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Raymond: No respite from losses - Views on News from Equitymaster

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Raymond: No respite from losses
Aug 16, 2013

Raymond declared the results for the first quarter of financial year 2013-2014 (1QFY14). The company has reported 15% YoY growth in net sales in 1QFY14 while losses at the net level are lower by 18% YoY. Here is our analysis of the results.

Performance summary
  • Standalone sales grow by 15% YoY in 1QFY13, while consolidated sales grew 4% YoY, backed by higher volumes in the suiting and garmenting businesses.
  • Steep rise in raw material and employee costs hurt standalone EBIDTA margins which are -0.5% in 1QFY14.
  • Higher interest costs erode bottomline during 1QFY14. Excluding the exceptional items in 1QFY13, the 1QFY14 losses are down 33% YoY.

Standalone financials
(Rs m) 1QFY13 1QFY14 Change
Net sales 3,663 4,219 15.2%
Expenditure 3,868 4,240 9.6%
Operating profit (EBDITA) (205) (21)  
EBDITA margin (%) -5.6% -0.5%  
Other income 186 175 -5.9%
Depreciation 276 285 3.3%
Interest 633 360 -43.1%
Exceptional items (129) -  
Profit before tax (799) (491) -38.5%
Tax (252) (42)  
Effective tax rate 32% 9%  
Profit after tax/(loss) (547) (449) -17.9%
Net profit margin (%) -14.9% -10.6%  
No. of shares (m)   613.8  
Diluted earnings per share (Rs)*   (6.2)  
Price to earnings ratio (x)   N.A  
(*On a trailing 12-month basis)
Exceptional items refer to VRS payments net of profit on sale of long term investments

What has driven performance in 1QFY14?
  • Showing very poor resilience to rise in input costs and forex volatility, Raymond showed a dip in margins across business segments, with the exception of worsted fabrics. .

    While the growth in sales and margins in the worsted fabrics segment continued to offer support, a sharp drop in operating profits in garmenting and shirting businesses took toll. In the branded fabric business too, besides the drop in sales the company witnessed losses at the operating level. The company attributed the fall in operating margins to rise in input costs and forex volatility. The rise in sales in the garmenting business was led by higher exports. Denim, branded apparel and worsted fabrics together comprised nearly 85% of consolidated sales.

    Segmental contribution to consolidated sales
    Worsted fabric performance
    (Rs m) 1QFY13 1QFY14 Change
    Revenue 3,390 3,820 12.7%
    % of cons.sales 40.5% 43.7%  
    EBIDTA margins 5.0% 8.9%  
    Branded apparel performance
    Revenue 1,840 1,580 -14.1%
    % of cons.sales 22.0% 18.1%  
    EBIDTA margins 2.7% -6.3%  
    Garmenting performance
    Revenue 520 830 59.6%
    % of cons.sales 6.2% 9.5%  
    EBIDTA margins 13.5% 8.4%  
    Shirting fabric performance
    Revenue 680 710 4.4%
    % of cons.sales 8.1% 8.1%  
    EBIDTA margins 14.7% 11.3%  
    Denim (India) performance
    Revenue 2,220 2,320 4.5%
    % of cons.sales 26.5% 26.5%  
    EBIDTA margins 12.2% 12.1%  

  • 21 new retail stores were opened during 1QFY14 adding 27,378 sq feet of retail space. The total number of stores stood at 944 at the end of June 2013. This sustained Raymondís position as the largest specialty retailer. Same store sales grew by 8% YoY in 1QFY14 due to improved retail demand in domestic markets as well.

  • The fundamentals of the denim business remained stable with no change in operating margins. Further, the domestic order book remains healthy due to increased denim garmenting capacity of 4 lac pieces per annum.

  • Low operating margins, relatively high interest costs (long term debt to equity of 1.1 times in FY13) coupled with forex volatility eroded profits in 1QFY14.

What to expect?
At the current price of Rs 192, the stock is trading at multiple of 5.0 times our estimated FY16 EV / EBIDTA. While the performance on the topline front has been in line with our estimates, we believe that the volatile operating margins across businesses and higher cost of operating in addition to the extended retail network may continue to impact the companyís bottomline in the medium term.

We neither expect the operating margins to improve dramatically nor are interest costs set to fall at a rapid pace anytime in the near future. However, we do expect Raymond's core business to throw up better operating cash flows over the next three years. With no further capex planned, the incremental cash flow could help the company cap its leverage. The company has entered the energy drinks business through subsidiary JK Ansell in 3QFY13. The stock has corrected more than 60% since our Sell recommendation in December 2012. Given the risks to fundamentals we would recommend investors to not buy the stock despite attractive valuations.

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