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Raymond: Pricing pressure

Feb 18, 2003

It has been a rather lacklustre year for Raymond Limited. While volume growth has been on the impressive side for the first nine months of the current fiscal year, operating margins continue to remain depressed in light of weakness in its core businesses viz. textiles and industrial files. After a sharp spurt in operating efficiency in FY02 thanks to benefits from the divestment of its commodity businesses, margins are reverting back to the mean.

(Rs m)3QFY023QFY03Change9mFY029mFY03Change
Net sales 2,274 2,527 11.1% 5,978 6,730 12.6%
Other Income 56 53 -6.0% 147 164 11.9%
Expenditure 1,878 2,172 15.6% 4,796 5,599 16.7%
Operating Profit (EBDIT) 396 355 -10.2% 1,182 1,131 -4.3%
Operating Profit Margin (%)17.4%14.1%19.8%16.8%
Interest (net) 47 (14) - 137 (2) -
Depreciation 135 148 9.7% 393 426 8.5%
Profit before Tax 271 274 1.3% 799 871 9.1%
Extraordinary items (3) - - (22) - -
Tax 81 83 2.5% 229 293 27.8%
Profit after Tax/(Loss) 186 191 2.6% 548 578 5.5%
Net profit margin (%)8.2%7.6%9.2%8.6%
No. of Shares (m) 61.4 61.4 61.4 61.4
Diluted Earnings per share (Rs)* 12.1 12.4 11.9 12.6
P/E Ratio (x) 7.4 7.3
(*annualised)

Revenue has seen encouraging growth in 9mFY03 primarily led by sharp spurt in denim sales. The company is in the process of expanding its denim manufacturing capacity from 10 million meters (mm) to 20 mm, of which 5 mm is already operational. This is reflected in the table below with denim sales increasing by 19% to Rs 986 m. Apart from revival in demand in the international markets, denim prices have remained firm. Raymond has been concentrating on the value-add segment of denim, where its realisation is higher by 2%-3% in dollar terms. These factors have led growth in 9mFY03. Raymond has also benefited from stable performance of its textiles and files divisions. Growth in revenues from its textiles division is on the higher side for 9mFY03, which could have been led by increased contribution from branded garment sales.

However, the company has suffered at the operating level in light of continued weakness in prices of its textiles and files products. But benefits from higher capacity utilisation and stable prices have resulted in a sharp spurt in PBIT margin for denim products in 9mFY03. Raymond is flush with funds after the sale of its commodity businesses, which it is utilising to retire high cost debts (total debt was lower by Rs 2.3 bn in FY02). We expect the trend to have continued especially when one considers the relaxation in prepayment of external commercial borrowings by RBI during the course of this fiscal year. The rise in depreciation could be due to expansion of denim capacity.

Segment revenue break-up
(Rs m)3QFY023QFY03Change9mFY029mFY03Change
Textiles 1,938 2,005 3.5% 5,042 5,417 7.4%
PBIT margin (%)13.7%11.3%17.3%15.2%
Files 352 381 8.3% 959 998 4.0%
PBIT margin (%)20.9%13.7%18.6%13.3%
Denim 384 384 0.0% 831 986 18.7%
PBIT margin (%)12.4%17.8%11.1%18.7%
Others 15 32 120.0% 53 121 131.2%
PBIT margin (%)-96.6%18.8%-68.8%44.4%
Total 2,687 2,801 4.2% 6,884 7,522 9.3%
PBIT margin (%)13.8%12.6%16.1%15.9%

Net profit growth is below our expectations primarily due to significant pressure at the operating level. The company entered into an agreement with ColorPlus for a 75% stake in the company (Read more on benefits from ColorPlus acquisition, Raymond: 'ColorPlus' growth) . Pending finalisation of the legal procedures, the first nine months performance do not include ColorPlus numbers. We expect branded garments as one of the key growth drivers over the longer term, both in the export and domestic markets. The stock currently trades at Rs 92 implying a P/E multiple of 9.2x nine months earnings. One of the key cause of concern is the expansion in denim capacity and continued pressure in prices. Until clarity emerges on the company's strategy on the garments front (including ColorPlus), the stock may remain range bound.

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