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November 03, 2011

Raymond

Ugly Duckling

Premium brand at a discount

Buy; CMP: Rs387

Company details
Price target:

Rs530

Market cap:

Rs2,379 cr

52 week high/low:

Rs458/245

NSE volume:
(No of shares)

4.5 lakh

BSE code:

500330

NSE code:

RAYMOND

Sharekhan code:

RAYMOND

Free float:
(No of shares)

3.7 cr

Shareholding pattern

Foreign
8%

Public & Others

21%

Institutions
28%

Non-promoter corp
4%

Promoters
39%

Price chart

420
390
360
330
300
270
Nov-11

Aug-11

May-11

Nov-10

Feb-11

240

Price performance
1m

3m

Absolute 16.2

6.3

11.0

-9.2

Relative
to Sensex

9.9

19.3

4.3

9.4

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

450

(%)

Key points
 Lifestyle retailer with strong brands and powerful distribution set-up: Raymond

6m 12m

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

FY2011

FY2012E

FY2013E

2,508
-2.0
349.0
114.5
32.4
5.3
73.3
9.6

3,036
21.1
483.8
38.6
149.2
360.7
24.3
15.9
7.2

3,446
13.5
580.3
19.9
202.2
35.5
32.9
11.7
5.8

3,811
10.6
669.4
15.4
252.8
25.0
41.2
9.4
4.7

stock idea

Raymond

Company background

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.

 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.

 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 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.

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

 Raymond has a strong distribution network in the form

Integrated operations

Sharekhan

November 2011

stock idea

Raymond

 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.

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.

 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.

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.

 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.

FY2011 revenue mix

Denim,
8.5%

Auto,
4.3%

Others,
0.4%

Employs various distribution channels to reach endcustomer

Files,
10.6%

 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.

Textiles,
49.4%

28.3%

FY2011 EBITDA mix

Denim,
5%

 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.

Auto,
3.4%

Files,
5.9%
Garments,
14%

 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.

Textiles,
71%

Clothing business overview

 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.

Sharekhan

November 2011

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Raymond

 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.

Deep distribution network

762

1HFY12

739

FY11

676

FY10
584

FY09

547

FY08
437

FY07
0

Investment arguments
Lifestyle retailer with strong brands and powerful
distribution set-up

200

400

600

800

1000

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.

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.

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.

Bouquet of powerful brands across segments

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.

Sharekhan

November 2011

stock idea

Raymond

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%.

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.

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

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

Issues resolved
Business

Issues

Action taken

Present status

ERP implementation

Teething issues in SAP implemen-

Resolved by FY2008.

Better inventory management

tation resulted in loss on sales and

and lower lead time.

high cost.
Denim business

Denim joint venture ran up op-

The US and Belgian operations were

The denim segment now operates

erational losses due to high-cost

shut which caused around 80% of the

through low-cost markets of In-

structure.

loss.

dia and Romania, and both are

profitable.

Apparel

Losses in newly introduced

Exited Gas joint venture, discontin-

Focus is now on core brands and

brands, Zapp! Beeline; losses in

ued new brands and segments.

core categories, leading to the

apparel joint venture with Gas.

segment reporting a robust performance.

Textile

Though the uncompetitive Thane

Reached an amicable agreement

Led to cost rationalisation affect-

plant was closed but the em-

with the employees.

ing the margin by 300-400 basis

points.

ployee cost was running.

Sharekhan

November 2011

stock idea

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.

Return ratios expected to improve

Particulars

FY08

FY09

FY10

FY11

FY12E

FY13E

RoE (%)

0.2

-8.7

2.7

3.2

13.9

16.8

RoCE (%)

4.4

-0.1

5.8

11.3

14.1

16.0

Valuation and view

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.

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.

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.

Turnaround not getting reflected in valuations; re-rating likely

Key concerns

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.

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

We put Buy with our SOTP price target of Rs530

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.

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.

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

Valuation metrics

EPS

Reasoning

Per share value

Consolidated business

10.5x PER FY13

41.2

10.5

433

Thane land parcel

@ 50% discount to ruling price

97
530

Sharekhan

November 2011

stock idea

Raymond

Financials
Profit & Loss statement
Particulars
Net sales

FY09

FY10

FY11

2,559.5 2,507.8 3,035.9

Raw material cost

Balance sheet

Rs (cr)

816.8

864.8 1,014.8

FY12E

FY13E

Rs (cr)

Particulars

3,446.3 3,811.1

Share capital

1,154.5 1,257.7

Reserves

FY09

FY10

FY11

FY12E

FY13E

61.4

61.4

61.4

61.4

61.4

1,134.4 1,114.5 1,158.8 1,341.5 1,524.3

Employee cost

450.6

455.7

475.6

525.9

571.6

Shareholder's fund

1,216.6 1,175.9 1,220.2 1,402.9 1,585.7

Admin & selling cost

610.7

619.0

706.5

781.3

849.1

Debt

1,823.0 1,692.1 1,633.3 1,633.3 1,683.3

Manufacturing &
operating expenses

491.0

449.9

536.8

585.9

647.9

Total expenditure

2,369.1 2,268.3 2,626.4

Operating profit
OPM (%)

Defeered tax liability

Minority interest

2,922.5 3,212.8

27.5

21.2

(29.7)

6.7

7.3

7.7

Capital employed

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

190.4

239.5

409.6

525.3

593.4

7.4

9.6

13.5

15.2

15.6

Gross block
Depreciation

949.5 1,058.7 1,197.9 1,364.9 1,527.4

Other income

(27.8)

109.5

74.2

55.0

76.0

Depreciation

166.5

176.5

160.8

167.8

165.2

Net block

84.7

62.9

123.5

60.0

60.0

630.1

629.7

499.5

499.5

499.5

1,550.7 1,463.8 1,329.5 1,283.5 1,181.0

132.8

129.3

124.1

142.9

143.1

Capital WIP

PBT

(136.6)

43.2

198.9

269.6

361.1

Investment

Recurring PAT

(116.2)

32.4

149.2

202.2

252.8

Current assets

Reported PAT

(227.8)

(46.0)

53.8

182.2

250.8

Other current assets

Interest

Key ratios
Particulars

FY09

FY10

FY11

FY12E

FY13E

89.1

75.3

90.3

90.3

90.3

Inventories

595.1

562.5

765.3

849.8

939.7

Sundry debtors

458.9

451.0

508.7

566.5

626.5

Cash and bank Balance 83.6

70.7

47.9

186.3

451.6

239.1

255.7

255.7

255.7

551.1

501.6

685.5

755.4

835.3

89.3

109.1

62.4

760.6

717.2

Loans and advances

257.9

EPS

(18.9)

5.3

24.3

32.9

41.2

PER

(20.4)

73.3

15.9

11.7

9.4

2.0

2.0

1.9

1.7

1.5

Less: Current liabilities

and provisions

21.4

9.6

7.2

5.8

4.7

Current liabilities

EV/sales

1.4

1.3

1.1

1.0

0.8

Provisons

RoCE (%)

-8.7

2.7

3.2

13.9

16.8

Net current assets

RoE (%)

-0.1

5.8

11.3

14.1

16.0

Capital employed

P/BV
EV/EBITDA

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

Rs (cr)

Particulars

FY09

FY10

FY11

FY12E

FY13E

Reported PAT

(228)

(46)

54

182

251

Depreciation

167

177

161

168

165

Cash profit

(61)

131

215

350

416

changes in WC

162

43

(155)

(135)

(70)

Cash from operations

101

174

60

215

346

Capex

71

65

73

90

Free cash flow to firm

30

173

(6)

143

256

Sharekhan

November 2011

stock idea

Raymond

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SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related
securities. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates
or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect those
of SHAREKHAN.

Sharekhan

November 2011