Improved operational performance
* Raymond’s overall performance was above our expectations, driven by broad-based growth across divisions. Sales increased 16%, which was 8% above our estimates while EBITDA/PAT rose 36%/63%, which came in 20%/30% above our expectations.
* Management commentary was cautious on Q3 growth trends, but it expects growth to improve from Q4 due to the wedding season.
* While Raymond has maintained its 100bps margin expansion guidance for the year, given the 190bps margin expansion in H1, we believe that upsides are likely. Better capacity utilization in garmenting, higher gains from currency depreciation, and continued focus on efficiencies should drive margin expansion in H2.
* Debt and interest costs, however, increased in the quarter — a negative which has resulted in a 12-14% cut in our FY19-20E EPS. At 10x FY20 EBITDA, the stock still appears attractive. We maintain Buy, with a revised TP of Rs1000 (from Rs1260), valuing Raymond at 12,5x FY20 EV/EBITDA.
* Branded textile business recovers post weak Q1:
Compared with a weak 1Q, branded textiles growth recovered to 15%, partly on a low base. LTL EBITDA margins were lower by 50bps due to higher wool prices and ad spends. Management believes that wool prices have peaked and expects price hikes of 2-4% and other cost savings to help maintain fullyear margins.
* Branded apparel growth driven by MBOs –
Management initiatives for increasing the number of distributors and better placement of brands have driven strong growth in apparels. MBO recorded 53% growth, which is likely to be sustained. Growth across EBO was slower but it expects the EBO channel to pick up in H2 on festivities. Margins were stable at 3.2% despite high ad spends and prolonged EOSS.
* Focus on efficiencies driving profitability:
Overall operating margin improved 150bps despite higher ad spends (5.9% vs. 4.6%), driven by strong margin gains in garmenting (420bps), high-value shirting (480bps), and tools and hardware (540bps). Management believes that Raymond will see net gains of currency depreciation and expects gains in H2 to be higher (H1 gains were lower due to hedged positions).
* EPS cut due to higher interest costs; transformation journey still on track:
Management expects to turn FCF positive next year and plans to reduce debt through asset monetization. Although operational performance was good, factoring in the increase in interest costs, we cut FY19-20E EPS by 12-14%. At 10x FY20E EV/EBITDA, valuations still appear attractive. Maintain Buy with a revised TP of Rs1000 (from Rs1260).
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