Raymond: Back in black

Recommendation: Hold

Reshma Krishnan

RAYMOND was back in black in the July-September quarter after a year of mediocre performance.

Despite a fall in turnover, there has been significant growth in the bottomline with the company tightening its operations and raising efficiency. The benefits of the restructuring have begun to show, as is evident in the second quarter performance.

The highlight of the quarter's performance was the Rs 40.83-crore net profit compared to a loss in the corresponding previous period.

Sales fell a whopping 33.62 per cent in the second quarter ending September 2001 to Rs 294.99 crore (Rs 444.40 crore). This is attributed to seasonal factors and a general downtrend in the industry. First, the fabrics sector is seasonal and owing to Diwali a bulk of the sales will be realised in the second half of the year. Second, the textiles sector *- especially fabrics _ is facing saturation.

Expenses fell by 38.44 per cent resulting in a smaller fall in operating profit, which fell 9.22 per cent to Rs 66.53 crore for the quarter ending September 2001 from Rs 73.29 crore in the corresponding previous quarter. This was on the back of a large rise in margins. Margins rose to 22.55 per cent for the quarter ending September 2001 from 16.49 per cent in the corresponding previous period. Therefore, the restructuring exercise seems to have made the company cost-efficient.

Margins were better on the back of a steep fall in cotton prices, the lowest in three years. This has benefited Raymond to a large extent, as cotton is one of its major raw materials.

Net profit margins were at 13.84 per cent for the quarter ending September 2001. And this was due to the 86 per cent fall in interest costs at Rs 4.17 crore from Rs 30.14 crore. This is another area where the restructuring seems to have paid off.

As a result of the sale of the cement and steel divisions in September 2000 and January 2001 respectively, there was a resultant cash inflow of Rs 1,100 crore. These have been partly used to cut debt and fund a buyback.

The company is also looking to retire debt up to Rs 70-75 crore, which will probably bring this figure within the 0.40-0.50 range. Part of the cash inflows were also used to fund a buyback through which Raymond bought back 13.7 crore shares at an aggregate value of Rs 186.25 crore. The share capital was, thereby, reduced to Rs 61.38 crore.

Sales for the six months ended September 2001 fell even further than the quarter by 44.62 per cent to Rs 427.13 crore from Rs 771.23 crore for the corresponding previous period. The second quarter was a definite improvement over the first, accounting for 60 per cent of the sales for the six months ending September 2001.

Since the divestment of cement and steel, textiles has become Raymond's core segment and is largely responsible for the rise in operating profit margins; accounts for almost 80 per cent of total sales, and has divisional margins of 24 per cent. This is higher than all the other segments.

Employment of capital is still in need of better management as return on capital employed (ROCE) stands at 8.1 per cent. The major drag on this is the denim division which has an ROCE of a measly 1.08 per cent. Denim is a recent addition to the company's portfolio, following the amalgamation of the erstwhile Raymond Caltiri Denim Ltd in April 2000.

Denim has seen some rough years in the recent past. The company is looking to expand its denim capacity to 16.5 million meters from 11.5 million meters, probably because denim is coming back in fashion.

The company's earnings per share (annualised) is about Rs 12, a jump from the actual EPS (excluding exceptional items) of Rs 3.91 as of March 2001.

Raymond is beginning to emerge as a company with strong cash flows going in the right direction. In the next six months, there should be an improvement in topline performance owing to the seasonal nature of the business and the continued weakness in cotton prices. Investors can hold on to their exposures in the company and buy if prices fall momentarily.