Raymond - Q2FY14 Results: Turning the corner, improving visibility on profitability - Upgrade to BUY - PhillipCapital

Raymond Q2FY14 consolidated Results were way ahead of 20% our estimates and 54% consensus estimates. At operating level, results were in line with our estimates, PAT ahead because of lower tax rate (16.8%). Going forward, H2FY14E is likely to better H1FY14 led by more festive activities and wedding dates. We upgrade our estimates by 11% to factor in better margins in textile segments. Upgrade to BUY.

Focus towards profitable growth: The current results demonstrate the management strategy for the current year to focus on profitable growth. Although the topline has grown by 8% and 9% in Textile division and branded apparel biz respectively, the margin improvement witnessed in these two segments was significant. Textile segment EBITDA margins well ahead of our estimates at 27% (highest ever reported since last 10 quarters) followed by Branded Apparel that reported margin improvement of 88bps at 8%.

Key takeaways from conference call: a) Management stated that the Q2FY14 performance inline with company's estimates. b) Management is targeting of RoCE of 15% (currently at 11%) for its branded business over the medium term (Refer page-3 for roadmap) c) Inventory write off provided during quarter Rs70 mn and Rs40 mn on account of sale below cost price. No further provisioning is envisaged. d) Expects ôMakers ôto grow at 30% for next couple of years as there is immense scope in Poly Viscose Market. e) Management, although cautious, expects to sustain the growth momentum and sustain margin improvement on the back of demand led by good monsoons, forthcoming elections and Indian marriage season

Management Strategy ahead: a) Strengthening leadership position across the branded fabric biz. with market share (organized) in poly wool (60%) and poly viscose(25%). b) to become global supplier value added garments in US, Europe. c) Strengthen operative framework of Branded Apparel to improve market share of the business, Structural steps taken in last 3-4 quarters has resulted in bringing down the Autumn Winter' 11 inventory to Rs 100mn.

H2FY14 Outlook: (a) We expect H2FY14 margins to be closer to that of H2FY12 (one of the best years on operating metrics) at 12.6% as we expect company to maintain margin improvement in textiles, improve margins in Branded Apparel biz as full impact of supply chain initiatives begin to kick in.

We expect H2FY14E will be as strong PAT of (Rs915 mn) as consumer sentiments continue to be sluggish, we expect benefits of improvement in operations such as pricing and festive/wedding demand for textiles and reversion to normal inventory levels in branded biz coupled with to witness improvement in margins of the consumer facing business.

Valuation: The stock currently trades at 10.7x FY14E and 8x its FY15E earnings. We revise our estimates upwards to factor in higher to factor higher margins and lower tax rate. The performance in branded segment has improved as expected from Q2FY14 onwards because (a) Supply chain programme has resulted in fulfilling in primary sales in Q2 as against Q1 b) Re-organization/Centralization of Apparel biz and supply chains of all brands. Therefore we have better visibility of future earnings and believe it calls for re-rating of the stock. Therefore, we revise our rating to BUY and value the company based on 10xFY15 (roll over to FY15 estimates) with the revised target price of Rs 337.

Source : Equity Bulls

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