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Raymond: Garments steal the show - Views on News from Equitymaster

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Raymond: Garments steal the show
Jul 21, 2007

Performance summary
  • Topline declines by 26% YoY, although not comparable to 1QFY07 due to the inclusion of the denim business in the standalone numbers of 1QFY07. On a like to like basis, net sales has grown by 12% YoY.

  • Textile and files and tools divisions record sales growth of 7% YoY each.

  • EBIDTA and net profit margins fall from 8.6% and 4.1% in 1QFY07 to 2.6% and 2.5% respectively in 1QFY08. Excluding denim division, net profit grows by 9% YoY.

  • As domestic realisations continue to remain under pressure, the company’s increasing reliance on exports was clearly visible in this quarter’s performance.

Financial performance: A snapshot
(Rs m) 1QFY07 1QFY08 Change
Net sales 2,806 2,091 -25.5%
Expenditure 2,565 2,037 -20.6%
Operating profit (EBDITA) 241 54 -77.6%
EBDITA margin (%) 8.6% 2.6%  
Other income 178 272 52.8%
Interest 57 74 29.8%
Depreciation 186 172 -7.5%
Profit before tax 176 80 -54.5%
Extraordinary income/(expense) (14) (23)  
Tax 46 5 -89.1%
Effective tax rate 26% 6%  
Profit after tax/(loss) 116 52 -55.2%
Net profit margin (%) 4.1% 2.5%  
No. of shares (m) 61.4 64.0  
Diluted earnings per share (Rs)*   21.5  
Price to earnings ratio (x)   13.6  
(* On a trailing 12-month basis)

An integrated textile player
Raymond is India's largest and world's third largest integrated manufacturer of wool and wool blended fabrics with production capacity of 31 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 40 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. The denim division, which comprised 17% of revenue and 14% of the profits of the company in 1QFY07, was hived off into a 50:50 joint venture (JV) with UCO of Belgium in August 2006. The company’s shirting and woolen JVs with Zambaiti and Fedora respectively started operations in the latter half of FY07.

What has driven performance in 1QFY08?
Textile – Input cost pinch: The standalone performance of Raymond in 1QFY08, although not strictly comparable to the corresponding quarter of FY07, confirmed the fact that the margin woes of the textile division is here to stay. The textile division, which contributed 79% of the standalone revenues in 1QFY08, with the hiving off of the denim division into a separate JV, witnessed severe cost pressures in this quarter. The division (70% of which is poly wool) registered a single digit revenue growth of 6.3% YoY with a substantial 14% drop in margins. The wool prices have risen by an average 30% YoY due to a severe drought in Australia, putting pressure on margins. The high costs can also be attributed to the higher depreciation mainly on account of the Vapi expansion and advertisement expenditures.

The increased demand for worsted fabrics was catered to from the expanded capacity at Vapi, which has became fully operational in 4QFY07. With the capacity of an additional 3 million meters per annum (mmpa) having commenced operation, the total capacity of textiles has gone to 31 mmpa.

Denim JV
  Capacity utilisation Realisation
  (%) Euro / metre
India 90  
Domestic (Rs)   108.00
Exports   1.94
US 90 3.20
Europe 75 4.26
Denim JV – Over supply blues: The cyclical downturn in the denim industry globally impacted the global and Indian markets alike in FY07. Mills in Europe operated at 60% capacity while several in the US declared closures. In Europe, while domestic denim production was down 13% YoY in 2006, imports were lower by 30% YoY. Overall the European denim market contracted by approximately 10% YoY in 2006. In the US, while the denim volumes were down 8.4% YoY, two companies announced closures. In the Indian market, the excess denim capacity was to the tune of 150 m metres in FY07. The total denim capacity in the country has gone up by 33% YoY in FY07 (from 450 mm in FY06 to 600 mm in FY07). This has induced severe oversupply especially in the non-premium segment, leading to pressure on realisations. The pressures were coupled with forex losses due to rupee appreciation.

The company, having entered into a JV with UCO of Belgium (combined capacity of 80 mm) in August 2006, reported revenues of Rs 1.1 bn (53% of consolidated sales) and losses to the tune of Rs 38 m (29% of consolidated losses) at the net level in 1QFY08. EBIDTA margin in the denim business is approximately 15%. Having said that, the company has added new customers in the US market, which is expected to reap benefits in the latter part of FY08. The demand for premium denim is expected to grow at 20% per annum, while realisation pressure will sustain for the next 6 to 9 months.

Segmental snapshot…
(Rs m) 1QFY07 1QFY08 Change
Textiles
Revenue 1,563 1,661 6.3%
% share 55.7% 79.4%  
PBIT margins 18.8% 4.9%  
Denim
Revenue 862 - -100.0%
% share 30.7% 0.0%  
PBIT margins 13.0% 0.0%  
Files & Tools
Revenue 371 398 7.3%
% share 13.2% 19.0%  
PBIT margins 8.1% 8.3%  

Files and tools – Input pressures abate: The turnover from the files and tools division recorded 7.3% growth in this quarter, as seen in the past several quarters. The PBIT margins that had improved by 750 basis points in the last quarter due to the fall in steel prices (input) for the drills business also remained flat in this quarter. The export sales from this division (55% of sales in 1QFY08) witnessed pressure on realisations due to rupee appreciation. The division has continued right sizing manpower in order to improve its efficiency and productivity.

Apparels – Growth driver: Around 40% of Raymond’s exports are through the garmenting route. The branded apparel division continues to be largely reliant on its star brands namely ‘Parx’, ‘Park Avenue’ and ‘Manzoni’. While Raymond Apparels witnessed a revenue growth of 59% YoY, Colorplus (having the distinction of being the most profitable brand in the country) grew its sales by 26% YoY. Colorplus, however, continued to suffer cost pressures due to the opening of new retail outlets and increase in staff costs (on the back of new recruitments). Cotton prices have also moved up by 10%.

Raymond has opened 82 new outlets in FY07 bringing the total to 450 (1 m square feet of retail space). The company is targeting 1,000 outlets by FY10. While the retail venture has enabled the company position its brands at a premium and given it a first mover advantage, with the rise in rental rates, the pressure on operating margins is unavoidable. Raymond has opened 10 exclusive ‘Raymond Shops’ in 1QFY08, bringing the tally to 44. Currently, while 48% and 25% of the retailing is done through wholesalers and multi brand outlets/large format stores respectively, 27% of the sales are from the Raymond stores.

Apparel performance…
(Rs m) 1QFY07 1QFY08 Change
Raymond Apparel
Revenue 466 739 58.6%
PBT margins 3.8% 1.6%  
Colorplus Fashions
Revenue 279 352 26.2%
PBT margins 19.8% 16.4%  

Silverspark (30% used for captive brands) and Celebrations Apparel (95% used for captive brands) grew by 51% YoY and 60% respectively during the quarter. Celebrations Apparel is currently operating at 85% capacity utilisation. During the third quarter of FY07, Raymond entered into a 50:50 JV with Grotto SpA of Italy for the retailing of premium casual wear involving an investment of around Rs 460 m spread over 2 years. The JV will sell its products under the ‘GAS’ brand in India and the launch of the products took place in March 2007. For the garments division, the Raymond board has approved setting up of a 540,000 unit capacity for suit manufacturing near Bangalore. This facility is expected to commence operations during 1QFY09.

Garment performance…
(Rs m) 1QFY07 1QFY08 Change
Silver Spark Apparel
Revenue 149 225 51.0%
PBT margins -2.8% 6.9%  
Celebrations Apparel
Revenue 9 15 60.4%
PBT margins -14.3% 8.2%  

What to expect?
At the current price of Rs 292, the stock is trading at a multiple of 8.3 times our estimated consolidated FY10 earnings. 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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