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  • Nov 4, 2023 - Top High Growth Sectors that Raymond is Tapping. Investors Take Note...

Top High Growth Sectors that Raymond is Tapping. Investors Take Note...

Nov 4, 2023

Top High Growth Sectors that Raymond is Tapping. Investors Take Note...

"The Complete Man"

Where have you heard this before?

No prizes for guessing because this tagline is embossed in the minds of almost all Indians.

We are talking about Raymond.

It was in 1925 when Raymond was born as "Raymond Woolen Mill".

And in 1944, Lala Kailashpat Singhania took over Raymond Woolen Mill with a vision to create a company that would produce the finest wool and wool-blended fabrics right here in India.

In the last 8 decades, Raymond has ventured into different industries with the aim of expansion.

However, its recent foray into sunshine sectors like defence, aerospace and EVs has moved a lot attention to the group.

Sunrise industries are emerging industries that have the potential to grow rapidly and generate significant economic activity.

On 3 November 2023, the Raymond group announced its acquisition of a 59.25% stake in Maini Precision Products (MPPL), at a price of Rs 6.2 billion (bn).

On completion of the acquisition, Raymond will merge its engineering businesses, JK Files, RPAL (Ring Pplus Aqua Ltd), and MPPL, into a new subsidiary called "Newco" to create a larger and more efficient company.

Raymond will hold 66.3% of this new entity that will be led by the founder of MPPL, Gautam Maini.

Just to give you a better view at the companies involved, MPPL with experience of 50 years, is a leading exporter of Precision components that had presence in 25 countries and has 11 manufacturing plants.

Its revenue in FY23 stood at Rs 7.5 bn.

Look at the company's performance in the table below.

Financial Snapshot of MPPL

Rs m, standalone FY18 FY19 FY20 FY21 FY22
Total Income 4,435.77 5,737.32 5,841.20 4,368.04 6,269.59
Operating Profit 558.25 425.74 395.37 130.4 418.37
Profit After Tax 211.31 -183.57 -226.47 -468.81 -182.67
Total Debt 1,673.60 4,263.67 4,746.86 5,236.15 5,504.00
Data Source: Ace Equity

Moving on to other companies that Raymond has a controlling stake in...

JK Files has been around for over six decades with six manufacturing plants and presence in over 65 countries. Its revenue in FY23 stood at Rs 8.7 bn.

As things stand, the consolidated (Proforma) revenue for Newco as of FY23 is Rs 16 bn with an EBIDTA of Rs 2.2 bn.

The core business strategy behind this upcoming merger is Consolidate-Expand-Improve Margins.

This acquisition could catapult Raymond's entire engineering business.

The new company will become a major provider of engineering, automotive, EV, aerospace, and defence components.

It will be uniquely positioned to target high-growth precision engineering products with a significant presence in both international and domestic markets.

In recent years, the trend of established companies buying stake in exciting startups/small companies has become common. It gives them a direct entry into a particular sector without having to worry about establishing the business from scratch.

It helps in finding solutions for challenging problems and gives them access to new technologies too.

Some Indian companies that have already done this or doing this include Bharti Airtel, Infosys, Hero MotoCorp, HDFC Bank, IndiaMart Intermesh, Minda Corporation, BSE, among others.

So now, does the stock of Raymond deserve better valuations because of its foray into new sectors, some of which may create huge optionality in the business?

Optionality is generated from an investment which has the potential to give huge returns, but the quantum of it cannot be ascertained while making that investment.

One can arrive at a fair value only over a period of time. Not to mention that such investments come with their fair share of risk.

And if they do not play out as expected, could lead to poor capital allocation.

The exciting aspect of optionality is that the loss is limited to the extent of investment, but the payoffs could be disproportionately large.

For the time being, it remains to be seen what kind of potential payoffs Raymond could get from this new acquisition.

Raymond currently has a marketcap of Rs 124.7 bn with a debt of Rs 25.3 bn.

It reduced debt by approximately Rs 4 bn in financial year 2023.

In the past one year, the stock has generated strong returns of over 40%.

chart

As on the day of the acquisition announcement, its stock was trading at 4.3 times its book value.

In FY23, the company posted sales of Rs 82.2 bn which was 33% higher compared to previous financial year.

The net profit stood at Rs 5.4 bn, a jump of 101% compared to previous year's Rs 2.7 bn.

Financial Snapshot of Raymond

Rs m, standalone FY19 FY20 FY21 FY22 FY23
Net Sales 32,763.90 31,863.90 21,760.50 42,606.60 57,795.60
Sales Growth (%) 9% -3% -32% 96% 36%
Operating Profit 4,019.60 3,830.70 370.3 7,465.70 10,496.10
OPM (%) 12% 12% 2% 18% 18%
Net Profit 738.2 943.2 -2,765.30 -3,959.20 4,104.60
NPM (%) 2% 3% -13% -9% 7%
Total Debt 17,351.10 14,972.60 16,788.10 17,132.60 18,244.40
Debt to Equity (x) 1.27 0.84 0.85 0.95 0.81
ROE (%) 9.7 2.3 -13.2 11.9 20.4
ROCE (%) 11.7 6.7 -4 11 21.1
Data Source: Ace Equity

In Conclusion

Raymond's foray into sunrise industries is a strategic move that will benefit the company, the Indian economy, and Indian investors.

Not to mention the company is already on a high growth trajectory, all thanks to the upcoming wedding season.

Suits are a wedding staple and Raymond stands to benefit from the increase in weddings. It's one of the leading players in the suiting business with a market share of over 60%.

The company is planning to add 150 outlets by the financial year 2024.

Further, Raymond is also a beneficiary of China plus one megatrend. The company claims to have a healthy export order book.

And with input cotton prices on a decline, among other reasons, textile sector is set for a strong comeback which could keep Raymond in steady waters.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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