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Shanthi Venkataraman

A leader in the premium fabric market, Raymond is emerging as a garment player to reckon with. Its wide presence in the export market makes it a strong contender in the race to gain global market share in clothing, post-2005.

Premium garments to provide avenues for growth.

INVESTORS can hold the stock of Raymond. Although the results for the April-June quarter were disappointing, the company's long-term growth prospects remain unaffected.

The company continues to enjoy a leadership position in the worsted fabric market. It has also gained a dominant presence in the domestic market for high-end garments. Having made inroads in the export market, Raymond is better placed to cater to the demand from such markets, post-2005, when quantitative restrictions on import of garments would be removed.

The stock trades at about 11 times its trailing four quarters earnings' per share.

Financial performance

Raymond's performance in the April-June quarter was lacklustre. Excluding its loss on foreign exchange transaction, which, on account of the depreciating rupee, was substantial, earnings fell 35 per cent over the corresponding previous period.

Operating margins declined steeply across its textile, denim and steel files division, due to rising costs of raw materials — wool, cotton and steel respectively. Earnings have also been affected by an outgo on interest.

Raymond has traditionally earned a significant interest income, which has normally offset its interest payments.

Had it not been for `other income', which grew 30 per cent, the company would have ended the quarter with a loss. Raymond has large cash holdings, the bulk of which has been invested in liquid funds. Income from treasury operations has, over the years, accounted for more than 75 per cent of its profits.

However, with interest rates going flat, the company may have to rely less on its treasury operations to boost its profits.

There appears to be some scope for improvement in operating margins, though. The price of Australian wool, which it imports, is on the decline; so also, the price of cotton. This could lead to an easing up of margin pressure in the near term. Also, robust demand from the domestic and export market would augur well for revenue growth.

The April-June quarter is normally a lean period for Raymond's textiles division, which continues to be its key revenue and earnings driver. This being the case, the coming quarters may provide a clearer indication of the company's growth prospects.

Increasing thrust on garments

While the textile and denim divisions are the mainstay of the company, their focus has, in recent years, shifted from fabric to garments, where margins are ostensibly higher.

The focus on garments would also lend stability to the revenue and earnings of the business vis-à-vis the fabric segment, which frequently faces pressure on margins. Also, with the domestic and export markets for readymade garments growing at an increasing pace, a presence in garments would provide it an opportunity to augment its earnings.

Post its acquisition of Color-Plus, Raymond has emerged as a dominant player in the branded apparel business. Its brands — Park Avenue, Parx, Manzoni and now Color-Plus — cater to the premium segment. It has also tried to complete its product portfolio through its launch of the brand "BE", which caters predominantly to the growing women's clothing market.

Widening retail network

An important prerequisite for a successful branded apparel business is visibility. Raymond has a headstart with more than 300 exclusive shops spanning the country. The company also plans to set up outlets in select shopping malls. The exclusive shops eliminate the need for intermediaries. They also lend a premium quality to Raymond brands as compared to multi-brand outlets. With the onset of the retail boom, the company would be able to leverage on its retail outlets to augment its topline.

Tapping export markets

Raymond has a strong presence in the export market, particularly for its fabric business. This should stand the company in good stead as, post-2005, international retailers would be looking to source their requirements from those with whom they share a long-standing relationship.

Raymond has been ramping up capacity in anticipation of the surge in demand for garments. It is also increasing its annual denim capacity to 30-million metres. The company, by way of acquiring a manufacturing unit, Regency Texteis Portuguesa Limitada in Portugal, now has a manufacturing base that would enable it to cater to markets in Europe. Moreover, Raymond has ample cash holdings, which could be used to fund other acquisitions in the international markets.

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