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Raymond: Where to from here?

Dec 6, 2000

Having divested its steel and cement plant, Raymond supposedly has received Rs 3,810 m as a consideration from ThyssenKrupp for the steel plant. However, Raymond is yet to receive Rs 7,850 m from Lafarge India, which took over the cement plant of the company. Reportedly, the company has planned to retire close to Rs 4,700 m worth of debt this year (Rs 2,000 m of debt already retired). This is expected to improve the company’s margins at the net profit level, as till date higher interest costs had been absorbing margins. We also expect a significant improvement in operating margins. A look at the table below sheds more light to this.

The after-effects of restructuring
(Rs m) FY99 FY00
Total raw material cost 4,222 4,672
Total cost 10,099 10,325
Cement    
Limestone & others 179 250
% of raw material cost 4.2% 5.4%
% of total cost 1.8% 2.4%
Steel    
HR coil, Gypsum & others 2,194 2,876
% of raw material cost 52.0% 61.6%
% of total cost 21.7% 27.9%
Cumulative savings in cost 2,373 3,126
% of raw material cost 56.2% 66.9%
% of total cost 23.5% 30.3%

The steel division alone accounted to around 62% of total raw material costs in FY00 (52% in FY99). This division exposed the company to the typical cyclical nature of the both the cement and steel businesses. The company manufacturers cold rolled steel coils for which hot rolled steel coils is the raw material. This as a percentage of total raw material cost is around 59% as of FY00. On the other hand, the raw material used to manufacturing cement, accounted for 5% of total raw material costs. Besides, both these divisions accounted for major proportion of power and fuel costs for the company.

With both cement and steel unit divested, on a cumulative basis, the company is expected to save around Rs 3,126 m (based on FY00 costs). However, the first half performance of the company does not seem to reflect any trend of improvement either at the operating level or at the net earnings level. For instance, in the second quarter ended 30th September 2000, the company has posted a loss of Rs 357 m with sales growing by just 2%. Operating margins have plummeted from 22% in 1HFY00 to 14% in 1HFY01. The company has also recorded a loss on sale of steel plant to the extent of Rs 1,760 m. As a result, net profit for the first half of the current year stands at Rs 1,857 m. Even if we were to exclude this loss, net loss stands at Rs 97 m for 1HFY01.

One aspect to note is that sales have dropped by 4% for the first half of the current year and we expect this to continue. This is because contribution from the fabrics business is expected to touch 82% post-restructuring (46% of FY00 sales). Prospects for this business are bleak with limited upside for realisations growth for a foreseeable future. Sales are not expected to grow unless the company acquires some brands to enhance its garments division (currently contributes to around 3% of turnover, including shirting).

Meanwhile, reportedly, the company is planning to venture into information technology business. This has raised apprehension as to why the company is venturing into an unrelated business after having suffered for four years due to non-core businesses. We believe that the key to success lies in enhancing its portfolio of brands in the garment business, which is growing at the rate of 30% per annum. Besides, Raymond is the market leader in the woolen fabric division for which the export potential of this division is promising.

The stock is currently trading at Rs 117 at a P/E multiple of 25x the FY00 earnings.

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