Raymond - High Inventory & Operating Margin Pressure amid Tepid Consumer demand; Downgrade to 'HOLD' - Karvy

Raymond Q3FY13 revenue grew 10% to Rs. 10,527, EBITDA declined 36% to Rs. 1,010 mn while adjusted net profit was at 252 mn (adj. for VRS payments). The Company reported net profit of Rs. 128 mn for the quarter. Textile Segment (worsted fabric): Raymond's textile business grew 8% YoY to Rs. 5,540 mn in Q3FY13 with flat volumes and lower realization by 1.5%. Poly wool realizations were down by 3% YoY. Higher exports share amid depreciating rupee and Makers brand aided revenue growth. 'Makers' brand contributed Rs. 670 mn to the top-line. EBITDA margin declined by 6% YoY to 19% due to higher raw material and utility costs, thus EBITDA declined 17% to Rs. 1,060 mn.

Branded Apparel under-performed: Branded Apparel sales declined 7% to Rs. 1,840 mn, EBITDA margins collapsed to 2% compared with 15% in the corresponding quarter. EBITDA slipped by 87% YoY to Rs. 40 mn. The segment is stacked up with high inventory of around three seasons, to push under season sale. We expect at least two more quarters to clear high inventory levels.

Denim & Cotton Shirting: Revenue from Denim and Cotton Shirt business grew 14% and 24% to Rs. 980 mn and Rs. 400 mn respectively. Lower cotton prices and higher exports pushed EBITDA by 34% and 32% to Rs. 120 mn and 60 mn respectively.

Files and Auto Component: Files reported top-line growth of 28% at Rs. 960 mn with 1% margin compression due to higher exports where margin is low while Auto Component revenue declined by 31% to Rs. 270 mn with 4% margin contraction, owing to weak demand from auto sector.

Outlook & Valuation: We expect revenue and net profit to grow at a CAGR of 12% and 10% respectively over FY12-FY14E. We marginally downgrade our FY13 and FY14 revenue forecasts. We revised our EBITDA down by 17.6% and 6.0% for FY13 and FY14 respectively on high operational costs. At CMP of Rs.405, the stock trades at 13.1x and 6.3x of FY14 earnings and EV/EBITDA respectively. We downgrade our recommendation to "HOLD" and target price to Rs. 426 based on 6.5x FY14 EV/EBITDA, which has a potential upside of 5%.

Source : Equity Bulls

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