Monday, January 30, 2012

>RAYMOND: Cyclical blip on secular growth story

Growth moderation in FY13 but 

company remains a solid proxy 
for India’s consumption story

■ Action/Valuation: Maintain Buy with Increased TP of INR525
Even after we factor in the impact of a relatively muted 3Q results in our estimates, we raise our TP to INR525 as we roll forward our estimates to FY14. Our TP still values the core business at INR425 based on 6x EV/EBITDA FY14E, which implies 10.1x P/E multiple, and we continue to value land at INR100/share. The current valuation of 10.3x FY13F adj. EPS and 7.3x FY13F EPS adjusted for land value appear quite compelling to us. We view the current price level as an excellent entry point for a long-term secular growth story.

■ Scaled back topline growth estimates for FY12-FY13 after 3Q results
We reduce our FY13 sales growth rate estimate from 11.1% to 7.1% on the back of Q3 results and expected moderation in realization growth. We incorporate a slowdown in the consumer sentiment on account of high inflation in our FY12-FY13 estimates but expect growth to rebound in FY14. While we also reduce our margin assumptions for FY12, we increase our FY13 EBITDA margin estimate by 220 basis points as we factor in the fall in raw material price along with the closure of unprofitable businesses like Manzoni.

■ Catalyst: Short-term headwinds but long-term story remains intact
We think Raymond remains a solid proxy for the Indian consumption story where we expect consumers will upgrade to branded and higher-value products driven by rising income and increased discretionary spending. This trend should improve the current relatively low per capita apparel consumption and low penetration of retail in India. Raymond, with its range of brands, high brand recall and a solid distribution network, should be very well positioned to benefit from rising demand, especially in tier 3/4/5 cities and towns. Reiterate Buy.

■ Q3FY12 – Volume impacted by festival timing and poor consumer sentiment that should only last a short time
Sales growth moderated to 11.7% in Q3 at the consolidated level. Volume growth, which dropped to 3% y-y in the suiting fabric business, was flat in shirt & trouser and negative in other apparel businesses. One reason for the dismal y-y sales growth in Q3 has been the timing of Diwali. Diwali in FY12 was in October vs. in November in FY11. This resulted in September being the strongest sales month in FY12 vs. October in FY11. So comparing (Q2+Q3) performance, Raymond’s sales grew at ~19% in FY12 vs. ~20% in FY11 which is quite healthy, in our view. But as per management, consumer sentiment was depressed in
the past two months of Q3FY12 on account of high inflation.

To read the full report: RAYMOND