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Raymond: Falling back on JVs - Views on News from Equitymaster
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Raymond: Falling back on JVs
Feb 2, 2008

Performance summary
  • Topline grows by 12% YoY on a standalone basis in 3QFY07. Growth stands at 18% YoY on a consolidated level.
  • Apparel and garment divisions record robust volume and realisation growth.

  • Standalone EBIDTA and net profit margins fall from 16.5% and 12.9% in 3QFY07 to 6.9% and 2.6% respectively in 3QFY08.

  • The company’s increasing reliance on exports has impacted this quarter’s performance due to the appreciation of the rupee against the US dollar.

Financial performance: A snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 2,972 3,320 11.7% 9,364 8,867 -5.3%
Expenditure 2,482 3,091 24.5% 7,994 8,226 2.9%
Operating profit (EBDITA) 490 229 -53.3% 1,370 641 -53.2%
EBDITA margin (%) 16.5% 6.9%   14.6% 7.2%  
Other income 268 208 -22.4% 606 770 27.1%
Interest 72 86 19.4% 221 256 15.8%
Depreciation 134 212 58.2% 465 599 28.8%
Profit before tax 552 139 -74.8% 1,290 556 -56.9%
Extraordinary income/(expense) (3) (7)   841 (36)  
Tax 165 44 -73.3% 217 70 -67.7%
Effective tax rate 30% 32%   17% 13%  
Profit after tax/(loss) 384 88 -77.1% 1,914 450 -76.5%
Net profit margin (%) 12.9% 2.6%   20.4% 5.1%  
No. of shares (m) 61.4 61.4   61.4 61.4  
Diluted earnings per share (Rs)*         8.4  
Price to earnings ratio (x)         41.3  
(* On a trailing 12-month basis)

What has driven performance in 3QFY08?
  • Textile and files – Cost pinch: At the standalone level, margin woes continued for Raymond in 3QFY08 as well. The increased demand for worsted fabrics that was catered to from the expanded capacity at Vapi came to the rescue in terms of higher volumes. The turnover from the files and tools division, however, remained flat. The PBIT margins halved to 4.4% in this quarter against 8.6% in the corresponding quarter of FY07 due to the rise in steel prices (input) for this business. The export sales from the textiles division (10% of total textile sales in 3QFY08) witnessed pressure on realisations due to rupee appreciation and grew by a marginal 6% YoY. Of this, 40% of fabric exports were made through the garmenting route.

    Segmental snapshot…
    (Rs m) 9mFY07 9mFY08 Change
    Textiles
    Revenue 6,940 7,548 8.8%
    % share 74.1% 85.1%  
    PBIT margins 23.9% 13.1%  
    Files & Tools
    Revenue 1,228 1,238 0.8%
    % share 13.1% 14.0%  
    PBIT margins 8.6% 4.4%  

  • Apparels and garments – Growth drivers: The branded apparel division remains largely reliant on its star brands namely ‘Parx’, ‘Park Avenue’ and ‘Manzoni’. While Raymond Apparels witnessed a revenue growth of 62% YoY, Colorplus (having the distinction of being the most profitable brand in the country) grew its sales by 24% YoY. Colorplus, however, continued to suffer cost pressures due to the opening of new retail outlets and increase in staff costs (on the back of new recruitments).

    Apparel performance
    (Rs m) 3QFY07 3QFY08 Change
    Raymond Apparel
    Revenue 648 1,050 62.0%
    PBT margins 8.6% 5.7%  
    Colorplus Fashions
    Revenue 316 393 24.4%
    PBT margins 13.6% 12.2%  
    Garment performance
    (Rs m) 3QFY07 3QFY08 Change
    Silver Spark Apparel
    Revenue 158 218 38.0%
    PBT margins 3.2% 10.1%  
    Celebrations Apparel
    Revenue 11 22 100.0%
    PBT margins -36.4% 4.5%  

  • JVs – Pulling up their socks: The order book is of the denim JV is full for Indian operations. Even as the regular product margins continue to be under pressure (partly due to high cotton prices inspite of record produce), there has been an increase in demand for value added products. Due to continuous value addition, the Indian operation has been able to increase price in dollar terms and has also added new customers in this segment. However, the European operations continue to languish.

    While the shirting JV with Zambaiti of Italy is also in line with its performance targets, the JV with Fedora is yet to break even. The GAS Apparel JV, despite receiving good response, is yet to break even.

What to expect?
At the current price of Rs 336, the stock is trading at a multiple of 9.9 times our estimated consolidated FY10 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.

Raymond is envisaging a capex of Rs 1 bn in the next two years of which 50% will be spent on retail operations and the rest on the international JVs. Despite having 35% of its debt from the TUF (technology upgradation fund), the rising interest costs are expected to weigh on the company’s bottomline. Raymond is, however, trying to counter this by reducing its working capital requirements. We expect the company to record unimpressive performances in FY08 and FY09 , after which a possible turnaround in the loss making business will offer some upsides.

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