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Raymond: Oper. losses, VRS payouts bleed bottomline - Views on News from Equitymaster
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  • Aug 29, 2012 - Raymond: Oper. losses, VRS payouts bleed bottomline

Raymond: Oper. losses, VRS payouts bleed bottomline
Aug 29, 2012

Raymond declared the results for first quarter of financial year 2012-2013 (1QFY13). The company has reported 5% YoY growth in net sales in 1QFY13 while losses reported for the quarter are nearly 5 times that for the corresponding period of FY12. Here is our analysis of the results.

Performance summary
  • Standalone sales grow by a marginal 5% YoY in 1QFY13, despite higher volumes in the suiting and garmenting businesses.
  • Steep rise in raw material and employee costs hurt standalone EBIDTA margins which go in the negative in 1QFY13.
  • Higher interest costs, VRS write-offs further erode bottomline during 1QFY13. Excluding the VRS writeoffs, the losses are still 4 times that in 1QFY12.

Standalone financial snapshot
(Rs m) 1QFY12 1QFY13 Change
Net sales 3,486 3,672 5.3%
Expenditure 3,278 3,867 18.0%
Operating profit (EBDITA) 208 (195)  
EBDITA margin (%) 6.0% -5.3%  
Other income 176 178 1.1%
Depreciation 260 277 6.5%
Interest 299 377 26.1%
Exceptional items - (129)  
Profit before tax (175) (800)  
Tax (75) (253)  
Effective tax rate 43% 32%  
Profit after tax/(loss) (100) (547)  
Net profit margin (%) -2.9% -14.9%  
No. of shares (m)   61.4  
Diluted earnings per share (Rs)*   1.9  
Price to earnings ratio (x)   183.2  
(*On a trailing 12-month basis)
Exceptional items refer to the VRS and employee termination costs

What has driven performance in 1QFY13?
  • Notwithstanding the impact of VRS writeoffs on standalone profits, even on a consoliaded level, the marginal growth in worsted fabrics and shrp drop in operating profits in its flagship business dented Raymond's performance in the June quarter. In the branded fabric business too, drop in sales and high input costs halved margins. The garmenting and shirting fabrics business offered Raymond some relief, albeit marginally, for together they comprised only 13% of consolidated sales.

    While the standalone sales grew by 5% YoY, on a consolidated level sales were up 10% YoY. For the worsted fabric (suiting) business, exchange rates and higher input costs impacted margins adversely. The branded apparel segment was impacted by the extension of season sale for inventory liquidation.

    Segmental contribution to consolidated sales
    Worsted fabric performance
    (Rs m) 1QFY12 1QFY13 Change
    Revenue 3,440 3,660 6.4%
    % of cons.sales 45.2% 43.7%  
    EBIDTA margins 15.1% 4.9%  
    Branded apparel performance
    Revenue 1,770 1,710 -3.4%
    % of cons.sales 23.3% 20.4%  
    EBIDTA margins 13.0% 5.8%  
    Garmenting performance
    Revenue 320 460 43.8%
    % of cons.sales 4.2% 5.5%  
    EBIDTA margins 9.4% 13.0%  
    Shirting fabric performance
    Revenue 530 680 28.3%
    % of cons.sales 7.0% 8.1%  
    EBIDTA margins 9.4% 14.7%  
    Denim (India) performance
    Revenue 1,910 1,980 3.7%
    % of cons.sales 25.1% 23.7%  
    EBIDTA margins 11.0% 12.6%  

  • 28 new retail stores were opened during 1QFY13 adding 34,000 sq feet of retail space. This sustained Raymond's position as the largest specialty retailer. However, the like to like store sales declined by 3% YoY in 1QFY13 due to poor retil demand in domestic markets as well.

  • The fundamentals of the denim business improved with 2% improvement in operating margins. Further, the domestic order book remains healthy due to increased denim garmenting capacity of 4 lac pieces per annum.

  • Higher interest costs (long term debt to equity of 1.1 times in FY12) coupled with write-off of the VRS related expenses eroded profits in 1QFY13. While there are conflicting reports about the company selling off the land parcel to repay debts as against the earlier plans of developing the same, the management has not confirmed any details for sale of 12 acres of its land at Thane.

What to expect?
At the current price of Rs 348, the stock is trading at a steep multiple of 183 times trailing 12 month earnings. 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 company's 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 will itself help the company cap its leverage. We reiterate our HOLD view on the stock.

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