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Raymond: Research meet excerpts
Sep 26, 2006

We recently met the management of Raymond to understand the contours of the textile sector and apparel sector and its implications on Raymond’s positioning across various product segments. The following are the key excerpts of the meeting. Textiles: Of the green-field textile capacity expansion at Vapi (6 mm capacity), 3 mm has already been commissioned from June 2006 while the rest will be commissioned by 1QFY08. This will bring Raymond’s total worsted fabric capacity to 31 mmpa (million metres per annum). The worsted suiting segment registered 8% YoY growth in 1QFY07 and the company expects double-digit growth for the current fiscal. Also, the new facility at Kolhapur (JV with Gruppo Zambaiti of Italy) for manufacturing high value shirting fabrics has commenced production from July 2006. It may be recalled that this Rs 2 bn 50:50 joint venture deal was inked in 4QFY05 for production of 11.5 mm of cotton shirting.

Denim: The expanded capacity of the denim division (totaling to 40 mm) helped the company’s volumes grow by 35% YoY in 1QFY07. The exports sales from this division (51% of sales in 1QFY07) witnessed a growth of 51% YoY, largely due to the expanded capacity. The company, despite the pressure on denim realisations, was able to sustain its margins in this segment as its realisations for premium products (Rs 110 per metre) are 10% higher than that of the other players. This is likely to get a further boost due to the JV entered with UCO of Belgium in FY06. It may be recalled that earlier this year, Raymond entered into a JV with UCO that created an entity with a combined capacity of 80 mm. The JV is expected to give Raymond the benefits of global sourcing of dyes and other raw material as well as rationalise the distribution costs for exports, thus making the products cost competitive.

Branded Apparel: This segment includes Raymond Apparel (brands Parx, Park Avenue and Manzoni) and Color Plus (one of the country’s most profitable brands), which are targeted primarily at the domestic market. Both are currently growing at 20% YoY and account for 16% of the company’s consolidated turnover. The company expects these to account for around 23% of its turnover by FY08 on the back of increased demand for premium brands in the domestic market.

Garmenting: This segment includes Everblue Apparel (denim), Celebrations Apparel (shirts) and Silver Spark Apparel (trousers and shirts), which primarily cater to the export markets. While Everblue and Celebrations currently have 30% capacity utilisation levels, Silver Spark is operating at 60% of installed capacity. The company attributed the low utilisation levels to the time being taken to train the labour. Once the training is completed in the next 2-3 years, the utilisation levels are set to visibly improve. Each of the units is currently operating on a single shift basis. Given that the units have shorter run cycles, there is little pricing pressure. However, the lower volumes have kept the EBIDTA levels very marginal. The company expects Silver Spark to breakeven in FY07, while Everblue and Celebrations Apparel are likely to breakeven in FY08.

Files and tools: The files and tools division that registered 8% EBIDTA margin in 1QFY07 has been facing the pressure of higher input costs. While the turnover in volume terms remains flat YoY, as the input costs cool off, the division may have a higher contribution to the overall revenues. The company expects operating margins to fluctuate between 8% to 10% in the next couple of fiscals.

Auto ancillary: In this segment, the company’s subsidiary Ring Plus Aqua showed impressive growth and registered profit margin of 14% in 1QFY07 against the 10% margins registered during the corresponding quarter of last year, when it was acquired by Raymond. This subsidiary has also undertaken a capex of Rs 104 m to increase the capacity of ring gears from 1.4 m pieces to 2.2 m pieces, which will come on stream in 1QFY08. The company’s JV with MOB of France (for manufacture of files and rasps) has started commercial production from 1QFY07.

Capital employed: 39% of Raymond’s capital was employed in the denim business while nearly 50% was employed in textile business (including branded apparel and garments) at the end of FY06. The concentration towards the latter is expected to remain due to the incremental investments to be made in franchise. Raymond is expected to open another 30 ‘Raymond stores’ in FY07, while the number of ‘brand only stores’ (for Parx, Park Avenue and Color Plus) will go up by 45 in the same period. Also, Raymond will own most of the new stores (currently only 52 of the 395 stores are owned and managed by the company) as against leasing them. Nonetheless, of the Rs 3.2 bn TUF loan (at 2.5% to 3% interest p.a.), Rs 2.3 bn has already been allocated to the denim JV.

Company background
Raymond is India's largest and world's third largest integrated manufacturer of wool and wool blended fabrics with production capacity of 24 mm (million meters). It is the domestic market leader in files and tools with around 80% market share. The company is the second largest denim producer in the country with a capacity of 40 million meters (mm). It has a widespread distribution network across the country, which it can leverage to sell some of its well-recognised brands. Exports comprised 26% of the company’s revenues at the end of FY06.

Our view
At the current price of Rs 435, the stock is trading at a multiple of 19 times trailing 12 months earnings. The company continues to bear higher tax rates due to the fringe benefit tax and lower deferred tax assets, bringing the effective tax rates to 26% in 1QFY07. The company sees this going upto maximum 27% in the coming fiscals.

While the wool prices remain stable, the firm trend in cotton prices (average Rs 47 per kg) and continued pressure on denim realisations (albeit higher than that of its peers) restrict the upsides to the company’s operating margins in the near term. However, we believe that the company’s overseas alliances will give it an edge over players that continue to rely on their own standalone marketing and distribution capabilities overseas for the export orders. Also, since only 26% of revenues are from exports, the company is not substantially impacted by forex fluctuations. We believe that the benefits of the denim JV, breakeven in the garmenting business, capacity expansions, extended retail network and auto component foray will percolate into the company’s bottomline in the longer term. Also, the higher leverage (debt to equity 1x post TUF) will improve the company’s RONW (11% in FY06) in the longer term. We shall soon update our research report having factored in these estimations.

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