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Raymond: More room for margin growth

Sep 22, 2011

Raymond declared the results for first quarter of financial year 2011-2012. The company has reported 44% YoY growth in net sales while it continues to bear losses at the bottomline level. Here is our analysis of the results.

Performance summary
  • Standalone sales grow by 44% YoY in 1QFY12, despite higher volumes in the suiting and shirting businesses.
  • Standalone EBIDTA margins expand by 4.2% to 5.4% in 1QFY12 despite higher input costs.
  • Capex underway for 7.2 MW gas based captive power plant to bring cotton shirting fabric capacity from 11.5 m to 21.6 m meters per annum by end of 1HFY12.
  • Higher interest costs, VRS write-offs keep the bottomline in the negative.

Standalone financial performance
(Rs m) 1QFY11 1QFY12 Change
Net sales 2,409 3,462 43.7%
Expenditure 2,400 3,276 36.5%
Operating profit (EBDITA) 9 186 1966.7%
EBDITA margin (%) 0.4% 5.4%  
Other income 146 168 15.1%
Depreciation 254 259 2.0%
Interest 210 287 36.7%
Exchange rate loss / (gain) 52 (17)  
Profit before tax (361) (175) -51.5%
Extraordinary income/(expense) 19 -  
Tax (94) (75)  
Effective tax rate 26% 43%  
Profit after tax/(loss) (248) (100)  
Net profit margin (%) -10.3% -2.9%  
No. of shares (m)   61.3  
Diluted earnings per share (Rs)*   (1.6)  
Price to earnings ratio (x)   N.A  
(*On a trailing 12-month basis)
Extraordinary expenses refer to the VRS payments written off

What has driven performance in 1QFY12?
  • Backed by higher volumes and better realizations from domestic as well as export markets, Raymond saw its standalone sales grow by 44% YoY in 1QFY12. It's standalone operating margins too improved by nearly 4.2% to 5.4% in 1QFY12. The worsted fabrics business managed 24% YoY growth in volumes and 13% YoY growth in realizations in the domestic market this quarter. For the shirting business, realisations were higher by 25% YoY. The operating margins in the branded segment improved significantly despite high cotton yarn prices. Improved product mix and the lower operating cost (with the Thane plant being shut) lent some stability to Raymond's overall performance for 1QFY12. The garmenting and denim businesses, however, faced margin pressures. If the wool and cotton prices cool off in the coming quarters, Raymond is likely to derive the benefit of higher realizations in its margin expansion. However the same remains uncertain.

    Worsted fabric performance
    (Rs m) 1QFY11 1QFY12 Change
    Revenue 2,380 3,440 44.5%
    % share 41.0% 44.0%  
    EBIDTA margins 2.1% 8.7%  
    Branded apparel performance
    Revenue 1,490 1,880 26.2%
    % share 25.6% 24.1%  
    EBIDTA margins 9.4% 14.9%  
    Garmenting performance
    Revenue 230 320 39.1%
    % share 4.0% 4.1%  
    EBIDTA margins 13.0% 12.5%  
    Denim (India) performance
    Revenue 1,320 1,940 47.0%
    % share 22.7% 24.8%  
    EBIDTA margins 12.1% 10.8%  

  • The branded fabric sales continued to comprise 15% of Raymond's consolidated sales at the end of 1QFY12. At the EBIDTA level, however, the 1QFY12 performance of this division was affected by the levy of excise duty.

  • 19 new stores were opened during 1QFY12 adding 16,600 sq feet of retail space and this sustained Raymond's position as the largest specialty retailer. The company plans to add 200 stores in tier 3 and 4 cities by end of 2012 mainly through the franchise model. The like to like store sales grew by 4% YoY in 1QFY12.

  • In the denim business, Raymond's Indian operations faced pressures with cotton prices moving up. While the domestic order book remains healthy, the company witnessed volume growth of 3% YoY due to increased denim garmenting capacity of 4 lac pieces per annum. The realizations grew by a healthy 45% this fiscal. Raymond clocked EBIDTA margin of 11% in the Indian operations as against 12% in 1QFY11.

  • The company has planned relocation of Thane worsted fabric capacity to Jalgaon. The writeoff of the VRS related expenses heavily eroded the bottomline. 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 338, the stock is trading at an EV/EBIDTA multiple of 32 times our FY14 estimates. 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 maintain our negative view on the stock given the very negligible prospects of improvement in return on equity. In the event of the company confirming details about plans to sell its land parcel to reduce debt, we will have to incorporate the same into our estimates.

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