Redington management’s guidance implies significant growth in around 35%-40% range in H2FY12F for the India business, says Nomura Equity Research in its Quick Note
According to Nomura Equity Research in its Quick Note, Redington India’s Q2 results were broadly in line with estimates at the EBITDA level, but the key positive that emerged from the conference call was a solid outlook of “12-15%” growth at the consolidated level for FY13 (the brokerage estimates 11.9% growth for FY13F currently). The management’s guidance, implies significant growth in around 35%-40% range in H2FY12F for the India business, driven mainly by: 1) iPhone sign up with Apple, where it expects to do around Rs11,000 million in the second half; 2) a pick-up in government orders (the company has a UID-Aadhar project in Q3 which will get executed over the next 2-3 quarters) in the IT business; and 3) a pickup in the Blackberry business, boosted by the launch of Blackberry 10 in January 2013.
Redington’s consolidated sales at Rs58,597 million (y-y growth of 12.9%) were 7% ahead of Nomura’s expectations driven by solid 21% growth in the overseas business (constant currency growth of 9%) and the result of strong performances at Lenovo, Toshiba and Acer in the Middle Eastern markets. This offset a muted topline in the India business which declined by 3.9% in the quarter (while the IT business grew at 2%, non-IT declined by 16% owing to a 40% decline in Blackberry sales.
EBITDA including other income (which is a better metric than EBITDA before other income, as other income includes discounts that Redington gets from vendors) was Rs1.553 million, in line with Nomura’s expectations ofRs1,575 million. EBITDA margin at 2.65% was lower than the brokerage’s expectation of 2.85% owing to relatively lower margins in the India business (the miss was owing to a decline in the higher margin Blackberry business).
Profit before tax for the second quarter at Rs1,014 million was in line with Nomura’s estimate of Rs1,019 million. Net income at Rs729 million was ahead of its expectation of Rs66.7 million primarily owing to a lower tax rate of 23.8% compared to Nomura’s expectation of 30%.
At the lower end of the management guidance of 12-15% sales growth for FY13 would imply 14-20% growth in H2 (H1FY13 sales growth was 10.3% y-o-y), said Nomura. The management has indicated that India’s contribution in H2 will be around 52% against 46% in H1. Nomura believes the management is suggesting a significant pickup in growth in the India business in the second half (implied growth of around 35-40%) driven by:
• Incremental contribution of Rs11,000 million from Apple in the next five months owing to the addition of iPhone (around 35-40% of its distribution agreement with Redington). While this is lower margin than Blackberry, returns are expected to be higher on account of low working capital days (receivable days are around 15 while they get a credit of around 30 days). This essentially suggests that they the company expects the ex-Apple business in India to growth between 11-18%.
• Blackberry sales per month picked up from a run-rate of 60,000-70,000 in Q2 as per management to 80,000-90,000 in October. The management is also positive about an expected substantial pick up post the Blackberry 10 launch in January 2013. This, according to Nomura, could mean that the decline will taper off in the second half (ex of a big pick-up in sales post Blackberry 10, current run-rate would suggest a decline of around 18%).
• The management indicated that they have a large UID-Aadhar project in Q3 which will get executed over the next 2-3 quarters and should benefit the IT business. Nomura expects the IT business to grow at 15%+ in 2HFY13F.
• The implied growth rate for the international business for 2HFY12F is in the range of -3% to 2%, to which Nomura sees upside potential given that the Samsung sales ramp up will be visible in the second half plus Redington has witnessed solid momentum in the Middle Eastern business on the back of strong performances at Lenovo, Toshiba and Acer.
Nomura estimates that working capital days came down by at least two days to around 44 days in 1HFY13 versus 1HFY12, driven primarily by a decrease in receivable days by around 11 days. Free cash flow improved significantly in 1HFY13 as it was negative Rs340 million versus negative Rs2,490 million in 1HFY12. Management guided for net debt to come down
or stabilize at around Rs17,000 million (current level at Rs1,8260 million, translates to a net debt/equity of around 1.23x; this is expected to come down to around Rs15,127 million by end-FY13F).
Nomura believes that on the back of these numbers, consensus EPS FY13F estimates will likely move up by around 5% and inch towards our estimates, which are currently slightly higher than consensus.
The brokerage reiterates its ‘Buy’ rating on India’s largest distributor of IT and electronic products. The potential of the Indian market should be seen in the context of a doubling of the middle-class population in the next 10 years (source: Dell), which is likely to mean increasing average disposable income and should drive IT/electronic penetration rates in
India, said Nomura. The company has end-to-end coverage of the distribution value chain (procurement, warehousing, non-banking financial corporation’s (NBFC) and after-sales services). It has impressive processes in place and a strong conservative management team.
The company has a credible history of managing inventory and credit risk, which the brokerage considers key to success in the distribution business. Average provisions for inventory and receivables were 0.04% and 0.1% over FY08-FY12 for India and overseas business over the same period, respectively.
The current valuation at 7.1x FY14F EPS (8.95x FY13F EPS) is a 39% discount (23% discount on FY13F) to its discount to its six-year average of 11.7x and is an attractive entry point, says Nomura.