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Raymond: Performance in tatters - Views on News from Equitymaster

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Raymond: Performance in tatters
Aug 3, 2009

Performance summary
  • Standalone sales remain stagnant while standalone EBIDTA margin drops further by 1.7%.
  • Consolidated sales drop by 8.5% YoY; EBIDTA margin improves from 2.9% to 5.3% due to discontinuance of loss making operations.
  • Higher interest costs and lower other income drain bottomline.
  • Lower realisation in the worsted fabric business due to adverse product mix.
  • Promoters decline option to convert warrants into equity shares.


Standalone financial performance
(Rs m) 1QFY09 1QFY10 Change
Net sales 2,357 2,347 -0.4%
Expenditure 2,433 2,461 1.2%
Operating profit (EBDITA) (76) (114)  
EBDITA margin (%) -3.2% -4.9%  
Other income 238 215 -9.7%
Depreciation 203 270 33.0%
Interest 123 232 88.6%
Exchange rate loss / (gain) 242 (48)  
Profit before tax (406) (353)  
Extraordinary income/(expense) (4) (50)  
Tax 6 (87)  
Profit after tax/(loss) (416) (316)  
Net profit margin (%) -17.6% -13.5%  
No. of shares (m)   61.4  
Diluted earnings per share (Rs)*   (42.5)  
Price to earnings ratio (x)   N.A  
(*On a trailing 12-month basis)

What has driven performance in 1QFY10?
  • Raymond’s strongest positioning in the textile business gave way to poor profitability this quarter. The company’s worsted fabric business suffered lower margins on the back of transitional on-costs due to additional capacity in Vapi. Although the segment’s sales grew by 4% YoY backed by 14% volume growth, the realizations were lower by 8% mainly due to adverse product mix. Wool prices, however, declined 12% YoY in 1QFY10.

  • The branded apparel division also reported 11% lower sales and stagnant EBIDTA margins. Here the accessories business witnessed growth of 68% YoY. Also a new format ‘Shirts and More’ was launched this quarter. Raymond expects the SAP implementation that is currently in progress, once completed, to deliver supply chain benefits to this unit.

    Worsted fabric performance
    (Rs m) 1QFY09 1QFY10 Change
    Revenue 1,780 1,850 3.9%
    % share 75.5% 78.8%  
    EBIDTA margins 4.5% -3.8%  
    Branded apparel performance
    Revenue 1,390 1,240 -10.8%
    % share 59.0% 52.8%  
    EBIDTA margins 6.5% 6.5%  
    Garment performance
    Revenue 230 180 -21.7%
    % share 9.8% 7.7%  
    EBIDTA margins 17.4% 16.7%  

  • 87,000 sq feet of retail space was added in the last 12 months (up 7% YoY) and this sustained Raymond’s position as the largest specialty retailer. Most of these are through the franchisee model in Tier 3, 4 and 5 cities to target cost optimization.

  • Turnover from garmenting division dropped by 22% YoY due to lower exports and deferment of deliveries to 2QFY10 by customers.

  • It may be recalled that the high loss making operations of the denim JV in US and Belgium were closed down in December 2008. On the basis of the assessment of the value of its investments in the overseas subsidiaries, Raymond provided Rs 2.3 bn towards write down of investments in FY09. The Indian operations, meanwhile, continue to be EBITDA positive (14% EBIDTA margin).

What to expect?
At the current price of Rs 175, the stock is trading at an EV/EBIDTA multiple of 20 times our FY11 estimates. The promoters of the company have declined to convert 6.1 m warrants into shares and the initial amount paid has been forfeited. We believe that the volatile operating margins across businesses and higher cost of operating the extended retail network may continue to impact the company’s bottomline in the medium term. Risks on the forex side also remain unresolved. We maintain our negative view on the stock.

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