Redington India's Q4FY19 results (Outperformer) - Strong end to the year…

Q4FY19 results highlights (base adjusted for Ind-AS 115)

• Cons. revenue posted strong growth of 15.6% yoy at ~Rs125.8bn (4% beat) – India business grew 24% yoy to ~Rs47.4bn (9% beat), while Overseas business grew 11.1% yoy to ~Rs78.5bn (in-line).
• Gross margin fell ~20 bps yoy to 5.8% (IDFCe: 6.0%) on account of product mix issues. Consequently, gross profit grew ~12.0% yoy (in-line). EBITDA margin came off ~10 bps yoy to 2.03% (IDFCe: 2.13%) impacted by stock appreciation rights (SAR) related charges and tad higher provisioning. EBITDA grew 10.1% yoy to Rs2.6bn (in-line).
• Higher other income (~2x yoy; 112% beat) and lower tax rate (17.8% vs 21.7% yoy; IDFCe: 20.3%) meant that REDI’s net income beat estimates by 9%, growing strongly 17.9% yoy to ~Rs1.7bn.
• NWC fell 7 days yoy to 33 days as of Q4 end (9 days fall qoq) due to sharp correction in inventory (on strong revenue growth in India). The fall has also resulted in REDI’s FCF coming in at ~Rs11.4bn in Q4. India/Overseas FCF came in at Rs7.4bn/Rs4bn respectively. For FY19, REDI’s FCF came in at ~Rs7.3bn (India – Rs1.1bn/Overseas 6.3bn).
• India Business: Revenue grew 24.0% yoy to ~Rs47.4bn (9% beat), while EBITDA grew 17.5% yoy to ~Rs1.2bn (2.4% margin; -20 bps yoy). NWC down 15 days yoy to 40.
• Overseas Business: Revenue grew 11.1% yoy to ~Rs78.5bn (in-line), while EBITDA grew 13.3% yoy to ~Rs1.7bn (2.1% margin; flat yoy). NWC down 3 days yoy to 30.

Key positives: India business rev. growth, NWC reduction, FCF generation.

Key negatives: Gross margins fell 20 bps yoy.

Impact on financials: 8% FY20E EPS upgrade, introduce FY21E financials

Valuation & View

REDI’s Q4FY19 performance was very strong at the revenue and NWC level which we believe might not be sustainable going forward but should still remain healthy. With its India business growth falling in place, and decent overseas performance, we believe that REDI is in a position to drive sustainable early digit earnings growth over the medium-term. Potential uptick in India enterprise IT spending (signs visible in H2FY19), mobility business growth (both domestic/overseas), and continued growth of services (ProConnect/Ensure) is good; however, currency movement in overseas markets remains key monitorable. Current valuations (FY20E P/E 5.8x) are attractive, maintain OP rating with a revised TP of Rs129 (8x FY20E EPS).