Redington India's Q1FY20 results (Outperformer) - FY20E opens on a strong footing…

Q1FY20 results highlights

• Cons. revenue grew ~14.3% yoy at ~Rs117bn (5% beat) – India/Overseas businesses grew ~14.5%/~14.2% yoy respectively.
• Gross margin fell ~40 bps yoy to 5.56% (IDFCe: 5.8%) on account of mix issue (higher mobility rev.). As a result, gross profit grew ~6.3% yoy to ~Rs6.5bn (in-line). Reported EBITDA grew ~39.5% yoy to ~Rs2.3bn, adjusted for Ind-AS 116 +ve impact, EBITDA grew ~25% yoy to ~Rs2.1bn (16% beat). The healthy beat was on account of zero receivable provisions accounted during this qtr (vs 0.26% yoy).
• Net income came in at ~Rs1.1bn (+24.1% yoy; 20% beat) on strong EBITDA performance and lower tax rate (25% vs est. 30%).
• NWC was steady yoy at 44 days (+11 days qoq) – Higher mobility business meant that DSO (down 7 days yoy to 49) and DPO (down 6 days yoy to 39) both fell, while inventory stayed largely steady (34 days vs 33 yoy). However, the sharp spike in WC days qoq meant that FCF turned negative in Q1 (at Rs9.3bn).
• India: Rev. up 14.5% yoy to ~Rs41bn (6% beat). Adj. EBITDA grew ~36% yoy. NWC increased by 5 days yoy to 57 due to lower DPO and slightly higher DIO.
• Overseas: Rev. up 14.2% yoy to Rs75bn (4% beat). Adj. EBITDA grew ~17% yoy. NWC improved 3 days yoy to 36.

Key positives: Growth across India/Overseas, nil receivable provisions.

Key negatives: Sequential pressure in WC, negative FCF.

Impact on financials: Broadly unchanged.

Valuation & View

REDI has now delivered four consecutive quarters of double-digit revenue growth (last two growing ~15% each) while NWC levels have more or less stabilized at sustainable levels. Provision impacts are expected to be benign to stable over FY20E (vs the sudden shock in Q1FY19). With India business growth more or less in place (despite near-term liquidity related issues at client-end) and overseas growth chugging at a decent pace, REDI is on track to achieving its target of ~10% revenue CAGR over the next three years. Services contribution to overall business also continues to remain healthy and on track and should help profits grow in line or faster than rev; management commentary on giving priority to receivables and risk management vs growth, in the current liquidity constrained environment, is welcome. However, currency movement in overseas markets remains a key monitorable. Current valuations (FY20E/21E P/E of 6.0x/5.3x) are undemanding in our opinion. Maintain OP rating with a TP of Rs127 (8x FY20E EPS).