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Raymond: Other income fillip

Aug 21, 2003

The post 2005 scenario for the textile sector has raised lot of hopes among investors in general. While it is not as rosy as it seems, some companies are in a position to capitalise on the growth opportunity arising out of removal of WTO restrictions. Raymond is one among them. We consider the 1QFY04 performance of the company in general and future growth prospects. Raymond, the leading producers of suiting fabrics, posted a huge 398% increase in net profit growth in the June quarter. Though topline grew at a faster rate of 13%, operating profits grew very marginally. But net profit almost quadrupled due to higher other income.

(Rs m) 1QFY03 1QFY04 Change
Sales 1,452 1,644 13.2%
Other Income 21 150 614.3%
Expenditure 1,254 1,444 15.2%
Operating Profit (EBDIT) 198 200 1.0%
Operating Profit Margin (%) 13.6% 12.2%  
Interest -income/(expense) -23 62 -
Depreciation 135 148 9.6%
Profit before Tax 61 264 332.8%
Tax 19 55 189.5%
Profit after Tax/(Loss) 42 209 397.6%
Net profit margin (%) 2.9% 12.7%  
No. of Shares (m) 61.4 61.4  
Earnings per share (Rs)* 2.7 13.6 397.6%
(* annualised)      

Textile Division continues to be the major contributor to the company's total sales and profitability. Though the revenue from this segment has increased by 6% YoY, the contribution to topline has comedown to 62% in 1QFY04 from 65% in 1QFY03. Textile business being seasonal in nature, the bulk of the despatches of high value fabric takes place during the later part of the year. Hence, performance of the first quarter is not representative of the full year's performance.

Revenues from files and tools division shrunk by around 6% YoY. The demand for these products have been more or less stagnant, both domestic and internationally. Moreover, the company is facing stiff competition in this segment from cheap supplies from China. Margins were lower mainly due to increase in steel prices.

The company has increased its denim production capacity from 10m meters in FY02 to 16m meters in 1QFY04. As a result, sales have grown substantially by 53% YoY. It has plans to increase the denim production capacity to 20m meters by the end of FY04. However, margins in this segment were hit due to increase in the cotton prices. Given this backdrop of higher input costs, operating margins in 1QFY04 suffered.

Profits arising from sale of the assets of a divested business and interest income earned on the investments contributed to higher other income in 1QFY04. If one were to exclude the rise, net profit in 1QFY04 has actually declined substantially.

Let’s have a look at the segmental break-up of revenue.

(Rs m) 1QFY03 1QFY04 Change
Segmental revenue
Textile 1090 1159 6.4%
Files & Tools 302 282 -6.4%
Denim 275 423 53.4%
Others 14 7 -50.7%
Segmental results
Textile 100 118 17.1%
PBIT margin 9.2% 10.1%  
Files & Tools 41 29 -28.4%
PBIT margin 13.5% 10.3%  
Denim 54 60 11.0%
PBIT margin 19.5% 14.1%  
Others -5 -28 426.4%
PBIT margin - -  

At the current price of Rs 130, the stock trades at the P/E multiple of 9.5x annualised 1QFY04 earnings. But as we have said earlier, textile being seasonal in nature, the first quarter performance does not reflect the true picture. It has also got to be remembered that the key growth driver of the company is garments (i.e. ‘Parx’ and ‘ColorPlus’). Since both these brands are a part of the company’s subsidiaries, the consolidated picture will reflect the true valuation. Accordingly, the stock trades at 6x FY04E earnings.


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