Fundamental View: Raymond
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Strong double-digit growth in consolidated revenues in FY2012 but profitability suffers: FY2012 was the second consecutive fiscal when Raymond posted an over 20% growth. The revenue growth at 20.5% was driven by volume as well as improvement in blended realisations. Segment wise, denim and garments grew at a healthy pace of 25.5% and 23% respectively in FY2012.
Slowdown in retail business impacted consolidated performance: Like other apparel retail plays, Raymond too saw a consumer slowdown hitting its business by end of Q2FY2012. The same got accentuated during the festive season, that dragged the overall operating performance on a consolidated basis. The operating profit grew at 16.2% on a year-on-year (Y-o-Y) basis, while the margins were down 50 basis points on a Y-o-Y basis from 13.5% in FY2011 to 13% in FY2012.
Disclosure norms improved; in terms of segments denim witnessed highest profitability improvement: As opposed to the erstwhile structure of reporting the stand-alone performance on a quarterly basis and providing the overall consolidated picture only on an annual basis, from H1FY2012 onwards Raymond started reporting results on both stand-alone and consolidated basis.
The segmental performance on a consolidated basis helps in gauging and understanding the underlying business environment and the performance of each business. Dissecting the segmental results, we observe that the denim business showed a tremendous improvement on the profitability front—the EBIT grew by 84.5% YoY, resulting in a 180-basis-point expansion in the EBIT margin from 3.8% in FY2011 to 5.6% in FY2012.
Affected by profitability, the RoE contracted to 10.5%: Despite a strong improvement in the revenue, the macro slowdown along with the cost escalation resulted in a lower profitability for the year, affecting the return ratios. The return on equity (RoE) for FY2012 stood at 10.5% vs 14.6% in FY2011. Going forward, the management aims at getting return ratios in higher double digits (~18-20%) over the next two years through efficient asset utilisation.
Maintain our Buy rating and price target for the stock: Incorporating the FY2012 annual report into our model, we expect a revenue growth of 10.7% and 15.2% for FY2013 and FY2014 respectively. We expect the margins to improve significantly by 100 basis points over two years from 13% in FY2012 to 14% in FY2014. The profit after tax is expected to grow at a 30% compounded annual growth rate (CAGR) over FY2012 to FY2014.
We believe that Raymond, with a continuous focus on its power brands and a strong distribution franchise, is all set to encash on the strong secular consumer wave waiting ahead. Hence, we continue with our bullish view on the company.
Further, any development with regard the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash for the company. We maintain our Buy rating on the stock with a sum-of–the-parts (SOTP) based price target of Rs500 (valuing the core business at 10x FY2014E earnings plus 50% value for the Thane land bank parcel).
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