Redington India's Q2FY20 results (Outperformer) - Mobility powers revenue but impacts margins…

Q2FY20 results highlights

• Cons. revenue grew ~11.1% yoy at ~Rs123bn (1% miss) – India/Overseas businesses grew ~15.3%/~8.5% yoy respectively.
• Gross margin fell ~13 bps yoy to 5.54% (IDFCe: 5.65%) due to REDI’s focus on lower margin/lower WC businesses (esp. Mobility). As a result, gross profit grew ~8.5% yoy to ~Rs6.8bn (3% miss). However, EBITDA at ~Rs2.47bn (+32.2% yoy) was in-line due to inventory provision write-backs taken in Q2.
• PBT at ~Rs1.5bn (+2.6% yoy; 8% miss) was weaker than expectations due to higher depreciation expense (+186% yoy; 44% higher than exp.). Depreciation was higher on account of SAP implementation related costs and additional lease assets identified in Q2 (for Ind-AS 116 purposes). PAT however beat estimates by 4% at ~Rs1.3bn (24.8% yoy) due to lower than expected tax rate.
• NWC dropped ~11 days yoy to 30 days (best quarterly performance) due to higher focus on mobility business. This also led to FCF generation picking up in Q2 (~Rs16bn vs ~Rs9.3bn outflow in Q1).
• India: Rev. up 15.3% yoy to ~Rs48.7bn (1% beat). EBITDA grew 40.1% yoy. NWC fell 17 days yoy to 29. IT/Mobility/Services businesses grew 3%/42%/14% respectively.
• Overseas: Rev. up 8.5% yoy to ~Rs74.7bn (3% miss). EBITDA grew 12.7% yoy. NWC fell 5 days yoy to 32. IT/Mobility/Services businesses grew 10%/5%/9% respectively.

Key positives: India Growth, Inv. prov. write-backs, NWC improvement.

Key negatives: Lower gross margins, higher D&A.

Impact on financials: 10%/3% cut in FY20E/21E EPS.

Valuation & View

REDI’s ~10% revenue CAGR goal over FY20E-22E remains on track, aided by stronger focus on Mobility which is a lower gross margin but lower working capital (and thus higher returns) business. Under-control provisions and continued focus on lower WC revenue streams are healthy signs, especially in India given the weak macroeconomic conditions. ProConnect’s profitability has lagged in recent times (higher focus on lower-margin transportation to increase business scale), but its business rebasing towards higher-margin warehousing should lead to better profit growth from this division in the future, even though revenue growth slows down. Although the stock has rallied from its lows over Q2, current valuations remain undemanding in our opinion (6.1x FY21E P/E). Maintain OP with a TP of Rs130 (7.5x FY21E P/E).