Redington out of the box

RETALIERS DEALING WITH phones and electronics know that every day, some 15 trucks wind their way through green paddy fields near Chennai to a state-of-the-art, fully automated warehouse. From there, Laden with smartphones, computers, printers, iPads, and other electronic goods worth Rs 3 crore or so, the trucks roll away to retailers across the country. Chennai-based Redington is not just the force behind moving gadgets; the company is the distributor of all BlackBerry smartphones in India.

That’s a lot of phones, and that’s also the reason why the company has been growing at a steady 45% since 1994. And that’s why, in early 2011, Standard Chartered’s private equity arm spent $100 million (Rs 509.5 crore) on a 12% stake in Redington India. The man behind the company is R. Srinivasan, managing director and co-founder. At an age when most Indian executives are planning their retirement, this 64-year-old is planning to make his company No. 1. Always on the move—whether it’s to a far corner of the country to meet a retailer or just to his secretary’s table to pick up some of the documents he has asked for—Srinivasan maintains a punishing schedule. He doesn’t wait for anyone, as tardy employees and clients realise very soon. Two minutes late for a meeting, and it’s more than likely that Srinivasan has moved on to something else. So much nervous energy keeps his office buzzing. And that, in turn, fuels Redington.

An engineer and Indian Institute of Management Ahmedabad alumnus, Srinivasan’s abiding passion is, of all things, printers. He worked with Reader’s Digest and Coca-Cola in India, but came into his own when he moved to Singapore, where he began importing and selling printers. That was the beginning of Redington. When Srinivasan moved back to India in the mid-’90s, he brought Redington and the printers business with him. He got a contract to sell special (and expensive) digital printers, and realised that there was a healthy market in what he calls “adjacencies” and what the market calls peripherals. So, he started selling ink and paper for these printers. Around the same time, he began offering to service the printers.

The pursuit of growth through adjacencies led Srinivasan to take his boldest step: enter the financing space. The reasoning was that retailers who could not immediately afford to buy from Redington should be given the means to do so. To raise enough capital so that he could lend to retailers, Srinivasan took bank loans against Redington’s inventory. This was the genesis of the company’s non-banking finance company (NBFC) called EasyAccess. Today, EasyAccess has a book of Rs 600 crore and a net worth of Rs 266 crore.

An analyst from a Mumbai-based equity research firm says this business alone is worth Rs 1,000 crore. “There is a huge financial services opportunity sitting within Redington’s distribution business,” he says. Srinivasan has big plans for this arm, which he ultimately hopes to list as a separate company.

Service and finance are two distinct businesses that grew from the main technology products distribution business. A third is in logistics, where Redington offers warehouse space on rent to Indian and foreign companies. German hardware maker DORMA tried leasing out its own warehouses in important cities, but keeping track of inventory and mobility of goods never fell into place. “Though Redington’s services come at a premium, the time lag to have the best inventory services was reduced to zero,” says Dinesh Dhoka, DORMA India’s head of material resource planning.

Srinivasan says that he has begun to think of his business rather like a large pipe that distributes a host of products—much like a petrochemical pipeline that will transport petrol to plastic intermediaries. The idea is to use the supply chain and logistics expertise created across new product lines, such as consumer durables and other assorted products.

TODAY REDINGTON INDIA ACCOUNTS FOR 28% of the technology products distribution market, close on the heels of Ingram Micro, the Indian arm of Ingram, the global giant in this business. Ingram Micro has a 29% market share in India. However, globally, Redington clocks a fraction of Ingram’s sales: $3.4 billion in 2010, compared with Ingram’s $34.5 billion.

But that doesn’t bother Srinivasan; he sees a lot of opportunity in his existing businesses, as the large retail chains and mail order companies populate the Indian retail space. “Given India’s growth there is room for a couple of Redingtons in several areas,” he says.

There’s reason for his optimism. The hardware segment of infotech is expected to grow at 15% in the next five years, according to global market intelligence firm IDC. And with computer penetration as low as 3% currently, and mobile handsets sales rising at 8%, there’s room for growth. The company estimates that in the next three years, demand for smartphones will grow by 106% and for total handsets by 10.9%.

But competition has not been sitting idle while Redington has grown. There’s competition from niche players such as Avnet and Arrow, as well as online retail. New kid on the block Flipkart looks set to end the current year with Rs 100 crore in sales; in the sunrise sector of online retail, its growth has been the fastest. Flipkart’s network of warehouses and distribution system isn’t a patch on Redington’s, but analysts already value the unlisted online retailer at $1 billion, 40% more than Redington. Flipkart plans to own 10 warehouses across the country to be closer to customers. Binny Bansal, Flipkart’s chief operating officer and co-founder, says: “The logistics business will initially prove to be expensive as it would not have economies of scale compared with third-party logistics players, but this investment is a critical part of Flipkart’s long-term strategy.”

Don’t such valuations rankle Srinivasan? He says no, adding that few investors make money in a short time on new startups. A steady business (like his, he says modestly) allows investors to make money over the long term. Even during the current meltdown, Redington’s stock price held steady, he says. Reason enough for three brokerages to recommend that clients buy Redington shares. “Redington’s services will see a secular long-term growth as consumers prefer branded IT products over non-branded hardware brought via grey channels,” says Ankur Rudra, analyst at investment firm Ambit Capital.

However, some analysts feel that as the focus shifts to the more attractive online world, brick-and-mortar businesses, such as Redington’s, may lose their sheen. With the business changing rapidly, Redington needs to react quickly to the changing environment to stay relevant. “Srinivasan appears to be on a treadmill—he has to run faster to keep his business growing,” says a senior executive, who worked with Redington earlier.

TO GROW THE BUSINESS, Srinivasan is looking far beyond gadgets. He’s talking with Amazon to provide a back end link when the giant online retailer comes to India in 2012. But he’s also looking at entering the consumer goods space as well as at a peripheral role in the complex pharmaceutical distribution business in the country. “Anything that can be packed in a carton and assigned a unique number is in our realm of business,” says Srinivasan.

When the country rolls out a uniform goods and services tax, Redington plans to build a dozen more warehouses across the country to service major markets. This move will also work to the advantage of new faster-to-market online retail outfits—the two biggest costs for online retailers are caused by logistics and the payment gateway provider. Any efficiency in the logistics business will only lower their costs. “Logistics companies make clean money in every transaction but if goods are returned, we’ll make less cash,” says Rushabh Sanghavi, chief operating officer and co-founder of thestiffcollar.com, a fledgeling online company that sells “English” shirts. In three months of its operations, the company has sold 1,000 shirts a month.

It’s not just about increasing the already high growth rates of Srinivasan’s business. It’s also about reinventing it and increasing value. As yet, Srinivasan shows no signs of stress. Travelling from Mumbai to Delhi on a Sunday evening, he is taking the overnight Rajdhani train, the way he’s done all these years. That way, he catches up on his reading, meets his local manager at Vadodara in Gujarat, where the train halts for 15 minutes, and thinks of ways to take Redington ahead. “As a CEO, I need to be on the cutting edge,” he says.

Redington today is in a business where it is rarely seen or heard. Now that the whole distribution business is changing, thanks to the advent of online retailing, Srinivasan is thinking of ways to transform and stay relevant.

At a recent conference, Srinivasan met Renuka Ramnath, head of private equity firm MAAM and earlier the head of ICICI Securities, the biggest private equity investor locally. He recalls the time he spent explaining to her that the trick for Redington will no longer be to marginally increase the already high growth rates of his business, but to totally rethink the existing business in order to improve value.