Redington India's Q3FY20 results (Outperformer) - Mobility powered growth, but ProConnect hurts margins…

Q3FY20 results highlights

• Cons. rev. grew ~17.1% yoy to ~Rs148bn (5% beat) – India/Overseas businesses grew ~20.7%/~15.1% yoy respectively, powered by Mobility.
• Gross margin fell ~80 bps yoy to 5.2% (IDFCe: 5.6%) due to higher Mobility sales as well as high base. As a result, gross profit growth came in at ~1.8% yoy to Rs.7.7bn (3% miss). However, one-time provision taken in ProConnect (~Rs203m) led to EBITDA (post Ind-AS 116) coming in at ~Rs3bn (+7.8% yoy; 9% miss; Margin 2.02%). Adjusting for this, EBITDA growth would have been ~15% (3% miss) with margins of 2.15%.
• PBT (adj. for exceptional in base) grew ~5.9% yoy to ~Rs2.3bn (2% miss). However, PAT at ~Rs1.6bn (27.9% yoy fall) missed estimates by ~14% due to higher than anticipated tax payments (~Rs360m higher due to tax issues in Saudi market).
• NWC: Over 9MFY20, India NWC improved ~24 days yoy to 43, while Overseas NWC was flat at 34 days. Cons. NWC was down ~8 days to 38, leading to OCF generation of ~Rs670m in 9MFY20. However, FCF was still negative ~Rs3bn due to ~Rs2bn of dividend outflow.
• India: Rev. up 20.7% yoy to ~Rs54bn (6% beat). EBITDA fell ~13.1% yoy to ~Rs1bn due to ProConnect issues (esp at its East India subsidiary); Ex. ProConnect, revenue/EBITDA growth would be ~17%/20% yoy.
• Overseas: Rev. up 15.1% yoy to ~Rs94bn (4% beat). EBITDA grew 23.9% yoy to ~Rs2bn.

Key positives: Strong revenue growth in India/Overseas.

Key negatives: ProConnect impact on margins.

Impact on financials: 7% cut in FY20E/21E EPS. Introduce FY22E.

Valuation & View

REDI surprised positively on the revenue front in both India/Overseas despite a weak economic outlook. Although growth was powered by mobility which is a margin dilutive business, it has superior return ratios due to lower WC requirements. Provisions too remain under control. However, ProConnect’s issues at its Eastern India subsidiary may drag EBITDA for another two quarters, although the company is working to address these. As a result, we have cut our numbers to factor in poor performance of ProConnect. We now build a ~20% earnings CAGR over FY20E-22E and roll forward our estimates to FY22E. Maintain OP with a revised TP of Rs144 (7.5x FY22E EPS). A key monitorable would be any disruptions of electronic shipments from China due to the Coronavirus scare, which could impact REDI’s day-to-day operations in the near-term.