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Raymond: Apparels prove their mettle - Views on News from Equitymaster

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Raymond: Apparels prove their mettle
Oct 27, 2007

Performance summary
  • Topline declines by 4% YoY, although not comparable due to the inclusion of the denim business in the standalone numbers of 2QFY07. On a like to like basis, sales have grown by 8% YoY.
  • Apparel and garment divisions record robust volume and realisation growth.

  • EBIDTA and net profit margins fall from 17.9% and 15.5% (excluding extraordinary income) in 2QFY07 to 10.4% and 8.9% respectively in 2QFY08.

  • The company’s increasing reliance on exports impacted this quarter’s performance due to the appreciation of the rupee against the US dollar.

Financial performance: A snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 3,586 3,455 -3.7% 6,392 5,547 -13.2%
Expenditure 2,944 3,097 5.2% 5,511 5,134 -6.8%
Operating profit (EBDITA) 642 358 -44.2% 881 413 -53.1%
EBDITA margin (%) 17.9% 10.4%   13.8% 7.4%  
Other income 160 290 81.3% 339 562 65.8%
Interest 93 97 4.3% 149 170 14.1%
Depreciation 146 216 47.9% 332 388 16.9%
Profit before tax 563 335 -40.5% 739 417 -43.6%
Extraordinary income/(expense) 859 (6)   845 (29)  
Tax 6 22 243.8% 52 27 -48.1%
Effective tax rate 1% 7%   7% 6%  
Profit after tax/(loss) 1,416 307 -78.3% 1,532 361 -76.4%
Net profit margin (%) 39.5% 8.9%   24.0% 6.5%  
No. of shares (m) 61.4 61.4   61.4 61.4  
Diluted earnings per share (Rs)*         13.9  
Price to earnings ratio (x)         24.2  
(* On a trailing 12-month basis)

An integrated textile player
Raymond is India's largest and world's third largest integrated manufacturer of wool and wool blended fabrics with production capacity of 31 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 40 mm. It has a widespread distribution network across the country, which it can leverage to sell some of its well-recognised brands. Exports comprised 55% of the company’s revenues at the end of FY06. The denim division, which comprised 17% of revenue and 14% of the profits of the company in 1QFY07, was hived off into a 50:50 joint venture (JV) with UCO of Belgium in August 2006. The company’s shirting and woolen JVs with Zambaiti and Fedora respectively started operations in the latter half of FY07.

What has driven performance in 2QFY08?
Textile – Cost pinch: The standalone performance of Raymond in 2QFY08, although not strictly comparable to the corresponding quarter of FY07, confirmed the fact that the margin woes of the textile division are here to stay. The company’s, excluding the denim division, does not present a very pleasant picture. The textile division, which contributed 88% of the standalone revenues in 2QFY08, with the hiving off of the denim division into a separate JV, witnessed severe cost pressures in this quarter. The division (70% of which is poly wool) registered a single digit revenue growth of 6% YoY with a substantial 6% drop in margins. The wool prices have risen by an average 30% YoY due to a severe drought in Australia, putting pressure on margins. The high costs can also be attributed to the higher depreciation mainly on account of the Vapi expansion, labour costs and advertisement expenditures.

Performance excluding the Denim division
(Rs m) 2QFY07 2QFY08 Change
Total income 3,457 3,745 8.3%
Operating profit (EBDITA) 755 648 -14.2%
EBDITA margin (%) 21.8% 17.3%  
Exceptional items 859 (6) -100.7%
Profit before tax 1,397 329 -76.4%

The increased demand for worsted fabrics was catered to from the expanded capacity at Vapi, which has became fully operational in 4QFY07. With the capacity of an additional 3 million meters per annum (mmpa) having commenced operation, the total capacity of textiles has gone to 31 mmpa.

Segmental snapshot…
(Rs m) 2QFY07 2QFY08 Change
Textiles
Revenue 2,864 3,036 6.0%
% share 79.9% 87.9%  
PBIT margins 23.6% 17.9%  
Files & Tools
Revenue 432 415 -3.9%
% share 12.0% 12.0%  
PBIT margins 11.3% 4.8%  

Files and tools – Steel bores hole: The turnover from the files and tools division recorded a drop of 4% in revenues this quarter after a flat performance over the past several quarters. The PBIT margins halved to 4.8% in this quarter against 11.3% in the corresponding quarter of FY07 due to the rise in steel prices (input) for this business. The export sales from this division (55% of sales in 2QFY08) witnessed pressure on realisations due to rupee appreciation. The division has continued right-sizing manpower in order to improve its efficiency and productivity.

Apparel performance
(Rs m) 2QFY07 2QFY08 Change
Raymond Apparel
Revenue 689 881 27.9%
PBT margins 12.3% 9.5%  
Colorplus Fashions
Revenue 291 377 29.6%
PBT margins 14.8% 12.5%  
Apparels – Growth driver: Around 40% of Raymond’s exports are through the garmenting route. The branded apparel division remains largely reliant on its star brands namely ‘Parx’, ‘Park Avenue’ and ‘Manzoni’. While Raymond Apparels witnessed a revenue growth of 59% YoY, Colorplus (having the distinction of being the most profitable brand in the country) grew its sales by 26% YoY. Colorplus, however, continued to suffer cost pressures due to the opening of new retail outlets and increase in staff costs (on the back of new recruitments). Cotton prices have also moved up by 10%. The company recently launched the Colorplus Woman collection.

Raymond has opened 82 new outlets in FY07 bringing the total to 450 (1 m square feet of retail space). The company is targeting 1,000 outlets by FY10. While the retail venture has enabled the company position its brands at a premium and given it a first mover advantage, with the rise in rental rates, the pressure on operating margins is unavoidable. Currently, while 48% and 25% of the retailing is done through wholesalers and multi brand outlets/large format stores respectively, 27% of the sales are from the Raymond stores.

Silverspark (30% used for captive brands) and Celebrations Apparel (95% used for captive brands) grew by 51% YoY and 60% respectively during the quarter. Celebrations Apparel is currently operating at 85% capacity utilisation. For the garments division, the Raymond board has approved setting up of a 540,000 unit capacity for suit manufacturing near Bangalore. This facility is expected to commence operations during 1QFY09.

Garment performance…
(Rs m) 2QFY07 2QFY08 Change
Silver Spark Apparel
Revenue 204 241 18.0%
PBT margins 7.3% 10.4%  
Celebrations Apparel
Revenue 12 25 108.3%
PBT margins -25.0% 4.0%  

JV snapshot…
(Rs m) 1HFY08
Raymond UCO Denim
Revenue 1,923
EBIDTA 92
EBIDTA margins 4.8%
Indian operations  
Revenue 1,092
EBIDTA 123
EBIDTA margins 11.3%
Raymond Zambaiti
Revenue 287
Net profit 27.00
Net profit margins 9.4%
Raymond Fedora
Revenue 149
Net profit (23)
Net profit margins -15.4%
GAS Apparel
Revenue 28
Net profit (21)
Net profit margins -75.0%
JVs – Pulling up their socks: The cyclical downturn in the denim industry globally impacted the global and Indian markets alike in FY07. Mills in Europe operated at 60% capacity while several in the US declared closures. The European market remained extremely difficult and overcapacity situation in Turkey has put pressures on the selling prices. However, the premium fabric produced by the company has been very well received by the Italy, Morocco and other European markets. In the Indian market, the excess denim capacity was to the tune of 150 m metres in FY07. The total denim capacity in the country has gone up by 33% YoY in FY07 (from 450 mm in FY06 to 600 mm in FY07). This has induced severe oversupply especially in the non-premium segment, leading to pressure on realisations. The pressures were coupled with forex losses due to rupee appreciation.

The company’s Indian operations for the denim business continued to outperform the European operations due to the premium offerings. Against the denim business’ consolidated EBIDTA margin of 4.8% the Indian operations reported EBIDTA margin of 11.3%. The demand for premium denim is expected to grow at 20% per annum, while realisation pressure will sustain for the next 6 to 9 months.

While the shirting JV with Zambaiti of Italy is also in line with its performance targets, the JV with Fedora is yet to break even. During the third quarter of FY07, Raymond entered into a 50:50 JV with Grotto SpA of Italy for the retailing of premium casual wear involving an investment of around Rs 460 m spread over 2 years. The JV has started selling its products under the ‘GAS’ brand in India since 1QFY08.

What to expect?
At the current price of Rs 336, the stock is trading at a multiple of 9.6 times our estimated consolidated FY10 earnings. We believe that while on one hand, the wider retail presence will continue to enable the company to consolidate its domestic market share, on the other hand, overseas alliances will give it an edge over players who continue to rely on their standalone marketing and distribution capabilities overseas for export orders. Raymond is envisaging a capex of Rs 1 bn in the next two years of which 50% will be spent on retail operations and the rest on the international JVs. Despite having 35% of its debt from the TUF (technology upgradation fund), the rising interest costs are expected to weigh on the company’s bottomline. Raymond is, however, trying to counter this by reducing its working capital requirements. We expect the company to record unimpressive performances in FY08 and FY09, after which a possible turnaround in the loss making business will offer some upsides.

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