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Raymond: Not bad after all

Apr 29, 2005

Performance Summary
Raymond declared its results for the fiscal year ended March 2005. Despite the 11% YoY growth in the topline, operating margins took a hit on the back of rise in the input and labour costs. Bottomline too, declined by 36% YoY due to a VRS write-off to the tune of Rs 252 m and fall in the other income by 33%. But for the VRS write-off, the profitability would have reduced at a lower rate of 15% YoY.

What is the company’s business?
Raymond is India's largest and world's third largest integrated manufacturer of wool and wool blended fabrics with production capacity of 24 mm (million meters). The company is the second largest denim producer in the country with a capacity of 30 mm. The company has divided its business into 3 divisions: textiles, denim and files and tools. The company is the leading producer in suiting fabric with 60% market share, which is marketed under the brand name ‘Raymond’. Through its subsidiary company, Raymond Apparel Ltd, it owns reputed brands such as Park Avenue, Parx & Manzoni.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 2,949 3,187 8.1% 10,239 11,438 11.7%
Expenditure 2,736 2,767 1.1% 9,004 10,177 13.0%
Operating profit (EBDITA) 213 420 97.3% 1,235 1,261 2.1%
EBDITA margin (%) 7.2% 13.2% 12.1% 11.0%
Other income 437 180 -58.7% 1,025 679 -33.8%
Interest outgo/(inflow) (80) 21 - (190) 142
Depreciation 173 200 15.3% 634 638 0.6%
Profit before tax 557 380 -31.7% 1,816 1,161 -36.1%
Extraordinary items-gain/(loss) 35 (219) - 35 (247)
Tax 198 (68) - 548 82 -85.0%
Profit after tax/(loss) 394 229 -41.9% 1,303 831 -36.2%
Net profit margin (%) 13.4% 7.2% 12.7% 7.3%
No. of shares (m) 61.4 61.4 61.4 61.4
Diluted earnings per share (Rs)* 25.7 14.9 21.2 13.5
Price to earnings ratio (x) 23.0
(* annualised)

What has driven performance in FY05?
Denim drives growth: Among the key segments, denim sales for FY05 grew by a robust 21% YoY. This could be attributed to the increase in denim volumes, as the company has increased its denim capacity from 20 mm to 30 mm. Textiles revenues for 4QFY05 and FY05 grew by 9.8% YoY and 9.2% YoY respectively, reinforcing the fact that the growth is generally stronger for textiles in the latter half of the year.

How have segments performed?
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Textiles 2,021 2,220 9.8% 7,091 7,741 9.2%
PBIT margins 13.9% 19.5% 17.2% 16.5%
Denim 520 572 10.0% 1,851 2,233 20.6%
PBIT margins 14.0% 9.1% 11.2% 9.6%
Files & Tools 428 420 -1.9% 1,332 1,498 12.5%
PBIT margins 13.1% 1.2% 11.2% 0.4%

Margins under pressure: Raw material prices continued to pressurise margins, which fell by 110 basis points. Though cotton prices softened during the course of the year, the company could not take advantage of the same owing to existing inventory, which were at higher price points. However, the company has benefited from lower power and fuel costs. High polyester prices (up 25%) and steel prices also resulted in the operating profits registering a miniscule 2% growth YoY.

Expenditure table
(% sales) 4QFY04 4QFY05 FY04 FY05
Consumption of raw materials 28.6% 27.8% 30.4% 30.3%
Staff cost 15.4% 16.3% 17.6% 17.7%
Power and fuel costs 6.8% 6.3% 8.1% 7.3%
Other expenditure 27.1% 23.5% 23.0% 23.7%
(Increase)/Decrease in stock 6.1% 4.9% -0.4% 0.9%
Stores consumption 28.6% 8.1% 9.1% 9.0%

If one considers the PBIT margins of the files and tools division, the magnitude of impact is more pronounced than other divisions owing to higher steel prices. The margin outlook for this division for the first half of FY06 remains subdued. The company had, during the year, shut down operations at one of its plants at Thane and due to settlement of wage related issues, labour costs also witnessed an increase. But this is one-time in nature and to that extent, there will be cushion to margins in the next fiscal year.

Bottomline would have been better: It must be noted that the company had extraordinary foreign exchange gains in the previous year due to rupee appreciation, which did not recur in FY05. This resulted in a fall of 34% YoY in other income, the impact of which was reflected in the bottomline. Also, there was a VRS expenditure write-off to the tune of Rs 252 m. If one were to exclude this write-off, the net profit actually declined by 15% YoY.

Over the last few quarters: If one were to look at the segmental margin trend over the last nine quarters, there has been a steady increase in textile division margins. While denim margins have been more or less maintained at the same level, the files and tools division has actually posted a profit in 4QFY05 as compared to a loss in 3QFY05. Amidst concerns, a broader overview indicates that fundamentals are improving.

What to expect?
At Rs 311, the stock is trading at a price to earnings multiple of 23 times FY05 earnings. We feel that given the circumstances, the performance of the company is decent. Going forward, the company has embarked on expansion plans. Capacity in textiles is expected to expand from 25 mm to 28 mm. Denim capacity is expected to increase to 40 mm by March 2006.

More importantly, the garment expansion in Bangalore is on stream and we expect significant contribution from these initiatives over the next two to three years. All the above initiatives are likely to augur well for the company and improve its volumes and consequently, revenues post the quota regime. The company currently has a 26% market share in the world in the files and tools segment and is expecting the share to go up to 30%. We maintain our positive view on the stock from a two to three year perspective.

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