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Raymond: Beyond textiles...

May 4, 2006

Performance Summary
Raymond announced results for the fourth quarter and year ended March 2006. Although the company's fourth quarter numbers were impacted by higher tax incidence and interest outgo, the annual results show impressive growth. While the denim segment retains prominence in the company's performance, investment in the denim capacity expansion and several joint ventures that the company entered into in FY06, are set to remain the focus areas going forward. Our analysis of the company's results includes extracts of the results' conference call.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 3,187 3,843 20.6% 11,438 13,247 15.8%
Expenditure 2,732 3,311 21.2% 10,151 11,258 10.9%
Operating profit (EBDITA) 455 532 16.9% 1,287 1,989 54.5%
EBDITA margin (%) 14.3% 13.8% 11.3% 15.0%
Other income 146 159 8.9% 652 695 6.6%
Interest 21 54 157.1% 142 231 62.7%
Depreciation 199 193 -3.0% 637 727 14.1%
Profit before tax 381 444 16.5% 1,160 1,726 48.8%
Extraordinary income/(expense) (4) 2 (247) (100)
Tax - 96 150 414 176.0%
Effective tax rate 0% 22% 13% 24%
Profit after tax/(loss) 377 350 -7.2% 763 1,212 58.8%
Net profit margin (%) 11.8% 9.1% 6.7% 9.1%
No. of shares (m) 61.4 61.4 61.4 61.4
Diluted earnings per share (Rs)* 19.7
Price to earnings ratio (x) 30.3
(* trailing 12 months)

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). 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 30 million meters (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.

What has driven performance in 4QFY06?
Textile on the phase out: The textile division (70% of which is poly wool) registered revenue growth of 13% YoY on the back of a 6% YoY growth in volumes and 7% YoY growth in realisations. The exports sales from this division (12% of sales in FY06) witnessed a growth of 9% YoY primarily through the garmenting route. The division, however, continues to witness pricing pressure due to overcapacity in the domestic market. It may be noted that additional fabric capacity of approximately 140 mm has intensified competition in the domestic market, as the new entrants are not targeting export markets. While the wool consumption was lower by 9% YoY in FY06, lower cotton prices (down 17% YoY) aided realisations. The contribution of textiles to the gross sales of the company reduced from 50% in FY05 to 47% in FY06 and this is expected to reduce substantially in FY07 due to the denim JV and the higher turnover from the garmenting business.

Segmental snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Textiles
Revenue 2,186 2,564 17.3% 7,664 8,684 13.3%
% share 68.6% 66.7% 67.0% 65.6%
PBIT margins 16.3% 15.0% 13.8% 13.1%
Denim
Revenue 569 818 43.8% 2,224 2,941 32.2%
% share 17.9% 21.3% 19.4% 22.2%
PBIT margins 13.9% 10.8% 7.3% 7.0%
Files & Tools
Revenue 402 445 10.7% 1,458 1,585 8.7%
% share 12.6% 11.6% 12.7% 12.0%
PBIT margins -5.0% 6.7% 0.1% 6.2%

Denim – big promises: The revenues from the denim division grew by 32% YoY driven by 35% rise in volumes (due to the capacity expansion from 20 million metres per annum to 30 MMPA). Average realisations per metre were, however, lower by 1% as compared to FY05 due to the change in the market mix in favour of the domestic market. While realisations in the domestic market grew by 2%, that in the overseas market grew by 3%. While the company anticipates the pressure on denim prices to continue in the coming quarter, introduction of products in the premium segment is expected to aid margins.

Apparel – future growth driver: The branded apparel segment of the company continues to remain its focus area, with Raymond Apparel and Color Plus (most profitable standalone brand in the country) witnessing revenue growth of 11% YoY and 16% YoY respectively in FY06.Although the company believes that the current EBIDTA levels of these two subsidiaries (at 17% and 24% respectively) have peaked, it expects the apparel division to continue clocking 20% plus growth in the medium term. It has also cited that despite having tie ups with 17 to 18 malls, the slow opening of the malls has delayed the company's growth in this division. Raymond is expected to open another 30 ‘Raymond stores' in FY07, while the number of ‘brand only stores' (for Parx, Park Avenue and Color Plus) will go up by 45 in the same period. Also, Raymond will own most of the new stores as against leasing them.

Files and tools – Slow but steady: The financial restructuring of this division following the shut down of the files and tools plant in Thane has helped the division to slowly but steadily recover. While the company's initiative to increase production in the value-add segment was one reason for the improvement in performance, the other reason for the turnaround was the softening of input cost (steel). But with steel prices again gaining ground, margins may remain rangebound.

New ventures: Of the green-field textile capacity in expansion at Vapi (6 mm capacity), 3 mm has already been commissioned while the rest will be commissioned by 2HCY06. Also, in the denim division, the JV entered into with UCO of Belgium has created a total capacity of 80 mm and will start generating revenues by July 2006. Further, Raymond has opened a design Studio in Italy in 3QFY06, which will be a joint venture between the company and its shirting partner Gruppo Zambaiti, Italy, to be managed by the latter. The design studio will provide Raymond with strategic design capabilities for all its textile and apparel businesses. Besides, the same is expected to provide the company access to international design talent and visibility to Raymond's products globally.

What to expect?
At the current price of Rs 599, the stock is trading at a price to earnings multiple of 23 times our estimated FY08 standalone and 18 times our estimated FY08 consolidated earnings. The company has borne higher tax rates in FY06 due to the fringe benefit tax and lower deferred tax assets, bringing the effective tax rates from 13% in FY05 to 24% in FY06. The company sees this going upto maximum 27% in the coming fiscals.

Although margin pressures for the apparel division and higher raw material costs for the textile divisions remain our prime concerns, we believe that the capacity expansions, extended retail network and auto component foray will accelerate the company's growth in the long term.

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