Buy Raymond; target Rs 460: FinQuest Securities

FinQuest Securities is bullish on Raymond and has recommended buy rating on the stock with a target price of Rs 460 in its January 28, 2013 research report.

"Raymond Ltd Q3 FY13 results were below our as well as consensus estimates both on the topline and bottom-line front. In the quarter, company's net sales increased 10.1% Y-o-Y; however, it decreased 5.6% sequentially to Rs. 10.52 bn, as against our expectations of Rs. 11.15 bn. In the quarter, the EBIDTA declined 36.8% Y-o-Y and 36.6% sequentially Rs. 1.01bn, as against our expectations of Rs. 1.66 bn, mainly on account of lower than expected margins in the Textile and Branded apparel business of the company. In Q3FY13, PAT declined 78.9% Y-o-Y and 74.5% sequentially to Rs. 128.4 mn while the Adjusted PAT came in at Rs. 210.8 mn, down 66.6% Y-o-Y and 63% sequentially. Despite festive season textile and branded apparels segments disappoints, but expect up-tick in performance on account of good wedding season ahead: In Q3FY13, the Textile segment revenue increased 8% Y-o-Y; however, remained flat sequentially to Rs. 5.54 bn.  Lack of pricing power in high inflationary environment coupled with a weak consumer sentiment despite festive season resulted in the decline in both realization and volumes. However, the sales ramp up in Makers and Combo pack supported sales growth on Y-o-Y basis. In the quarter, the EBIDTA margin of the segment declined ~600 bps Y-o-Y and 400bps sequentially to 19%, on account of higher raw material and utility cost coupled with a lower capacity utilization leading to lower absorption of cost.  The management stated that the order book for the coming quarters is good on account of the strong wedding season and, on the other hand, the wholesale channel (accounts for ~50% of textile sales), which witnessed de-growth in the quarter, has started to witness traction due to clearance of inventory at the wholesaler level. Raymond's textile division continues to witness good growth in the MBOs (Multi Brand Outlets), exports and TRS (The Raymond Stores) channels. Inventory overhang in the Branded Apparel division likely to be over in couple of quarters; benefits of supply chain initiatives to trickle in FY14: In Q3FY13, the net sales of the branded apparel segment declined 7% Y-o-Y and 19% sequentially to Rs. 1.84 bn due to change in the channel mix. The EBIDTA margin of the segment declined ~ 1300 bps Y-o-Y and ~800 bps sequentially to 2% due to higher discounting and inventory liquidation. The management mentioned that the division still has ~Rs 500 mn of inventory (about three seasons old) which could take another 1-2 quarters for clearance. In the quarter, the like to like sales witnessed a 9% growth as against a growth of 3% in Q2FY13 and 2% in Q3 FY12. The company's Supply Chain implementation is likely to be complete by FY13 and that the benefits of it likely to come from the next season. The management mentioned that the company current focus is on liquidating the current inventory pile up and the company is likely to start on a leaner note from FY14. There could be incremental margin expansion to the tune of ~3%-3.5% on account of the SCM initiatives. Denim business and Cotton shirting continue their robust performance: In Q3FY13, Raymond Zambaiti - JV net sales increased 24% Y-o-Y to Rs. 0.80 bn on account of increase in exports and realizations.  The EBIDTA increased 32% Y-o-Y to Rs. 0.12 bn while the margins improved 100 bps Y-o-Y led by the increase in the capacity utilization which increased to 83% in the quarter as against 69% in Q3 FY12. In the quarter, Raymond UCO denim - JV net sales increased 14% Y-o-Y to Rs. 1.95 bn led by improvement in the realization. The EBIDTA of the segment increased 34% Y-o-Y to Rs. 0.24 bn mainly on account of a 200 bps Y-o-Y improvement in margins to 12% on the back of higher realization. Focus on cost rationalization and Retail network expansion continues…In the quarter, the company added 21 stores taking the total count of stores to 914 while the retail space increased 9% Y-o-Y to 1,748 thousand square feet. The management mentioned that the company has started cost rationalization initiatives in the textile business to bring back margins to the earlier levels.   Valuations and outlook: At the CMP, Raymond is trading at an Adjusted P/E of 14.0x FY14E of Rs. 27.8 and at an EV/EBIDTA of 6.6x FY14E of Rs. 5.05 bn. We value Raymond at FY14E EV/ EBIDTA multiple of 7.5x, a ~25% discount to its historical average. We maintain our Buy rating on the stock with a FY14 target price of Rs. 460 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," says FinQuest Securities research report. Institutional holding more than 40% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

Read More