14 June 2012
Update
Raymond
CMP: INR385
TP: INR462
Buy
Restructuring initiatives bearing fruit; Land bank base
case value INR147/share; Reiterate Buy
We met the management of Raymond (RW IN, Mkt Cap USD0.4b, CMP INR385,
Buy). Key takeaways:
Restructuring initiatives are bearing fruit with FY12 RoE climbing to ~11%
from negative to low single digits earlier.
There is tremendous scope to increase efficiencies and rationalize costs,
including lower working capital, higher focus on key brands, etc.
Expect FY13 performance to be muted with PAT down 10% to INR1.3b.
We estimate the value of its 125 acres land at Thane plant at INR147/share
(based on INR120m/acre sold monetized within 2 years, discounted @ 14%)
Adjusting for real estate value, Raymond trades at FY14E P/E of 8x and EV/
EBITDA of 5x.
We reiterate Buy with a target price of INR462 (21% upside), based on
intrinsic EV/EBITDA of 6x FY14E and land bank value of INR147/ share.
Restructuring initiatives bearing fruit
Over FY10-12, the restructuring initiatives undertaken by the management has
started showing some encouraging results:
RoE in FY12 has climbed up to ~11%
Legacy issues at Thane have been successfully resolved resulting in labor cost
declining from ~17% of sales in FY10 to ~13.1% in FY12
Rationalization and renewed focus on its branded retail franchisee business.
Raymond added 269 new stores (net) over FY10-12, taking its retail store
count to 853 in FY12 from 584 stores in FY09. The management has a target
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Raymond
of having presence across all Class 1-5 cities/ towns. In this regard it has
identified ~435 towns where it would like to have its TRS (The Raymond
Store) format retail presence over the next 3-4 years.
Backdrop:
Raymond always promised high potential on paper, given its decades
old positioning in the domestic men’s apparel segment and the tremendous
brand recall its flagship brands enjoyed. Nonetheless, for most of the last decade
(FY02-10), Raymond’s financial performance was dismal with RoEs at negative to
low single digits. This was primarily due to 1) legacy issues (high labor cost at its
key manufacturing plant at Thane), 2) series of very bad investment decisions
(UCO NV/Gas/Fedora etc) and 3) lack of focus. A confluence of all the above
factors put the company under tremendous stress during FY09-FY10. This forced
the management to few very tough decisions such as (a) closure of key UCO NV
plants in US and Europe, (b) exit few of its troublesome JV’s (Gas, Fedora), and
(c) a renewed focus on revitalizing its core business.
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Raymond has strong presence across the value chain
Tremendous scope to increase efficiencies and rationalize costs
Raymond has addressed some of its key legacy issues, thereby reducing cost and
unlocking assets for value creation. The scope for further cost reduction across
its businesses is huge. While the management is very positive on the growth
prospects for its key businesses, shareholder returns can be substantial from
successful cost rationalization alone:
Scope to lower working capital cycle and improve supply chain management:
Raymond currently has long working capital cycle, which can be reduced for
most of the business segments. The management has recently appointed a
leading consultant to work for implementing and achieving internal cost
rationalization targets over the next few quarters.
Increased focus on few brands:
Raymond has now identified four key apparel
brands to focus on – Park Avenue, Parx, Color Plus and Raymond Premium
Apparel. It will direct bulk of its advertisement and promotional initiatives
(INR1.7b advertisement expenditure in FY12). In this regard, over the last one
year it has slowly phased out several unprofitable brands such as Manzoni
(Premium luxury), Zapp (Kid’s wear) and GAS (JV brand).
Capital structure:
Since FY01, Raymond has INRs4-5b investment in liquid
MFs/equity MFs, earning very low returns. (The management has in the past
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Raymond
rationalized the holding of such cash to several factors including VRS, war chest
for acquisition, spread between TUF loan, etc.)
FY13 performance to be muted
Raymond’s 4QFY12 results saw EBITDA margin drop 200bp YoY and 720bp QoQ
to 10.2%, while adjusted PAT dropped 98% YoY. This was due to (1) input cost
pressures (Raymond imports bulk of its wool requirement), and (2) poor
consumer demand for its branded garment business.
The outlook for 1HFY13 remains challenging given the continuance of several of
the above factors. We expect Raymond’s performance to improve from 2HFY13.
We model Raymond’s FY13 EBIT to be flat at INR2.6b and PAT down 10% to
INR1.3b.
Real Estate value unlocking
Post closure of its Thane plant, Raymond has managed to free up ~125 acres for
commercial development. However, the management has not shared any
concrete plans with regard to monetization timeline, development plan or cash
flow utilization.
The most positive scenario for shareholders would be that Raymond continues
to remain focused on its core business, monetizes the land through outright
sale/JV and distributes bulk of proceeds through payout.
We have done a sensitivity analysis of the possible land bank monetization value
and arrived at a base case value of INR147/share. This assumes sale of the entire
land @ INR120m/acre (last large transaction in that area) within two years
(post-tax cash proceeds discounted at 14%).
Valuation and view
Raymond faces near-term challenges of rising input prices and poor consumer
demand, particularly in its branded apparel business. However, over the longer
term, it is one of the strongest plays in the branded garment segment, well
positioned to capitalize its strong franchise value.
It is in the last stage of finalizing its plans for its freed land bank at Thane, which
could unlock significant value (base case value INR147/share).
Raymond trades at FY14E P/E of 13x and EV/EBITDA of 6.8x, before adjusting for
its real estate value. Adjusting for real estate value, it trades at FY14E P/E of 8x
and EV/ EBITDA of 5x.
We reiterate Buy on the stock with a target price of INR462, implying a 21% upside
from current levels. Our target price is based on intrinsic EV/EBITDA multiple of 6x
FY14E and land bank value of INR147/ share.
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Raymond
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Raymond LTD
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