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Raymond dominates the suit fabric segment (market share ~70%) in India and, in
our view, looks well positioned (after its recent restructuring) to grow business in its
core brands by opening new stores across the length and breadth of the country.
We initiate coverage with a BUY rating and price target of Rs470.
Catalysts
Strong revenue growth driven by new store openings; margin expansion due to
re-structuring; and monetisation of real estate are potential catalysts for the stock.
Anchor themes
Discretionary spending by the Indian consumer is likely to be strong in coming
years, especially in the premium clothing segment. We look for this trend of
increased spending on luxuries to spread to the smaller cities and towns of India
(refer to our report, Playing India consumption, dated 8th July 2011).
Renewed focus on growth
A play on discretionary consumption in smaller cities
Raymond is expanding rapidly and has opened around 150 stores
(mainly in smaller cities) in the past one and a half years. Going
forward, it has plans to add the same number of stores over the
coming year and a half. Thus, we consider the company a play on the
growth in domestic discretionary spending on clothing and retailing.
Most popular brand in suit fabric and premium pricing
Raymond is the biggest brand in suit fabric, with ~70% market share
in India. As per TNS Global Market Research, the Raymond brand
tops the list for ‘off the top of the head’ and spontaneous recall versus
its competitors. While Raymond fabric is available across a wide price
range, in all categories it sells at a premium to its competitors.
Operations restructuring and growth focus
The company has closed its loss-making subsidiaries and brands, and
renewed its focus on a few brands. Pursuing this strategy, it is
opening new stores, creating product awareness and moving
manufacturing to low-cost locations. This operational restructuring is
likely to lead to margin expansion of over 300bps in FY10-13F, in our
view.
Potential trigger in real estate; initiate with a BUY
The stock currently trades at 14.4x FY12F reported EPS of INR21.06,
which is a material discount to other branded retail plays (based on our
and consensus estimates). In our view, the company is now on a
consistent growth path, which along with value realisation from real
estate could act a trigger for the stock. We value the core business at
13x one-year forward P/E and the real estate business at a
conservative value of Rs100/share. This gives us our price target of
Rs470.
Drilling down
Executive summary
A play on discretionary consumption in smaller cities
Raymond is expanding rapidly to tier 3/4/5 cities to take advantage of underpenetration
in India. The company has opened around 150 stores in past one and a
half years and has plans to add the same number of stores over the next year and a
half. With India’s rising income and increasing consumer spending, the company’s
premium products should benefit from rising discretionary consumption in the country.
Most popular brand in worsted fabric, on premium pricing
Raymond is the biggest brand in worsted (ie, suit) fabric with ~70% market share in
India. As per TNS Global Market Research, the Raymond brand tops the list for ‘top of
the head’ and spontaneous recall, and has the highest brand equity compared to its
competitors based on survey results. Raymond fabric is present across a wide price
range, but at a premium to its competitors.
Operation restructuring — exposure to JV and subsidiaries
Loss-making subsidiaries and a not-so-successful JV saw the company clock losses of
Rs2,284mn and Rs460mn in FY09 and FY10, respectively. To stem its losses,
Raymond closed its loss-making plants, converted the JV to a subsidiary and has
since substantially improved performance in a loss-making plant thus far in FY11. The
company had issues with implementation of ERP, which has now been rectified and is
being used to reduce lead time and for better inventory management. This operational
restructuring should drive margin expansion of more than 300bps over the FY10-13F
period, based on our forecasts.
Real estate pricing — potential upside
The company has 120 acres of land at Thane which it plans to develop for commercial
and residential purposes. It received board approval for development of 15 acres of
land for residential purposes, and a decision over the remaining acres will be taken in
3-4 months, as per management. Based on our conservative valuation of the land
parcel, this could lead to upside of Rs100/share when it is monetised.
Asset-light model and high return ratio
Raymond is following a franchise-based business model to enter into tier 3/4/5 cities.
This model requires low capex of ~Rs2.5mn per store and thus low assets on its
balance sheet, according to management. Furthermore, the company plans to open
~150 stores in the next one and a half years, which will require capex of just Rs375mn.
This, along with a turnaround in performance, should lead to improvement in ROA,
ROCE and ROE; we expect ROE of ~15% by FY13F.
Valuation
The stock is trading at around 14. 4x FY12F reported EPS of INR 21.06, which is a
steep discount to other branded retail companies (see the comparative exhibit below).
The valuation becomes an attractive 9.5x, if we adjust for the value of real estate that
can be monetised.
We value the core business at a 13x one-year forward P/E, based on a target
EV/EBITDA of 6x, a ~45% discount to its average EV/EBITDA of the past five years.
Reflecting our conservative approach, we assign this discount given the company’s
recent loss-making years. Since the company has been loss making at the net level for
the past three years, comparisons with historical P/E are not possible.
In our view, these discounts reflect past losses suffered by the company on some of its
businesses, which have now been restructured. Going forward, we reckon the
company is set for consistent revenue and EPS growth.
The value of the 120-acre land parcel comes to Rs100 per share, on our conservative
valuations, and we believe monetisation of real estate would likely be a key catalyst for
the stock. We initiate coverage on Raymond with a BUY and a price target of Rs470.
Investment risks
Woollen fabric business
As per management, the woollen outwear fabric business is not generating a profit and,
thus, the company will likely look to make a decision on the future of this business if
necessary. Closure of this business would likely lead to a one-time write-down, thereby
impacting our estimates.
Romania denim plant
The denim manufacturing plant in Romania is loss-making as demand in Europe is still
weak. If economic conditions in Europe remain subdued for a long time, management
may have to make a decision on the future of this plant, or simply tough out continued
losses there.
Unexpected economic downturn
As Raymond is a play on discretionary consumer consumption, any economic
downturn would likely lead consumers to reduce or postpone discretionary spending.
Also, a drop in demand in smaller cities and towns may not justify further company
expansion. In that case, we expect the company would halt its expansion plans. Any
such decline in consumer spending poses a risk to our estimates.
Rapid increase in raw material price
Raw material costs equate to around 25% of sales. Any unexpected increase in the
price of raw materials like cotton, wool and polyester could impact margins. Although
the company has thus far been able to pass on increases in raw material prices with a
3- to 6-month time lag, such increases do impact margins in the short term. Also, in the
shirt business, it is difficult to pass on an increase in raw material prices, since as per
management, customers are not wiling to pay beyond a certain price point for shirts.
Delay in real estate development
A delay in the company’s plan to divest its real estate property poses a risk to our price
target.
Exchange rate movement
Some of the raw materials, especially wool, are imported, and the company exports
products to Europe and the US. Although Raymond follows a conservative hedging
policy, any unexpected movement in exchange rates poses a risk to our earnings
estimates.
Valuation
Implied upside: 55%
The stock is trading at 14.4x FY12F reported EPS of INR21.06, which is a steep
discount compared to other branded retail companies, based on our and consensus
estimates. The valuation would become an attractive 9.5x, on our numbers, if we
adjust for the value of real estate which can be monetised.
We value the core business at a 13x one-year forward P/E, based on a target
EV/EBITDA of 6x, a ~45% discount to its average EV/EBITDA (11.1x) of the past five
years (April 05-Dec 10). Reflecting our conservative approach, we assign this discount
given the company’s recent loss-making years. Since the company has been loss
making at the net level for the past three years, comparison with historical P/E is not
possible.
In our view, these discounts reflect past losses suffered by the company on some of its
businesses, which have now been restructured. Going forward, we reckon the
company is set for consistent revenue and EPS growth.
The value of the 120-acre land parcel comes to Rs100 per share, on our conservative
valuations, and we believe monetisation of real estate would likely be a key catalyst for
the stock. We initiate coverage on Raymond with a BUY and a price target of Rs470.
We think our valuation of Raymond’s core business at a one-year forward P/E of 13x is
justified given:
The company has been transformed and is on a secular growth trajectory as
evidenced by aggressive growth plans (150 stores in the next one and half year).
We expect the ROE to improve to around ~15% by FY13F.
Asset-light franchise model of expansion in which the company’s typical return on
investments on new stores is high (50-60%).
Valuation of land parcel
We have valued the real estate business conservatively at Rs100 per share (Rs6.2bn).
This is based on almost a 55% discount to the current post tax realisable value
(Rs14bn) of this land parcel.
The company has a 120-acre land parcel in the heart of Thane city which is available
for real estate development, according to management. As per our property analyst
Aatash Shah, this land is centrally located and, in his view, could fetch a price of
around Rs150mn per acre. Based on this estimate, the total land parcel could be sold
at Rs18bn, or about Rs14bn net of taxes. This valuation is also corroborated by other
recent deals taking place in the same area — like DB Reality’s purchase of 105 acres
in Thane from Bayer Crop Science at Rs15,400mn (The Economic Times, 7 October
2010). As per Aatash, the quality of Raymond’s land is higher (in terms of location and
access) as compared with land bought by DB Reality and, in his view, could be valued
at 20% premium to that land.
Debt repayment scenario
Management stated on 23 January 2011 that it would like to use part of cash from real
estate monetisation to repay outstanding debt (~Rs16bn as of 31 2010). We have
assumed cash of Rs14bn would be used to repay debt — Rs7bn in FY12F and FY13F
each (in addition to “normal” debt repayment).
For reference, in this scenario of debt repayment, FY13F EPS would rise to Rs40.8
from our Rs29.9 estimate due to the impact on interest expense. In this case,
assuming the same target P/E of 13x, our price target could reach Rs499.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action
Raymond dominates the suit fabric segment (market share ~70%) in India and, in
our view, looks well positioned (after its recent restructuring) to grow business in its
core brands by opening new stores across the length and breadth of the country.
We initiate coverage with a BUY rating and price target of Rs470.
Catalysts
Strong revenue growth driven by new store openings; margin expansion due to
re-structuring; and monetisation of real estate are potential catalysts for the stock.
Anchor themes
Discretionary spending by the Indian consumer is likely to be strong in coming
years, especially in the premium clothing segment. We look for this trend of
increased spending on luxuries to spread to the smaller cities and towns of India
(refer to our report, Playing India consumption, dated 8th July 2011).
Renewed focus on growth
A play on discretionary consumption in smaller cities
Raymond is expanding rapidly and has opened around 150 stores
(mainly in smaller cities) in the past one and a half years. Going
forward, it has plans to add the same number of stores over the
coming year and a half. Thus, we consider the company a play on the
growth in domestic discretionary spending on clothing and retailing.
Most popular brand in suit fabric and premium pricing
Raymond is the biggest brand in suit fabric, with ~70% market share
in India. As per TNS Global Market Research, the Raymond brand
tops the list for ‘off the top of the head’ and spontaneous recall versus
its competitors. While Raymond fabric is available across a wide price
range, in all categories it sells at a premium to its competitors.
Operations restructuring and growth focus
The company has closed its loss-making subsidiaries and brands, and
renewed its focus on a few brands. Pursuing this strategy, it is
opening new stores, creating product awareness and moving
manufacturing to low-cost locations. This operational restructuring is
likely to lead to margin expansion of over 300bps in FY10-13F, in our
view.
Potential trigger in real estate; initiate with a BUY
The stock currently trades at 14.4x FY12F reported EPS of INR21.06,
which is a material discount to other branded retail plays (based on our
and consensus estimates). In our view, the company is now on a
consistent growth path, which along with value realisation from real
estate could act a trigger for the stock. We value the core business at
13x one-year forward P/E and the real estate business at a
conservative value of Rs100/share. This gives us our price target of
Rs470.
Drilling down
Executive summary
A play on discretionary consumption in smaller cities
Raymond is expanding rapidly to tier 3/4/5 cities to take advantage of underpenetration
in India. The company has opened around 150 stores in past one and a
half years and has plans to add the same number of stores over the next year and a
half. With India’s rising income and increasing consumer spending, the company’s
premium products should benefit from rising discretionary consumption in the country.
Most popular brand in worsted fabric, on premium pricing
Raymond is the biggest brand in worsted (ie, suit) fabric with ~70% market share in
India. As per TNS Global Market Research, the Raymond brand tops the list for ‘top of
the head’ and spontaneous recall, and has the highest brand equity compared to its
competitors based on survey results. Raymond fabric is present across a wide price
range, but at a premium to its competitors.
Operation restructuring — exposure to JV and subsidiaries
Loss-making subsidiaries and a not-so-successful JV saw the company clock losses of
Rs2,284mn and Rs460mn in FY09 and FY10, respectively. To stem its losses,
Raymond closed its loss-making plants, converted the JV to a subsidiary and has
since substantially improved performance in a loss-making plant thus far in FY11. The
company had issues with implementation of ERP, which has now been rectified and is
being used to reduce lead time and for better inventory management. This operational
restructuring should drive margin expansion of more than 300bps over the FY10-13F
period, based on our forecasts.
Real estate pricing — potential upside
The company has 120 acres of land at Thane which it plans to develop for commercial
and residential purposes. It received board approval for development of 15 acres of
land for residential purposes, and a decision over the remaining acres will be taken in
3-4 months, as per management. Based on our conservative valuation of the land
parcel, this could lead to upside of Rs100/share when it is monetised.
Asset-light model and high return ratio
Raymond is following a franchise-based business model to enter into tier 3/4/5 cities.
This model requires low capex of ~Rs2.5mn per store and thus low assets on its
balance sheet, according to management. Furthermore, the company plans to open
~150 stores in the next one and a half years, which will require capex of just Rs375mn.
This, along with a turnaround in performance, should lead to improvement in ROA,
ROCE and ROE; we expect ROE of ~15% by FY13F.
Valuation
The stock is trading at around 14. 4x FY12F reported EPS of INR 21.06, which is a
steep discount to other branded retail companies (see the comparative exhibit below).
The valuation becomes an attractive 9.5x, if we adjust for the value of real estate that
can be monetised.
We value the core business at a 13x one-year forward P/E, based on a target
EV/EBITDA of 6x, a ~45% discount to its average EV/EBITDA of the past five years.
Reflecting our conservative approach, we assign this discount given the company’s
recent loss-making years. Since the company has been loss making at the net level for
the past three years, comparisons with historical P/E are not possible.
In our view, these discounts reflect past losses suffered by the company on some of its
businesses, which have now been restructured. Going forward, we reckon the
company is set for consistent revenue and EPS growth.
The value of the 120-acre land parcel comes to Rs100 per share, on our conservative
valuations, and we believe monetisation of real estate would likely be a key catalyst for
the stock. We initiate coverage on Raymond with a BUY and a price target of Rs470.
Investment risks
Woollen fabric business
As per management, the woollen outwear fabric business is not generating a profit and,
thus, the company will likely look to make a decision on the future of this business if
necessary. Closure of this business would likely lead to a one-time write-down, thereby
impacting our estimates.
Romania denim plant
The denim manufacturing plant in Romania is loss-making as demand in Europe is still
weak. If economic conditions in Europe remain subdued for a long time, management
may have to make a decision on the future of this plant, or simply tough out continued
losses there.
Unexpected economic downturn
As Raymond is a play on discretionary consumer consumption, any economic
downturn would likely lead consumers to reduce or postpone discretionary spending.
Also, a drop in demand in smaller cities and towns may not justify further company
expansion. In that case, we expect the company would halt its expansion plans. Any
such decline in consumer spending poses a risk to our estimates.
Rapid increase in raw material price
Raw material costs equate to around 25% of sales. Any unexpected increase in the
price of raw materials like cotton, wool and polyester could impact margins. Although
the company has thus far been able to pass on increases in raw material prices with a
3- to 6-month time lag, such increases do impact margins in the short term. Also, in the
shirt business, it is difficult to pass on an increase in raw material prices, since as per
management, customers are not wiling to pay beyond a certain price point for shirts.
Delay in real estate development
A delay in the company’s plan to divest its real estate property poses a risk to our price
target.
Exchange rate movement
Some of the raw materials, especially wool, are imported, and the company exports
products to Europe and the US. Although Raymond follows a conservative hedging
policy, any unexpected movement in exchange rates poses a risk to our earnings
estimates.
Valuation
Implied upside: 55%
The stock is trading at 14.4x FY12F reported EPS of INR21.06, which is a steep
discount compared to other branded retail companies, based on our and consensus
estimates. The valuation would become an attractive 9.5x, on our numbers, if we
adjust for the value of real estate which can be monetised.
We value the core business at a 13x one-year forward P/E, based on a target
EV/EBITDA of 6x, a ~45% discount to its average EV/EBITDA (11.1x) of the past five
years (April 05-Dec 10). Reflecting our conservative approach, we assign this discount
given the company’s recent loss-making years. Since the company has been loss
making at the net level for the past three years, comparison with historical P/E is not
possible.
In our view, these discounts reflect past losses suffered by the company on some of its
businesses, which have now been restructured. Going forward, we reckon the
company is set for consistent revenue and EPS growth.
The value of the 120-acre land parcel comes to Rs100 per share, on our conservative
valuations, and we believe monetisation of real estate would likely be a key catalyst for
the stock. We initiate coverage on Raymond with a BUY and a price target of Rs470.
We think our valuation of Raymond’s core business at a one-year forward P/E of 13x is
justified given:
The company has been transformed and is on a secular growth trajectory as
evidenced by aggressive growth plans (150 stores in the next one and half year).
We expect the ROE to improve to around ~15% by FY13F.
Asset-light franchise model of expansion in which the company’s typical return on
investments on new stores is high (50-60%).
Valuation of land parcel
We have valued the real estate business conservatively at Rs100 per share (Rs6.2bn).
This is based on almost a 55% discount to the current post tax realisable value
(Rs14bn) of this land parcel.
The company has a 120-acre land parcel in the heart of Thane city which is available
for real estate development, according to management. As per our property analyst
Aatash Shah, this land is centrally located and, in his view, could fetch a price of
around Rs150mn per acre. Based on this estimate, the total land parcel could be sold
at Rs18bn, or about Rs14bn net of taxes. This valuation is also corroborated by other
recent deals taking place in the same area — like DB Reality’s purchase of 105 acres
in Thane from Bayer Crop Science at Rs15,400mn (The Economic Times, 7 October
2010). As per Aatash, the quality of Raymond’s land is higher (in terms of location and
access) as compared with land bought by DB Reality and, in his view, could be valued
at 20% premium to that land.
Debt repayment scenario
Management stated on 23 January 2011 that it would like to use part of cash from real
estate monetisation to repay outstanding debt (~Rs16bn as of 31 2010). We have
assumed cash of Rs14bn would be used to repay debt — Rs7bn in FY12F and FY13F
each (in addition to “normal” debt repayment).
For reference, in this scenario of debt repayment, FY13F EPS would rise to Rs40.8
from our Rs29.9 estimate due to the impact on interest expense. In this case,
assuming the same target P/E of 13x, our price target could reach Rs499.
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