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Raymond: Subdued performance

Oct 24, 2002

Raymond has posted a subdued performance for the second quarter ended September 2002. While slower revenue growth could be on account of seasonal nature of demand in the sector, margins have taken a severe beating during 2QFY03. But for 1HFY03, revenue growth in on the higher side led by increased contribution from exports.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Sales 2,655 2,751 3.6% 3,704 4,203 13.5%
Other Income 66 90 37.6% 90 111 23.0%
Expenditure 1,990 2,175 9.3% 2,918 3,428 17.5%
Operating Profit (EBDIT) 665 577 -13.3% 786 776 -1.3%
Operating Profit Margin (%) 25.0% 21.0%   21.2% 18.5%  
Interest -expense/(income) 42 (12)   90 11 -87.4%
Depreciation 130 144 10.8% 258 279 7.9%
Profit before Tax 559 534 -4.4% 528 597  
Extraordinary item - -   (18) - -
Tax 148 190 28.8% 148 210 41.7%
Profit after Tax/(Loss) 411 344 -16.3% 362 387 7.0%
Net profit margin (%) 15.5% 12.5%   9.8% 9.2%  
No. of Shares (m) 61.4 61.4   61.4 61.4  
Earnings per share (Rs)* 26.8 22.4   11.8 12.6  
P/E (x)         8.1  

The company is one of the largest players in the fabrics business that account for as high as 75% of revenues. After growing at an impressive rate in 1QFY03 (textile division grew by 45%), growth has petered down in 2QFY03, which is apparent from the table below. As against a growth 10% in 1HFY03, the textile division witnessed a fall in revenues in 2QFY03. On the other hand, Raymond's files division saw a sharp spurt in sales in 2QFY03. The company is the leading manufacturer of files tool in the world and we expect the segment to grow by around 3%-4% in FY03. The denim division, where Raymond is expanding capacity, has also aided growth in 2QFY03 (8% in 2QFY03 and 10% for 1HFY03). Concentrated strategy to boost export contribution has also yielded positive results with exports rising by 26% in value terms to Rs 340 m (8% of sales) in 1HFY03.

Overall, slowdown in the economy, commodity nature of its products and lacklustre consumer spending have resulted in slower growth in revenues in 2QFY03. While there could be a spurt in demand for both fabrics and branded garments in the festive season (sold through its subsidiary, Raymond Apparel), keeping the current domestic and global economic environment in mind, revenue growth will remain subdued. However, with the company having acquired a majority stake in Color Plus (Read Raymond: 'ColorPlus' growth) , the consolidated picture is expected to be on the better side.

Revenue mix-Second quarter slows…
(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Textiles 2,359 2,322 -1.6% 3,104 3,412 9.9%
Files 285 315 10.8% 607 617 1.6%
Denim 303 327 8.0% 548 603 9.9%
Others 14 75 426.6% 38 90 135.5%
Total 2,961 3,040 2.7% 4,298 4,721 9.8%

Despite higher realisations for its textile and denim businesses, operating margins have come under pressure both in 2QFY03 and 1HFY03. Interest costs have come down significantly in 1HFY03 on account of accelerated debt repayment (with the RBI relaxing ECB repayment norms, Raymond would have capitalised on this opportunity to retire some of its ECB loans).

The stock currently trades at Rs 102 implying a P/E multiple of 8x annualised 1HFY03 earnings. During the quarter, one of the company's helicopter was lost in a accident. But Raymond does not foresee any significant loss from this accident. However, this raises apprehensions over continuation of such unrelated activities. On the whole, as we mentioned earlier, garments would be the key growth driver in the long-term. On a consolidated basis, the garments division contributes to 16% of consolidates revenues. After the acquisition of ColorPlus, this would increase substantially and consequently augurs well for Raymond. That said, growth prospects in FY03 is challenging due to slowdown in the economy.

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