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Raymond: Extraordinary quarter! - Views on News from Equitymaster

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Raymond: Extraordinary quarter!
Nov 1, 2006

Performance summary
Raymond has announced results for the second quarter and half year ended September 2006. While the company has expanded its operating margins by an appreciable 200 basis points during the quarter, the one time extraordinary gain due to hiving off of the denim division and lower tax incidence have been largely responsible for the near tripling of the bottomline over the corresponding quarter of FY06. Not considering the extraordinary gains, the bottomline for the quarter and half year have grown by 38% YoY and 9% YoY respectively. As domestic realisations continue to remain under pressure, the company is largely reliant on its export revenues.

(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 3,496 3,586 2.6% 5,952 6,392 7.4%
Expenditure 2,942 2,945 0.1% 5,076 5,510 8.6%
Operating profit (EBDITA) 554 641 15.7% 876 882 0.7%
EBDITA margin (%) 15.8% 17.9%   14.7% 13.8%  
Other income 231 160 -30.9% 394 339 -14.1%
Interest 66 93 39.5% 116 149 28.8%
Depreciation 180 146 -19.0% 346 332 -4.0%
Profit before tax 539 562 4.4% 808 739 -8.5%
Extraordinary income/(expense) (35) 859   (76) 845  
Tax 136 6 -95.3% 175 52 -70.1%
Effective tax rate 25% 1%   22% 7%  
Profit after tax/(loss) 368 1,415 284.2% 557 1,532 175.1%
Net profit margin (%) 10.5% 39.4%   9.4% 24.0%  
No. of shares (m) 61.4 61.4   61.4 61.4  
Diluted earnings per share (Rs)* 24.0 92.2   18.1 49.9  
Price to earnings ratio (x)         9.1  
(* trailing 12 months)            

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 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 30 million meters (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.

What has driven performance in 2QFY07?
Textile – Realisation blues: The textile division, which until the last quarter, was paring its share as the largest contributor to the company’s turnover, due to the increased focused on the denim division, has once again regained dominance (80% of revenues in 2QFY07), with the hiving off of the denim division into a separate JV. The division (70% of which is poly wool) registered an appreciable revenue growth of 18% YoY (mainly due to the impact of the festival season) coupled with a 100 basis points improvement in margins. The segment’s volumes grew by 13% YoY and realisations grew by 5% (due to improved product mix in worsted fabrics) over the corresponding quarter of FY06. Exports grew by 1% YoY (9% of sales in 2QFY07) despite competitive pressures from low cost producers.

Denim JV – Yet to bear fruits: The company having entered into a JV with UCO of Belgium (combined capacity of 80 mm) in August 2006 has reported the numbers for the denim division upto the month of July. The JV’s Indian operations had capacity utilisation of 95% and fetched realisations of Rs 104 per metre (against Rs 90 per metre for Arvind Mills). Around 50% of the produce of the Indian operations is being exported with the rest being sold through the company’s outlets. The blended realisation (considering UCO’s US and European operations) is Rs 107 per metre. The volumes in the overseas market however continued to be lower than the domestic market. The denim JV registered revenue of Rs 1.4 bn and EBIDTA margin of 13% in this quarter.

The profits earned by the company on the shift of denim division (Rs 871 m) coupled with the transfer of the deferred tax liabilities to the denim JV (which brought down the effective tax rate in this quarter to 1%) are primarily responsible for the company posting extraordinary profits in this quarter.

Segmental snapshot…
(Rs m) 2QFY06 2QFY07 Change
Textiles
Revenue 2,425 2,863 18.1%
% share 69.4% 79.8%  
PBIT margins 22.5% 23.8%  
Denim
Revenue 687 286 -58.4%
% share 19.7% 8.0%  
PBIT margins 11.4% 8.0%  
Files & Tools
Revenue 382 430 12.7%
% share 10.9% 12.0%  
PBIT margins 7.1% 11.5%  

Files and tools – Strong recovery: The turnover from the files and tools division improved in this quarter after several quarters of flat growth. Also, the margins nearly doubled on the back of lower input (steel) costs. The export sales from this division (55% of sales in 2QFY07) witnessed a growth of 19% YoY. The company has also shut down the files and tools division in Thane that will lead to further cost savings going forward.

Apparels – The growth driver: The branded apparel division continues to remain largely reliant on its star brands namely ‘Parx’, ‘Park Avenue’ and ‘Manzoni’. While Raymond Apparels witnessed a revenue growth of 19% YoY, Colorplus (having the distinction of being the most profitable brand in the country) suffered cost pressures due to the opening of several single brand stores in malls (leading to higher lease costs). Despite Raymond having entered into tie-ups with 17 to 18 malls, the slow opening of the malls has delayed the company’s growth in this division. Raymond is expected to open another 30 ‘Raymond stores’ in FY07, while the number of ‘brand only stores’ (for Parx, Park Avenue and Color Plus) will go up by 45 in the same period. Also, Raymond will own most of the new stores as against leasing them.

Apparel performance…
(Rs m) 2QFY06 2QFY07 Change
Raymond Apparel
Revenue 461 689 49.5%
PBT margins 16.7% 14.1%  
Colorplus Fashions
Revenue 260 291 12.0%
PBT margins 27.2% 12.1%  

New ventures: Of the green-field textile capacity expansion at Vapi (6 mm capacity), 3 mm has already been commissioned while the rest will be commissioned by 1QFY08.

What to expect?
At the current price of Rs 453, the stock is trading at a multiple of 16 times our estimated consolidated FY08 earnings. We believe that while on one hand the wider retail presence will continue to enable the company consolidate its domestic market share, on the other hand, the overseas alliances will give it an edge over players who continue to rely on their standalone marketing and distribution capabilities overseas for the export orders. On the cost side, however, while the wool prices remain stable, the firm trend in cotton prices and continued pressure on denim realisations (albeit higher than that of its peers) restrict the upsides to the company’s operating margins in the near term. The benefits of the denim JV, break-even in the garmenting business, capacity expansions, extended retail network and auto component foray will percolate into the company’s bottomline in the longer term. We maintain our ‘Hold’ recommendation on the stock.

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