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Raymond: Stellar performance - Views on News from Equitymaster
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Raymond: Stellar performance
Oct 27, 2005

Performance Summary
Raymond announced its second quarter results today. While net sales during the quarter grew by a slower rate of 3%, operating profits rose by 18% on the back of the files division of the company returning to profitability with a big margin. This was also accompanied by improved textile realisations. The first half performance of the company is significantly above our full year estimates and there is a need to revise our earnings projections upwards.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 3,387 3,497 3.2% 5,262 5,952 13.1%
Expenditure 2,922 2,946 0.8% 4,849 5,083 4.8%
Operating profit (EBDITA) 466 550 18.2% 413 869 110.4%
EBDITA margin (%) 13.7% 15.7%   7.8% 14.6%  
Other income 88 231 161.7% 348 394 13.3%
Interest 50 63 25.8% 72 109 51.0%
Depreciation 140 180 28.3% 273 346 26.7%
Profit before tax 364 539 48.0% 415 808 94.5%
Extraordinary income/(expense) 6 (35) - 6 (76) -
Tax 50 136 173.6% 70 175 151.4%
Profit after tax/(loss) 320 368 15.0% 352 556 58.2%
Net profit margin (%) 9.5% 10.5%   6.7% 9.3%  
No. of shares (m) 61.3 61.3   61.3 61.3  
Diluted earnings per share (Rs)* 20.9 24.0   11.5 18.2  
Price to earnings ratio (x)         22.0  
(* annualised)            

What is the company's business?
Raymond is India's largest and world's third largest integrated manufacturer of wool and wool blended fabrics with production capacity of 24 mm (million meters). It is the domestic market leader in files and tools with around 80% market share. The company is the second largest denim producer in the country with a capacity of 20 million meters (mm). It has a widespread distribution network across the country, which it can leverage on to sell some of its well-recognised brands.

What has driven performance in 2QFY06?
Denim propells topline growth: As is evident from the table below, while the textiles and files division posted a marginal increase in turnover, the denim division saw a 14% Yoy growth. The company has been on a capacity expansion spree since the last two and half years (from 10 MM to 30 MM in FY05 going upto 40 MM by this fiscal year). Once the current capacity expansion is completed, the growth in denim division will be higher. Textile exports grew by 17% primarily aided by sales through the garmenting route. The topline growth, on a standalone basis, is very much in line with our full year estimates.

Segmental snapshot…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Textiles 2,398 2,426 1.2% 3,451 3,879 12.4%
PBIT margins 18.8% 22.5%   15.9% 20.8%  
Denim 602 687 14.3% 1,075 1,309 21.7%
PBIT margins 8.8% 10.5%   7.8% 9.1%  
Files & Tools 376 382 1.4% 700 754 7.8%
PBIT margins -1.1% 7.1%   1.6% 9.2%  

Turnaround in files division: There has been an allround improvement in operating margins during the quarter and in the first half. According to the company, it was able to increase textile prices during the quarter. This combined with softer raw material prices (basically wool and cotton) has benefited the company immensely. Another highlight of the first half is the turnaround in files & tools division. While the company's initiative to increase production in the value-add segment is one reason for the improvement, the other reason is the softening of input cost (steel). We had mentioned in our full year analysis that this division will turnaround. In fact, we expect a much higher operating profit growth in the second half, especially when one considers the fact that files division had posted a net margin of -10% in 3QFY05. At the operating level, the performance has been robust and as mentioned earlier, we have to upgrade our earnings projections.

Surplus money boosts net profit: The growth at the net level in 2QFY06 stands at 15% YoY. However, if one were to exclude the extraordinary items from both the quarters, the growth is even higher at 28% in 2QFY06 and 83% in 1HFY06. Exceptional items pertain to VRS payment of Rs 37 m writen off during the quarter (Rs 79 m far the half year) and discount received on prepayment of sales tax deferment loan of Rs 3 m (Rs 3 m for the half year). It is a commendable performance by Raymond and we are optimistic about the company's ability to grow profitability over the next three years.

What to expect?
At Rs 400, the stock is trading at a price to earnings multiple of 12.3 times our estimated FY08 consolidated earnings. We had recommended the stock in July 2005 at Rs 367 with a price target of Rs 450 with a HOLD rating, which we upgraded later to Rs 490 (post our meeting with the management). We maintain our view.

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