Raymond: Valuations rich, buy on dips

The garmenting segment’s margins were impacted in FY18 due to an appreciating rupee against the dollar, particularly in the second half of the financial year. However, operational efficiencies kept margins stable in Q4 vis-a-vis last year.

A robust offtake in domestic markets and product rationalisation measures enabled the tools and hardware segment to report a healthy YoY increase in margins. The company’s auto component segment gained momentum due to higher demand from passenger, commercial and industrial vehicle players.

Raymond’s plans going forward

Branded fabric
In the branded textile segment, product innovations (new high-end varieties) and tailoring services will play a decisive role in achieving a higher conversion-to footfall ratio. This assumes significance as the segment contributes about 50 percent to Raymond’s consolidated revenue.

Branded apparel
To complement its fast-growing power brands (Parx, Raymond Ready To Wear, ColorPlus, Park Avenue), Raymond launched premium ethnic products in Q4. The company will distribute its offerings progressively across The Raymond Shop (TRS), select multi-brand outlets and large format stores across India to boost turnover growth.

Capex
The company concluded its major capex programme in FY18 by commencing processes at two new facilities at Amravati and Ethiopia. In FY19 capex of Rs 250 crore will be funded largely through internal accruals for increasing retail store count and refurbishing existing outlets, apart from maintenance capex.

Store additions
To keep its business model as asset-light as possible, Raymond aims to expand its existing network of 1,219 stores, primarily through the franchise-run route. The management is bullish on the prospects of mini ‘The Raymond Shop’ outlets succeeding in tier 4/5/6 regions.

Product launches
To tap a higher chunk of the market share shift from unbranded to branded clothing by aspirational buyers, the management introduced ‘Next Look’ apparel to target the value segment. ‘Khadi by Raymond’, ‘Denim Made To Measure’ and ‘Casual Wear Made To Measure’ are some of the other additions.

Linen plant
Raymond’s greenfield linen fabric factory at Amravati, with a capacity of four million metre per annum, was commissioned in Q4 FY18 to meet captive consumption demands of the branded shirting fabric segment. This should result in savings on high import costs.

Ethiopian facility
To ensure that garments manufactured by Raymond gain duty free access to North American and European markets, the company operationalised its Ethiopian unit in the middle of FY18. The rupee’s depreciation against the dollar should have a positive effect on earnings. 

Land bank monetisation
The management approved a plan to develop 20 acres of land in Maharashtra for residential purposes. The project, with an expected duration of five-to-six years, will entail a capital outflow of Rs 300 crore in FY19. Except for a few construction-related approvals, the other requisite permissions are in place.

Should you invest at current levels?
After facing difficulties in managing cash flows due to company-specific issues like headwinds in branded apparel and plant set up costs and macro factors like demonetisation and the Goods & Services Tax, Raymond is well-poised to generate positive free cash flows going forward.

The management stated that the economic outlook will remain positive in FY19, underpinned by uptrends in private consumption and public investment. Further, unorganised entities, which are highly active in the semi-urban and rural territories, will gradually lose their pricing advantage.

Though Raymond’s hardware and auto component segments form a small part of its overall turnover, the outlook for both is promising. While restructuring measures for the former seem to be bearing fruit, the latter is on a strong footing given the growth in the auto space.

Continuous discounting in the apparel industry could moderate Raymond’s margins going forward. Rising crude (for synthetic material) and steep cotton prices could lead to higher input costs. Owing to stiff competition, it may be hard to pass on such hikes to consumers.

In the last 30 days, the stock has rallied pretty sharply. At a steep valuation of 26.7 times FY20 projected earnings, there is not much left on the table for prospective investors. Any downside on account of sluggishness in a seasonally weak H1 FY19 may perhaps provide better entry opportunities.

Follow @krishnakarwa152

For more research articles, visit our Moneycontrol Research page