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Raymond: Margins give a miss!

Apr 28, 2007

Performance Summary
Apparel major Raymond announced results for the fourth quarter and fiscal ended March 2007 yesterday reporting a 10% YoY and 3% YoY decline in revenues for the quarter and full year period respectively. The FY07 results of the company include the denim division operations upto July 2006, subsequent to which, the denim division was combined into a 50:50 joint venture with UCO NV, Belgium. Consequently, the FY07 results are not strictly comparable with that of FY06. On a like-to-like basis (without considering the denim division), revenues have registered a 14% YoY growth during the fiscal. While operating margins have shrunk during the quarter, forex losses and higher tax rates have nullified the benign impact of reduction in depreciation charges. As domestic realisations continue to remain under pressure, the company’s increasing reliance on exports was clearly visible in this quarter’s performance.

Financial performance: A snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 3,843 3,477 -9.5% 13,247 12,842 -3.1%
Expenditure 3,306 3,039 -8.1% 11,242 11,033 -1.9%
Operating profit (EBDITA) 537 438 -18.4% 2,005 1,809 -9.8%
EBDITA margin (%) 14.0% 12.6%   15.1% 14.1%  
Other income 159 94 -40.9% 695 700 0.7%
Interest 59 78 32.2% 247 299 21.1%
Depreciation 193 165 -14.5% 727 631 -13.2%
Profit before tax 444 289 -34.9% 1,726 1,579 -8.5%
Extraordinary income/(expense) 2 (29)   (99) 812  
Tax 96 153 59.3% 415 370 -10.8%
Effective tax rate 22% 53%   24% 23%  
Profit after tax/(loss) 350 107 -69.4% 1,212 2,021 66.7%
Net profit margin (%) 9.1% 3.1%   9.1% 15.7%  
No. of shares (m) 61.4 61.4   61.4 61.4  
Diluted earnings per share (Rs)*       19.7 32.9  
Price to earnings ratio (x)         10.9  
(* trailing 12 months)

An integrated textile player
Raymond is India's largest and world's third largest integrated manufacturer of wool and wool blended fabrics with production capacity of 31 mm (million meters). It is the domestic market leader in files and tools with around 80% market share. The company is the second largest denim producer in the country with a capacity of 40 mm. It has a widespread distribution network across the country, which it can leverage to sell some of its well-recognised brands. Exports comprised 55% of the company’s revenues at the end of FY06. The denim division, which comprised 17% of revenue and 14% of the profits of the company in 1QFY07, was hived off into a 50:50 joint venture (JV) with UCO of Belgium in August 2006.

What has driven performance in 4QFY07?
Textile – Cost pressures: The textile division, which continued to maintain its dominance in revenue contribution (86% of revenues) in 4QFY07, with the hiving off of the denim division into a separate JV, witnessed severe cost pressures in this quarter. The division (70% of which is poly wool) registered a revenue growth of 16% YoY with 20 basis points drop in margins. The wool prices have risen by an average 30% YoY due to a severe drought in Australia, putting pressure on margins. Polyester prices were stable during the year. Textile exports (10% of sales) grew by 10% YoY.

The increased demand for worsted fabrics was catered to from the expanded capacity at Vapi, which has became fully operational in 4QFY07. With the capacity of an additional 3 mmpa having commenced operation, the total capacity of textiles has gone to 31mmpa.

Denim JV – Over supply blues: The total denim capacity in the country has gone up by 33% YoY in FY07 (from 450 mm in FY06 to 600 mm in FY07). This has induced severe oversupply especially in the non-premium segment, leading to pressure on realisations. The pressures were coupled with forex losses due to rupee appreciation. However, despite the difficult market conditions, the fabric division of the company operated at 90% capacity utilization.

The company, having entered into a JV with UCO of Belgium (combined capacity of 80 mm) in August 2006, reported revenues of Rs 5 bn and losses at the net level for the full year period. The Indian operations contributed 50% of the revenues and 13% of the losses in FY07. EBIDTA margin in the denim business is approximately 15%. Market conditions in both Europe and the US continued to be difficult. The US markets were largely affected due to a drop in overall jeans sales in the US by about 9% YoY and failure of some of the major customers to pick up the orders they had booked. Having said that, the company has added new customers in the US market, which is expected to reap benefits in the next fiscal. The demand for premium denim is expected to grow at 20% per annum, while realisation pressure will sustain for the next 6 to 9 months.

Segmental snapshot…
(Rs m) 4QFY06 4QFY07 Change
Revenue 2,564 2,982 16.3%
% share 66.7% 85.8%  
PBIT margins 22.1% 20.3%  
Revenue 818 - -100.0%
% share 21.3% 0.0%  
PBIT margins 9.6% 0.0%  
Files & Tools
Revenue 445 451 1.3%
% share 11.6% 13.0%  
PBIT margins 3.4% 10.9%  

Files and tools – Input pressures abate: The turnover from the files and tools division remained flat in this quarter, as seen in the past several quarters. However, PBIT margins improved by 750 basis points due to the fall in steel prices (input) for the drills business. The export sales from this division (55% of sales in 4QFY07) witnessed a growth of 8% YoY accompanied by 6% improvement in realisations. The company has shut down the files and tools division in Thane that will lead to cost savings going forward. The division has continued right sizing manpower in order to improve its efficiency and productivity.

Apparels – Growth driver: The branded apparel division continues to be largely reliant on its star brands namely ‘Parx’, ‘Park Avenue’ and ‘Manzoni’. While Raymond Apparels witnessed a revenue growth of 24% YoY, Colorplus (having the distinction of being the most profitable brand in the country) suffered cost pressures due to the opening of new retail outlets and increase in staff costs (on the back of new recruitments). Despite Raymond having entered into tie-ups with 17 to 18 malls, the slow opening of the malls has delayed the company’s growth in this division.

Apparel performance…
(Rs m) FY06 FY07 Change
Raymond Apparel
Revenue 1,898 2,371 24.9%
PBT margins 12.2% 6.9%  
Colorplus Fashions
Revenue 1,034 1,231 19.1%
PBT margins 14.4% 10.6%  

During the third quarter of FY07, Raymond entered into a 50:50 JV with Grotto SpA of Italy for the retailing of premium casual wear involving an investment of around Rs 460 m spread over 2 years. The JV will sell its products under the ‘GAS’ brand in India and the launch of the products took place in March 2007. During FY07, the company added about 90,000 sq. ft. of retail space (82 stores). Rs 150 m and Rs 120 m approximately have been spent on retail expansion for Raymond stores and multi brand apparel stores.

Garment performance…
(Rs m) FY06 FY07 Change
Silver Spark Apparel
Revenue 554 726 31.0%
PBT margins -8.7% 3.7%  
Celebrations Apparel
Revenue 1,034 53 -94.9%
PBT margins 14.4% -17.1%  

What to expect?
At the current price of Rs 344, the stock is trading at a multiple of 9.6 times our estimated consolidated FY09 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. On the cost side, however, the firm trend in wool prices and continued pressure on denim realisations (albeit higher than that of its peers) restrict the upsides to the company’s operating margins in the near term. The benefits of the denim JV, break-even in the garmenting business, capacity expansion, extended retail network and auto component foray will percolate into the company’s bottomline in the longer term.

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