Equity Research: Raymond Ltd

Raymond looks strong for further growth with increasing innovation and introduction of various outfits targeting different segments across clothing industry, which in turn will improve the company's CAGR.

With roots dating back to 1925, as a small woollen mill in Thane (Maharashtra), manufacturing coarse woollen blankets, Raymond Brand has evolved into a leading manufacturer of the finest fabrics in the world. Reckoned for its pioneering innovations and having enjoyed the patronage of millions of consumers, Raymond is amongst the trusted brands in India.Raymond Limited was first incorporated as the Raymond Woolen Mill in 1925 near Thane Creek. Lala Kailashpat Singhania took over The Raymond Woolen Mill in the year 1944. Ever since then they have been analogous with class, elegance and individuality which is evident in their men's fashion. In the year 2000, Mr Gautam Singhania was appointed Chairman and Managing Director of Raymond Limited. In 2015, Raymond became the first textile company in the world to produce Super 250s and innovative fabrics. Raymond with its 97-year-old expertise is a textile powerhouse with modern infrastructure and strong fibre-to-fabric manufacturing capabilities. Along with being reputed, it is the fastest-growing fashion fabric brand. Raymond offers an exquisite range of shirting and suiting fabrics across a plethora of options such as Worsted fabrics, Cotton, Wool blends, Linen and Denim. The ethnic culture, exquisite clothing and the comfort of couture in each of its brands - Park Avenue, Raymond Ready To Wear, ColorPlus and Parx Ethnix have proven beneficial and created a desirous space in your lives. With the central theme of ‘Go Beyond’, the conglomerate has undertaken the project to build quality housing for all by introducing Raymond Realty and Home. The Raymond Group has a significant hold over the B2B space through its garments business. With its presence in this sector and state-of-the-art, owned subsidiaries, they manufacture suits, trousers, shirts, and jeans for famous fashion brands throughout the world.Raymond has remarkable participation in the Denim Market, as one of the main producers and preferred suppliers of superior quality Ring Denim to some of the world's most prestigious jeanswear companies. 'Raymond Made To Measure,' which pioneered the original concept of bespoke apparel provides a luxurious service to discerning consumers who want to customize their appearance. Raymond Consumer Care Brands- Park Avenue and KamaSutra have a prominent presence in the FMCG market. Venturing into the engineering business in 1949, JK Files and Engineering Ltd is the largest manufacturer of steel files with a global presence in over 50+ countries. The group has set a strong foot in this space through Ring Plus Aqua Ltd (RPAL). Raymond and its brands are also available in tier IV and V cities with over 1500 outlets scattered across 600 towns and a vast network of over 20,000 points of sale in India. Raymond is the largest integrated textile company in the world and exports its suits to more than 60+ countries including the USA, Canada, Europe, Japan and the Middle East.

Shareholding:

Industry Research:

India’s textiles sector is one of the oldest industries in the Indian economy, dating back to several centuries. The industry is extremely varied, with hand-spun and hand-woven textiles sectors at one end of the spectrum, with the capital-intensive sophisticated mills sector at the other end. The fundamental strength of the textile industry in India is its strong production base of a wide range of fibre/yarns from natural fibres like cotton, jute, silk and wool, to synthetic/man-made fibres like polyester, viscose, nylon and acrylic. The decentralised power looms/ hosiery and knitting sector form the largest component of the textiles sector. The close linkage of textiles industry to agriculture (for raw materials such as cotton) and the ancient culture and traditions of the country in terms of textiles makes it unique in comparison to other industries in the country. India’s textiles industry has a capacity to produce a wide variety of products suitable for different market segments, both within India and across the world.

In order to attract private equity and employee more people, the government introduced various schemes such as the Scheme for Integrated Textile Parks (SITP), Technology Upgradation Fund Scheme (TUFS) and Mega Integrated Textile Region and Apparel (MITRA) Park scheme. The Indian textile and apparel industry is expected to grow at 10% CAGR from 2019-20 to reach US$ 190 billion by 2025-26. India has a 4% share of the global trade in textiles and apparel. India is the world’s largest producer of cotton. Estimated production stood at 362.18 lakh bales during cotton season 2021-22. Domestic consumption for the 2021-22 cotton season is estimated to be at 338 lakh bales. Cotton production in India is projected to reach 7.2 million tonnes (~43 million bales of 170 kg each) by 2030, driven by increasing demand from consumers. In FY23, exports of readymade garments (RMG) including accessories stood at US$ 16.2 billion. It is expected to surpass US$ 30 billion by 2027, with an estimated 4.6-4.9% share globally.

Production of fibre in India reached 2.40 MT in FY21 (till January 2021), while for yarn, the production stood at 4,762 million kgs during the same period. Natural fibres are regarded as the backbone of the Indian textile industry, which is expected to grow from US$138 billion to US$195 billion by 2025. India’s textile and apparel exports (including handicrafts) stood at US$ 44.4 billion in FY22, a 41% increase YoY. During April-November in FY23, the total exports of textiles stood at US$ 23.1 billion. India’s textile and apparel exports to the US, its single largest market, stood at 27% of the total export value in FY22. Exports of readymade garments including cotton accessories stood at US$ 6.19 billion in FY22. India’s textiles industry has around 4.5 crore employed workers including 35.22 lakh handloom workers across the country. The future of the Indian textiles industry looks promising, buoyed by strong domestic consumption as well as export demand. India is working on various major initiatives to boost its technical textile industry. Owing to the pandemic, the demand for technical textiles in the form of PPE suits and equipment is on the rise. The government is supporting the sector through funding and machinery sponsoring.

India is the 6th-largest exporter of textiles and apparel products in the world, with a massive raw material and manufacturing base. During 2020-21, textiles, apparels and handicrafts cumulatively contributed 11.4% share in India’s total exports, with India in turn constituting 4% of the global trade share in textiles and apparels. Despite unprecedented logistics issues, in FY21-22, India registered highest-ever exports of USD 44.4bn in textiles and apparel (T&A), including handicrafts, recording 41% and 26% growth over FY20-21 and FY19-20, respectively. As per Apparel Export Promotion Council, during FY2022-23 (until Sep’22), exports of ready-made garments (RMG) stood at USD 8,127.3mn, expanding at 10.8% YoY.

Based on product category, during 2021-22, exports recorded the highest yearly growth of 54% in cotton textiles, followed by 51% growth in MMT, 30% in RMG and 22% in handicrafts. Cotton textiles was a major export contributor comprising 39% share of total exports of the T&A industry, while the share of RMG, MMT and handicrafts in exports was 36%, 14% and 5%, respectively. Exports of cotton yarn/fabs /madeups, handloom products, etc., stood at USD 767.50mn in Sep’22 and accounted for 2.35% of total exports.

Top players in the sector are achieving sustainability in their products by manufacturing textiles that use natural recyclable materials. aWith consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with the entry of several international players like Marks & Spencer, Guess and Next into the Indian market. The growth in textiles will be driven by growing household income, increasing population and increasing demand by sectors like housing, hospitality, healthcare, etc.

The technical textiles market for automotive textiles is projected to increase to US$ 3.7 billion by 2027, from US$ 2.4 billion in 2020. Similarly, the industrial textiles market is likely to increase at an 8% CAGR from US$ 2 billion in 2020 to US$ 3.3 billion in 2027. The overall Indian textiles market is expected to be worth more than US$ 209 billion by 2029.

Investment Rationale:

Branded Cloting with greater reach: RAYMOND is a market leader and India’s leading branded player in suiting and shirting fabrics. It is a market leader in domestic worsted suiting industry with a majority share in branded textiles. It has also emerged as the largest over-the- counter (OTC) branded shirting player in the domestic organised market since its launch in 2015. The company is among the world’s largest horizontally and vertically- integrated worsted suiting manufacturer. Globally, it is renowned for manufacturing Super 250s, the world’s finest worsted suiting fabric. It has state-of-the-art facilities across Vapi (Gujarat), Chhindwara (Madhya Pradesh) and Jalgaon (Maharashtra), with aggregate capacity of 48mn mtrs of suiting fabric across wool, poly-wool, silk, and other premium blends. RAYMOND provides extensive choices between Rs 350 to Rs 3.5 lakh per metre price range to suit diverse customer groups, with 20,000+ SKUs. It is expected that consumer demand to stay robust with high number of weddings coupled with social gatherings, and opening up of physical workspaces leading to higher footfalls in the retail network. Moreover, the company plans to make a shift in positioning in suiting fabric from ‘Occasion Wear’ to ‘Daily Wear’. Product and service innovation are expected to drive sustainable growth momentum. Scaling of the institutional business and capitalising international business opportunities should aid sales growth. The company aspires for growth in its suiting business to surpass industry growth rate. Premiumisation in suiting (wool-rich blends) is expected to drive margin expansion while premiumisation in shirting is expected to be driven in cotton, silk and linen categories. RAYMOND is a pioneer in India’s apparel brand, Park Avenue. Launched way back in 1986, Park Avenue defined formal wear for the Indian diaspora. The company has come a long way since, and now offers diversified silhouettes and creative lines of high-fashion apparel through power brands like — Raymond Ready to Wear (RRTW), Park Avenue, ColorPlus and Parx. Catering to discerning consumers for their wedding and celebration needs, ‘Ethnix by Raymond’ offers a wide range of menswear suited for special occasions, weddings, and celebrations.

High Value Clothing:

With a clear domain in crafting natural fabrics in India, RAYMOND has an edge in creating the best cotton and linen fabrics. It has the prowess to manufacture 340s count cotton and 150s linen, which makes it a leading supplier for domestic and international brands, both in high-value cotton and linen fabrics, along with bottom weight fabrics. Diversified proximity to weaving clusters enables better efficiencies in procurement, enabling cost advantages. We believe RAYMOND’s innovation and high-value differentiated product offerings and services to customers would continue, as we expect value addition to improve realisation. Increasing footprints across new geographies should help it in expanding its customer base. Sustainable cost saving initiatives would enable operational efficiencies to enhance profitability.  Under its engineering business, the company manufactures and sells precision- engineered components for tools and hardware such as steel files, drills, hand tools and power tool accessories as well as auto components such as ring gears, flex plates and water pump bearings. The business has successfully maintained long-term relationships with domestic and international customers over the decades, which is a testimony and recognition of it being a reliable partner that ensures consistent high- quality products. The company plans to expand capacity in drills, hand tools and power tools. We expect by increasing its manufacturing capacity, the company should be able to leverage the growing opportunity in the industrials space. Focus on development and introduction of new products should drive revenue growth. Long-term initiatives are expected to grow domestic and global market shares, with business likely increasing from existing customers along with new customer acquisitions.

Real Estate- A Game Changer: 

RAYMOND launched its real estate business in 2019, by beginning to develop company-owned land parcel in Thane. With distinct advantages of offering the right product, at the right price with location advantage, Raymond Realty is now reckoned as one of the best-selling real estate projects in Thane, Maharashtra within a short span. The company has developed 2 residential real estate projects across a 20-acre land parcel. TenX Habitat consists of 10 towers with 2.9mn sq ft of saleable area and The Address by GS has 2 towers with 1.2mn sq ft of saleable area.

With tailwinds from increase in affordability, supportive government policies, revival in consumption cycle and aspiration to upgrade homes, we expect the real estate sector to maintain growth momentum. The company is evaluating numerous options to unlock value from the remaining 60-acre land parcel in Thane, in addition to the ongoing aspirational 1 and 2 BHK ‘TenX’ project and the premium residential 3,4,5 and above BHK ‘The Address by GS’ project. It launched its 3rd project in February 2023 in Thane, ‘TenXEra’ – these are 2 towers having a carpet area of 0.7 mn sq ft. The company is also expanding its real estate business beyond Thane in MMR region through an asset-light model of joint development with land owners by focusing on value-based offerings in projects with a topline of Rs 18-22bn. We expect the real estate business to grow at 21% CAGR, and sustain EBITDA margin at >28% during FY24E and FY25E. The current projects are expected to generate a cumulative FCF of Rs 14bn.

Business through JV & Associates:

Raymond UCO Denim Private Limited is a preferred supplier of high-quality denim fabrics and apparels to the world with its denim garmenting unit in Bengaluru, Karnataka. It services the most reputed denim brands spread across the US, Europe, Asia and India. The company’s strength lies in producing fabrics comprising premium cotton, stretch, exotic blends, special finishes and performance denims, amongst others. Its denim fabric manufacturing facility is located in Yavatmal, Maharashtra that supplies to varied denim brands. Raymond Group has a presence in the FMCG industry through its associate company, Raymond Consumer Care Limited (RCCL). The FMCG businesses of personal care, sexual wellness and home care were integrated in RCCL in FY2019-20. The integration has brought about business synergies, operational efficiencies and channel distribution strengths. RCCL is amongst the top players in India’s fragrances and sexual wellness categories, with aspirational brands like Park Avenue, KamaSutra, KS and Premium encompassing its personal care, sexual wellness and home care segments. Raymond Consumer Care also has a worldclass condom manufacturing facility with 450mn per annum capacity in Aurangabad, Maharashtra. The company expects its FMCG business to grow at 18% CAGR going forward.

Strong product diversification and innovation initiatives across segments to drive volumes and premiumisation:

Under suiting, the focus is on casualisation; the company plans to introduce innovative designs such as stain-free, water-resistant suits. Within shirting, premiumisation (linen blends, Italian fabrics) and massification (plans to launch shirts in Rs 250-300 price range) are slated to drive growth. Considering the increased consciousness towards eco-friendly, sustainable, and functional fabric, the company has introduced a range of offerings such as ‘Sustainova’, ‘Ecomoda’ and ‘Ecogreen’, advanced flexi, auto fit range and active formal work wear in knit bases. As the shirting category requires high degree of innovation, the company has launched a unique set of collections across product categories and exclusive channel merchandise. These have received encouraging response from trade partners and retail outlets. RAYMOND recently launched its stretched collection, ‘Spanax’, which has multi- directional and shape retention features as a performance and comfort fabric. It has introduced vibrant and vivid shirting fabrics under ‘Vibez’ collection, that caters to an increasing casualisation trend.

RAYMOND plans to increase its share in the wedding wear market in India, as it expects this category to drive growth. The apparel business aims to achieve this by expanding its Ethnix brand, for which it is opening stores across India. RAYMOND aims to capture a larger market share by leveraging its distribution network and opening new stores.

Over last one and a half years, the company has opened 46 stores for Ethnix, and plans to bring the label’s brick and mortar total to 70 by the end of FY23, extend it to 180 by the end of FY24, touching 250-300 stores by FY25E. The company aspires to have 400-500 Ethnix stores in the coming 4-5 years. Ethnix stores are expected to generate Rs 600-700mn in revenue in FY23. 250 stores by FY25E translate into revenue of Rs 3.8-4.2bn. These will largely be franchisee (FOFO) stores, but some flagship stores will be owned. Store margins in Ethnix will likely be comparable to industry benchmarks.

An end to pandemic-led restrictions on social gatherings and moderation in gold prices heralded a return to traditional, large-scale weddings for many Indians. The company also plans to develop the untapped Smart Ethnix category and keep an optimal portfolio of core ethnic and casual ethnic. Increased traction in this sub- segment would help in reducing the wedding-dominated seasonality in this business. RAYMOND aspires to become a leading player in the ethnic wear space in the next 5- 6 years.

‘Raymond Reward Points’ is instrumental in rendering the omni-channel loyalty programme attractive. It is a flexible, versatile, and real-time solution for repeat customers to choose how they use their reward points and earn more from the diverse touchpoints. This improves their ability to provide relevant offers and increase offtake. The company has a member base of 14.2mn ‘Raymond Rewards’ loyalty programme (1.2mn members added in FY22, 1.8mn members added during FY23). During FY22, repeat purchases from loyalty members grew in double digit. Member ATV was 30% higher in FY23 compared to non- members. The company is targeting to rationalise its portfolio of SKUs in a bid to have better control of its product portfolios and thereby improve its bottom line. This will enable it to a) lower inventory costs, b) increase forecast accuracy by eliminating the variability risk of producing multiple similar products, and c) simplifying and streamlining its business by limiting the number of suppliers, equipment, workers, and storage space.

 Management Profile:

Financials:

BalanceSheet

Profit & Loss

Cash Flow

Valuation:

Currently Management’s focus is on collections and improving efficiency in inventory and production cycle management since last couple of years has helped it lower the NWC cycle from a peak of 94 days in 2QFY20 to 52 days in 3QFY23. This in turn has helped it reduce net debt from Rs 24.8bn in 2QFY20 to Rs 11.3bn in 3QFY23. It is expected that this focus on liquidity management will continue, and estimate free cash generation of Rs 30+ bn over FY22-25E to help improve RoCE from 18% in FY22 to 36% in FY25E. Segmental RoCEs present an even better picture, with branded textiles, engineering and real estate, posting strong return ratios, partially offset by branded apparel, corporate overheads and liquidity maintained on the books.

 Key Risks:

1.) Rising input prices and inflationary pressures may have short-to mid- term impact on demand; price hikes undertaken may not be commensurate with the increase in costs.

2.) Modest growth in fabric business with increasing competition from ready-made garments.

3.) Growing competition and fast-paced evolving fashion leading to shortened product cycle.

4.) High influx of international fashion brands could intensify competition through value-based retail formats.

5.) Increasing competition from neighboring Asian countries that offer low- cost garmenting solutions with the support of their government, along with India’s lack of clarity on FTA, especially with the US and the European regions.

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