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Raymond: The path ahead

Aug 12, 2002

The path to turnaround has been a steady one for Raymond Limited, the textiles and denim major. After having divested some of its non-core businesses, there has been a marked improvement in profitability of the company. The first quarter performance also suggests that Raymond has benefited from consolidating its presence in the textile business.

(Rs m) 1QFY02 1QFY03 Change
Sales 1,321 1,452 9.9%
Other Income 24.9 21.1 -15.3%
Expenditure 1,201 1,253 4.4%
Operating Profit (EBDIT) 121 199 65.0%
Operating Profit Margin (%) 9.1% 13.7%  
Interest 49 23 -52.4%
Depreciation 129 135 5.0%
Profit before Tax -31 62 -
Extraordinary item (15) - -
Tax - 19 -
Profit after Tax/(Loss) (46) 43 -
Net profit margin (%) -2.4% 3.0%  
Diluted number of shares 61.4 61.4  
Diluted Earnings per share* -3.0 2.8  
P/E (x)   38.5  
*(annualised)      

Raymond reported a 10% rise in topline for 1QFY03, which was primarily led by a 46% rise in textile sales. This impressive performance could be on account of its fabrics division that contributed to around 69% of sales in FY02. The company has been increasingly focusing on export market as demand has been lacklustre back home. Textile sales of Rs 1,090 m in 1QFY03 also include Raymond's garment business that has been growing at a impressive rate over the last three years (11% CAGR). However, garment sales still contribute an insignificant portion to revenues (estimated at around 1.5% in 1QFY03) even after considering the acquisition of a Portugal company last year.

The sales mix...
(Rs m) 1QFY02 1QFY03 Change
Textiles 745 1,090 46.3%
% of sales 56.4% 75.0%  
Files and tools 323 302 -6.5%
% of sales 24.4% 20.8%  
Denim 245 275 12.3%
% of sales 18.6% 19.0%  
Total of the above 1,313 1,667 26.9%

Denim manufacturers, both in the international and domestic markets, have benefited in a large way over the last year and a half from the strengthening of denim prices. Denim is back in the limelight with the international fashion houses and Raymond (being one of the key suppliers to many fashion houses) has taken advantage of the situation. Denim sales have risen 12% during the quarter. We expect the denim division to post around 10% growth for FY03. The global slowdown in the industrial sector has however, affected the performance of the files division where Raymond is one of the largest players in the world.

Raymond continues to benefit from the sell-off of its cement and steel division. Operating margins have increased notably to 14% in 1QFY03 on account of lower material and manufacturing expenses. Interest costs have more than halved in 1QFY03 as the company is estimated to have repaid debts close to Rs 700 m in the same period. Going forward, interest cost would continue to fall (but at a slower rate) as the government has recently relaxed repayment of ECBs, to a certain extent. The company was not able to repay foreign currency loans in the past due to stiff guidelines (the quantum of foreign currency loans in FY02 was Rs 1,355 m or 25% of total debt of the company). Raymond could have taken advantage of this as well in 1QFY03. Other income has declined despite cash balance of Rs 344 m in FY02 due to accelerated debt repayment.

The stock currently trades at Rs 108 implying a P/E multiple of 38.5x 1QFY03 annualised earnings. On the consolidated FY02 EPS of Rs 12, P/E multiple works out to 8.7 times. In FY03, sluggish domestic and international markets could subdue growth prospects of its garments and textile divisions. However, margin improvement would continue to remain impressive. This combined with lower interest expenses will propel profit growth at a net level in FY03. However, the key cause of concern is how the company utilises its surplus cash. Raymond has already initiated denim capacity expansion, which has raised apprehensions amongst investors, considering the fact that there is excess capacity in the global markets. Infact there are possibilities that the rise in denim prices could be shortlived. Therefore, the key lies in how the company increases the contribution from the garments division in the future without any further diversifications.

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