BUY Raymond: Target 635 :Anand Rathi

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Closing 381 BUY Target 635
Investment Rationale
~ Strong portfolio of brands
~ Largest retail network
~ The turnaround
~ Land bank, the trigger
~ Industry outlook
Company Description
The largest integrated manufacturer of worsted fabric, Raymond
has one of the largest exclusive retail networks in textiles and
fashion in India. It is part of an eight-decade-old group, in
operation since 1925.
It has three business divisions, Textiles, Engineering and
Automobile components, with 13 plants in Maharashtra, West
Bengal, Gujarat, Madhya Pradesh and Karnataka. It has textiles
capacity of: 31m metres per annum (Chindwara, Vapi and
Jalgaon) in worsted fabric, 21.6m mpa in high-value cotton fabric
(Kolhapur), 1.7m mpa in woolen fabric (Jalgaon) and 47m mpa in
denim fabric (Yavatmal and Romania).
It has a strong wide marketing of 762 exclusive outlets, comprising
150 exclusive brand outlets and over 18,000 touch points. It
covers over 400 towns.
It is exclusively present in over 150 cities across India and
overseas especially exports to over 55 countries including the
USA, Canada, Europe, Japan and the Middle East.
The Business
The company operates three business divisions: Textiles,
Engineering and Automobile components.
Textiles includes branded apparel, garments and denim. This
segment is the major revenue contributor, contributing almost 88%
to total revenue.
Engineering includes files and tools, sold under the brand JK Files
and Tools, contributing around 8.3% to total revenue.
Automobile components. The company is an original-equipment
manufacturer, supplying to domestic and international automobile
manufacturers. The segment contributes around 4.3% to total
revenue.
Exports are hardly 15% of the total revenue.
Investment Rationale
• Strong portfolio of brands
Raymond operates in the fast-growing discretionary and lifestyle
category of branded textiles and apparel.
It has a strong portfolio, both in fabric and apparel that best
position it to cater to brand-conscious customers.
Its brand, the Park Avenue, recently got a new logo and is the
largest men's apparel brand for the textile major. Its Color Plus the
second largest, also focusing on the men's sub-segment (it
recently quit women’s wear). Also, Parx and Raymond Premium
Apparel (RPA) continue to be men-centric.
So, the company has a rich and diversified product profile.

• Largest Retail network
The company has one of the largest exclusive retail networks
across the country. It has a strong network in the form of 762
outlets (comprising 150 EBOs, 571 The Raymond Shop outlets in
India and 41 The Raymond Shop outlets internationally). It has
over 18,000 touch points and markets in more than 400 towns.
It exports its products to over 55 countries, including the USA,
Canada, Europe, Japan and the Middle East.
At present, it is moving into smaller towns and cities (tier-3, tier-4,
tier-5).
It also follows a very unique asset-light franchise model.
• The turnaround
Profitability had been affected in 2008-2009 mainly due to the
denim business and the slowdown across the world. Besides,
forex losses and duplicate plant costs (Thane and Vapi) had
impacted performance. Now the company has quit the US and
Belgium denim business. It has also exited GAS JV with other
brands such as Zapp! Behome. It is now re-focusing on its core
business as well planning to reduce its debt burden gradually over
the period of time.
The core business has stabilised. The renewed focus on power
brands and on deepening penetration in tier-3, tier-4 and tier-5
cities is expected to drive growth across business.
The Q2FY12 results for the company showed stellar performance,
with 26.5% growth in the top line and 23.7% growth in the bottom
line. Strong growth in the branded apparel business, sharp focus
on frontline brands (Color plus, Park Avenue, Parx and Raymond),
and healthy growth in garmenting business were the main reasons
for the quarter. It clocked an EPS Rs. 13.19 for the quarter ended.
It has cash and cash equivalents of ~Rs. 547crs.
• Land bank, the trigger
The land bank has been a hangover for a long time now. The
company has 120 acres in Thane. In 2009, the Thane plant was
closed and the issue of VRS for workers there has now been
settled. Hence, the land is now ready to be developed. The

company is planning to monetize this land and reduce its debt and
strengthen its balance sheet. This would act as a trigger ahead.
Thane plant relocation is also on schedule and is expected to
commence production by Q4FY12.
• Industry Outlook
Industry size: Rs.7,200 crore men's casual ready-to-wear market
(overall men's ready-to-wear is Rs.24,000crore), indicating huge
potential for growth.
On the policy front, there are hopes that the government may
soon allow foreign direct investment (FDI) in the multi-brand retail
sector. There was recent speculation that the Department of
Industrial Promotion, which falls under the Commerce and
Industry Ministry, mooted a proposal to open multi-brand retailing
to FDI. At present, FDI in multi-brand retailing is prohibited in
India, whereas it is permitted up to 51% in single-brand retailing.
Further, the full opening of FDI in retail would create conditions for
a greater flow of investments to the back-end with related benefits
to farmers, small business and consumers.
Concerns
Fluctuating commodity prices may pose some risk for the
company.
The media report of income-tax raids at Raymond’s premises has
further dampened sentiment.
Valuations
Raymond has shown good performance for the current financial
year and with festive season and improved demand the company
shows a positive outlook for future though pressure on margins is
visible. At CMP the stock trades close to its lowest PE valuations
of last 5 years. We have a price target of Rs. 635.