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November 03, 2011

Raymond
Premium brand at a discount
Company details Price target: Market cap: 52 week high/low: NSE volume: (No of shares) BSE code: NSE code: Sharekhan code: Free float: (No of shares) Shareholding pattern Rs530 Rs2,379 cr Rs458/245 4.5 lakh 500330 RAYMOND RAYMOND 3.7 cr

Ugly Duckling
Buy; CMP: Rs387

Key points
Lifestyle retailer with strong brands and powerful distribution set-up: Raymond is present in the fast growing discretionary & lifestyle category of branded textiles and apparels. With the growing income, rise in aspirations to lead a luxurious life, greater discretionary spending and favourable demographics, the segment of branded apparels & fabrics presents a tremendous growth opportunity and Raymond with its brands and superior distribution set up is very well geared to encash the same. Core business back on track: For the last four years Raymond had been struggling with a slew of issues, namely loss in the denim business, ERP roll-out issues, forex issues, and duplicate plant cost at Thane and Vapi. These issues have been resolved with the closure of the loss-making businesses and an amicable settlement with the workers. Thus the core business has stabilised. The renewed focus on power brands and on improving its penetration in tier-2 and tier-3 cities is expected to drive the growth in the companys core textiles business. Branded apparel business gains critical mass: With a bouquet of strong brands (like Raymond, Park Avenue, Parx and ColorPlus) in its portfolio Raymond is well placed to cash in on the discretionary consumption opportunity offered by the favourable demographic and income profile of the Indian consumer. The top-ofmind brand recall along with a penetration-led strategy (762 exclusive stores, presence in around 18,000 retail touch points) would help it in gaining critical mass in the branded apparel segment. Currenlty branded apparel contributes ~22% to the companys total revenue. With renewed focus and enhanced retail thrust, we expect the share to reach ~26% in the next 3-4 years time frame. Land bank provides additional trigger: After reaching a VRS settlement with its employees Raymond now has 120 acre of land (previously the location of the Thane plant) in the heart of Thane city (situated at Pokhran Road) available for development. The company is exploring options to monetise this land either through an outright sale or joint development. Any development with regard to land bank monetisation would provide additional trigger for the stock. Attractive valuations: A branded play with a strong distribution franchisee, enhanced focus and a turnaround story with improved earnings visibility, Raymond is trading at 9.4x its FY2013 EPS of Rs41.2. This is attractive compared to the other branded retail plays, and does not factor the inherent strength of the brand and renewed focus and turn around status. Thus we believe that the stock is due for a re-rating. Further, any development with regard to the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash to the company. We initiate coverage on Raymond with a Buy rating and our SOTP based price target for the stock is Rs530 (valuing the core business at 10.5x FY2013E earnings +50% value for the Thane land bank parcel).
Key financials Net sales (Rs cr) % growth EBITDA (Rs cr) % growth Reccurring PAT (Rs cr) % growth EPS (Rs) PER (x) EV/EBITDA (x) FY2010 2,508 -2.0 349.0 114.5 32.4 5.3 73.3 9.6 FY2011 3,036 21.1 483.8 38.6 149.2 360.7 24.3 15.9 7.2 FY2012E 3,446 13.5 580.3 19.9 202.2 35.5 32.9 11.7 5.8 FY2013E 3,811 10.6 669.4 15.4 252.8 25.0 41.2 9.4 4.7

Public & Others 21%

Foreign 8% Institutions 28%

Promoters 39%

Non-promoter corp 4%

Price chart
450 420 390 360 330 300 270 240 Feb-11 May-11 Nov-10 Aug-11 Nov-11

Price performance (%) 1m 3m 6.3 9.9 6m 12m 11.0 19.3 -9.2 4.3

Absolute 16.2 Relative to Sensex 9.4

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Raymond

Company background Founded in 1925, Raymond is one of the largest clothing and apparel companies in India today. It is also the market leader in both textile and file & tool businesses. Its business interests range from textiles, garmenting, apparel, retail and lifestyle brands (which are gaining more prominence now) to engineering (files, tools and automobile components). It is vertically integrated across the entire textile value chain. It has 13 plants spread across Maharashtra, West Bengal, Gujarat, Madhya Pradesh and Karnataka. It has brands like Raymond, ColorPlus, Park Avenue, Parx and Manzoni in its kitty. It also has an accessories store, Neckties & More.

of 612 The Raymond Shop outlets, 150 exclusive brand outlets (EBOs), and over 18,000 touch-points. It has a presence in over 400 towns. Since Raymond enjoys strong brand equity and recall, it has franchisees operating even out of tier-3, tier-4 and tier-5 cities. The brands are trusted so much that the company is able to follow a unique asset-light business model wherein the franchisees buy out the entire stock requirement without recourse to the company. The company has exited the loss-making Belgian and US denim operations that had affected its profitability in FY2008 and FY2009. The company is focusing again on its core business in India where a lot of market still remains untapped in the tier-3, tier-4 and tier-5 cities. The business Integrated operationsfrom fabric to retailing Raymond is an integrated apparel retail player, manufacturing a range of fabrics and apparels from a combination of wool, wool blended and cotton-based fabrics. The company leads the worsted market segment (wool and wool blends). Apart from the brand Raymond the company has a bouquet of other apparel brands, viz Park Avenue, Parx, Raymond Premium Apparel and ColorPlus, each being distinct with a leadership position in its segment. The company has a capacity to manufacture 31 million meters of worsted fabric, spread across three locations (Chindwara, Vapi and Jalgoan), with 21.6 million meters capacity to manufacture high-value cotton shirting fabric (of this about 10 million meters has been commissioned

The share of retail in the companys overall revenues has been increasing over the past few years. Retail stores contributed around 26% of the companys revenues in 2011. Going forward, this share from retail would rise even further. The higher value addition at the retailing level will ensure higher profitability. Raymond has a strong distribution network in the form
Integrated operations

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Raymond

recently). It has a 50:50 joint venture with UCO to manufacture every year 47 million meters of denim fabric spread in India (40 million meters) and in Romania (7 million meters), along with a garmenting capacity based out of Bangalore that caters to the companys in-house as well as external customers. Operates through 5 segments3 main segments contribute 90% EBITDA Raymond, along with its subsidiaries and joint venture companies, operates in five segments-textiles, branded apparel & garment, denim, files & tools and automobile components. The three businesses of textiles, branded apparels & garments and denim collectively make up for the main clothing business of the company and contributed 88% and 91% of the consolidated FY2011 revenue and EBITDA respectively.
FY2011 revenue mix
Denim, 8.5% Files, 10.6% Textiles, 49.4% Auto, 4.3% Others, 0.4%

The files and tools segment contributed 8.3% and 5.9% to the FY2011 consolidated revenue and EBITDA respectively. Under this segment Raymond manufactures steel files and other engineering tools sold under the brand JK Files and Tools. The automobile component segment contributed 4.3% and 3.4% to the FY2011 revenue and EBITDA respectively. Under this segment the company sells automotive components and is original equipment manufacturer supplying to domestic and international automobile manufacturers. On the clothing business, around 84% of the business is branded in nature (B2C). This includes worsted fabric sold under the brand Raymond (regular and premium), apparel sales under brands Raymond, Raymond Premium Apparel, Park Avenue, Parx, ColorPlus and Manzoni. About 16% of the sales comes through institutional/commoditised business that includes the cotton shirting business, the denim business and the garment conversion business. Employs various distribution channels to reach endcustomer Raymonds fabrics and apparels are sold through an array of distribution network employed by the company. It consists of a mix of distributors, wholesalers, retail touch-points, The Raymond Shop outlets and EBOs. Owing to its superior brand equity and brand recall status, the brand is stocked and available in around 18,000 retail touch points spanning from metro, tier1, tier-2, tier-3, tier-4 and tier-5 towns. Its own retail network of The Raymond Shop outlets and EBOs also have deeply penetrated into the hinterland with overall 762 outlets (comprising 150 EBOs, 571 The Raymond Shop outlets in India and 41 The Raymond Shop outlets internationally) spanning over 1.5 million square feet of retail space. Raymonds own retail network of The Raymond Shop outlets and EBOs account for around 26% of the total branded clothing retail sales (B2C) while the balance 74% of the B2C comes via distributors and retailers. The majority of the The Raymond Shop outlets and EBOs are franchisee based wherein the franchisee has to generally incur most of the capital expenditure needed to open a Raymond store. Apart from this, the franchisees also buy out their entire stock requirement. They do not do business on consignment basis where the unsold stock is returned to the franchisor (in this case Raymond). So the franchisees buy what they are confident of selling.

28.3%

FY2011 EBITDA mix

Denim, 5% Files, 5.9% Garments, 14% Auto, 3.4%

Textiles, 71%

Clothing business overview

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November 2011

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Raymond
Deep distribution network
1HFY12 FY11 FY10 FY09 FY08 FY07 0 200 400 437 600 800 1000 584 547 762 739 676

These franchisee-led stores entail minimum investment from the company, as the entrepreneur franchisees invest in inventory with no recourse from the company. Increasing revenues through this mode shall enhance the margins (as these are retail-driven brand sales), increase the asset returns (high sales on low investment) and thus enhance the returns for the shareholders. Investment arguments Lifestyle retailer with strong brands and powerful distribution set-up Raymond is present in the fast growing discretionary & lifestyle category of branded textiles and apparels. With the growing income, rise in aspirations to live a luxurious life, greater discretionary spending and favourable demographics, the segment of branded apparels & fabric presents a tremendous growth opportunity and Raymond is very well geared to capitalise the same. Strong brand, with dominant market share: Raymond is the oldest textile brand in India with a history spanning more than 85 years. Over the years through its quality focus approach and unique brand-building initiatives the brand Raymond has gained a unique mind share and brand recall amongst consumers (the company has spent over Rs900 crore over the last ten years to advertise the brand). The testimony to the same is its market leadership status in the worsted fabric segment. Apart from the fabric segment the brand Raymond is present in the ready-towear (apparel) segment. The company also owns a bouquet of other premium apparel brands, Park Avenue, Parx and ColorPlus, which enjoy leadership status in their respective categories. This strong brand lineage helps Raymond to earn a premium over the other players and aids it to shield its margins during commodity inflationary situations.
Bouquet of powerful brands across segments

Robust distribution set-up; deep and wide: Strong distribution is a prerequisite for any consumer-led model and Raymond has created strong entry barriers for competitors in this regard. It has an enviable distribution setup that is a blend of wholesalers, distributors, MBO touch points, EBOs and its own famous store brand, The Raymond Shop. The brand is present in more than 400 towns across class-1 to class-5 towns and cities, is retailed through over 18,000 touch points including exclusive Raymond brands available in 762 retail stores (612 The Raymond Shop outlets and 150 EBOs), covering over 1.5 million square feet of retail space. Since Raymond enjoys strong brand equity and recall, it has franchisees operating even out of tier-3, tier-4 and tier-5 cities. Raymonds retail presence through The Raymond Shop outlets and EBOs: The company has expanded its retail network across tier-3, tier-4 and tier-5 cities as well. Most of its stores are franchisees operated by local entrepreneurs wanting to cash in on the brand equity enjoyed by Raymond built over 85 years since its inception. Raymond enjoys better brand awareness and recall than all the other players in the market. The fact that it has a significant number of franchisee stores indicates the popularity of its brands. Enhanced focus on power brands to further yield results: With already strong brands in its portfolio, the company is continuously focusing all its energy on growing its four power brands, Raymond, Park Avenue, Parx and ColorPlus. Within these brands it is concentrating only on mens wear category (it has divested itself from the other sub-categories introduced earlier, like womens wear, kids wear). It has strategised on continuous investment in the brands through advertisement, enhanced retail expansion covering more hinterland class-3, class4 and class-5 towns and cities. We believe that the sharper focus and concentrated energy towards enlarging the power brands are likely to yield returns in the form of enhanced market share and a richer profitability matrix for the company.

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November 2011

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Raymond

Launch of Makers brand in the value-for-money segment to open new growth avenues: Raymond is continuously looking at innovative ways to spread its wings in new growth areas. Looking at the strong domestic demographic profile, increasing human aspiration for branded apparels and the absence of any strong panIndia brand in the mid to economy part of the suitings segment, Raymond has launched a fabric brand Makers in the value-for-money segment (in the sub Rs250 a meter price point). The company has done a regional launch of the new brand in the east and the initial response has been strong. The pan-India launch is expected to be complete in the next two to three quarters. The brand would be marketed through the distributors, wholesalers and the MBOs of the company. Thus Raymond aims to leverage its strong textile fabric understanding and distribution reach to enhance its brand portfolio. Restructuring and operational issues resolvedcore business back on track with improved vigour Raymond had a difficult period over FY2007-10 when its operational performance had suffered and the company was struggling with a slew of issues, namely loss in the denim business, ERP roll-out issues, forex issues, and duplicate plant cost at Thane and Vapi. With its exit from the US and Belgian markets, the revival and stabilisation of the Indian domestic denim market and an amicable agreement with its employees on a

voluntary retirement scheme (VRS), a strong turnaround has been witnessed in the business. From a loss of Rs116 crore in FY2009 the business reported a recurring profit of Rs149 crore in FY2011 (after providing for exceptional items of Rs205 crore). Going forward, we expect the company to clock a recurring earnings compounded annual growth rate (CAGR) of 30.3%. Further, the asset-light strategy of achieving a franchisee-led retail growth would entail low investment leading to better asset utilisation, thereby resulting in enhanced returns. We expect the return ratios to improve considerably from sub-optimal 6% in FY2011 to 16-17% in FY2013.
Successful turnaround in company's performance

Issues resolved Business ERP implementation Issues Teething issues in SAP implementation resulted in loss on sales and high cost. Denim business Denim joint venture ran up operational losses due to high-cost structure. The US and Belgian operations were shut which caused around 80% of the loss. The denim segment now operates through low-cost markets of India and Romania, and both are profitable. Apparel Losses in newly introduced brands, Zapp! Beeline; losses in apparel joint venture with Gas. Exited Gas joint venture, discontinued new brands and segments. Focus is now on core brands and core categories, leading to the segment reporting a robust performance. Textile Though the uncompetitive Thane plant was closed but the employee cost was running. Reached an amicable agreement with the employees. Led to cost rationalisation affecting the margin by 300-400 basis points. Action taken Resolved by FY2008. Present status Better inventory management and lower lead time.

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November 2011

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Return ratios expected to improve Particulars RoE (%) RoCE (%) FY08 0.2 4.4 FY09 -8.7 -0.1 FY10 2.7 5.8 FY11 3.2 11.3 FY12E 13.9 14.1 FY13E 16.8 16.0

Raymond

sion; we believe it is a normal enquiry and would not have any impact on the companys financials, though sentimentally the event could have an impact on the stock in the short term. Valuation and view Premium branded player available at a discount At the current market capitalisation of Rs2,400 crore, the stock is available at 9.4x our FY2013 earnings estimate of Rs253 crore (EPS of Rs41.2). We believe that a branded play with a powerful distribution set-up (762 stores, 18,000 retail touch-points) is available at a discount to the other branded players (Kewal Kiran Clothing, 14x FY2013; Shoppers Stop, 26x FY2013; Page Industries, ~23x FY2013). Further, the recent 40% stake sale by Arvind to VF Corporation at 2.14x revenue also reflects the strong valuation that a retail brand can command. We believe a company like Raymond which owns four strong focussed brands is a strong contender for a re-rating. Turnaround not getting reflected in valuations; re-rating likely We believe that the turnaround in the business performance and the enhanced focus on its core business of branded mens wear are not getting reflected in the stocks valuations. Given the companys consistent performance, its move towards a more transparent reporting structure (reporting quarterly consolidated financials) and sharp focus on high-margin brands, the company is due for a re-rating. We put Buy with our SOTP price target of Rs530 We take cognisance of the turnaround in the companys performance. But owing to the diversified structure of the company (12% of its revenues come from the nonapparel segment and 30% from the un-branded segment), we conservatively value the consolidated business at 10.5x its FY2013E earnings. This yields a per share price of Rs433. To this we add 50% value of the Thane land bank and derive a value of Rs97 per share. Thus, our SOTP price target for the stock is Rs530. We recommend a Buy on Raymond.

Unlocking value from land bank Raymond has a huge parcel of 120 acre land in the heart of Thane city at Pokhran Road. This land housed the Thane facility, which is now closed. With the company reaching an amicable settlement with the employees of the plant the land is now available for monetisation. Raymond is exploring options of monetisation through an outright sale or in the form of a joint development of the land. Based on the current property rates at Thane, the value of the land is pegged at Rs1,200 crore (about Rs97 per share). We believe that any development on this front would help the company in reducing its debt and strengthening its balance sheet. Conservatively we have built in 50% value of the land in our target price for the company. Key concerns Rising commodity prices to pose risk For Raymond the cost of raw materials including wool, polyester and cotton accounts for 30-33% of its total expenditure. Any adverse price movement in these commodities may put strain on the volume offtake and margins of the company. Discretionary spend has strong correlation with the economy Raymond is a player in the lifestyle branded apparel & consumer discretionary segment whose growth is strongly correlated to the growth of the economy. Any negative development in the general income and the overall economic growth momentum could have more than a disproportionate impact on the earnings and profitability of the company. Income tax raid rumour dampens sentiment Media reports state that there has been an income tax raid on the companys premises on allegation of tax eva-

SOTP price target Segment Consolidated business Thane land parcel Valuation metrics 10.5x PER FY13 @ 50% discount to ruling price EPS 41.2 Reasoning 10.5 Per share value 433 97 530

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November 2011

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Raymond

Financials
Profit & Loss statement Particulars Net sales Raw material cost Employee cost Admin & selling cost Manufacturing & operating expenses Total expenditure Operating profit OPM (%) Other income Depreciation Interest PBT Recurring PAT Reported PAT Key ratios Particulars EPS PER P/BV EV/EBITDA EV/sales RoCE (%) RoE (%) FY09 (18.9) (20.4) 2.0 21.4 1.4 -8.7 -0.1 FY10 5.3 73.3 2.0 9.6 1.3 2.7 5.8 FY11 24.3 15.9 1.9 7.2 1.1 3.2 11.3 FY12E 32.9 11.7 1.7 5.8 1.0 13.9 14.1 FY13E 41.2 9.4 1.5 4.7 0.8 16.8 16.0 FY09 816.8 450.6 610.7 491.0 190.4 7.4 (27.8) 166.5 132.8 (136.6) (116.2) (227.8) FY10 FY11 FY12E Rs (cr) FY13E Balance sheet Particulars Share capital Reserves Shareholder's fund Debt Defeered tax liability Minority interest Capital employed Gross block Depreciation Net block Capital WIP Investment Current assets Other current assets Inventories Sundry debtors Loans and advances 89.1 595.1 458.9 257.9 75.3 562.5 451.0 70.7 239.1 90.3 765.3 508.7 47.9 255.7 90.3 849.8 566.5 186.3 255.7 90.3 939.7 626.5 451.6 255.7 FY09 61.4 FY10 61.4 FY11 61.4 FY12E 61.4 Rs (cr) FY13E 61.4

2,559.5 2,507.8 3,035.9 864.8 1,014.8 455.7 619.0 449.9 239.5 9.6 109.5 176.5 129.3 43.2 32.4 (46.0) 475.6 706.5 536.8 409.6 13.5 74.2 160.8 124.1 198.9 149.2 53.8

3,446.3 3,811.1 1,154.5 1,257.7 525.9 781.3 585.9 525.3 15.2 55.0 167.8 142.9 269.6 202.2 182.2 571.6 849.1 647.9 593.4 15.6 76.0 165.2 143.1 361.1 252.8 250.8

1,134.4 1,114.5 1,158.8 1,341.5 1,524.3 1,216.6 1,175.9 1,220.2 1,402.9 1,585.7 1,823.0 1,692.1 1,633.3 1,633.3 1,683.3 27.5 6.7 21.2 7.3 (29.7) 7.7 -

2,369.1 2,268.3 2,626.4

2,922.5 3,212.8

3,073.9 2,896.5 2,831.4 3,036.3 3,269.0 2,500.2 2,522.6 2,527.4 2,648.4 2,708.4 949.5 1,058.7 1,197.9 1,364.9 1,527.4 1,550.7 1,463.8 1,329.5 1,283.5 1,181.0 84.7 630.1 62.9 629.7 123.5 499.5 60.0 499.5 60.0 499.5

Cash and bank Balance 83.6 Less: Current liabilities and provisions Current liabilities Provisons Net current assets Capital employed 551.1 89.3 760.6

501.6 109.1 717.2

685.5 62.4

755.4 -

835.3 -

872.2 1,007.0 1,076.9

3,073.9 2,896.5 2,831.5 3,036.3 3,269.0

Cash flow statement Particulars Reported PAT Depreciation Cash profit changes in WC Cash from operations Capex Free cash flow to firm FY09 (228) 167 (61) 162 101 71 30 FY10 (46) 177 131 43 174 1 173 FY11 54 161 215 (155) 60 65 (6) FY12E 182 168 350 (135) 215 73 143

Rs (cr) FY13E 251 165 416 (70) 346 90 256

Sharekhan

November 2011

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Raymond

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Sharekhan

November 2011