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Research meet excerpts: Raymond - Views on News from Equitymaster
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Research meet excerpts: Raymond
Nov 29, 2004

The following are the key highlights of our management meeting with textile major, Raymond. The focus of the discussion was on the changing business environment in textile industry and the management’s outlook. But first a brief background

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). The company is the second largest denim producer in the country with a capacity of 20 mm. Raymond has a widespread distribution network across the country, which it can leverage to sell some of its well-recognized brands. The company has divided its business in three segments viz. fabrics, files & tools and denim. In fabric, the company is into producing high quality suiting, which is sold under the brand name 'Raymond'. This segment contributes to around 65% of the company's revenues. The company is also into ready to wear segment through one of its 100% subsidiary, Raymond Apparels with some coveted brands like 'Park Avenue', 'Parx' and 'BEE'. The company acquired 'ColorPlus' in FY03.

Higher cost impacting margins in 1HFY05…
The operating margin fell from 17.1% in 1HFY04 to 7.8% in 1HFY05. The basic reason for the same were:
  1. Increase in raw material prices such as cotton, wool and steel. Realizations were not in line with the increase in raw material prices, which put pressure on the margins.

  2. There was an additional excise duty paid by the company on input material to claim excise exemption from finished products, following the change in regulations in the last budget.

  3. There was VRS offered to company workers.

Expansion plans for changing environment…
The company has expanded its denim manufacturing capacity from 10 mm (million meters) in FY03 to 20 mm in FY04 and will expand it to 40 mm by FY06. With quota restrictions likely to be eased post 2005, the company is preparing itself to capitalize on the opportunity. Earlier, the company had to buy quotas from other countries to sell denim.

The company has also ventured into contract manufacturing of garments. It has established three facilities i.e. 1 m shirting, 3 m jeans, 500,000 suits and 1 m trouser capacity in Banglore. These will be export-oriented units. Over a period of two to three years, we expect revenues to the tune of Rs 3 bn from this Bangalore unit. As per the company, operating margins are likely to be in the range of 7% to 8%.

Higher growth in apparel segment…
According to the management of the company and the industry conditions, the fabric segment is likely to grow at 2% to 3%. However, apparels segment is growing very fast owing to changes in income levels, urbanization and the growing 'mall culture'. Raymond has many brands in this segment, which include Parx, Park Avenue and Color Plus. These products are likely to grow at a rate of about 15% to 16% per annum.

What to expect?
Our interaction with the company gave us visibility on the revenue front from a long-term standpoint. Post the WTO regime, we believe Raymond will be one of the key beneficiaries due to its ability to provide a one-stop solution to customers (manufacturing, design and garmenting). As far as margins are concerned, the company's initiative to shift its files and textiles manufacturing facilities at Thane in a gradual manner is likely to have a positive impact on margins. Owing to better cotton output and the consequent decline in prices, we expect raw material costs to decline as a percentage of sales. Therefore, we have factored in a marginal improvement in margins in the next two years.

At Rs 302, the stock is trading at price to earnings ratio 15 times FY05E our earnings estimate. From a long-term perspective, positives outweigh concerns and therefore, we have recommended a BUY on the stock in this week's Stock Select.

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