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Raymond - Headed north?

Apr 25, 2003

It is back to a phase of steady growth for Raymond Limited. The company declared its full year results ended March 2003 yesterday in which it has posted a 8% and 6% rise in revenues and net profit respectively (excluding extraordinary adjustments). Against our consolidated earnings estimate of Rs 823 m, the company's net profit stands at Rs 820 m.

Standalone
(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net sales 2,707 2,631 -2.8% 8,684 9,361 7.8%
Other Income 423 177 -58.2% 570 341 -40.1%
Expenditure 2,577 2,364 -8.3% 7,373 7,963 8.0%
Operating Profit (EBDIT) 130 267 105.9% 1,311 1,398 6.6%
Operating Profit Margin (%) 4.8% 10.2%   15.1% 14.9%  
Interest (net) 116 (137) - 252 (139) -
Depreciation 133 152 14.0% 526 578 9.9%
Profit before Tax 304 429 41.2% 1,103 1,300 17.9%
Extraordinary items - 20 - (22) 20 -
Tax 41 124 205.4% 270 417 54.6%
Profit after Tax/(Loss) 263 324 23.2% 811 903 11.3%
Net profit margin (%) 9.7% 12.3%   9.3% 9.6%  
No. of Shares (m) 61.4 61.4   61.4 61.4  
Diluted Earnings per share* 17.2 21.1   13.2 14.7  
P/E ratio (x)         6.3  
(* annualised)            

Net sales for FY03 is higher by 8% primarily led by a sharp rise in denim sales and stability in its core business i.e. textiles. Raymond augmented denim capacity during the course of this fiscal from 10 million meters (mm) to 20 mm, which was done in two phases (the second phase of 5 mm was completed in the last quarter). With denim back in fashion with international designer houses, demand and prices have shown a marked improvement since the second half of FY02. Raymond is the second largest player in the denim market in India after Arvind Mills. Higher concentration on exports and higher value denim products is estimated to have benefit the company in terms of better realisations as well. Just to put things in perspective, as against the domestic price realisation of Rs 98-102 per metre, exports fetch around Rs 115 per meter for the company. As a supplier to many of the international fashion houses, Raymond has benefited.

The textile division of the company, which includes products like fabrics, woolen materials, garments and shirting, has seen a marginal growth of 4%. This is in line with expectations when one considers the fact that this business is mature in nature. More importantly, there has been a marked shift towards readymade garments from fabrics, which has also resulted in the company's growth slowing down over the years. Shirting and garments (Park Avenue and Manzoni) still account for less than 3% of revenues. 'Park Avenue' has reached a critical size of an estimated Rs 1.3 bn and as a result further growth from this brand could be led by brand extensions alone. Since the textile division accounts for a bulk of the company's revenues (72% in FY03), the decline in 4QFY03 has weighed on FY03 performance on the whole.

Segment-wise revenue mix…
(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Textiles 2,149 2,077 -3.4% 7,191 7,494 4.2%
PBIT margin (%) 6.8% 11.2%   14.2% 14.1%  
Files 444 388 -12.7% 1,403 1,385 -1.3%
PBIT margin (%) 12.1% 12.1%   16.5% 12.9%  
Denim 329 376 14.4% 1,159 1,362 17.5%
PBIT margin (%) 15.8% 12.2%   12.4% 16.9%  
Others 21 11 -46.4% 74 133 80.3%
PBIT margin (%) -116.1% -243.4%   -82.3% 19.9%  
Total 2,943 2,852 -3.1% 9,827 10,375 5.6%

Operating margins for FY03 have declined due to pricing pressure on its files division, which again is a mature business and offers little room for growth in the long run. Since this division contributes significantly at the operating level, the pressure on prices and the consequent fall in margins has mired overall performance. Backed by increased capacity utilisation and higher realisations, the denim division's PBIT margin has increased notably, as is apparent from the table above. If one were to look at the quarterly trend in revenues and operating margin in FY03, the performance of denim division seems to weigh heavily on the topline growth (graph).

Though tax outflow has increased for FY03, significant savings in interest cost has resulted in a 6% rise in net profit. On a consolidated basis, growth in revenues is on the higher side. This is primarily led by increased garment sales (Parx), where the company has been expanding its presence. Other initiatives like 'Be:' (designer retail stores) are at a nascent stage and will take time to contribute meaningfully in the short term. Though net profit growth is just 2% on the first sight, excluding other adjustments, the consolidated net profit growth for FY03 is 18% YoY.

Consolidated
(Rs m) FY02 FY03 Change
Net sales 9,913 11,372 14.7%
Other Income 566 408 -27.8%
Expenditure 8,559 9,774 14.2%
Operating Profit (EBDIT) 1,355 1,598 17.9%
Operating Profit Margin (%) 13.7% 14.0%  
Interest (net) 265 (96) -
Depreciation 553 618 11.8%
Profit before Tax 1,103 1,484 34.5%
Extraordinary items (87) (153) 76.0%
Tax 281 462 64.3%
Profit after Tax/(Loss) 735 869 18.2%
Other adjustments 70 (47) -
Minority interest - 2 -
Net income 805 820 1.8%
Net profit margin (%) 7.4% 7.6%  
No. of Shares (m) 61.4 61.4  
Diluted Earnings per share (Rs)* 13.1 13.4  
P/E ratio (x)   7.0  
(* annualised)      

The stock currently trades at Rs 93 implying a P/E multiple of 6.4x our estimated consolidated earnings for FY04 (excluding adjustments for ColorPlus). ColorPlus, with an estimated revenues of Rs 600 m (5% of consolidated revenues of FY03), is likely to push revenue growth further in the long term. The company is also vying for acquisition on the denim front in the domestic market in an effort to consolidate its presence. These initiatives combined with debt restructuring is expected fuel profitability and thus, alter the valuation matrix. Perhaps the areas of concern are the utilisation of surplus cash and continuation of presence in areas like aviation.


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