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Raymond: Brand strength boost margins - Views on News from Equitymaster

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Raymond: Brand strength boost margins

Feb 3, 2009

Performance summary
  • Consolidated sales falls by 1% YoY during 3QFY09, standalone sales up 7% YoY.
  • Standalone EBIDTA margin (adjusted for forex losses, mark-to-market (MTM) losses on investments) improved from 7% in 3QFY08 to 13% in 3QFY09.
  • Loss on foreign currency borrowing of Rs 330 m, loss on MTM investments of Rs 7 m in 3QFY09.
  • 55,000 square feet of retail space (24 new stores) added during 3QFY09.
  • Higher realisations in the worsted fabric business aid margins.
  • To shut down denim facility in US and Europe during the current quarter (4QFY09), investment diminution of Rs 4.2 m provided for in 3QFY09.


Standalone financial performance
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 3,321 3,545 6.7% 8,867 10,238 15.5%
Expenditure 3,120 2,992 -4.1% 8,409 9,138 8.7%
Operating profit (EBDITA) 201 553   458 1,100  
EBDITA margin (%) 6.1% 15.6%   5.2% 10.7%  
Other income 243 60 -75.3% 852 455 -46.6%
Depreciation 212 217 2.4% 600 626 4.3%
Interest 121 191 57.9% 340 498 46.5%
Exchange rate loss / (gain) (30) 329   (189) 693  
Profit before tax 141 (124)   559 (262)  
Extraordinary income/(expense) (7) (11)   (38) (25)  
Tax 44 12 -72.7% 71 33 -53.5%
Effective tax rate 31% -10%   13%    
Profit after tax/(loss) 90 (147) -264.0% 450 (320)  
Net profit margin (%) 2.7% -4.2%   5.1% -3.1%  
No. of shares (m)       61.4 61.4  
Diluted earnings per share (Rs)*         (0.9)  
Price to earnings ratio (x)         N.A.  
(* On a trailing 12-month basis)

What has driven performance in 3QFY09?
  • Better product mix, resilient pricing power and reduction in cost of wool prices (5% YoY in Australian dollar terms) led to an appreciable performance of Raymond’s flagship worsted fabrics business. The division operated at 100% capacity utilisation even in times of stress and the segmental EBIDTA margins improved from 13% in 3QFY08 to 16% in 3QFY09. With the continuation of the wedding season and cotton prices witnessing a downward trend, Raymond expects the margins to improve further in the next quarter. The branded fabric sales continued to comprise 39% of Raymond’s consolidated sales at the end of 9mFY09.

    Worsted fabric performance
    (Rs m) 3QFY08 3QFY09 Change
    Revenue 2,850 2,920 2.5%
    % share 85.8% 82.4%  
    EBIDTA margins 13.0% 16.1%  
    Branded apparel performance
    Revenue 1,440 1,460 1.4%
    % share 43.4% 41.2%  
    EBIDTA margins 11.8% 8.9%  
    PBT margin 6.9% 2.1%  
    Garment performance
    Revenue 230 250 8.7%
    % share 6.9% 7.1%  
    EBIDTA margins 17.4% -4.0%  
    PBT margin 8.7% -12.0%  

  • The branded apparel division remains largely reliant on its star brands namely ‘Parx’ (16% of apparel sales), ‘Park Avenue’ (37% of apparel sales) and ‘Colorplus’ (24% of apparel sales). Despite pressure on volumes, high average realisation helped this segment’s turnover grow by 1% YoY. The brand ‘Parx’ particularly grew by 24% YoY. 24 new stores were opened during the third quarter of FY09 adding 55,000 sq feet of retail space and this sustained Raymond’s position as the largest specialty retailer. The company is also in the process of renegotiating rental costs and has seen a 20% correction in the same in the past quarter. Exports comprised 17% of the company’s sales in 9mFY09 as against 19% in 9mFY08.

  • Turnover from the files and tools division improved with 10% increase in average realisation and cost of steel coming down by 22% from the peak levels.

  • In the denim business, Raymond’s Indian operations remain profitable at the operating (EBIDTA) level. The company is in the process of restructuring this division and has already shut down the US and Belgium operations. These will be winded up during the current quarter (4QFY09) by paying-off liabilities through liquidation of assets and the entire diminution in value of investments will be provided for. This restructuring is expected to cut down the consolidated losses for the company from FY10 onwards.

What to expect?
At the current price of Rs 90, the stock is trading at an EV/EBIDTA multiple of 10 times our FY11 estimates. While the company’s performance on the topline front has been in line with our estimates, on the bottomline front, the higher forex losses and diminution in investment value have kept the margins marginally lower than our estimates. We believe that the volatile operating margins across businesses and higher cost of operating the extended retail network may continue to impact the company’s bottomline in the medium term. Risks on the forex side also remain unresolved. We maintain our negative view on the stock. We may have to review our estimates for the stock once there is more clarity on the probable loss to be booked from the denim business.

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