CLSA Ramayana: Disastrous 2q10 result

• Ramayana reported disastrous result, much below our and consensus.
• Net income is only 11% of our full year forecasts. Usually 1H makes up 20%-25% of full year forecasts.
• EBIT is only 7% of full year forecasts. And operating profits usually makes up 20-25% of full year profits.
• SSG has been strong like 15% up to May 2010 but margins were lower. This means Ramayana has to discount a lot more to clear inventory.
• We also understand from other consumer companies that during school holidays, families tend to spend less and save more preparing for reopening of schools. This could also possibly impacted Ramayana sales as it customers are super low end.
• That said, we need to drill down further as we had not expected such a poor performance.
• Investment conclusion: We would wait for more details to downgrade the stock as note 3Q10 is always the key as that is when Ramayana can book as much as 50-60% of its full year profits. Additionally, Ramayana remains an M&A play as we understand the company has separated its distribution centers for Department store and super market and also maintaining separate books of account for the two.