Krishna Karwa Moneycontrol Research
After a disappointing Q1FY18 performance, Raymond reported much better earnings for the quarter ended September 30, 2017, notwithstanding the challenges associated with seasonality, advancement of sales to the June quarter and GST implementation.
Performance review of the core segments
Barring the garmenting segment, all other segments of Raymond performed well.
The branded textile segment was impacted by lower off-take by the wholesale channel for suiting products. An early onset of the festive season, however, helped trade channels in the last 15-20 days of September, thereby leading to an increase in sales with respect to Raymond’s shirting fabric and ‘Made To Measure’ brands. Operational efficiencies led to a marginal margin improvement.
Raymond’s branded apparel segment gained strong traction during the September quarter due to high demand from trade and an extension of the ‘end of season sale’ period. The company’s Ready to Wear, Park Avenue, ColorPlus, and Parx brands recorded good growth.
Raymond’s high-value cotton shirting fabric segment, which has been a fairly steady performer for the company, witnessed marginal growth on account of a decline in customer spends from July to September. Nevertheless, a better mix of products and stable raw materials aided margin stability.
Appreciation of the rupee against the US dollar affected the product mix, realisation and margins of Raymond’s garmenting segment in the second quarter of the ongoing fiscal.
The company added 54 new stores (including 31 mini ‘The Raymond Shop’ stores and one exclusive brand outlet) mainly through the franchise route, shut 12 stores, and renovated 13 stores in the second quarter of the fiscal.
Higher realisations, volume-driven growth in the Latin American and African markets, and turnaround measures gave Raymond’s tools and hardware segment a shot in the arm in Q2FY18.
Raymond’s auto ancillary segment reported healthy volume growth of nearly 12 percent on the back of post-GST re-stocking by dealers, higher export realisations, and tailwinds in demand for passenger/commercial vehicles in the September quarter.
The scenario ahead
Restocking across the supply chain for Raymond’s textile and FMCG segments hasn’t been up to the mark yet and return to normalcy might take some time.
Sales at Raymond’s retail stores, which got off to a slow start at the beginning of October, are likely to pick up in the remainder of the fiscal as the festive and wedding season commences. Introduction of 500 variants of suiting and shirting fabric, addition of 60 new stores pan-India in Q3FY18 (including 45-50 mini ‘The Raymond Shop’ stores), channel expansion through multi-brand and exclusive brand outlets, and positive demand for ethnic wear are some of the other factors that could aid revenue growth.
The company targets to achieve EBITDA margins of close to 10 percent by FY20 and reduce its working capital cycle from 109 days to 90 days over a period of time.
Going forward, asset-light expansion by virtue of more franchise stores (of small size in tier 3/4/5 cities of India) remains Raymond’s strategic plan.
Restructuring decisions in the tools and hardware segment are on track and should yield positive results going forward.
Valuation
While we take note of Raymond’s improved quarterly performance, at 36x FY19 projected earnings, the stock price, apparently, seems to have fully discounted the economic moats (particularly in relation to the capacity expansions) that we elaborated on in our earlier article. We would, therefore, recommend buying on corrections.
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