S Mobility focuses on realigning retail business: CRISIL
CRISIL Research has come out with its report on S Mobility. The research firm expects the realignment of the retail business to start reflecting in the margins from FY14.
March 11, 2013 / 16:47 IST
CRISIL Research has come out with its report on S Mobility. The research firm expects the realignment of the retail business to start reflecting in the margins from FY14.
S Mobility's Q2FY13 (financial year ending June) results were below CRISIL Research's expectations. While revenues from mobile value-added services (VAS) business were in line, revenues from the handset and retail businesses were lower than expected. The company's ability to realign operations in its retail business will remain a key monitorable. We maintain the fundamental grade of 2/5.Retail: Restructuring of business
S Mobility is restructuring its retail operations by cutting down on low-margin businesses. Revenues from retail business declined 30.8% y-o-y (down 12.7% q-o-q) to Rs 2,507 mn. To ensure better profitability, the company has 1) closed down 39 low-performing stores out of the total 871 stores at the end of Q1FY13 and 2) cut-down on some of the low-margin businesses with one of their vendors. Retail operations reported EBITDA margin of -5% largely due to provision (on receivables) on one of their bulk deals. We expect the realignment of the retail business to start reflecting in the margins from FY14.Handsets: Revenues down but margin improvement continues
Handset business' revenues declined 9.3% y-o-y (down 8.9% q-o-q) to Rs 1,790 mn due to lower proportion of smart phones which have much higher average selling price (ASP) than feature phones. The company launched new smart phones towards the end of Q2FY13; according to the management, these have received a good response and should boost smart phone volumes in the coming quarters. EBITDA margin for the handset business continued to improve due to better gross margin and focus on cost rationalisation. It was 8.5% in Q2FY13 compared to -14.8% in the corresponding quarter last year.VAS: Impacted by delay in receivables
Revenues from VAS increased 3.4% y-o-y (0.5% q-o-q increase) to Rs 608 mn from Rs 588 mn in December 2011. Increase in content costs and lower revenue share from telecos resulted in lower gross margins. Owing to delay of more than 180 days in payment from one of their clients, S Mobility has made a provision for Rs 90 mn. Accordingly, EBITDA margin declined y-o-y to 3.7% from 8.0%. The management is confident of recovering this amount and the provision is expected to get reversed.Earnings estimates and fair value revised downwards
We have reduced our FY13 and FY14 earnings estimates by 17% and 12%, respectively due to the restructuring of the retail business. Based on the revision in earnings estimates, our discounted cash flow-based fair value estimate for S Mobility is Rs 43 per share. At the current market price of Rs 25, the valuation grade is 5/5.To read the full report click on the attachmentDisclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.© CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"
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