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Raymond: Garments thrust

Jun 19, 2003

The imperative for Raymond to acquire Color Plus in FY03 not only stems from the fact that the core businesses of the company are stagnating, but also due to other reasons. We have compared Raymond's garments division with Raymond Apparel (a subsidiary that sells 'Parx' brands), Color Plus and Indian Rayon. Raymond derives close to 70% of its revenues from sale of textiles that includes fabrics and woolen items. But in the last six years, volume and value growth of this division has declined at a CAGR of 1% and 2% respectively. Since this business is mature in nature, growth prospects are limited and the company has been concentrating on export to beat the slowdown. However, with global markets also exhibiting volatile trend, overall revenue growth has been lacklustre. This is one of the key reasons why Raymond has been increasing its presence in the garments sector.

The garments sector is benefiting from a number of factors like the robust growth in organised retailing, switch to branded garments from fabrics and general improvement in income levels. Though the sector has been growing at 30% in the last three years, bigger players have not been able to capitalise on the same due to stiff regional competition and from smaller brands. 'Park Avenue', Raymonds flagship brand, generates revenues in excess of Rs 1 bn for Raymond. However, having achieved a critical mass as an organised brand, Raymond focused on launching product extensions. The company launched 'Manzoni' in FY02 to keep the growth momentum growing. Raymond's garment division recorded a 14% rise in revenues in FY03. But it still forms just 2% of net sales.

Garments - A comparative view
(Rs m) Raymond** Raymond Apparel Color Plus Indian Rayon
Sales* 189 1,661 604 3,476
Sales growth (%) 19.3% 12.7% 28.7% -8.5%
OPM (%) NA 4.0% 21.1% 0.3%
NPM (%) 14.1%** 3.9% 14.0% -4.5%
Avg. realisation/unit (Rs) 882 632 999 563
*Sales of garment division alone
**PBIT margin for textiles division

The acquisition of Color Plus, as a result, is of significance. Color Plus not only has a diversified 53 dealer network, but also is superior in terms of operating efficiency. Consider the table above. Color Plus scores high on growth in revenues, superior operating margins and higher realisations per unit sold.

Raymond currently trades at Rs 118 implying a P/E multiple of 8x FY03 earnings (7.5x FY04E earnings). Historically, the stock has traded in a P/E band of 7x-8x due to a low growth profile. Raymond plans to introduce Color Plus in its own retail outlets in FY04, which will further add to the growth in revenues of the consolidated entity. Though one could expect more acquisition in the future, the expansion of capacity on the denim front has to be viewed with caution. While denim prices are strong at Rs 120 per meter in the international markets, sustainability is a cause of concern.

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