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Raymond: Domestic business gathers steam - Views on News from Equitymaster
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Raymond: Domestic business gathers steam
Aug 4, 2008

Performance summary
  • Consolidated topline grows by 13% YoY in 1QFY09, standalone sales up 13% YoY.

  • Proportion of branded apparel in sales increases from 53% in 1QFY08 to 59% in 1QFY09; garments’ share reduce from 12% to 10%.

  • Standalone EBIDTA margin (adjusted for forex losses, mark-to-market losses on derivatives and investment in retail and new initiatives) improved from 12% in 1QFY08 to 13% in 1QFY09.

  • Higher wool and retailing costs take a toll on margins.

  • Better capacity utilisation and higher realisations in the domestic business aid margins.



Standalone financial performance
(Rs m) 1QFY08 1QFY09 Change
Net sales 2,091 2,357 12.7%
Expenditure 2,112 2,501 18.4%
Operating profit (EBDITA) (21) (144)  
EBDITA margin (%) -1.0% -6.1%  
Other income 272 274 0.7%
Depreciation 172 203 18.0%
Interest 74 91 23.0%
Exchange rate loss / (gain) (76) 242  
Profit before tax 81 (406)  
Extraordinary income/(expense) (23) (4)  
Tax 5 7 40.0%
Effective tax rate 6% -2%  
Profit after tax/(loss) 53 (417)  
Net profit margin (%) 2.5% -17.7%  
No. of shares (m) 61.4 61.4  
Diluted earnings per share (Rs)*   4.1  
Price to earnings ratio (x)   49.5  
(* On a trailing 12-month basis)

What has driven performance in 1QFY09?
  • While the contribution of fabric (30% of total sales) to Raymond’s non-retail sales remained stable, that of branded apparel increased substantially from 23% in 1QFY08 to 26% in 1QFY09. Exports comprised 23% of total sales.

  • Steep rise in wool prices took a toll on Raymond’s textile division. However, the increase in realisation from Rs 292 per metre in 1QFY08 to Rs 300 per metre in 1QFY09 shielded margins. The company believes that the rising costs of Chinese garment manufacturers are likely to boost exports of garments from other exporting countries like India.

  • Turnover from the files and tools division recovered from the pressure witnessed as a result of increased cost of steel due to price hikes effected in the previous quarter. While the domestic sales grew by 8% YoY, international sales were up 10% YoY.

    Segmental snapshot…
    (Rs m) 1QFY08 1QFY09 Change
    Textiles
    Revenue 1,660 1,784 7.5%
    % share 79.4% 75.7%  
    EBIDTA* margins 5.0% 8.4%  
    Files & Tools
    Revenue 398 525 31.9%
    % share 19.0% 22.3%  
    EBIDTA margins 8.3% 9.1%  
    * Including incremental investment in retail

  • The branded apparel division remains largely reliant on its star brands namely ‘Parx’ (21% of apparel sales), ‘Park Avenue’ (36% of apparel sales) and ‘Colorplus’ (25% of apparel sales). The average realisation for these brands increased by 11% YoY. 31 new stores were opened during the first quarter of FY09 adding 39,000 sq feet of retail space and this sustained Raymond’s position as the largest specialty retailer. Addition of new stores has adversely impacted margins due to the higher operating, advertising and rental costs.

    Branded apparel performance
    (Rs m) 1QFY08 1QFY09 Change
    Revenue 1,091 1,396 28.0%
    % share 52.2% 59.2%  
    EBIDTA margins 10.2% 6.4%  
    PBT margin 6.2% 0.9%  

    Garment performance
    (Rs m) 1QFY08 1QFY09 Change
    Revenue 240 228 -5.0%
    % share 11.5% 9.7%  
    EBIDTA margins 10.8% 16.2%  
    PBT margin 6.3% 9.6%  

  • Focused efforts on new innovative washes helped the denim garmenting unit to position itself at the medium and top end of the market and resulted in new customer additions. The business in the European division, however, continues to be challenging due to global concerns.

    Raymond UCO Denim (1QFY09)
    (Rs m) India Consolidated
    Revenue 1,110 2,285
    EBIDTA margins 9.0% -2.5%
    Net profit margins -5.9% -1.8%

    While the shirting JV with Zambaiti of Italy is also in line with its performance targets, the JV with Fedora is yet to break even. The GAS Apparel JV, despite receiving good response, is yet to break even.

What to expect?
At the current price of Rs 203, the stock is trading at a multiple of 49 times trailing 12-month earnings. We believe that while on one hand, the wider retail presence will continue to enable Raymond 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. The company is envisaging a capex of Rs 1 bn over the next two years of which 50% will be spent on retail operations and the rest on the international JVs. Having said that, besides rising interest costs, forex losses and mark to market losses in its investments have deteriorated the fundamentals of the company to some extent and are expected to weigh on the company’s bottomline in the near term. Given the recent developments we need to revise our estimates for the company and shall soon update our research report on the stock.

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