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Raymond: Entering a new phase

Feb 2, 2005

Performance Summary
Raymond, India's largest and the world's third largest manufacturer of wool and wool-blended fabrics recently announced its 3QFY05 results. While the company witnessed a decent topline growth of over 16% YoY, the bottomline has dipped by nearly 18% YoY. If one were to exclude the VRS write-off, net profit during the quarter has actually declined by 11% YoY. Higher interest cost is one of the key reasons behind this decline in profits.

What is the company's business?
Raymond is the country's largest wool and wool-blended fabrics manufacturer with a capacity of 24 MM (million meters). Also, the company is a market leader in files and tools with around 80% of the domestic market share. It also has interests in the denim segment being the second largest manufacturer of denims in the country with capacity of 20 MM. Post quota regime, the company is looking to double its denim capacity to 40 MM.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 2,578 2,992 16.1% 7,290 8,257 13.3%
Expenditure 2,233 2,585 15.8% 6,139 7,424 20.9%
Operating profit (EBDITA) 345 406 17.7% 1,151 833 -27.6%
EBDITA margin (%) 13.4% 13.6% 15.8% 10.1%
Other income 178 159 -11.0% 459 506 10.2%
Interest outgo/(inflow) (49) 49 -200.0% (110) 121
Depreciation 157 165 4.8% 462 438 -5.0%
Profit before tax 415 351 -15.4% 1,259 780 -38.0%
Extraordinary items - (20) - - (28)
Tax 109 80 -26.4% 349 150 -57.0%
Profit after tax/(loss) 305 251 -17.9% 910 603 -33.7%
Net profit margin (%) 11.8% 8.4% 12.5% 7.3%
No. of shares (m) 61.4 61.4 61.4 61.4
Diluted earnings per share (Rs)* 19.9 16.3 19.8 13.1
Price to earnings ratio (x) 22.2
(* annualised)

What has driven performance in 3QFY05?
Better realizations help topline growth: During the period under review, the company's topline grew by a decent 16% YoY. This could be largely attributed to the growth witnessed in the clothing business, whereby the denims segment grew by 18% and the textiles business grew by 17% YoY. Capacity expansion in denims seems to be filtering in. On the other hand, files and tools segment of the business grew by nearly 6%. Going forward, the recent drop in cotton prices is likely to help the company, as volumes are likely to rise post the quota regime.

(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 28.7% 31.6% 28.1% 30.6%
Staff cost 17.8% 17.9% 18.5% 18.3%
Power and fuel costs 8.0% 6.8% 8.7% 7.7%
Other expenditure 32.2% 30.7% 28.9% 33.7%

Margins actually higher: During 3QFY05, Raymond witnessed a marginal increase of 20 basis points in its operating margins. Higher raw material costs continue to depress margins. But for the savings in power and fuel costs and other expenditure, the decline would have been much sharper. As we go forward, given the softening of cotton prices, we believe that margins are likely to improve. This will be supported by better capacity utilisation and higher contribution from value-added denims.

Interest outgo eats into the bottomline pie: On a year-on-year basis, the company's bottomline has dipped by nearly 18% during 3QFY05. During the quarter, the company shut down operations at one of the plants, thereby resulting in higher expenditure on staff settlement expenses, through VRS. However, a look at the interest figures indicates that in the corresponding period last fiscal the company had earned net interest income, as against an interest outgo this quarter. If the effects of the interest component are taken out, the bottomline has actually grown by nearly 17% YoY. This increase in interest, despite healthy cash balance in the balance sheet, could be attributed to the increase in working capital to fund its denim and garment facility expansions.

What to expect?
At Rs 290, the stock is trading at a price to earnings multiple of 22.2 times its annualized 9mFY05 standalone earnings (10.7 times our estimated consolidated earnings). During the first nine months of the current fiscal, the textile industry has witnessed higher raw material prices as a result of which margins have come under pressure. However, the recent decline in cotton prices is likely to help Raymond in its denims operations. The company is further expanding its denims capacity to 40 MM from the current 20 MM. Raymond recently shut operations of Thane plant of the files division. Going forward, this is likely to help the company on the back of rightsizing its operations. Looking from a two to three year perspective, we believe that the company's garment facilities in Bangalore (shirts, trousers and suits) will provide a big kicker to the topline growth, taking into account lower prices on the outsourcing side. We had re-iterated our BUY view on the stock in November 2004 at Rs 302 with a target price of Rs 450 with a two to three year view and we maintain our view even at the current juncture.

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