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Raymond Limited – Lined up for take-off!

The overall focus on profitable growth remains the key underlying point across strategic plans for various businesses within the company. While the mantra for its Branded Apparel business is geared towards growth, the same for its Branded Textiles is more on innovations (product + experience) to drive growth. With Mr. Gautam Singhania’s objective very much aligned with shareholders and the efforts within the organization to revamp both its core corporate structure as well as business divisions, we believe that the company is on course to pull itself out of its recent slump and build on its foundations in the year ahead.. Land-sale, non-core business hive-offs, and growth potential of FMCG business could provide further upside triggers for the stock.

Key Analyst Meeting Pointers:

1)Growth focus in Apparel/Innovations in Textiles: RW reiterated its strategies to power growth in its B2C businesses viz. Branded Apparel (Park
Avenue/RTW/ColorPlus/Parx) and Textiles (Suiting/Shirting Fabrics). Given thestrong growth visibility for the Apparel Industry as a whole, the company would continue to roll out its retail footprint through multiple channels (TRS/EBO/eCommerce – 300 new stores to be added over the next 12-18 months) to capture growth. On the Textiles front, given the slow growth of the suitingfabric industry (3-5% CAGR over the last 3 years), RW continues to innovate to rehash its products (Techno-Series/Champion Collection), or improve itsofferings (expanding MTM offerings/online tailoring services). While RW’s Textiles business is expected to grow at a decent pace (10-15% CAGR overFY18E/19E), Apparel is expected to grow  15-20% over the next two years (1.5x-2x the industry growth rate).

2) Ethiopia Garments to add ~INR2.5bn in revenue: RW commissioned its garmentsmanufacturing unit in Ethiopia in late June 2017. The first phase would produce 1.3 mn garments per year (mostly suits) which would majorly cater to the US market. At peak utilization (expected by late FY18E), the unit is expected to contribute INR2.5bn in revenue while margins are expected to be higher than current levels (10%), given that operating costs in Ethiopia are 25% cheaper vis-à-vis India and that the country has Free Trade Agreements with the US and the Euro Zone.

3)Group-level margin/return ratio improvement expected: As the seeds of profitable growth bear fruit in the Branded Apparel and Garments businesses, as well as the engineering businesses, the management expects group-level EBITDA margins to expand by  150-200 bps by FY20E (from  8% currently). In tandem, RoCE (pre-tax) is also expected to improve to 12-15% by FY20E (from 6-8% currently).

4)Capex cycle peaking in the near-term; To be FCF positive by FY20E: RW’s FY18E capex plans of  INR3.3bn includes  INR2bn spends on its Ethiopia and Amravati facilities. While the Ethiopia factory has commenced operations, the Amravati factory is expected to become operational by late FY18E. Post this, no major capex plans are on the anvil, barring new store additions (where the focus would be to expand through the franchisee route). The company would start paring of debt from internal accruals (assuming no land-sale in the interim) and expects its Net Debt/EBITDA ratio to reduce to 1.5-2.5x by FY20E (from 4x currently).

5) No announcement on land value-unlocking: Regarding the monetization of RW’s Thane land parcel (140 acres), the company expects all requisite clearances to be concluded by the end of the year. No concrete proposal has been finalized as to the way forward in this case.

Outlook & Valuation
We remain positive on the future prospects of the company given that the B2C businesses are showing signs of normalcy, enough low-hanging fruits to support Branded Apparel margin expansion over the next two years, and the ramp-up of the company’s Ethiopia garments unit over FY19E. Our SOTP-based target price of INR770/share ( 9.7x FY19E implied EV/EBITDA). Land-sale, non-core business hive-offs, and growth potential of FMCG business could provide further upside triggers for the stock.
While we do not ascribe any value to the land (given lack of clarity), we believe that its sale could potentially add  INR450/share to our target price
(140 acres/INR200mn per acre). Assuming a 50% holding-company discount, our target price could rise by  INR225/share to  INR1,000/share once clarity emerges on land-monetization.



Strong rally has been witnessed in recent past after being traded in a tight range for quite a while. Momentum throughout the sideways action has eased off to take supports around long term levels. Looking at the weekly chart the stock is in a good uptrend were we find the stock is very well supported the pitchfork median line setup currently it has given a  pitchfork breakout as well as the previous peak high indicating  a fresh bullish participation in the counter. It has stage breakout from pennant formation. RSI ticks higher taking support at 60 level indicates bullish momentum in price, In near term we can expect 943 levels with intermediate resistance at 869.

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