Tuesday, August 21, 2012


Short term blip in long term growth story
Raymond Ltd Q1 FY13 results were below street estimates, both on the topline and bottom-line front. In Q1 FY13, company's net sales increased 9.5% Y-o-Y however declined 12.5% sequentially to Rs. 8377.1 mn while the EBIDTA margin declined ~565 bps Y-o-Y and ~ 464 bps sequentially to 3.7%, primarily on account of lower margins in the Textile and Branded apparel business.

Textile and Branded apparel segment impacted due to poor consumer sentiments, higher input costs, inventory liquidation, lower contribution from high margin products … In the quarter, the textile division sales increased 6% Y-o-Y to Rs. 3.66 bn while that of the branded apparel segment declined 3% Y-o-Y to Rs. 1.71 bn, on account of a weaker demand profile due to poor consumer sentiment and a subdued wedding season. The EBIDTA margins of textile and branded apparel division declined ~ 1000 bps Y-o-Y and ~ 700 bps Y-o-Y to 5% and 6% respectively. The management expects the demand to recover in H2 FY13 on account of a strong wedding and festive season.

…However, Other segments showed robust performance
In Q1FY13, Raymond Zambaiti - JV net sales increased 29% Y-o-Y to Rs. 0.68 bn while the EBIDTA margin of the business increased ~ 400 bps Y-o-Y to 14%. The capacity utilization of the 21.6 mnpa plant improved to 76% and likely to be fully utilized by FY13.

In the quarter, Indian denim business net sales increased 3% Y-o-Y to Rs. 1.98 bn while the EBIDTA margin which increased ~ 200 bps Y-o-Y to 13%. The plant operated at 100% capacity utilization. The segment is likely to continue its robust performance on account of a good order book.

In the quarter, the Tools and Hardware sales increased 30% Y-o-Y to Rs.0.91 bn while the margin expanded 200 bps Y-o-Y to 13%. The auto component sales increased 20% Y-o-Y to Rs. 0.39 bn while the EBIDTA margin ~ 200 bps Y-o-Y to 17%.

Emphasis on core brands, cost rationalization and retail network expansion continues…
In the quarter, the company added 28 stores taking the total count of stores to 867. In Q1 FY13, the company added 21 EBO while the retail space increased 11% Y-o-Y to 1,681 thousand square feet. For FY13, the company is likely to add 80-100 stores. In the quarter, company reported exceptional expense of Rs. 129.2 mn on VRS payments for 140 employees. The company is likely to carry out further employee rationalization which may put pressure on the bottom-line in the short term but is positive in the long term.

Valuations and outlook
We cut the EBIDTA estimates of FY13 by 7.8% to factor in the subdued Q1 FY13 results. At the
CMP, Raymond is trading at an Adjusted P/E of 13.0x FY13E and 9.6x FY14E EPS of Rs. 27.4 and Rs. 37.1 respectively. Over FY12-14E, we expect the company's sales and EBIDTA to grow at CAGR of 12% and 13% to Rs. 45.45 bn and 5.9 bn respectively. Raymond is trading at an EV/EBIDTA of 6.5x FY13E. We value the company at an EV/ EBIDTA multiple of 8.0x FY13E, a ~25% discount to its historical average; we arrive at a revised target price of Rs. 480 per share. The company's ~ 125 acres Thane land could fetch Rs. 15.0 -18.75 bn (implying valuation of Rs. 244- 305 per share) at conservative land valuation of Rs 120-150 mn per acre. However we do not factor the land valuation in arriving at our target price. We believe any sale of land would substantially reduce the debt and strengthen the balance sheet and would drive further re-rating in the stock. We have not factored in valuation of land in arriving at our target price. Any form of real estate value unlocking would be value accretive.