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Raymond: Raw (material) deal

Jul 26, 2004

Introduction to results
Textiles major, Raymond, has announced lackluster results for 1QFY05. Topline of the company has increased by 8% YoY during the quarter, however, the bottomline has fallen sharply by 85%. The operating margins have been hit severely (down 590 basis points) because of higher raw material prices.

(Rs m) 1QFY04 1QFY05 Change
Net sales 1,732 1,876 8.3%
Other income 150 197 31.3%
Expenditure 1,531 1,769 15.5%
Operating profit (EBDITA) 201 107 -46.7%
Operating profit margin (%) 11.6% 5.7%  
Interest (27) 22  
Depreciation 148 133 -10.2%
Profit before tax 230 149 -35.1%
Extraordinary items (35) 98  
Tax 55 20 -63.6%
Profit after tax/(loss) 210 31 -85.3%
Net profit margin (%) 12.1% 1.6%  
No. of shares (m) 61.3 61.3  
Diluted earnings per share (Rs)* 13.7 2.0  
P/E ratio (x)   105.0  
(* annualised)      

What's 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 20 mm. Raymond has a widespread distribution network across the country, which it can leverage to sell some of its well-recognised brands. The company is also into ready-to-wear segment through one of its 100% subsidiaries, Raymond Apparels, with some coveted brands like 'Park Avenue', 'Parx' and 'BEE'. The company has also acquired 'ColorPlus' in FY03.

What has dented performance in 1QFY05?
The topline of the company grew by around 8% during the quarter due to strong double digit growth witnessed by the company's denim and files business. As can be seen from the table below, the fabric business of the company failed to impress during the quarter. However, one should remember that fabric segment picks up during the second half of the year as festival and marriage season approaches.

The denim business grew by around 18% during the quarter due to revival of demand from international markets. However, denim realisations have remained suppressed during the period. A significant 26% growth in the file and tools business is due to the fact that Raymond has expanded its product offering and is also exploring new international markets to boost sales.

(Rs m) 1QFY04 1QFY05 Change
Textiles 1,075 1,078 0.2%
PBIT margins 14.2% 9.1%  
Denim 403 475 17.8%
PBIT margins 14.7% 6.5%  
Files & Tools 263 331 25.8%
PBIT margins 11.9% 4.8%  

The operating margins of the company have been hit severely (down 590 basis points) due to increase in the raw material prices, both cotton and wool. Though cotton prices have started softening, but since companies have a forward cover, the effect of the change in prices takes some time to trickle down to the bottomline. Higher steel prices affected the margins of the company's file and tools division.

Net Profit
Due to lower margins across its business segments and extra ordinary loss on account of currency exchange, the net profit of the company declined by 85% YoY for the quarter. Last year, the company witnessed a gain amounting to Rs 35 m on currency exchange as compared to Rs 98 m loss for 1QFY05. Other income of the company includes Rs 76 m on account of sale of 25 million equity shares of EBG India Private Ltd. Further, Hindustan Files Limited, a company acquired by Raymond, has turned profitable due to various steps involving restructuring of its products and processes initiated.

What to expect?
At the current price of Rs 211, the stock trades at P/E multiple of 105x annualised 1QFY05 earnings. As we have mentioned earlier, first quarter is not the true representative of the company's full year performance because the high value fabric sale picks up during the second half of the year. Since retailing and branding is gaining ground in India, Raymond's brands like Parx, Park Avenue and Color Plus are likely to benefit from the same considering the shift to ready-made garments. Talking about post-2005 opportunities, there is no denying the fact that opportunities for Raymond are huge but strong raw material (cotton) prices and uncertainty over wool and steel prices remain a cause of concern for the company.

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