Lira crisis hits this Indian co real hard; experts see an opportunity

NEW DELHI: This stock got punished badly over the past six sessions in a row, only to see a mild rebound on Thursday after the company held a conference call to list out steps that its Turkish subsidiary is taking to offset losses due the economic crisis in that country. For Redington India, its Turkish subsidiary Arena brings in 7.5 per cent of overall revenue. The stock declined 15 per cent in six sessions till Tuesday, but regained 2 per cent in early trade on Thursday.The company said between Friday and Tuesday, Arena put 42 per cent of orders on hold with the vendors. The sales team is focused only on collection, and not sales. The company said it would only sell with margins or do not sell at all.“We purchase in dollars, sell in dollars and hence collections are also in dollars. To that extent, we are naturally hedged,” the company said.The company is aiming to cut costs by 10-12 per cent and lay off 25-30 people, representing 10-12 per cent of its work force."We have taken very clear measures to reduce working capital this quarter by $35-40 million. We are also very clear that we are not driving growth and we do not want to sell at a cost. We want to slow down sales, and make sure whatever we sell, we sell profitably," the management said.There are some transactions in which the payment comes in Turkish lira, towards which the positions are squared up completely every morning, the company said.Turkish operations contribute 7.5 per cent to Redington India’s FY18 revenues. The contribution to profit after tax was a meagre 0.2 per cent for the year. In June quarter, Arena reported loss. Redington does not expect Arena's numbers to hurt it in a material way.Analysts noted that 82 per cent of Arena’s receivables are dollar denominated. “Arena has a strong balance sheet with $70.6 million net worth, 0.42 debt-equity ratio and a meagre 25–27 per cent utilisation of bank credit. The company is responding optimally to the challenging external environment," Edelweiss Securities said in a note.The brokerage believes tax implication of lira's depreciation would be a concern."While the actual income-tax rate in Turkey has been 20–22 per cent, the effective tax rate has been much higher (71.1 per cent and 156.6 per cent for CY17 and H1CY18, respectively) as dollar is the functional currency and tax computation is carried out at corresponding exchange rates at each leg of the transaction. The tax rate would remain volatile due a surge in the dollar-lira volatility," Edelweiss Securities said.Turkish currency lira has been in a free fall this year, plunging over 80 per cent against the dollar since January and 40 per cent in August alone. Shares of Redington India have slipped 18 per cent so far this month."An 18 per cent correction in the stock price since the Turkish crisis broke out is overdone, given Arena's meagre contribution to overall revenue and PAT. Besides, the dollar being the functional currency provides a natural hedge. At 6.7 times FY19E EPS, the stock valuation is attractive in the light of Redington’s growth prospects and returns profile,” Edelweiss said. 65420538 65405388 65394910

from The Economic Times https://ift.tt/2vO6xES