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Raymond: Stiff task ahead

Dec 28, 2001

Among the turnaround stories in India Inc., Raymond stands out in one way. It managed to sell two of its non-core businesses viz. cement and steel to multinationals at a fairly descent price and now it is focusing purely on fabrics and garments for growth in the coming years. But is the turnaround for real?

(Rs m) 1HFY01 1HFY02 Change
Sales 6,661 3,976 -40.3%
Other Income 78 90 15.3%
Expenditure 5,802 3,190 -45.0%
Operating Profit (EBDIT) 859 786 -8.5%
Operating Profit Margin (%) 12.9% 19.8%  
Interest 556 90 -83.8%
Depreciation 483 258 -46.5%
Profit before Tax (102) 528  
Extraordinary item (1,760) (15) -99.1%
Tax - 148  
Profit after Tax/(Loss) (1,862) 365  
Net profit margin (%) -28.0% 9.2%  
No. of Shares (m) 75.1 61.4  
Diluted Earnings per share* - 11.9  
P/E Ratio   8.0  

The performance of the company in the first half of the current fiscal is purely a reflection of the change in sales mix. While turnover fell by 40% to Rs 3,976 m, much of it is on account of the sale of cement and steel, which contributed to 33.9% of the company's turnover in FY01. On the other hand, operating margins went up sharply from 12.9% in 1HFY01 to 19.8% in 1HFY02 due to a sharp fall in raw material and manufacturing expenses. The company was expected to save Rs 1.5 bn from the sale of non-core activities, which hitherto were pressurising profits of the company. The results were in line with our expectations and going forward, the company is expected to improve its operating margins even further.

Benefiting divestments…
(Rs m) FY99 FY00 FY01
Cumulative savings in cost 2,373 3,126 1,533
% of raw material cost 56.2% 66.9% 42.9%
% of total cost 19.6% 25.4% 11.7%

Coming to the growth prospects of Raymond, there is not much to cheer about at the current juncture. For one, given the mature nature of the fabrics segment (69% of FY02E turnover) and a unlikely price increases, growth prospects are restricted. Apart from fabrics, Raymond is the worldwide market leader in the steel files segment (8.7% of FY01 sales). Weakening industrial production, globally as well as in domestic markets, does not augur well for the industry in the current year. While Raymond was expecting a 10% growth in sales in the current fiscal, the September attacks on the US coupled with slowdown in other key economies are likely to subdue growth prospects.

The likely impetus to the topline for Raymond is the garments segment, which has been growing at a CAGR of 25%. Raymond has one of the best brands in the industry i.e. 'Parx'. The upmarket nature of the product also benefits the company in terms of premium pricing. But rather unfortunately, this business contributes to just 1.2% of sales and even after doubling growth, it does not add to the topline significantly. So the company has been scouting for acquisitions, both in domestic as well as international markets, to give fillip to sales. Raymond's acquisition of Regency Textiles Portugesa Limitada, a company incorporated in Portugal, engaged in manufacturing and marketing of readymade garments in 2QFY02 is in line with its inorganic growth strategy. The consideration for the proposed acquisition is US$ 3 million (Rs 144 m). But one has to look at the product profile to guage long-term growth prospects.

The company merged Calitri Denim, one of its loss making subsidiary in FY01, with itself and consequently denim business was added to the portfolio (5.7% of FY01 sales). Though denim prices have started to move up after prolonged slump, Raymond's capacity expansion plans on the denim front is worrying.

Given this backdrop, the challenge for the company is to increase the size of the garments business and to consolidate its presence in steel files and fabrics segment, which has been growing at a slower rate. Though it has been successful on the later, much has to be done on the garments front to boost growth. Not surprisingly, even after the buy-back, the scrip has been languishing at Rs 95 levels. It is trading at a P/E multiple of 8.0x annualised 1HFY02 earnings.

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