positions Redington for sustained growth, benefiting from global demand in digital transformation.
  
• Improved operational management reduces working capital days, potentially lowering interest costs and boosting net margins.
  
• Economic challenges in Turkey and dependency on low-margin deals pose risks to Redington's revenue growth, profitability, and financial performance.

Catalysts

Provides supply chain solutions in India and internationally.

• Continued growth in the company’s cloud business unit, driven by the hyperscaler business and subscription software offerings, is expected to sustain and potentially increase revenue growth going forward.
  
• The Technology Solutions Group has seen strong growth due to robust enterprise demand, which is likely to bolster revenue in the future if the trends continue.
  
• Redington’s efficient operational management has led to improved working capital from 36 to 33 days, which should help lower interest costs and potentially improve net margins.
  
• In emerging markets like South Africa, Kazakhstan, and Azerbaijan, as well as potential expansion into parts of ASEAN, there is optimistic revenue growth assumed due to strategic market entry.
  
• The company’s focus on cloud, AI, and digital transformation positions it well for continued revenue growth, benefitting from the increasing global demand in these areas.

Redington Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Redington's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.6% today to 1.4% in 3 years time.
• Analysts expect earnings to reach ₹19.4 billion (and earnings per share of ₹24.76) by about July 2028, up from ₹16.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹22.7 billion in earnings, and the most bearish expecting ₹16.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, up from 12.9x today. This future PE is lower than the current PE for the IN Electronic industry at 41.2x.
• 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 15.11%, as per the Simply Wall St company report.

Redington Future Earnings Per Share Growth

Risks

• High inflation and interest rates in Turkey, though softening, continue to pose economic challenges, which could affect Redington's revenue and net margins in the region.
  
• The company's increased factoring costs and the uncertainty in securing competitive approvals for its divestment strategy in Turkey could impact its financial performance and net earnings.
  
• Dependency on large deals within the Technology Solutions Group, which often have lower margins and demands on working capital, indicates risks to maintaining gross margins and profitability.
  
• The evolving competitive landscape and declines in PC demand in key markets like Turkey could pressure Redington's revenue growth and overall profitability.
  
• The introduction of new global and regional tax regulations may lead to increased tax expenses, potentially impacting Redington's net earnings and return on capital employed (ROCE).

Valuation

• The analysts have a consensus price target of ₹262.5 for Redington based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be ₹1337.5 billion, earnings will come to ₹19.4 billion, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 15.1%.
• Given the current share price of ₹265.45, the analyst price target of ₹262.5 is 1.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.