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Raymond: Rupee benefits

Oct 23, 2003

Raymond, the leading producer of suiting fabrics, has reported subdued performance for the September quarter. Topline has increased by just over 9% mainly due to the increase in denim production capacity. But the bottomline has grown by around 15% mainly due to higher non-core income. Operating profits of the company have gone down by around 13% YoY.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Sales 2,956 3,229 9.2% 4,623 5,084 10.0%
Other Income 90 133 47.1% 111 283 154.0%
Expenditure 2,379 2,726 14.6% 3,847 4,380 13.9%
Operating Profit (EBDIT) 577 503 -12.7% 776 704 -9.3%
Operating Profit Margin (%) 19.5% 15.6%   16.8% 13.8%  
Interest -expense/(income) (12) (98) 737.6% (11) (160) 1355%
Depreciation 144 154 7.1% 279 302 8.3%
Profit before Tax 534 580 8.5% 619 844 36.4%
Tax 190 185 -2.8% 210 240 14.5%
Profit after Tax/(Loss) 344 395 14.7% 410 605 47.6%
Net profit margin (%) 11.6% 12.2%   8.9% 11.9%  
No. of Shares (m) 61.4 61.4   61.4 61.4  
Earnings per share (Rs)* 22.4 25.7   13.3 19.7  
P/E (x)   5.7     7.4  

Raw material cost as percentage of sales has gone up from 40% in 2QFY03 to 45% in 2QFY04. As a result, the operating margins of the company declined by around 390 basis points to below 16%. However, net profit margins improved marginally because of higher interest earnings, as Raymond, taking advantage of rupee appreciation, repaid long term borrowings due in US dollar terms.

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

Segmental break-up
(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Revenues 2322 2468 6.3% 3412 3627 6.3%
PBIT 496 481 -2.9% 596 599 0.5%
PBIT margin 21.3% 19.5%   17.5% 16.5%  
Files & Tools            
Revenues 315 314 -0.4% 617 596 -3.3%
PBIT 40 14 -63.8% 80 44 -45.8%
PBIT margin 12.5% 4.6%   13% 7%  
Revenues 327 456 39.4% 603 879 45.8%
PBIT 63 29 -54.7% 117 88 -24.4%
PBIT margin 19% 6%   19% 10%  
Revenues 75 5 -93.5% 90 12 -86.7%
PBIT 53 (36)   48 (64)  

As evident from the table above, textile division revenues for the quarter went up by 6% YoY, as compared to a lower growth in 1QFY04. Textiles being a seasonal business, the bulk of the despatches of high value fabric take place during the festival season and year-end. In this light, the third quarter (3QFY04) is likely to be better for the company going forward. Contribution of textiles to total revenues stood at around 76% for 2QFY04 as compared to 79% for 2QFY03. Margins during the quarter for this segment came down by 180 basis points, but we expect margins to improve in the second half.

Looking at the opportunities available post 2005, the company has doubled its denim production capacity from 10 m mtrs to 20 m mtrs. The revenues from denim business for 2QFY04 are up 39% YoY. Margins have reduced mainly due to increase in the cotton prices and lower realisations due to rupee appreciation in last few months.

Revenues from files and tools division somewhat recovered the setback of first quarter (down 6.4%) and were down marginally for 2QFY04 (0.4%). Margins got a hit mainly due to increased steel prices. The demand for its metal business has been more or less stagnant, both domestic and internationally. Moreover, the company is facing stiff competition in this segment from cheap China supplies.

We must remember that the key growth driver of the company is garments (i.e. ‘Parx’, ‘Park Avenue’ and ‘ColorPlus’). Since all these brands are a part of the company’s subsidiaries, the consolidated picture will reflect the true valuation. The recent acquisition of ColorPlus will strengthen its product portfolio, as ColorPlus is premium brand in casual segment and will also provide synergy of distribution network to Raymond.

At the current price of Rs 145, the stock trades at the P/E multiple of 7.4x annualised 1HFY04 earnings. However, if we exclude the non-core business income, the stock trades at P/E multiple of 15.7x. Though topline has grown, the decreasing profitability of denim, and file and tool business remains a cause of concern.

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