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Raymond: 'ColorPlus' growth

Sep 23, 2002

Last week, Raymond India announced its second acquisition in the garments segment. The company acquired a 75% stake in ColorPlus, the premium branded-garments player in the Indian market. After this acquisition, Raymond is no longer a smaller niche player in this market. The imperative for Raymond for acquiring ColorPlus is simple. The company has presence in segments like fabrics and steel files that are growing at less than 3%-5% per annum. Price realisations have also been under pressure due to excess capacity and slowdown in both the domestic and global economy. Since Raymond derives as much as 90% of its revenues from the fabric division that is not growing, the company has been looking at acquisitions in the garments business that is growing at around 20% per annum to strengthen its business mix. Indian Rayon, after its acquisition of Madura Garments in 2000, emerged the market leader by a fair distance. This acquisition will enable Raymond to consolidate its presence in the premium segment.

ColorPlus was incorporated in 1994 as the domestic brand of Ambattur Clothing Limited (ACL) with an estimated turnover of Rs 2,500 m. ColorPlus's website reads "Banana Republic, Ralph Lauren, Eddie Bauer, Gap, Liz Claiborne, Abercrombie & Fitch and other top international casual-wear labels have often made their fashion statements using ACL's facilities".

ColorPlus's network...
Region No. of outlets
North 25
South 16
East 3
West 8
Abroad 1
Total 53

The synergies between Raymond and ColorPlus are significant from a long-term perspective. Obviously the first positive is the combined distribution strength that could be exploited to increase market share. While Raymond has around 25 owned 'Parx' retail outlets, ColorPlus has 53 retail outlets spread across the Indian subcontinent (this includes one is Dubai). Secondly, since Raymond is itself a major supplier of fabrics to many international fashion houses, the acquisition would help increase the client list. As mentioned above, ColorPlus is also a major supplier to many international brands. Thirdly, raw material sourcing, manufacturing and distribution could be centrally handled thus lowering the cost of servicing the incremental retail outlet. These factors play a vital role in acheiving break-even at a faster rate.

On a consolidated basis, the garments division contributed to around 16% of revenues in FY02 (excluding inter company transactions between Raymond and Raymond Apparel). In FY02, both companies faced significant pressure in margins and sales due to the change in the excise duty structure. This combined with increased competition and lacklustre economy resulted in weaker revenue growth in the same period. Post this acquisition, we expect garments to emerge as one of the key growth drivers. While fabrics and steel files businesses would provide stable cash flow with no incremental cash investments at the current juncture, the garment division would drive topline.

But there are some concerns as well. Raymond still has presence in businesses like aviation that are cash guzzlers. It also had plans to expand its denim manufacturing capacity, which is a cause of concern. Though denim prices have strengthened, given the current state of the global economy, one is not sure whether the price rise in sustainable, though Raymond is increasingly catering to the value-add segment. One has to wait and watch how the company utilises the remaining surplus cash raised from the sale of cement and steel plants as well.

The stock currently trades at Rs 103 implying a P/E multiple of 37x 1QFY03 annualised earnings. Valuations seem to be on the higher side, as the company is on the path to turnaround.

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