Raymond Q3: Branded apparels lead the way; accumulate on dips

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Krishna Karwa
Moneycontrol Research

Highlights:
- The stock can be considered for accumulation
- Sales growth and margin improvement seen across most segments
- Store additions will be mainly under the franchise route
- Thane land monetisation holds key to unlocking value
- Competition, seasonality and high input costs are major risks
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Raymond reported a decent set of Q3 FY19 earnings. A diversified branded product portfolio, multi-format store additions and adoption of asset-light retailing make the stock accumulation-worthy.

Q3 review

Positives
- Sales grew across all segments
- Operating margin expanded sharply year-on-year (YoY)

Negatives
- An increase in financing costs and higher tax rate YoY impacted bottom-line margins

Observations

Revenue drivers
- Extension of the wedding season and ‘end of season sale’ schemes in Q4 should keep demand momentum intact in the textile, shirting and apparel segments
- New premium fabric variants will be introduced and marketed periodically. The number of tailoring hubs, which stood at 38 as on December 31, 2018, will increase as well
- New stores will be added every year to augment the existing network of 1,363 outlets (spanning 2.3 million square feet) across all brands: Parx, ColorPlus, Park Avenue, The Raymond Shop, Raymond Made to Measure
- The management is considering foraying into activewear, athleisure and innerwear products on a larger scale. At present, such products are sold under two brands -- Park Avenue and ColorPlus -- and comprise approximately 5 percent of branded apparel segment sales per year

Margin drivers
- To limit capex, garment manufacturing activities will be primarily outsourced and majority of the store additions will be under the franchise route
- Most of the new company owned, company operated outlets would be smaller in size to achieve cost rationalisation
- Utilisation levels at the Amravati (high-value linen shirting fabric) are likely to go up, thereby resulting in operational efficiencies
- Restructuring initiatives in the tools and hardware segment will continue

Miscellaneous
- Raymond received approvals from Maharashtra Real Estate Regulatory Authority (MAHA RERA) for commencing Phase I of its residential housing project at Thane. The project will be spread over 20 acres and would cover about 3 million sq ft of saleable area. Completion is likely within the next 4-5 years. Cash flows from this project can be used for debt repayment in due course

Risks

Outlook- A strong brand recall, availability of numerous product variants within each segment and network expansion strategies should augur well for Raymond going forward
- In the coming quarters, debt to the tune of Rs 200-225 crore may be raised for the real estate project. This would be in addition to the net debt (total debt minus cash) of Rs 2,185 crore as on December 31, 2018

- Raymond trades at 20 times its FY21 projected earnings
- The stock may be considered for long-term accumulation during volatile market conditions

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