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Raymond: Slow growth, margin blip mar 2Q - Views on News from Equitymaster

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Raymond: Slow growth, margin blip mar 2Q
Dec 11, 2012

Raymond declared the results for second quarter of financial year 2012-2013 (2QFY13). The company has reported 11% YoY growth in net sales in 2QFY13 while net profits have fallen by 57% YoY. Here is our analysis of the results.

Performance summary
  • Standalone sales grow by 11% YoY in 2QFY13, while consolidated sales grew 12% YoY, backed by higher volumes in the suiting and garmenting businesses.
  • Steep rise in raw material and employee costs hurt standalone EBIDTA margins which fell by 1.5% to 14.6% in 2QFY13.
  • Higher interest costs, VRS write-offs further erode bottomline during 2QFY13. Excluding the VRS writeoffs, the 2QFY13 profits are down 31% YoY.

Standalone financial snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 4,985 5,526 10.9% 8,446 9,189 8.8%
Expenditure 4,183 4,720 12.8% 7,461 8,588 15.1%
Operating profit (EBDITA) 802 806   985 602  
EBDITA margin (%) 16.1% 14.6%   11.7% 6.5%  
Other income 290 175 -39.7% 490 363 -25.9%
Depreciation 255 280 9.8% 515 557 8.1%
Interest 349 394 12.8% 648 770 18.9%
Exceptional items - (95)   - (224)  
Profit before tax 488 212 -56.5% 312 (586)  
Tax 126 56 -55.6% 51 (196)  
Effective tax rate 26% 26%   16% 33%  
Profit after tax/(loss) 362 156 -56.8% 261 (390)  
Net profit margin (%) 7.3% 2.8%   3.1% -4.2%  
No. of shares (m)         61.4  
Diluted earnings per share (Rs)*         (1.4)  
Price to earnings ratio (x)         N.A  
(*On a trailing 12-month basis)
Exceptional items refer to VRS payments net of profit on sale of long term investments

What has driven performance in 1HFY13?
  • VRS writeoff to the tune of Rs 318 m took a massive toll on the standalone profits of Raymond in the first six months of FY13. Even on a consolidated level, profits were down 38% YoY in 2QFY13. The exceptional item in 1HFY13 is VRS payment net of profit on sale of long term investments to the tune of Rs 94 m.

    Marginal growth in worsted fabrics and a sharp drop in operating profits in its flagship business dented Raymond's performance in the September quarter. In the branded fabric business too, drop in sales and high input costs halved margins. The garmenting and shirting fabrics business offered Raymond some relief, albeit marginally, for together they comprised only 19% of consolidated sales.

    For the worsted fabric (suiting) business, exchange rates and higher input costs impacted margins adversely. The branded apparel segment was impacted by the extension of season sale for inventory liquidation.

    Segmental contribution to consolidated sales
    Worsted fabric performance
    (Rs m) 1HFY12 1HFY13 Change
    Revenue 8,410 9,180 9.2%
    % of cons.sales 48.3% 47.1%  
    EBIDTA margins 20.7% 15.7%  
    Branded apparel performance
    Revenue 3,970 3,990 0.5%
    % of cons.sales 22.8% 20.5%  
    EBIDTA margins 16.4% 8.0%  
    Garmenting performance
    Revenue 830 1,280 54.2%
    % of cons.sales 4.8% 6.6%  
    EBIDTA margins 3.6% 4.7%  
    Shirting fabric performance
    Revenue 1,090 1,470 34.9%
    % of cons.sales 6.3% 7.5%  
    EBIDTA margins 11.9% 15.0%  
    Denim (India) performance
    Revenue 3,820 3,930 2.9%
    % of cons.sales 21.9% 20.1%  
    EBIDTA margins 10.7% 13.0%  

  • 42 new retail stores were opened during 2QFY13 adding 61,900 sq feet of retail space. The total number of stores stood at 902 at the end of September 2012. This sustained Raymond's position as the largest specialty retailer. Like to like store sales grew by 3% YoY in 2QFY13 due to improved retail demand in domestic markets as well.

  • The fundamentals of the denim business improved with 3% improvement in operating margins. Further, the domestic order book remains healthy due to increased denim garmenting capacity of 4 lac pieces per annum.

  • Higher interest costs (long term debt to equity of 1.1 times in FY12) coupled with write-off of the VRS related expenses eroded profits in 1HFY13.

What to expect?
At the current price of Rs 481, the stock is trading at multiple of 5.9 times FY15 EV / EBIDTA. 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 company's bottomline in the medium term.

We neither expect the operating margins to improve dramatically nor are interest costs set to fall at a rapid pace anytime in the near future. However, we do expect Raymond's core business to throw up better operating cash flows over the next three years. With no further capex planned, the incremental cash flow will itself help the company cap its leverage. The company has entered the energy drinks business through subsidiary JK Ansell in 3QFY13. We will soon update our view on the stock.

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