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Raymond: Still off the track - Views on News from Equitymaster
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Raymond: Still off the track
Apr 30, 2008

Performance summary
  • Consolidated topline grows by 17% YoY in FY08; on a standalone basis growth is 3% YoY.
  • Proportion of branded apparel and textile retail sales have increased from 30% in FY07 to 33% in FY08.

  • Consolidated EBIDTA and net profit margins fall from 13.3% and 6.9% in FY07 to 7.1% and 0.9% respectively in FY08.

  • Higher wool and cotton prices take a toll on margins.

  • The company’s increasing reliance on exports has impacted this quarter’s performance due to the appreciation of the rupee against the US dollar.

Consolidated financial performance
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 3,477 4,357 25.3% 20,406 23,961 17.4%
Expenditure 3,040 3,934 29.4% 17,697 22,264 25.8%
Operating profit (EBDITA) 437 423 -3.2% 2,709 1,697 -37.4%
EBDITA margin (%) 12.6% 9.7%   13.3% 7.1%  
Other income 94 92 -1.4% 780 910 16.7%
Interest 78 (1) -100.8% 501 601 20.0%
Depreciation 164 211 28.7% 1,257 1,688 34.3%
Profit before tax 289 305 5.6% 1,731 318 -81.6%
Extraordinary income/(expense) (29) (9)   214 73  
Tax 153 85 -44.3% 549 287 -47.7%
Effective tax rate 53% 28%   32% 90%  
Profit after tax/(loss) 107 211 97.2% 1,396 104 -92.5%
Share of profit in associates - -   28 41  
Minority interest - -   (9) (8)  
Pre-acquisition loss / (profit) - -   (16) 74  
Net profit - -   1,399 210 -85.0%
Net profit margin (%) 3.1% 4.9%   6.9% 0.9%  
No. of shares (m)       61.4 64.4  
Diluted earnings per share (Rs)*         3.3  
Price to earnings ratio (x)         84.2  
(* On a trailing 12-month basis)

What has driven performance in FY08?
  • Textile and files – Cost pinch: Steep rise in wool prices (up 40% YoY) took a toll on Raymond’s textile division this year. Further, despite buoyant market demand, internal issues pertaining to ERP implementation affected delivery during the year. The company opened 13 new textile retailing stores (28,440 sq feet) and sales from these stores grew by 21% YoY. The company believes that the rising costs of Chinese garment manufacturers are likely to boost exports of garments from other exporting countries like India.

    The turnover from the files and tools division witnessed sever pressure due to increased cost of steel and the appreciation of the rupee against the US dollar. Having said that, the pressures were thwarted to some extent by rationalizing sales’ geographies.

    Segmental snapshot…
    (Rs m) FY07 FY08 Change
    Textiles
    Revenue 9,922 11,334 14.2%
    % share 48.6% 47.3%  
    EBIDTA margins 22.8% 15.7%  
    Net profit margin 13.7% 5.7%  
    Files & Tools
    Revenue 1,680 1,770 5.4%
    % share 8.2% 7.4%  
    EBIDTA margins 6.0% 4.0%  
    Net profit margin 0.8% 0.1%  

  • Apparels and garments – Growth with lower margin: The branded apparel division remains largely reliant on its star brands namely ‘Parx’, ‘Park Avenue’ and ‘Manzoni’. 10 new stores were opened during the quarter adding 8,801 sq feet of retail space. Addition of new stores has adversely impacted margins due to the higher operating and advertising costs. The fourth quarter was particularly not impressive in terms of performance of the branded apparel segment as it was a discount season with surpluses being sold out.

    Apparel performance
    (Rs m) FY07 FY08 Change
    Raymond Apparel
    Revenue 2,371 3,500 47.6%
    % share 11.6% 14.6%
    EBIDTA margins 9.6% 8.5%
    Net profit margin 4.4% 2.2%
    Colorplus Fashions
    Revenue 1,209 1,475 22.0%
    % share 5.9% 6.2%
    EBIDTA margins 19.1% 13.5%
    Net profit margin 10.8% 5.3%
    Garment performance
    (Rs m) FY07 FY08 Change
    Silver Spark Apparel
    Revenue 726 881 21.3%
    % share 3.6% 3.7%
    EBIDTA margins 9.1% 14.5%
    Net profit margin 3.7% 8.4%
    Celebrations Apparel
    Revenue 53 90 69.8%
    % share 0.3% 0.4%
    EBIDTA margins 3.8% 13.3%
    Net profit margin -17.0% -1.1%

  • JVs – Not yet remunerative: The over-supply situation in India and the sluggish demand in Europe and USA continue unabated, thus taking a toll on the denim business. Competition from Pakistan, Bangladesh, Turkey in export markets continued. Nonetheless, the Indian fabric division maintained higher production and sales registering over 90% capacity utilisation. Focused efforts on new innovative washes helped the garmenting unit to position itself at the medium and top end of the market and has resulted in new customer additions The order book of the European division is strong and the division has managed to retain all its existing customers.

    While the shirting JV with Zambaiti of Italy is also in line with its performance targets, the JV with Fedora is yet to break even. The GAS Apparel JV, despite receiving good response, is yet to break even.

    JVs bleeding the bottomline…
    (Rs m) FY07 FY08 Change
    Raymond UCO Denim    
    Revenue 5,043 7,742 53.5%
    EBIDTA margins 4.3% -2.4%  
    Net profit margins -11.9% -15.6%  
    Raymond Zambaiti    
    Revenue 317 1,007 217.7%
    EBIDTA margins -3.5% 25.1%  
    Net profit margins -31.5% 6.0%  
    Raymond Fedora    
    Revenue 229 353 54.1%
    EBIDTA margins -37.1% -17.0%  
    Net profit margins -61.6% -33.4%  
    GAS Apparel    
    Revenue - 157  
    EBIDTA margins - -107.0%  
    Net profit margins - -122.9%  

What to expect?
At the current price of Rs 275, the stock is trading at a multiple of 8.0 times our estimated consolidated FY10 earnings. Since the consolidated performance of the company is well below our estimates, we will have to revisit our projected numbers. 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.

Raymond is envisaging a capex of Rs 1 bn in the next two years of which 50% will be spent on retail operations and the rest on the international JVs. Despite having 35% of its debt from the TUF (technology upgradation fund), the rising interest costs are expected to weigh on the company’s bottomline. Raymond is, however, trying to counter this by reducing its working capital requirements. We expect the company to record unimpressive performances in FY08 and FY09 after which a possible turnaround in the loss making business will offer some upsides.

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