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>RAYMOND: Relocation of Thane capacity to Jalgaon completed (Q4FY2012 Result)
Liquidation drive to clear inventory results in poor earnings
Denim showed improved performance while worsted & branded apparels witnessed margin pressure: Across the board for the quarter, the revenue momentum was robust for the core business segments (viz- textiles, garments, denim, branded apparels) with the only exception being the shirting business, that saw a decline in revenue by 9.7% YoY. On the profitability front, the denim business saw an improved performance on a Y-o-Y as well as sequential basis with its EBITDA growing by approximately 91% YoY and 17% sequentially. The same has come on the back of increased volume offtake (+5% YoY) and stable realisation.
The worsted / suiting segment that sells fabric under its flagship brand Raymond, along with the branded apparel business (that includes readymade apparels for formal wear sold under Raymond and Park Avenue brands and casual wear sold under Parx and Colorplus brands) saw pressure in its gross margins due to an extended sale season for inventory liquidation. The worsted EBIT margins tumbled down 310 basis points YoY (-440 basis points quarter on quarter [QoQ]), while the branded apparel business posted an EBITDA loss of Rs15 crore for the quarter (as against a profit of Rs6 crore in Q4FY2011 and Rs29 crore in Q3FY2012).
Earnings revision: The management in its commentary sounded committed to its core strategy of focusing on its four power brands and enhancing its already strong network with new stores in the hinterlands (smaller towns and cities). But for the short term ie H1FY2013, it sounded cautiously optimistic. Building the same momentum in our estimates we have revised our
earnings for FY2013, with new EPS at Rs Rs32.8 and have also introduced our FY2014 estimates where we expect Raymond to report an earning per share (EPS) of Rs39.7 for the year.
Strong brand play - we maintain Buy: Raymond’s Q4FY2012 performance has been resilient in the light of challenging macroeconomics (demand slowdown, high input cost pressure) . We believe that Raymond, with its continuous focus towards its power brands and strong distribution franchise, is all set to encash on the strong secular consumer wave waiting ahead.
Hence we continue with our bullish view on the company. Further, any development with regard to the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash for the company. We continue to maintain our Buy rating on the stock and our revised sum of the part (SOTP) based target price of Rs500 (valuing the core business at 10x FY2014E earnings plus 50% value for the Thane land bank parcel).
What happened in the quarter gone by?
Q4FY2012 reported robust revenue growth; like to like sales grew 15%: Raymond’s consolidated Q4FY2012 revenue grew at a strong 13.1% YoY to Rs949 crore, led by a growth in textiles, garmenting and denim businesses, each of which grew at a Y-o-Y pace of 24.4%, 40.5% and 14% respectively for the quarter. Volumes in the denim business showed an increase of 5% on a Y-o-Y basis.
Increased discounting to liquidate inventory casted pressure on gross margin and thus operating performance: Increased discounting in the branded garment segment as a result of the management’s strategy of liquidating inventory due to weak macro sentiments and prolonged discounting season dented the company’s gross margins (down 2000 basis points
from approximately 64% to 43%). Hence the profitability for the quarter (operating profit margin
[OPM]) was down by approximately 400 basis points.
Earnings down 89% YoY, led by poor operating performance coupled with increased interest
charge: Along with a de-growth in the operating profit, an increased interest expense (+26% YoY) and depreciation (+7.6% YoY) dented the earnings down by 89% YoY for the quarter.
Denim showed improved performance while worsted & branded apparels witnessed margin pressure: Across the board for the quarter, the revenue momentum was robust for the core business segments (viz textiles, garments, denim, branded apparels) with the only exception being the shirting business, that saw a decline in revenue (-9.7% YoY). On the profitability front, denims saw an improved performance on a Y-o-Y as well as sequential basis; its EBITDA grew by approximately 91% YoY and 17% sequentially with increased volume offtake (+5% YoY) and stable realisation.
The worsted / suiting segment that sells fabric under its flagship brand Raymond, along with the branded apparel business (that includes readymade apparels for formal wear sold under Raymond and Park Avenue brands and casual wear sold under Parx and Colorplus brands) saw pressure in its gross margins due to an extended sale season for inventory liquidation. The worsted EBIT margins tumbled down 310 basis points YoY (-440 basis points quarter on quarter [QoQ]), while the branded apparel business posted an EBITDA loss of Rs15 crore for the quarter (as against a profit of Rs6 crore in Q4FY2011 and Rs29 crore in Q3FY2012).
What were the management’s comments?
Q4FY2012 results included certain one-offs: Raymond’s Q4FY2012 results included certain one-off expenses / costs in the form of inventory write-off (approximately Rs4 crore) and costs related to the Thane plant’s relocation to Jalgaon (Rs9 crore booked in the manufacturing cost). Concentrated efforts towards clearing and liquidating old inventory from the system
impacted the gross margin (around 32% sales from the branded garment segment amounting to approximately Rs53 crore came from the deep discount sales).
Satisfied with Raymond’s achievements: Despite a challenging macroeconomic environment in H2FY2012, the management sounded quite satisfied with its performance and mentioned that its worsted segment’s volume growth at 9% was ahead of the industry growth rate. In the branded fabric business it has increased its market share in the multi brand outlet (MBO) segment which grew by 34% for the year. The extension of brand Raymond from a fabric to apparel has been successful (in two years’ time frame) with its apparel range clocking a turnover of Rs85 crore for FY2012.
Expects recovery from H2FY2013 onwards: The management in its commentary sounded cautiously optimistic about the near term macro environment and expects a strong recovery from H2FY2013 onwards. Likewise it is gearing itself towards the same with it introducing a new avatar for its ColorPlus range and is planning to make Makers a national brand from a
regional one currently.
Relocation of Thane capacity to Jalgaon completed: The relocation of the 7 million meters Thane capacity to Jalgaon has been completed and the same has enhanced the company’s worsted capacity from 31 million meters to 38 million meters with a total cost of Rs65 crore.
Focus on power brand continues to be strong: The company continues to focus all its energy on growing its four power brands - Raymond, Park Avenue, Parx and ColorPlus. It has strategised on continuous investment in the brands through advertisement and enhanced retail expansion (the management has guided towards opening 100 The Raymond stores in
FY2013) covering more hinterlands ie class-3, class-4 and class-5 towns and cities.
What have we done to our estimates?
The management in its commentary sounded committed to its core strategy of focusing on its four power brands and enhancing its already strong network with new stores in the hinterlands (smaller towns and cities). But for the short term ie H1FY2013, it sounded cautiously optimistic.
Building the same momentum in our estimates we have revised our earnings for FY2013 to Rs32.8 and have also introduced our FY2014 estimates where we expect Raymond to report an EPS of Rs40 for the year.
Strong brand play - we maintain Buy: Raymond’s Q4FY2012 performance has been resilient in terms of macroeconomics (demand challenges) although it faced input pressure. We believe that Raymond, with its continuous focus towards its power brands and strong distribution franchise, is all set to encash on the strong secular consumer wave waiting ahead. Hence we continue with our bullish view on the company. Further, any development with regard to the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash for the company. We continue to maintain our Buy rating on the stock and our revised SOTP based target price of Rs500 (valuing the core business at 10x FY2014E earnings plus 50% value for the Thane land bank parcel).
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