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Raymond: Extended franchise, improved margins - Views on News from Equitymaster
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Raymond: Extended franchise, improved margins
Mar 2, 2011

Raymond declared its 3QFY11 results. The company has reported 20% YoY growth in net sales while the company continues to bear losses at the net level have for the quarter and nine month periods. Here is our analysis of the results.

Performance summary
  • Standalone sales grow by 8% YoY in 9mFY11, despite higher volumes in the suiting and shirting businesses.
  • Standalone EBIDTA margins expand by 3.3% to 15.4% in 9mFY11 despite higher input costs.
  • Capex underway to bring cotton shirting fabric capacity from 11.5 m to 21.6 m meters per annum by end of FY11.
  • Lower interest costs, VRS writeoffs eased pressure on the bottomline.

Standalone financial performance
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 3,723 4,472 20.1% 10,056 10,830 7.7%
Expenditure 3,156 3,517 11.4% 8,936 9,167 2.6%
Operating profit (EBDITA) 567 955 68.4% 1,120 1,663 48.5%
EBDITA margin (%) 15.2% 21.4%   11.1% 15.4%  
Other income 164 159 -3.0% 533 515 -3.4%
Depreciation 281 260 -7.5% 832 770 -7.5%
Interest 211 254 20.4% 670 691 3.1%
Exchange rate loss / (gain) 28 4   72 (23)  
Profit before tax 211 596 182.5% 80 741  
Extraordinary income/(expense) 259 (1,153)   240 (1,239)  
Tax 45 600   136 567 316.9%
Effective tax rate 21% 101%   N.A 77%  
Profit after tax/(loss) 425 (1,157) -372.2% 184 (1,065)  
Net profit margin (%) 11.4% -25.9%   1.8% -9.8%  
No. of shares (m)         61.4  
Diluted earnings per share (Rs)*         2.5  
Price to earnings ratio (x)         158.5  
(*On a trailing 12-month basis) Extraordinary expenses refer to the VRS payments written off

What has driven performance in 3QFY11?
  • Backed by improved demand from domestic as well as export markets, Raymond saw its operating margins improve by nearly 4% in 9mFY11. The worsted fabrics business managed 5% YoY growth in volumes and 16% YoY growth in realizations this quarter. For the shirting business, volume was up by 7% and realisations were higher by 8% YoY. The operating margins in the branded segment improved significantly despite high cotton yarn prices. The lower operating cost (with the Thane plant being shut) lent some stability to Raymondís overall performance for 9mFY11. The garmenting and denim businesses, however, faced margin pressures.

    (Rs m) 3QFY10 3QFY11 Change
    Worsted fabric performance
    Revenue 3,680 4,440 20.7%
    % share 55.3% 53.9%  
    EBIDTA margins 16.8% 23.6%  
    Branded apparel performance
    Revenue 1,380 1,780 29.0%
    % share 20.7% 21.6%  
    EBIDTA margins 8.7% 14.6%  
    Garmenting performance
    Revenue 240 310 29.2%
    % share 3.6% 3.8%  
    EBIDTA margins 12.5% 9.7%  
    Denim (India) performance
    Revenue 1,130 1,540 36.3%
    % share 17.0% 18.7%  
    EBIDTA margins 14.2% 11.7%  

  • The branded fabric sales continued to comprise 22% of Raymondís consolidated sales at the end of 9mFY11. At the EBIDTA level, however, the performance of this division was amongst the best in 3QFY11.

  • 33 new stores were opened during 3QFY11 adding 46,279 sq feet of retail space and this sustained Raymondís position as the largest specialty retailer. The company plans to add 200 stores in tier 3 and 4 cities by end of 2011 mainly through the franchise model. The like to like store sales grew by 14% YoY in 32QFY11.

  • In the denim business, Raymondís Indian operations faced pressures with cotton prices moving up. While the domestic order book remains healthy, the company witnessed volume growth due to increased denim garmenting capacity of 4 lac pieces per annum. The realizations grew by 13% this quarter. Raymond clocked EBIDTA margin of 12% in the Indian operations as against 14% in 3QFY10.

  • The high costs had made the companyís Thane factory operations unviable which led to the shift of the capacity to Vapi. The company has been writing off the VRS related expenses every quarter. The total liability amounts to Rs 2.6 bn of which Rs 1.5 bn is payable immediately and balance of Rs 1.1 bn is payable in three years. Out of 1,885 workers over 93% had accepted the VRS package by the end of October 2010. Although this is certainly a positive, the companyís diversification into the real estate business is also not a very enthusing proposition. The company has clarified it has not finalised any proposal for sale of 12 acres of its land at Thane.

What to expect?
At the c urrent price of Rs 274, the stock is trading at an EV/EBIDTA multiple of 31 times our FY13 estimates (ResearchPro subscribers can view latest updates here). While the performance on the topline front has been in line with our estimates, we believe that the volatile operating margins across businesses and higher cost of operating in addition to the extended retail network may continue to impact the companyís bottomline in the medium term. Risks on the forex side also remain unresolved. We maintain our negative view on the stock.

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