Raymond: Buy

The company is focussing on apparel retail that holds strong growth potential

Got a stomach for risk? Consider textile major Raymond. The stock’s near-doubling in the past year has pushed valuations to 28 times the trailing 12-month earnings, above the near 25 times three-year average.

Retail stocks such as Kewal Kiran and textile exporters such as Bombay Rayon and Bombay Dyeing trade at over 33 times the trailing earnings. Raymond exports and also retails fabric and garments, helping it gain from improving textile exports and better domestic consumer sentiment.



Why buy

Bounce back in sales growth

Building on brand strength

Restructuring efforts to pay off

The company’s retail footprint is gradually expanding. It has been working on getting its retail strategy right as well as making manufacturing process more efficient.

But this will pay off only over the long term. High costs are set to persist in the short term. Raymond’s tools and automotive component businesses too drag profitability. Investors who can hold on for two-three years and take the risk (Raymond, with a market capitalisation of ₹3,112 crore, is a small-cap stock) can buy the stock.

Diversified streams

The company’s product lines stretch from the bread-and-butter worsted suiting, to high-quality cotton apparel, denim, and woollen outerwear. This entire range is both exported to most regions and retailed through a vast domestic network. Textiles make up about 88 per cent of revenue. The remaining comes from manufacture and sale of steel files and automotive components.

Volumes in both garments and cotton shirting fabrics have been healthy in the past few quarters; the garmenting segment, for instance, grew 27 per cent and 44 per cent year-on-year in the past two quarters. Much of this is attributable to better exports. Overall, exports make up about a fifth of the company’s revenue.

Retail push

Branded apparel and branded textiles, which account for more than half the revenues, have clocked good sales growth of 13 per cent and 25 per cent in the six months to September 2014. Growth in sales at stores open more than a year bounced back to around 6 per cent this year after being flat for much of the last fiscal. Besides consumer purchases in high-end apparel slowly coming back, exports also aided growth.

Raymond is focussing on apparel retail that holds strong growth potential. Moderating cost of living can also spur apparel purchases hereon.

And in ‘Raymond’ the company has a strong play, aided by Park Avenue, Parx, and ColourPlus. The company has also ventured into formal women’s wear, a high-margin, high-growth segment. Raymond’s retail footprint covers 18.56 lakh square feet up 4 per cent from end-March 2013. Its exclusive store count is at 964 outlets against the 934 at end-March 2013. While growth is on the lower side compared with peers, Raymond has been closing down poorly-performing stores with equal enthusiasm with which it was opening new ones.

This active reworking of store network has resulted in volatile margins — the branded apparel segment swung from operating profit margins of 8 and 9 per cent in the 2011 and 2012 fiscals to losses in 2013 to 7 per cent by the September 2014 quarter.

The company is still in the process of rationalising store network, besides keeping a sharp focus on brand-building. While this will pay off in the long term, profit margins in the short term are likely to remain volatile.

Cost efficiencies

What can support margins are the sliding prices of raw materials. Raw cotton prices are down 22 per cent in the calendar and are set to stay subdued. With oil turning cheap, derivative polyester yarn price is also on the decline. Raw materials make up about 40 per cent as a proportion to sales.

Raymond also reworked its supply-chain strategy with inventory turnover cycle starting to shrink in the 2013-14 fiscal. It overhauled manufacturing facilities as well. These initiatives can continue in the next fiscal as well. Overall operating margins held steady at 9 per cent in the 2013 and 2014 fiscals.

The debt-equity ratio is on the high side at 1.3 times to fund store rollout and capital expenditure. But interest cover is healthy at over three times, and potential sale of land at Thane can bring in some cash flow.

But Raymond’s earlier high-cost structure cut into net profits; the 2013 fiscal, for instance, had a jump in interest and depreciation besides pricey inputs. Net profit shrunk from ₹229 crore in the 2011 fiscal to ₹111 crore in 2014.

The decline can moderate now with the company’s rationalisation efforts. Consolidated sales have grown an annual 15 per cent in the past three years to ₹4,560 crore.

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