Buy Ricoh India for a target of Rs280

Sushil Finance | June 16, 2015, midnight

Ricoh India, a 73.6% owned by Ricoh Group headquartered in Tokyo, deals from Printing & Document equipment & Solutions to IT Services to Communication Systems. Growing by leaps and bounds: Ricoh India has reported excellent revenue growth with a CAGR of 52% between FY11-14. This growth was well spelled out in FY12, when management expressed to achieve turnover of Rs.10 bn in FY14. Having achieved its FY14 target, now it has set another ambitious target of Rs.30 bn sales by FY17. This would be majorly driven by ( 1) Continuous widening product portfolio (2) Going deeper into tier 2,3 cities and (3) Strong pursuance of IT services.We believe, with above strategies & past track record, Ricoh should grow its Revenue by 35% CAGR for FY14-16E.

Strong case for Margins revival:From FY12 onwards its margins have suffered heavily though improved slightly in FY14, mainly due to INR depreciation as it imports all of its equipments and frontloaded Investment done for gaining foothold of its newly launched services such as production printers, laser printers and IT services. However, with stable INR coupled with part of frontloaded Opex behind going forward the capital invested for expansion of direct and indirect channel will start bearing behind, forward, results in coming years. This could be further supported by growing sales of IT services which is not impacted by forex volatility. We believe going ahead it should focus on improving its profitability through higher productivity, better working capitalmanagement, and reduction in fixed expenses. Hence, margins should improve gradually in FY14-16E.

Venturing into IT services to complement product biz:Under IT services Ricoh deals in Cloud storage, IT networking, and Document Management Services. Company is seeing great opportunity coming from Manage document Service where it is targeting all the Institutional players like Govt. Org, Educational Institutes, Hospitals, BFSI, Legal, retail, telecom and Small & Medium Enterprises.

OUTLOOK & VALUATION:Ricoh is growth oriented MNC with very high standards of products and services. Given the strong parent pedigree, Ricoh India provides proxy to players like Canon, HP, Konica Minolta and Xerox. Ricoh provides rare combination of branded products and IT services which are complementary to each other for business expansion. Given its enviable track record of revenue growth coupled with possibility of margin expansions, stock is going cheap with market cap to sales of just 0.64x on trailing basis. Currently stock is trading at 9x FY16E earnings, which we believe is attractive.We recommend BUY with price target of Rs.280 (15x FY16E).

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