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Raymond: Export-led growth - Views on News from Equitymaster

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Raymond: Export-led growth
Jan 22, 2007

Performance Summary
Raymond announced results for the third quarter and nine months ended December 2006. Revenues have declined by 14% YoY largely due to the exclusion of denim revenues in 3QFY07. On a like-to-like basis, revenues have registered a 13% YoY growth during the quarter. While operating margins have shrunk during the quarter, forex gains and reduction in depreciation charges have been largely responsible for the robust 26% YoY growth in the bottomline. As domestic realisations continue to remain under pressure, the company’s increasing reliance on exports was clearly visible in this quarter’s performance.

Financial performance: A snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 3,453 2,973 -13.9% 9,405 9,365 -0.4%
Expenditure 2,804 2,529 -9.8% 7,857 8,002 1.8%
Operating profit (EBDITA) 650 443 -31.8% 1,548 1,363 -12.0%
EBDITA margin (%) 18.8% 14.9%   16.5% 14.6%  
Other income 84 314 274.2% 455 615 35.0%
Interest 72 72 -0.1% 188 222 17.8%
Depreciation 188 134 -28.9% 534 466 -12.8%
Profit before tax 473 552 16.5% 1,281 1,290 0.7%
Extraordinary income/(expense) (25) (3)   (101) 842  
Tax 143 165 15.2% 318 217 -31.7%
Effective tax rate 30% 30%   25% 17%  
Profit after tax/(loss) 306 384 25.6% 862 1,915 122.1%
Net profit margin (%) 8.8% 12.9%   9.2% 20.4%  
No. of shares (m) 61.4 61.4   61.4 61.4  
Diluted earnings per share (Rs)*         36.9  
Price to earnings ratio (x)         11.0  
(* trailing 12 months)

An integrated textile player
Raymond is India's largest and world's third largest integrated manufacturer of wool and wool blended fabrics with production capacity of 24 mm (million meters). It is the domestic market leader in files and tools with around 80% market share. The company is the second largest denim producer in the country with a capacity of 30 mm. It has a widespread distribution network across the country, which it can leverage to sell some of its well-recognised brands. Exports comprised 55% of the company’s revenues at the end of FY06.

What has driven performance in 3QFY07?
Textile – Realisation blues: As in the last quarter, the textile division maintained its dominance in 3QFY07 too (85% of revenues), with the hiving off of the denim division into a separate JV. The division (70% of which is poly wool) registered a revenue growth of 12% YoY coupled with 80 basis points improvement in margins. This revenue growth and margin expansion was largely driven by the 15% YoY increase in volumes. However, realisations declined by 3% YoY due to the reduction in proportion of sale of wool based fabrics. Exports grew by a healthy 56% YoY (12% of sales in 3QFY07) despite competitive pressures from low cost producers.

Denim JV – Yet to bear fruits: The company having entered into a JV with UCO of Belgium (combined capacity of 80 mm) in August 2006, reported revenues of Rs 2 bn and EBDITA margin of 8% during the quarter. While the JV’s Indian operations recorded full capacity utilisation, realisations took a hit due to over supply in the domestic market and appreciation of the rupee against the US dollar. Market conditions in both Europe and the US continued to be difficult. Having said that, the company has added new customers in the US market, which is expected to reap benefits in the next fiscal.

Segmental snapshot…
(Rs m) 3QFY06 3QFY07 Change
Textiles
Revenue 2,241 2,514 12.2%
% share 64.9% 84.6%  
PBIT margins 26.5% 27.3%  
Denim
Revenue 815 - -100.0%
% share 23.6% 0.0%  
PBIT margins 10.8%    
Files & Tools
Revenue 385 428 11.1%
% share 11.2% 14.4%  
PBIT margins 7.7% 6.5%  

Files and tools – Input pressure: The turnover from the files and tools division improved in this quarter, registering a 11% YoY growth, after several quarters of flat growth. However, PBIT margins declined by 120 basis points due to the rise in steel prices (input) for the drills business and one-time expenses incurred during the quarter. The export sales from this division (55% of sales in 3QFY07) witnessed a growth of 9% YoY. The company has shut down the files and tools division in Thane that will lead to cost savings going forward.

Apparels – Growth driver: The branded apparel division continues to be largely reliant on its star brands namely ‘Parx’, ‘Park Avenue’ and ‘Manzoni’. While Raymond Apparels witnessed a revenue growth of 12% YoY, Colorplus (having the distinction of being the most profitable brand in the country) suffered cost pressures due to the opening of new retail outlets and increase in staff costs (on the back of new recruitments). Despite Raymond having entered into tie-ups with 17 to 18 malls, the slow opening of the malls has delayed the company’s growth in this division.

During the quarter, Raymond entered into a 50:50 JV with Grotto SpA of Italy for the retailing of premium casual wear involving an investment of around Rs 460 m spread over 2 years. The JV will sell its products under the ‘GAS’ brand in India and the launch of the products is expected to take place in February 2007.

Apparel performance…
(Rs m) 3QFY06 3QFY07 Change
Raymond Apparel
Revenue 579 649 12.0%
PBT margins 15.6% 8.6%  
Colorplus Fashions
Revenue 268 316 18.0%
PBT margins 23.7% 18.7%  

What to expect?
At the current price of Rs 405, the stock is trading at a multiple of 14.6 times our estimated consolidated FY08 earnings. We believe that while on one hand the wider retail presence will continue to enable the company to consolidate its domestic market share, on the other hand, overseas alliances will give it an edge over players who continue to rely on their standalone marketing and distribution capabilities overseas for export orders. On the cost side, however, while the wool prices remain stable, the firm trend in cotton prices and continued pressure on denim realisations (albeit higher than that of its peers) restrict the upsides to the company’s operating margins in the near term. The benefits of the denim JV, break-even in the garmenting business, capacity expansion, extended retail network and auto component foray will percolate into the company’s bottomline in the longer term. We maintain our ‘Hold’ recommendation on the stock.

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