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Raymond: VRS expenses erode profits - Views on News from Equitymaster

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Raymond: VRS expenses erode profits

Jun 15, 2011

Raymond declared the results for fourth quarter and financial year ended March 2011. The company has reported 12% YoY growth in net sales while it continues to bear losses for the full year period. Here is our analysis of the results.

Performance summary
  • Standalone sales grow by 12% YoY in FY11, despite higher volumes in the suiting and shirting businesses.
  • Standalone EBIDTA margins expand by 4.2% to 14.8% in FY11 despite higher input costs.
  • Capex underway for 7.2 MW gas based captive power plant to bring cotton shirting fabric capacity from 11.5 m to 21.6 m meters per annum by end of 1HFY12.
  • Relocation planned of Thane worsted fabric capacity to Jalgaon. Higher interest costs, VRS writeoffs erode bottomline.

    Standalone financial performance
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Net sales 3,293 4,134 25.5% 13,349 14,965 12.1%
    Expenditure 2,935 3,526 20.1% 11,930 12,756 6.9%
    Operating profit (EBDITA) 358 608 69.8% 1,419 2,209 55.7%
    EBDITA margin (%) 10.9% 14.7%   10.6% 14.8%  
    Other income 211 199 -5.7% 718 888 23.7%
    Depreciation 281 266 -5.3% 1,113 1,037 -6.8%
    Interest 174 284 63.2% 844 974 15.4%
    Exchange rate loss / (gain) (18) (2)   (5) (90)  
    Profit before tax 96 255 165.6% 175 996 469.1%
    Extraordinary income/(expense) (44) 153   (12) 2,426  
    Tax 73 89   (63) (378)  
    Effective tax rate 76% 35%   N.A -38%  
    Profit after tax/(loss) 67 13 -80.6% 250 (1,052)  
    Net profit margin (%) 2.0% 0.3%   1.9% -7.0%  
    No. of shares (m)         61.4  
    Diluted earnings per share (Rs)*         (16.3)  
    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 4QFY11?
    • Backed by higher volumes and better realizations from domestic as well as export markets, Raymond saw its standalone sales grow by 12% YoY in FY11. It operating margins too improved by nearly 4% to 14.8% in FY11. The worsted fabrics business managed 3% YoY growth in volumes and 21% YoY growth in realizations in the domestic market this fiscal. For the shirting business, volume was up by 28% and realisations were higher by 13% YoY. The operating margins in the branded segment improved significantly despite high cotton yarn prices. The lower operating cost (with the Thane plant being shut) lent some stability to Raymond's overall performance for FY11. The garmenting and denim businesses, however, faced margin pressures.

      Worsted fabric performance
      (Rs m) FY10 FY11 Change
      Revenue 12,230 14,850 21.4%
      % share 48.8% 48.9%  
      EBIDTA margins 14.0% 19.0%  
      Branded apparel performance
      Revenue 5,560 6,410 15.3%
      % share 22.2% 21.1%  
      EBIDTA margins 2.2% 4.1%  
      Garmenting performance
      Revenue 1,010 1,260 24.8%
      % share 4.0% 4.2%  
      EBIDTA margins 3.0% 2.4%  
      Denim (India) performance
      Revenue 4,670 5,960 27.6%
      % share 18.6% 19.6%  
      EBIDTA margins 3.4% 3.0%  

    • The branded fabric sales continued to comprise 21% of Raymond's consolidated sales at the end of FY11. At the EBIDTA level, however, the 4QFY11 performance of this division was affected by the levy of excise duty.

    • 63 new stores were opened during FY11 adding 93,000 sq feet of retail space and this sustained Raymond's position as the largest specialty retailer. The company plans to add 200 stores in tier 3 and 4 cities by end of 2012 mainly through the franchise model. The like to like store sales grew by 17% YoY in FY11.

    • In the denim business, Raymond's Indian operations faced pressures with cotton prices moving up. While the domestic order book remains healthy, the company witnessed volume growth of 3% YoY due to increased denim garmenting capacity of 4 lac pieces per annum. The realizations grew by a healthy 39% this fiscal. Raymond clocked EBIDTA margin of 11% in the Indian operations as against 12% in FY10.

    • The company has planned relocation of Thane worsted fabric capacity to Jalgaon. The writeoff of the VRS related expenses heavily eroded bottomline in FY11. The total liability amounts to Rs 2.6 bn of which provision for Rs 2.4 bn has already been made in FY11. While there are conflicting reports about the company selling off the land parcel to repay debts as against the earlier plans of developing the same, the management has not confirmed any details for sale of 12 acres of its land at Thane.

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