FY21/22e earnings down 31.5/25.1%; execution is very good; ‘Buy’ retained with revised TP of Rs 142
Redington India (Redington) reported underwhelming Q4FY20 revenue growth of 0.7% y-o-y (vis-a-vis Street’s 7% estimate) owing to the lockdown. The company is dealing with the ill effects of the lockdown via cost control and working capital (down by four days). Besides, management is not seeing challenges in collections, evident from Rs 12.7-bn FCF generation in Q4FY20. Provisioning towards advances in the ProConnect business dragged an otherwise strong profitability.
Overall, despite revenue growth challenges, keen cost control and working capital management instil confidence in Redington’s ability to tide over the lockdown crisis. We are cutting revenue by 19.5% for FY21e and 15.0% for FY22e, leading to respective earnings cuts of 31.5% and 25.1%. Maintain Buy with a revised TP of Rs 142 (earlier Rs 161; 10x FY22e EPS).
COVID-19 impacts revenue growth
Redington’s 0.7% y-o-y growth would have been 15%, ex-Covid-19 and lockdown impact. Sharper deceleration was seen in the India business, (-6.8% y-o-y versus 20.7% y-o-y in Q3FY20) than the overseas business (5.2% y-o-y versus 15.1% y-o-y in Q3FY20). We are building in growth trajectory from Q4FY21 anticipating consumers would delay purchases in H1FY21. However, we expect Redington to benefit from the ‘shift to digital’ phenomenon over the medium term.
ProConnect: Revival in progress
ProConnect revenue declined by 12% y-o-y and registered an Rs 254-mn Ebitda loss, largely on account of a Rs 207-mn provision against advances pertaining to its acquisition. Management has put in place a new team to drive momentum in this business. With the bulk of the impact of acquisition behind it, management would focus on profitability over growth over FY21.
Outlook: Core strong
We believe Redington’s execution in spite of the crisis is commendable. Although ProConnect profitability needs to be tracked, the overall business is well managed. Considering company’s improving RoCE, its valuation at 6.1x FY21e EPS is attractive. We maintain ‘BUY/SO’.