Raymond A weak performance; Inventory overhang persists: Prabhudas Lilladher

! Weak quarter despite festive season: Raymond’s performance across major
segments was extremely poor despite the festive quarter which is usually the
strongest quarter for the company. The consumer sentiment was extremely
poor through the quarter and hence, despite festivals and marriages, the offtake
remained weak.
The company reported revenues of Rs10.5bn, a 10% YoY increase and 5.6%
sequential decline. However, the major disappointment was on margins, with
EBITDA margins at 9.6% as against 16.4% in Q3FY13 and 14.3% in Q2FY13.
Reported PAT stood at Rs128.4m, 79% YoY and 75% QoQ decline. The company
incurred VRS expenses of Rs124m on retiring employees in their retail segment.

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! Textile division hit with cost increases: Although volumes were stable for the
worsted textile segment, the segment witnessed a 2% price decline. Growth in
sales of 7.8% YoY was on account of the ‘Makers’ brand contributing which is
now present across 7500 points of sale. However, margins in the segment
declined to 19% from 25% in Q3FY12 and 23% in Q2FY13. The sharp decline in
margins was on account of increase in raw material costs aided by the rupee
depreciation as well as an increase in the cost of utilities. Further, the additional
capacities of 7m metres, that were added last year, remained under-utilized on
account of the weak demand which further helped in mounting costs.
! Inventory overhang woes continue for branded apparels: The segment
witnessed a decline of 7% YoY in sales and 86% decline in EBITDA, with margins
at a mere 2% for the quarter. Heavy discounts to clear the inventory resulted in
poor financial performance. Besides, the company has also been transitioning
the sales channel for its ‘Park Avenue’ brand from operating out of ‘The
Raymond Stores’ (TRS) to a focused EBO sales channel which resulted in a
decline in presence of the brand at several TRS.


! The other business segments: The other business segments which contribute to
30% of sales witnessed a mixed performance, with the Cotton Shirting Fabric,
Denim and Garmenting businesses performing well during the quarter, while the
Auto components and tools & hardware witnessing pressures on account of a
tough business environment.
! The way forward: The company’s attempt is to clear the remaining inventory
through the End of Season Sale (EoSS) in Q4. The ongoing marriage season is
expected to help clear stocks at the channel level. The current ordering for the
next season is looking up and hence, FY14 could start off on a clean slate, post
the FY13 debacle. Besides, the company is confident of rolling out its supply
chain initiative by FY14 which shall help prop margins by a couple of hundred
basis points in the branded apparel segment.
! Valuations: As per our estimates, the stock currently trades at PER of 16.6 x
FY14E and 11.4 x FY15E. Our target price is based on 12X FY15E which gives us a
value of Rs424. We maintain ‘Accumulate’.