• MARCH 7, 2002

Raymond: Growth trajectory to shift?

From a diversified company with presence in steel, cement and textiles, Raymond, the flagship company under the Singhania Group, has come a long way. After having sold its cement and steel divisions, the company is consolidating its presence in the garments, steel files and denim businesses. Exit from non-core businesses has already started showing positive results at the operating level.

(Rs m)9mFY019mFY02Change
Net sales 11,225 6,842 -39.0%
Other Income 108 147 35.6%
Expenditure 9,813 5,661 -42.3%
Operating Profit (EBDIT) 1,412 1,182 -16.3%
Operating Profit Margin (%)12.6%17.3% 
Interest 757 137 -81.9%
Depreciation 671 393 -41.4%
Profit before Tax 92 799 764.2%
Extraordinary items (1,760) (22) -
Tax - 229 -
Profit after Tax/(Loss) (1,667) 548 -
Net profit margin (%)-14.9%8.0% 
No. of Shares (m) 75.1 61.4  
Diluted Earnings per share* (36.2) 11.9  
P/E Ratio (x)  8.4  

The company reported a 27% fall in sales in 3QFY02. The fall in turnover for the first nine months of the current fiscal is even acute at 39%. But this is largely on account of the sale of its cement and steel divisions last year. Both these divisions contributed to almost 34% of sales in FY01. However, given the slowdown in the economy in the current fiscal, it seems that the performance of the other divisions have also been affected. Raymond had targeted an export growth of around 10%-15% for its fabrics division in the current fiscal. However, post the terrorist attacks on the US combined with the slowdown in other key economies, export demand has remained lacklustre.

Raymond is one of the largest denim manufacturers in the world. Denim prices, which started to show signs of recovery in 3QFY01, has weakened. However, average realisation is on the higher side when compared with previous years' levels. To benefit from larger economies of scale, the company has plans to further augment its denim capacity in the current fiscal. On the garments, the company continues to expand its 'Parx' exclusive retail outlets. From around 10-12 outlets last year, it had plans to add another 100 showrooms over the next three years. Readymade garments is one of the fastest growing segment and the company's initiatives on this front seem to be promising.

Meanwhile, Raymond has acquired the engineering files division of the AV Birla Group Company, HGI Industries, for a consideration of Rs 175 m. This is expected to consolidate the position of the company, which has more than 30% of the world industrial files market. Post-acquisition, the market share is expected to increase by another 7%-8%. It has also acquired a Portuguese company in the current fiscal, which is engaged in manufacturing and marketing of readymade garments, for a consideration of US$ 3 million (Rs 144 m).

Operating margins have improved significantly for the first nine months and is in line with our expectations. With the exit from two of the most capital intensive businesses like cement and steel, Raymond was expected to save around 12% of total operating expenses. It has utilised surplus cash to retire debts, which has also enabled the company to post higher profits on account of interest cost savings.

Having hived-off its non-core businesses, the company utilised a major chunk of the profits made through sale of these divisions to buy-back shares through open market purchases at a maximum price of Rs 160 per share in the last quarter. As a result, the managementís stake in the company is estimated to have gone up from 27% earlier to 31% post-buyback.

But what is the future growth prospects for the company? Post the exit from steel and cement businesses, fabrics would account for a large portion of sales for Raymond (around 69%). This is a cause for concern because growth prospects for this particular segment is not encouraging. Though its premium image and nationwide presence are a positive, on the garments front, it still has a long way to go. Garments would account for just around 3% of sales in FY02E. Growth prospects for other divisions like denim (9% of FY02E sales) and steel files (12% of FY02E sales) are also limited. So, Raymond has to increase its presence in the garments segment, which holds promising potential and acquisition can be a faster mode to grow. The stock currently trading at Rs 100 implying a P/E multiple of 8.4x nine months earnings. On our expected EPS estimate of Rs 11.2 in FY03E, the stock trades at 7.6 times.

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