Redington India's Q1FY19 results (Outperformer) - Higher provisioning drubs EBITDA

Q1FY19 results highlights (base adjusted for Ind-AS)

• Cons. revenue came in at ~Rs102bn (+9.0% yoy; in-line when base adj. for Ind-AS 115). Gross profit grew 9.4% yoy to ~Rs6.1bn (2% beat) while margins stayed steady yoy at 6.0% (IDFCe: 5.5%).
• Cons. EBITDA fell by 4.7% yoy to ~Rs1.7bn (10% miss) due to higher receivable/inventory provisioning; due to adoption of Ind-AS 109 standards and incorporating ECL (estimated credit loss) methodology. REDI highlighted that as a prudent measure it has provisioned ~Rs200m extra vs the earlier standards and is confident of recovering most of this in coming quarters. Receivable provisioning is exp. to be within 14bp (as % of Sales) vs 10bp earlier.
• Cons. EBITDA margin came in at 1.64% (24 bps fall yoy; IDFCe: 1.72%). Although other income was higher than est. at ~Rs139m (+63.8% yoy), EBITDA miss and higher tax rate (30% vs est. 25%) led to PAT declining ~9.9% to ~Rs886m (13% miss).
• India business underperformed (+5.4% yoy; est. +8.5% yoy) due to weakness in IT segment (flat despite weak base). Mobility/Services businesses grew 18.5%/26.4% yoy respectively.
• Overseas business grew by a decent 10.8% yoy (est. 10.5% yoy). IT business grew 7.4% yoy, while Mobility grew 14% yoy. Services, albeit on a low base, doubled to 2% of of. rev.
• NWC remained stable at 44 days. Within geographies, India NWC improved to 52 days (vs 59 yoy), while Overseas NWC weakened slightly to 39 days (vs 37 yoy). FCF improved to ~Rs1.2bn (vs negative FCF of ~Rs152m yoy).

Key positives: Gross margins steady at 6.0%.

Key negatives: Higher provisioning expenses.

Impact on financials: Cut FY19E/20E EPS by 12%/10% respectively.

Valuation & View

Although REDI’s overseas business (ex. Turkey) continues to pace well, its India business performance remains weak due to a myriad of factors. While the consumer business in India has seen an improvement, the high-margin enterprise business remains sluggish. New provisioning norms under Ind-AS 109 would mean pressure on already thin margins and leads to a cut in our estimates. The markets would continue to keep an eye on REDI’s earnings growth trajectory (exp. to improve in FY20E) before a case for a multiple re-rating can be made (regardless of the improving NWC). Given the continued weakness in India, we cut our target multiple to 10x (vs 11x). Maintain OP with a revised TP of Rs148.