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Raymond: Shredded margins! - Views on News from Equitymaster
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Raymond: Shredded margins!
Jul 20, 2006

Performance summary
Raymond has announced results for the first quarter ended June 2006. Higher tax incidence and exchange rate losses continue to dent the company’s bottomline. While the denim segment retains prominence in the company’s performance, investment in the denim capacity expansion has led to higher depreciation costs. As domestic realisations continue to remain under pressure, the company is largely reliant on its export revenues.

(Rs m) 1QFY06 1QFY07 Change
Net sales 2,455 2,806 14.3%
Expenditure 2,137 2,578 20.7%
Operating profit (EBDITA) 318 228 -28.4%
EBDITA margin (%) 13.0% 8.1%  
Other income 163 179 9.8%
Interest 46 44 -4.4%
Depreciation 166 187 12.2%
Profit before tax 269 176 -34.5%
Extraordinary income/(expense) (42) (14)  
Tax 39 46 17.3%
Effective tax rate 15% 26%  
Profit after tax/(loss) 188 116 -38.3%
Net profit margin (%) 7.7% 4.1%  
No. of shares (m) 61.4 61.4  
Diluted earnings per share (Rs)* 12.3 17.7  
Price to earnings ratio (x)   20.6  
(* 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 1QFY07?
Textile – realisation blues: The textile division, although still the largest contributor to the company’s turnover (56% in 1QFY07), is steadily paring its share, as the denim and apparel segments assume importance in the company’s focus. The division (70% of which is poly wool) registered a tepid revenue growth of 7.5% YoY on the back of 8% YoY growth in volumes. However, realisation grew at a much slower pace of 2% in 1QFY07 as compared to the previous quarters. Exports declined by 6% YoY (16% of sales in 1QFY07) primarily on account of competitive pressures from low cost producers. The PBIT margins of the segment, however, improved on the back of lower input costs.

Denim – capacity benefits: It may be recalled that earlier this year, Raymond entered into a JV with UCO of Belgium that created an entity with a combined capacity of 80 mm. The expanded capacity helped the company’s volumes grow by 35% YoY. With this, the segment’s PBIT margins doubled in 1QFY07 over the corresponding quarter of FY06. Lower cotton consumption (13% YoY) in this quarter also aided margins. However, on the realisations front, while the domestic realisations dropped by 1%, the export realisation improved by 2% YoY. The exports sales from this division (51% of sales in 1QFY07) witnessed a growth of 51% YoY, largely due to the JV benefits.

Segmental snapshot…
(Rs m) 1QFY06 1QFY07 Change
Textiles
Revenue 1,454 1,563 7.5%
% share 59.2% 55.7%  
PBIT margins 17.9% 18.8%  
Denim
Revenue 621 862 38.8%
% share 25.3% 30.7%  
PBIT margins 6.5% 13.1%  
Files & Tools
Revenue 372 371 -0.3%
% share 15.2% 13.2%  
PBIT margins 11.4% 8.0%  

Files and tools – The cost pull: The turnover from the files and tools division remained flat, which is the nature of the business. Also, margins were under pressure on the back of higher input costs. However, going forward, as the input costs cool off, the division may have a higher contribution to the overall revenues. The exports sales from this division (55% of sales in 1QFY07) witnessed a growth of 11% YoY.

Apparel performance…
(Rs m) 1QFY06 1QFY07 Change
Raymond Apparel
Revenue 392 466 19.0%
PBT margins 2.6% 3.9%  
Colorplus Fashions
Revenue 232 281 21.0%
PBT margins 25.0% 23.8%  
Apparels – the growth driver: The branded apparel division continues to remain largely reliant on its star brands namely ‘Parx’, ‘Park Avenue’ and ‘Manzoni’. The said brands witnessed a revenue growth of 19% YoY and 21% YoY respectively in 1QFY07, while the other apparel brands are yet to break even. Despite Raymond having entered into 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.

New ventures: Of the green-field textile capacity expansion at Vapi (6 mm capacity), 3 mm has already been commissioned while the rest will be commissioned by 2QFY07. Further, Raymond has opened a design studio in Italy in 3QFY06, which will provide it 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 365, the stock is trading at a multiple of 20.6 times trailing 12 months earnings. The company continues to bear higher tax rates due to the fringe benefit tax and lower deferred tax assets, bringing the effective tax rates from 15% in 1QFY06 to 26% in 1QFY07. 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. Also, the company has adequate cash reserves to fund future expansion/acquisition as they arise. In the textiles sector, Raymond is one of our preferred plays. This is because of a well-diversified mix of revenues arising out of its export-oriented focus, strong domestic presence, superior brands in the domestic ready-made garments and a comfortable balance sheet position. Restructuring of its Thane facility over the long-term will result in significant cost savings and generate surplus cash, which in turn could bolster its return ratios. Overall, we are positive on the company from a long-term perspective.

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