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Raymond: Forex losses dent margins - Views on News from Equitymaster
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Raymond: Forex losses dent margins
Nov 3, 2008

Performance summary
  • Consolidated topline grows by 27% YoY; standalone sales up 26% YoY in 2QFY09.

  • Standalone EBIDTA margin (adjusted for forex losses, mark-to-market losses on investments) improved from 11% in 2QFY08 to 13% in 2QFY09.

  • Loss on foreign currency borrowing of Rs 120 m, loss on MTM investments of Rs 5 m.

  • 46,000 square feet of retail space (21 new stores) added during 2QFY09.

  • Better capacity utilisation and higher realisations in the domestic business aid margins.

  • To shut down denim facility in US and Europe by 4QFY09



Standalone financial performance

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 3,455 4,336 25.5% 5,547 6,694 20.7%
Expenditure 3,179 3,712 16.8% 5,290 6,146 16.2%
Operating profit (EBDITA) 276 624 257 548
EBDITA margin (%) 8.0% 14.4% 4.6% 8.2%
Other income 305 137 -55.1% 591 358 -39.4%
Depreciation 216 206 -4.6% 388 409 5.4%
Interest 112 165 47.3% 202 271 34.2%
Exchange rate loss / (gain) (82) 122 (157) 364
Profit before tax 335 268 415 (138)
Extraordinary income/(expense) (6) (10) (29) (14)
Tax 22 14 -36.4% 27 21 -22.2%
Effective tax rate 7% 5% 7%
Profit after tax/(loss) 307 244 -20.5% 359 (173)
Net profit margin (%) 8.9% 5.6% 6.5% -2.6%
No. of shares (m) 61.4 61.4
Diluted earnings per share (Rs)* 3.2
Price to earnings ratio (x) 26.3
(* On a trailing 12-month basis)

What has driven performance in 2QFY09?
  • Better product mix in worsted fabrics ensured 100% capacity utilisation in Raymond’s standalone textile division. Also, the stability in wool prices and increase in realisation from Rs 292 per metre in 2QFY08 to Rs 300 per metre in 2QFY09 aided profitability in this segment. EBIDTA margins in the worsted fabric division improved from 18% o 22% during this period. The 21% growth in textile division has been derived to the extent of 13% from volume growth and 8% from growth in realisation.

  • Turnover from the files and tools division recovered from the pressure witnessed as a result of increased cost of steel due to price hikes effected in the previous quarter. The cooling down of input costs also helped matters. While the domestic sales grew by 13% YoY, international sales were up 24% YoY.

    Segmental snapshot...

    (Rs m) 2QFY08 2QFY09 Change
    Textiles
    Revenue 3,040 3,700 21.7%
    % share 88.0% 85.3%
    EBIDTA margins 17.8% 21.6%
    Files & Tools
    Revenue 420 590 40.5%
    % share 12.2% 13.6%
    EBIDTA margins 4.8% 13.6%

  • The branded apparel division remains largely reliant on its star brands namely ‘Parx’ (21% of apparel sales), ‘Park Avenue’ (36% of apparel sales) and ‘Colorplus’ (25% of apparel sales). The average realisation for these brands increased by 20% YoY. 21 new stores were opened during the second quarter of FY09 adding 46,000 sq feet of retail space and this sustained Raymond’s position as the largest specialty retailer. Addition of new stores has, however, adversely impacted margins due to the higher operating, advertising and rental costs.

    Branded apparel performance
    (Rs m) 2QFY08 2QFY09 Change
    Revenue 1,260 1,600 27.0%
    % share 36.5% 36.9%
    EBIDTA margins 14.3% 13.1%
    PBT margin 10.3% 7.5%
    Garment performance
    (Rs m) 2QFY08 2QFY09 Change
    Revenue 250 310 24.0%
    % share 7.2% 7.1%
    EBIDTA margins 16.4% 14.2%
    PBT margin 10.8% 9.0%

  • In the denim business, while the Indian operations continue to remain EBIDTA positive, Raymond believes that the global business will remain challenging in the near term. The company has decided to shut down the US and Belgium operations by 4QFY09 by paying off liabilities through liquidation of assets. The total loss due to this is yet to be assessed. This is expected to cut down the consolidated losses for the company FY10 onwards.

    While the shirting JV with Zambaiti of Italy is also in line with its performance targets, the JV with Fedora has been terminated since August 2008.

  • The company will evaluate selling off its Thane property only once the Vapi operations stabilise and gather speed.


What to expect?
At the current price of Rs 89, the stock is trading at an EV/EBIDTA multiple of 10 times our FY11 estimates. While the company’s performance on the topline front has been better than our estimates, on the bottomline front, the higher forex losses have kept the margins in line with our estimates. We believe that the volatile operating margins across businesses and higher cost of operating the extended retail network may continue to impact the company’s bottomline in the medium term. Risks on the forex side also remain unresolved. We may have to review our estimates for the stock once there is more clarity on the probable loss to be booked from the denim business.

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