Can Raymond Go Up 3x to Rival Vedant Fashions?

Berkshire Hathaway was a struggling textile company until Warren Buffett took it over in 1965. He transformed it into a holding company with a portfolio of successful businesses.

However, Buffett often called his investment in the company one of his costliest mistakes. He later analysed that despite investments in capex and technology the textile companies are typically like chronically leaking boats.

The nature of textile business does not really change over time. They suck capital through their lifetime and reward investors only in short intermittent bursts.

The stock of Raymond, for instance, completes 100 years of existence in 2025. It has been listed for over 4 decades.

The stock fetched compounded rate of return of 22% over the past decade. But if not for the massive 1,085% returns in the past three years, an investor would have been left with virtually no returns over this period.

Meanwhile, its significantly younger rival Vedant Fashions, has been listed for only two years. So, investors in the stock have yet to see the impact of a downcycle.

The stock has delivered returns of 40% since listing. But it has traded at lofty valuations of over 75x during this period.

It is important to differentiate Raymond and Vedant Fashions from ordinary textile companies like yarn makers or contract manufacturers. Both Raymond and Vedant Fashions own very strong brands in men's wear. Both have strong retail franchises.

At the end of financial year 2024, both had debt to equity ratios less than 1 on their balance sheets. In other words, they are nothing like the typical low margin, inventory, high debt, ordinary textile company.

Also, we must remember that there have been cases of multibaggers like Page Industries. A strong brand, strong pricing power and quality moat can help even textile manufacturers create wealth. However, such cases are few and far between.

Now, to evaluate what kind of textile business can continue to thrive despite the inherent challenges, let us consider the dynamics of the industry.

Since the pandemic, global textile brand owners have been re-evaluating their reliance on outsourced manufacturers. First it was the China+1 policy. Later, Bangladesh's political instability warranted a shift in global textile supply chains.

Global majors are now looking at other countries such as India, Vietnam, Cambodia, and Sri Lanka to diversify their supply chains.

Also, the textile industry has been operating at 72-75% spinning capacity, with muted sequential growth in demand. The industry can see return of pricing power only once capacity utilisation touches 80-90%.

When it comes to exports, India is a leading supplier of terry towels and bed sheets to the US, with market share of over 40%. But thanks to the Red Sea crisis over past couple of quarters, freight costs have soared. Also delayed shipments adversely impacted revenues of businesses.

So, the challenges for Indian textile makers continue to threaten margins and pose obstacles to growth. But both Raymond and Vedant Fashions have managed to tread the rough waters successfully in recent times.

Raymond (Singhania group) oversees a motley mix of businesses ranging from engineering to aerospace to fashion, and realty. While the engineering companies will stay within parent entity, subsidiaries Raymond Lifestyle (worsted fabric company) and Raymond Realty are soon to independently debut on the bourses.

This is part of the company's restructuring plan. The aim of this restructuring is to dismantle Raymond's conglomerate structure, which led to the 'subdued valuations' for its businesses.

Meanwhile, Raymond Lifestyle, known for its premium suits for men and wedding wear, is eyeing expansion in the menswear market. The company is especially leaning on India's massive wedding industry to propel the next phase of growth.

Once listed, Raymond Lifestyle's rivals would include Vedant Fashions, that sells popular wedding wear brand Manyavar and Aditya Birla Fashion and Retail. While Raymond is a leader in men's formal wear, its key competitors are already market leaders in men's celebration wear.

Vedant Fashions caters primarily to the Indian celebration wear market with a diverse portfolio of brands. The company commands a dominant position in the so far unorganised wedding wear market with brands for men and women.

Raymond has a retail network of 1,590 stores in about 600 towns and cities in India and 49 overseas stores in nine countries. It's one of the largest vertically integrated manufacturers of worsted suiting fabric in the world.

In 2023, the company sold its FMCG business (Park Avenue brand) to Godrej Consumer and used the proceeds to reduce debt as well as generate cash flow.

Unlike Raymond, in the case of Vedant Fashions, a large portion of manufacturing is outsourced to third-party manufacturers. However, the company retains control of manufacturing at various stages.

Design conceptualisation and finalisation, fabric procurement, work allocation, quality control, testing and review of the allocation of job orders are managed by Vedant itself. The company also has a central warehouse at Kolkata for all its finished products.

Vedant Fashions has always been an asset-light franchisee business. It maintains 35-40% of the receivables as security deposits received from franchisees. These deposits protect the company from losses due to non-recovery of dues. So, Vedant Fashions has maintained a lean balance sheet while Raymond has some debt on its books.

The cash generating nature of Raymond's lifestyle (textile) business and capex heavy nature of realty business are hidden in Raymond's consolidated financials for now.

Once the subsidiaries are listed separately, the true nature of the each of the businesses will be reflected in their respective fundamentals.

Financials: Raymond Versus Vedant Fashions

The stark difference in the PE multiples of the two stocks is now intriguing investors.

The fact that Vedant Fashions' valuations are nearly 3x that of Raymond should not be seen as an anomaly.

Investors who believe that Raymond's P/E multiple of 25x could rise 3x to rival its competitor's P/E multiple of nearly 80x can do so at their own risk.

The separate listing of Raymond's subsidiaries will certainly lead to some value unlocking. However, one must wait to evaluate the financials of Raymond Lifestyle (post IPO) before anticipating such valuation rerating.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)