Raymond-The Impregnable Brand -Prabhudas Lilladher,

Raymond-The Impregnable Brand
• Leveraging brand, strongly expanding retail presence
• Upwards trajectory post restructuring
• Moving towards and asset-light model

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 Strong branded retail play: Leveraging on its strong five decade old brand,
Raymond is spurring ahead and expanding its retail presence which is currently
at 853 stores, up from 584 in FY09 and targeting 100 stores/year, going forward.
The might of the brand is further accentuated by the fact that 78% of its stores
are franchises. Besides, its franchise model involves outright purchase of stocks
by franchise owners, thus, limiting the company’s working capital.
 Focused restructuring paves the way: Raymond has been on a strong upward
trajectory post its FY08-11 restructuring. Strong scale-up in revenues and cost
savings have emanated from the series of restructuring activities undertaken
which includes transfer of its Thane operations, closure of its loss-making denim
factories, realignment of its brand strategy, as well as stabilisation of ERP. With
the restructuring complete, we expect a clear runaway, going forward.
 Moving towards an asset-light model: Keeping a strong eye on return ratios
which are currently low, Raymond targets to remain asset-light by focusing on
its franchise-strategy on the retail side as well as outsourcing of routine
manufacturing processes.
 All-round growth: Besides the textile & garments segment, which is expected to
grow at 15% CAGR over the next two years, the company expects strong growth
of 28% CAGR for its engineering division as well which includes the tools & files
as well as the auto components segment.
 Valuations: We have used a host of consumption names with retail bend for
comparison since there is no strict peer group for the company. These trade at
an average PER of 26x FY13 & 23x FY14, albeit with much higher return ratios
than Raymond. Accounting for the same, we are valuing Raymond at a PER of
12x FY14 which gives us a value of Rs467/share. Further, the prime land in
Thane owned by the company provides an option-value of Rs244-326/ share,
although not included in our target price. We initiate coverage on the stock with
a ‘BUY’.


Valuations
Although there is no strict peer group for Raymond, we have used a select set of
consumption names with a retail bend. The peer group trades at an average 26x
FY13 & 23x FY14. On a comparative basis, Raymond trades at 12.9x FY13 and 9.5x
FY14, albeit with much lower return ratios.
Taking into account Raymond’s lower return ratios, we are valuing the company at a
PER of 12x FY14 which gives us a value of Rs467/share. The implied upside, given this
TP, stands at 27%.
The value of the Thane land parcel works out to Rs244-366/share on a post-tax basis
based on a range of Rs150-200m/acre. This is nearly as much as the current market
capitalization of the company and has a potential to de-lever the company
completely. Although, we are not including this value in our target price calculation,
this offers strong down-side protection.
We initiate coverage on the stock with a ‘BUY’