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Raymond: Relying on volumes for now - Views on News from Equitymaster

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Raymond: Relying on volumes for now
Nov 18, 2010

Raymond declared its 2QFY11 results. The company has reported negligible fall in net sales while its profits at the net level have grown 428% YoY. Here is our analysis of the results.

Performance summary
  • Standalone sales remain flat for the half year period, despite higher volumes in the suiting and shirting businesses.
  • Standalone EBIDTA margins expand by 4.7% to 12% in 1HFY11 despite higher input costs.
  • Capex underway to bring cotton shirting fabric capacity from 11.5 m to 21.6 m meters per annum by end of FY11.
  • Lower interest costs, VRS writeoffs eased pressure on the bottomline.

(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 3,985 †3,949 -0.9% 6,333 6,358 0.4%
Expenditure 3,407 †3,197 -6.2% 5,868 5,596 -4.6%
Operating profit (EBDITA) †††578 ††††752 30.1% †††465 †††762 63.9%
EBDITA margin (%) 14.5% 19.0%   7.3% 12.0%  
Other income †††155 ††††309 99.4% †††369 †††456 23.6%
Depreciation †††281 ††††255 -9.3% †††551 †††510 -7.4%
Interest †††228 ††††226 -0.9% †††459 †††435 -5.2%
Exchange rate loss / (gain) ††††††(4) ††††††26   †††††44 ††††(27)  
Profit before tax †††220 ††††606 175.5% ††(132) †††246  
Extraordinary income/(expense) ††(152) ††††††(1)   ††(201) ††††(20)  
Tax ††††††(6) ††††214   ††††(91) †††††83  
Effective tax rate N.A 35%   N.A 34%  
Profit after tax/(loss) †††††74 ††††391 428.0% ††(242) †††143  
Net profit margin (%) 1.9% 9.9%   -3.8% 2.2%  
No. of shares (m)         ††61.4  
Diluted earnings per share (Rs)*         ††††2.5  
Price to earnings ratio (x)         158.5  
(*On a trailing 12-month basis)   Extraordinary expenses refer to the VRS payments written off

What has driven performance in 2QFY11?
  • Backed by improved demand from domestic as well as export markets after two consecutive years of disappointing volume growth, Raymond seems to have finally made a comeback. The worsted fabrics business managed 9% YoY growth in volumes and 13% YoY growth in realizations this quarter. For the shirting business, volume was up by 23% and realisations were higher by 4%. The operating margins in this segment, however, dipped on account of high cotton yarn prices. The lower operating cost (with the Thane plant being shut) lent some stability to Raymondís overall performance for 1HFY11.

    Worsted fabric performance
    (Rs m) 2QFY10 2QFY11 Change
    Revenue 3,450 3,930 13.9%
    % share 50.7% 49.6%  
    EBIDTA margins 18.3% 22.9%  
    Branded apparel performance
    Revenue 1,640 1,740 6.1%
    % share 24.1% 21.9%  
    EBIDTA margins 14.6% 13.8%  
    Garmenting performance
    Revenue †††360 †††360 0.0%
    % share 5.3% 4.5%  
    EBIDTA margins 16.7% 11.1%  
    Denim (India) performance
    Revenue 1,220 1,460 19.7%
    % share 17.9% 18.4%  
    EBIDTA margins 13.9% 13.0%  

  • The branded fabric sales continued to comprise 22% of Raymondís consolidated sales at the end of 1HFY11. At the EBIDTA level, however, the performance of this division remained stable with margins at 13.8% as compared to 14.6% in 2QFY10.

  • 23 new stores were opened during 2QFY11 adding 26,435 sq feet of retail space and this sustained Raymondís position as the largest specialty retailer. Simultaneously aggressive reviews of the non performing stores during the year resulted in 2 store closures. The company plans to add 200 stores in tier 3 and 4 cities by 2011 mainly through the franchise model. The like to like store sales grew by 10% YoY in 2QFY11.

  • In the denim business, Raymondís Indian operations witnessed an improved performance at the operating level, despite cotton prices moving up. While the domestic order book remains healthy, the company witnessed volume growth due to increased denim garmenting capacity of 4 lac pieces per annum. The realizations grew by 13% this quarter. Raymond clocked EBIDTA margin of 13% in the Indian operations as against 14% in 2QFY10.

  • The high costs had made the companyís Thane factory operations unviable which led to the shift of the capacity to Vapi. The company has been writing off the VRS related expenses every quarter. The total liability amounts to Rs 2.6 bn of which Rs 1.5 bn is payable immediately and balance of Rs 1.1 bn is payable in three years. Out of 1,885 workers over 93% had accepted the VRS package by the end of October 2010. Although this is certainly a positive, the companyís diversification into the real estate business is also not a very enthusing proposition.

What to expect?
At the current price of Rs 394, the stock is trading at an EV/EBIDTA multiple of 45 times our FY13 estimates ( ResearchPro subscribers can view latest updates here). While the performance on the topline front has been in line with our estimates, we believe that the volatile operating margins across businesses and higher cost of operating in addition to the extended retail network may continue to impact the companyís bottomline in the medium term. Risks on the forex side also remain unresolved. We maintain our negative view on the stock.

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