The Hindu Business Line : Raymond: Buy

Heavy investments in expanding facilities will reflect in Raymond's performance over the next couple of years. An attractive candidate for the portfolio from a long-term perspective, though returns could be moderate in the near term.

Robust revenue growth likely
Investment mode to payoff
A wider product portfolio
Joint venture for denim
More clout, courtesy JV partner
Earnings from JV to accrue in a couple of years

Advantage alliances: Raymond takes the joint-venture route to widen product range

Exposure, especially on weakness, can be considered in Raymond.

There is strong visibility on the revenue front; the topline in the early quarters of FY-07 could get a boost from new capacities that have been commissioned this month. Raw material prices too appear to be under check. Raymond continues to be comfortably placed to bankroll its aggressive expansion plans with its strong balance-sheet.

Once greater clarity emerges on its plans for the denim business, it could get reflected in the valuation levels.

The division will soon be part of a joint venture with an international player.

While the thrust over the past year has largely been on its core textile business, Raymond appears to be exploring options in other sectors such as engineering, through its subsidiaries.

If its investments become significant, the possibility of a restructuring to create focussed listed plays cannot be ruled out.

The investments in question are not large enough now. Deployment of surplus funds in projects that may not yield adequate returns, however, poses a risk to shareholders.

Performance and valuation

We re-visit the stock after our "book profits" call at Rs 344 last May, when Raymond had come off a year of lacklustre performance. Rising raw material prices and expansion costs had threatened to impede earnings growth.

Since then, however, the performance has improved substantially on the back of robust revenue growth in its textile and denim divisions, a better contribution from subsidiaries, lower raw material prices and gains from restructuring.

In the nine months to December, recurring profits have grown by more than 70 per cent over the corresponding previous period.

While the company has performed better than expectations, the stock has not. It may have under-performed the market; the stock is, however, one that is hard to ignore for those who want an exposure to the textile sector.

It now trades at 23 times its likely FY-06 per share earnings on a consolidated basis. Price declines linked to market weakness can serve as an attractive entry point for those with a long-term view.

As it goes ahead with its relentless expansion, the stock will be well-suited for investors who wish to participate in its growth phase and have expectations of modest returns in the near term.

More expansion underway

Raymond is in the midst of a heavy investmsent phase. In the first nine months of this fiscal, the company invested about Rs 115 crore in joint ventures and subsidiaries. This is in addition to the Rs 200 crore spent on expanding its denim and worsted fabric capacities, both of which will contribute to operations from the first quarter of FY-07.

It has just announced another Rs 200-crore project for setting up an integrated unit for making worsted suiting. This would take its total capacity in this segment to 31 million metres, a size on a par with global levels.

Aside from setting up subsidiaries that would manufacture jeans wear, shirts and formal suits, it has formed four international alliances over the past year that would strengthen its presence in existing businesses and broaden its product bouquet. The 50-50 joint venture with the Italian textile group, Gruppo Zambaiti, for making high-value cotton shirting fabric will cater to exports and offer quality fabric to Raymond's domestic brands such as Color-Plus and Park Avenue.

Denim pays off

Raymond's big-ticket alliance is, however, with UCO of Belgium, which would put its denim business on the global map. The 50:50 joint venture would merge both companies' denim businesses, creating 80 million metres of denim fabric.

The gains from the venture are, however, not one of size. UCO brings a lot more to the table, with facilities in the US and Romania. It has a higher revenue base of about Rs 550 crore and expertise in a value-added segment untapped by Raymond — colour denim.

The JV expects to clock revenues of Rs 1,100 crore in its first year of operation. The latter's focus on value-added denim has paid off, with the company weathering the pricing pressure in denim better than its peers.

The finer details of the JV are yet to be worked out. The denim division, which accounts for 20 per cent of its revenues, would no longer be an integral part of Raymond.

With the operations routed through the JV, Raymond will simply earn its share of profits from the venture. Its business will also not be directly affected by the cyclical nature of the denim business. The earnings flow from the joint venture may show significant growth only over a couple of years.

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