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Raymond: Forex gains redeem losses - Views on News from Equitymaster

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Raymond: Forex gains redeem losses
May 18, 2010

Raymond declared its FY10 results. The company has reported 3% YoY drop in net sales while it has declared profits at the net level as against losses last year. Here is our analysis of the results.

Performance summary
  • Standalone sales fall by 3% YoY during FY10, by 7% YoY in 4QFY10.
  • Standalone EBIDTA margins improve to 10% in FY10 from 9% in FY09, due to lower input costs.
  • While garment enjoys higher margins, branded apparel business suffers from lower volume growth.
  • Bottomline improves due to absence of losses on foreign currency borrowings this fiscal.
  • Extraordinary expenses include the VRS writeoffs; which also took a toll this year.

Standalone financial performance
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 3,554 3,293 -7.3% 13,792 13,350 -3.2%
Expenditure 3,467 2,934 -15.4% 12,604 12,016 -4.7%
Operating profit (EBDITA) 87 359   1,188 1,334  
EBDITA margin (%) 2.4% 10.9%   8.6% 10.0%  
Other income 174 175 0.6% 628 709 12.9%
Depreciation 262 282 7.6% 888 1,113 25.3%
Interest 133 173 30.1% 631 843 33.6%
Exchange rate loss / (gain) 198 (18)   891 (90)  
Profit before tax 64 61   1,188 (3)  
Extraordinary income/(expense) 2,759 (79)   4,170 (191)  
Tax (304) 73   (272) (63)  
Effective tax rate N.A N.A   N.A N.A  
Profit after tax/(loss) (2,391) 67   (2,710) 251  
Net profit margin (%) -67.3% 2.0%   -19.6% 1.9%  
No. of shares (m)     61.4 61.4  
Diluted earnings per share (Rs)*         (46.5)  
Price to earnings ratio (x)         N.A.  
(*On a trailing 12-month basis)
Extraordinary expenses refer to the VRS payments written off

What has driven performance in FY10?
  • Completing yet another year of disappointing performance, Raymond has made a comeback in its flagship worsted fabrics business. The contribution of textile business to the consolidated sales reduced from 49% to 44% in FY10 while that of garment and denim businesses went up from 28% and 10% to 30% and 14% respectively. In the textile business, increase in sales was backed by 14% increase in volumes. Despite continued pressure on prices, the higher volumes and lower operating cost (with the Thane plant being shut) this business lent some stability to Raymondís overall performance for FY10. Despite 9% rise in cost of wool prices, the EBIDTA margins improved from 13% in FY09 to 14% in FY10. Raymond also increased the capacity for shirting fabric from 11.5 mm to 21.6 mm in FY10.

    Worsted fabric performance
    (Rs m) FY09 FY10 Change
    Revenue 11,380 12,230 7.5%
    % share 44.5% 48.8%  
    EBIDTA margins 13.1% 14.0%  
    Branded apparel performance
    Revenue 5,690 5,560 -2.3%
    % share 22.2% 22.2%  
    EBIDTA margins 8.3% 7.2%  
    Garmenting performance
    Revenue 1,010 1,010 0.0%
    % share 3.9% 4.0%  
    EBIDTA margins 8.9% 15.8%  

  • The branded fabric sales continued to comprise 22% of Raymondís consolidated sales at the end of FY10. Pressure on volumes and lower average realisation led to sales drop by 2.3% YoY.

  • 88 new stores were opened during FY10 adding 99,000 sq feet of retail space and this sustained Raymondís position as the largest specialty retailer. Simultaneously aggressive reviews of the non performing stores during the year resulted in 28 store closures. The company plans to add 200 stores in tier 3 and 4 cities by 2011 mainly through the franchise model. The like to like store sales grew by 5% last fiscal.

  • In the denim business, Raymondís Indian operations witnessed an improved performance at the operating level. While the domestic order book remains healthy, the company witnessed volume growth of 3% and realization growth of 8% this fiscal. The company clocked EBIDTA margin of 12% in the Indian operations as against 2% in FY09.

  • The debt to equity ratio stood at 1 time at the end of FY10 as against 1.2 times at the end of FY09.

What to expect?
At the current price of Rs 219, the stock is trading at an EV/EBIDTA multiple of 23 times our FY12 estimates. While the companyís performance on the topline front has been in line with our estimates, we believe that the volatile operating margins across businesses and higher cost of operating in addition to the extended retail network may continue to impact the companyís bottomline in the medium term. Risks on the forex side also remain unresolved. The companyís diversification into the real estate business is also not a very enthusing proposition. We maintain our negative view on the stock

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