Redington India's Q3FY18 results (Outperformer) - Weak India business performance mars profitability...

Q3FY18 results highlights

• Revenue came in at ~Rs117.3bn (+7.0% yoy; 3.5% miss).
• India business underperformed (-4.3% yoy; 12.2% miss) due to weakness in Mobility segment (down 24.6% yoy, base quarter saw strong iPhone sales, but the same was tepid this quarter) as well as sluggish IT sales (+3.2% yoy, esp on the Enterprise side).
• The overseas business performed marginally better than expected (+14.0% yoy; 1.8% beat). Although Turkey continues to remain weak, other geographies performed better. UAE saw better sales in the last two weeks of December prior to a new tax regime (VAT) coming into place in the UAE and growth was also aided by addition of a new market (Saudi Arabia).
• Services business continued to grow strongly (33% yoy on a cons. basis) albeit on a low base. ProConnect grew by 65% yoy led by acquisition even as LTL growth was strong at ~30% yoy. Ensure services grew by 10% yoy/30% in India/Overseas.
• Given weakness in the India business (IT Enterprise is high margin, India Mobility has a relatively higher margin vs Overseas Mobility), and weakness in Turkey pulled gross margins lower by ~50 bps yoy to 5.1%. Gross Profit (true revenue for REDI) as a result declined 2.8% yoy to Rs6bn (12.4% miss). EBITDA declined 7.6% yoy to Rs2.1bn (18% miss) while EBITDA margin declined 30 bps yoy to 1.8%.
• Focus on balance sheet over growth has helped REDI reduce its net working capital cycle by 7/4 days yoy/qoq respectively to 36. 9M FCF touched ~Rs2.8bn as a result. Net debt stood at ~Rs8.5bn (Dec 2017).

Key positives: NWC declined yoy/qoq.

Key negatives: India business declined 4.3% yoy.

Impact on financials: Cut FY18E/19E/20E EPS by 9%/8%/6% resp.

Valuation & View

Although Q3 performance was tepid due to weak India performance, we believe that growth should recover going forward, especially in the IT space (enterprise IT spending has been sluggish but has bottomed out and should recover in the quarters ahead). We like REDI’s position as a solid bridge that connects ~200+ brands with ~39k resellers/retailers, giving the company a dominant bargaining position in the ICT distribution space. In addition, its strong execution and risk management skills provide a solid moat to the company. We continue to maintain our constructive stance on REDI (FY18E-20E EPS CAGR of ~21%). Maintain Outperformer with a revised target price of Rs224 (13x FY20E EPS).