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Raymond: Disappointing episode continues - Views on News from Equitymaster

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Raymond: Disappointing episode continues

Oct 23, 2009

Performance summary
  • Standalone sales fall by 5% YoY during 1HFY10, down 8% YoY in 2QFY10.
  • Standalone EBIDTA margins improve marginally to 8.9% in 1HFY10 due to lower input costs.
  • Branded apparel business witness sales and margin growth of 3% YoY and 11% YoY respectively.
  • Bottomline hammered by higher depreciation and interest costs, despite relatively lower losses on foreign currency borrowing.
  • Extraordinary expenses include the VRS writeoffs; which also took a toll this quarter.

Standalone financial performance
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 4,336 3,985 -8.1% 6,694 6,333 -5.4%
Expenditure 3,712 3,407 -8.2% 6,145 5,768 -6.1%
Operating profit (EBDITA) 624 578   549 565  
EBDITA margin (%) 14.4% 14.5%   8.2% 8.9%  
Other income 156 155 -0.6% 394 369 -6.3%
Depreciation 206 281 36.4% 409 651 59.2%
Interest 185 228 23.2% 307 459 49.5%
Exchange rate loss / (gain) (122) (4)   (364) 44  
Profit before tax 267 220 -17.6% (137) (132)  
Extraordinary (income)/expense 10 152 1420.0% 14 201  
Tax 14 (7)   21 (91)  
Effective tax rate 5%     -15%    
Profit after tax/(loss) 243 75 -69.1% (172) (242)  
Net profit margin (%) 5.6% 1.9%   -2.6% -3.8%  
No. of shares (m)       61.4 61.4  
Diluted earnings per share (Rs)*         (44.2)  
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 2QFY10?
  • Due to adverse product mix and higher manufacturing cost on account of the additional capacity at Vapi, Raymond faced pricing pressure in its flagship worsted fabrics business during 1HFY10. Despite 4% reduction in cost of wool prices, the EBIDTA margins deteriorated from 22% in 2QFY09 to 18% in 2QFY10, as the segment witnessed 3% fall in volume and 7% fall in value. With the continuation of the wedding season and cotton prices witnessing a downward trend, Raymond expects the margins to improve further in the next quarter. The branded fabric sales continued to comprise 37% of Raymond’s consolidated sales at the end of 1HFY10.

    Worsted fabric performance
    (Rs m) 2QFY09 2QFY10 Change
    Revenue 3,700 3,450 -6.8%
    % share 85.3% 86.6%  
    EBIDTA margins 21.6% 18.3%  
    Branded apparel performance
    Revenue 1,600 1,640 2.5%
    % share 36.9% 41.2%  
    EBIDTA margins 13.1% 14.6%  
    PBT margin 6.3% 1.8%  
    Garment performance
    Revenue 310 360 16.1%
    % share 7.1% 9.0%  
    EBIDTA margins 12.9% 16.7%  
    PBT margin 6.5% -8.3%  

  • The branded apparel division remains largely reliant on its star brands namely ‘Parx’ (16% of apparel sales), ‘Park Avenue’ (37% of apparel sales) and ‘Colorplus’ (24% of apparel sales). Despite pressure on volumes, high average realisation helped this segment’s turnover grow by 2.5% YoY. 52 new stores were opened during the second quarter of FY10 adding 1,04,000 sq feet of retail space and this sustained Raymond’s position as the largest specialty retailer. The company plans to add 289 stores in tier 3 and 4 cities by 2011 mainly through the franchise model. The like to like store sales grew by 5% last quarter.

  • The files and tools division has been spun off to a subsidiary Hindustan Files. The company has announced VRS for the employees of the Thane plant in order to meet the challenge of manufacturing-on costs.

  • In the denim business, Raymond’s Indian operations remain profitable at the operating (EBIDTA) level. The company is in the process of restructuring this division and has already shut down the US and Belgium operations. The EBIDTA margin of the Indian operations improved from 8% in 1HFY09 to 9% in 1HFY10.

What to expect?
At the current price of Rs 206, the stock is trading at an EV/EBIDTA multiple of 23 times our FY11 estimates. While the company’s 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. Risks on the forex side also remain unresolved. The company’s diversification into the real estate business is also not a very enthusing proposition. We maintain our negative view on the stock.

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