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Core competence for the complete man - Views on News from Equitymaster
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  • Nov 18, 2000

    Core competence for the complete man

    Raymond Limited, the flagship company of the Singhania group, has finally managed to come out of its past ‘blues’. Gautam Singhania who has taken reign as the Managing Director of Raymond from his father Vijaypat Singhania seems to be heading in the right direction. But he has an uphill task ahead.

    The company is on a restructuring spree. It has divested both its steel and cement division in the current year to enhance its focus on the textiles and the garments businesses. The cement division was sold to Lafarge India for a consideration of Rs 785 million (US$ 17 million) early this year and the steel division to EBG, a subsidiary of ThyssenKrupp Stahl of Germany for Rs 412 million (US$ 9 million). This includes a 24 percent stake that Raymond would be holding in the new joint venture formed in alliance with EBG. Earlier, the company also sold its stake in Raymond Synthetics to Reliance Industries, which was engaged in polyester manufacturing. Since these divisions have been putting enormous pressure on company’s bottomline, these divestments are expected to improve both margins as well as efficiency of the company.

    Besides, if the company were to utilise these sale proceeds (Rs 1,197 million (US$ 26 million)) to retire its high cost debt, Raymond would become debt free (total debt of the company as on March 2000 stands at Rs 7,642 million (US$ 163 million)). Additionally, with fresh inflow of funds, the company can fortify its textile business.

    Dismal Performance
    (Rs million) 1HFY00 1HFY01 Change
    Sales 6,033 5,809 -3.7%
    Other Income 69.8 77.5 11.0%
    Expenditure 4,730 4,993 5.6%
    Operating Profit 1,303 815 -37.4%
    Operating Profit Margin 21.6% 14.0%  
    Interest 562 538 -4.3%
    Depreciation 487 452 -7.3%
    Profit before Tax 323 -97 -
    Other Adjustments - 1,760 -
    Tax 39 - -
    Profit after Tax/(Loss) 284 (1,857) -753.1%
    Net profit margin 4.7% -  

    However, the company has posted a sharp drop in net profits for the second quarter ended 30th September 2000. While sales moved up marginally by 2 percent, the company reported a net loss of Rs 1,500 million (US$ 32 million) compared to a profit of Rs 498 million (US$ 11 million) in the corresponding period of the previous year. This was primarily due to the loss on sale of the steel division to the extent of Rs 1,750 million (US$ 37 million). Even if we exclude this loss, profits have declined by more than 50 percent for the second quarter.

    Even in the textiles business prospects are bleak. Raymond has a 68 percent market share in the woolen fabric segment. However, both multinationals and domestic players have appreciably increased their presence in this segment. Besides, the government recently lowered customs duty on 119 items most of which falls under woolen apparels and textile segment. As these would mean cheaper imports, Raymond’s market share looks threatened.

    Added to these woes, contribution from the cement and the steel division were 23 percent and 27 percent respectively. Both these divisions have been divested. As per our estimates, fabrics division, which contributes to around 45 percent of fiscal year 2000 turnover, post restructuring, would contribute 81 percent of fiscal year 2001 turnover (including Raymond Calitri Denim’s). Garments division, which is growing at the rate of 20 percent per annum, is just one percent of fiscal year 2000 sales. Even assuming a 50 percent growth in sales, contribution from this division would be insignificant.

    Raymond has also decided to amalgamate its loss making subsidiary, Calitri Denim, which is engaged in manufacturing denim fabric and yarn. Though the merger would enable Raymond to avail significant tax benefits (the entire net worth of this subsidiary is wiped out), denim business itself is in doldrums. This segment has been affected due to overcapacity as well as change in fashion trends and inclination of customers towards cotton casuals.

    However, the potential for Raymond to emerge as the market leader in textiles business is enormous. The likely impetus for growth in coming years for the company would be the garment business, which is growing at the rate of 20 percent per annum. More importantly, the trouser segment is growing at an astounding rate of 40 percent per annum where Raymond has a significant presence. The company has an overall market share of 25 percent and possesses good brand equity. Its products are also wisely segmented. While Park Avenue is an up-market brand, Parx is targeted at the casual segment. The company has planned to increase the number of exclusive Raymond outlets as well as introduce sub-brands, which should trigger sales. It is also scouting for acquisitions in the garment segment, which should provide a big-push to the company’s bottomline.

    Raymond is a ‘complete man’ now. The key to success lies in expanding market reach and tackle competition. But, will Raymond be able to manage it?



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