Redington India's Q4FY18 results (Outperformer) - India dull, Overseas shines...

Q4FY18 results highlights

• Cons. revenue came in at ~Rs113.1bn (+4.8% yoy; 4.6% miss led by rev. miss in India segment). Better traction in Enterprise revenue and weak Mobility revenue in India had a positive impact on cons. gross margins at 5.7% (+60 bps qoq; 30 bps fall yoy on a very high base; IDFCe: 5.4%). Gross Profit (true revenue for REDI) was flat yoy at ~Rs6.5bn (in-line).
• Cons. EBITDA declined ~0.8% yoy to ~Rs2.3bn (5% beat led by lower other expenses). EBITDA margin came in at 2.05% (12 bps fall yoy; IDFCe: 1.86%). While PBT was inline, PAT at Rs1.43bn (-6.2% yoy) was a beat of 11% led by tax rate of 21.7% vs exp. of 30%.
• India business underperformed (-3.9% yoy; 11.4% miss) due to weakness in Mobility segment (down 34% yoy; sluggish smartphone sales post rising customs duty) and weak IT sales (+4% yoy). Adj. for GST, India rev. growth would be higher by ~6% yoy.
• Overseas business grew by a decent 9.8% yoy (in-line). IT business grew 6% yoy, while Mobility grew 15% yoy. Constant currency growth would have been higher by 3.6% as per REDI.
• Services business continued to grow strongly (est. ~2x yoy on a weak base). ProConnect grew ~58.5% yoy to ~Rs929m, led by its Rajprotim acquisition.
• Focus on balance sheet helped REDI maintain its net working capital cycle at 40 days (39 yoy) during the quarter. However, India NWC increased by 5 days to 55 days, due to higher debtor days from its projects/enterprise business. Ov         erseas NWC increased by 1 day to 33 days. The rise in NWC led to OCF/FCF coming in at Rs-3bn/-Rs3.5bn respectively. Net debt stood at ~Rs9.2bn as of FY18.

Key positives: Lower than est. fall in gross margin.

Key negatives: India business declined 3.9% yoy, NWC pressure.

Impact on financials: Cut FY19E/20E EPS by 2%/5% respectively.

Valuation & View

FY18 has been a turbulent year, both on the domestic front as well as the international front, although REDI has fared decently during the year. Management has indicated that FY19E would be better than FY18 but bulk of this would be back-ended. While we like REDI’s strong execution and risk mgmt. skills, we believe it needs to demonstrate a more consistent performance before the market rewards it with a better multiple. Given near-term growth weakness, increasing interest rate regime and fuzzy macro we cut our target multiple to 11x (vs 13x earlier), maintain Outperformer with a revised TP of Rs179 (11x FY20E EPS).