Raymond is a leading player in the textile segment with a presence in several segments - worsted textiles, denim and apparels. A strong brand and significant cash surplus are the key advantages that would enable the company to pursue both organic and inorganic growth opportunities. The company is well positioned to explore multitude of growth opportunities available to the sector. With undemanding valuations at 6x FY2004E and a dividend yield of 4.5%, the stock is a good medium-term bet.

Background & Business

Raymond’s product portfolio consists of woolen fabric, blankets, and furnishing fabrics. Of its five divisions: Textiles, Aviation & Infotech, Files & Tools, Garments, and Denim, textiles has contributed more than 50 per cent of sales over the years. However, relatively new divisions such as denim and garments already contribute more than 20% of the sales. Raymond is a market leader in the Files & Tools business. Currently, its denim fabrics are exported to countries in Europe, Middle East and the sub-continent. The company has recently completed expansion of its denim capacity.

Business outlook

Denim division: The denim division led the topline growth during the first quarter with 53.4 per cent YoY increase. Exports accounted for 44% of denim sales and are likely to go up, going forward.

Worsted fabrics: The worsted textiles business witnessed a 6.4% YoY growth, at Rs116 crore, on the back of a 15.1% volume growth in the domestic market. Good monsoons ahead of the busy season portend a strong demand for Raymond in H2FY04.

Apparel and garmenting business: The apparels business under Raymond Apparel and Color Plus has also performed well with the former breaking even. Going forward, Raymond has plans to set up a garmenting unit at Bangalore to sell readymade suits as well as trousers. The company also plans to establish worsted fabrics capacity in the ASEAN region to cater to that market. The company’s product mix is now balanced now appears to be more seasonally balanced with textiles catering to winter months and Denim to other months.

Future outlook

Once export quotas are dismantled post 2005, Raymond sees a greater possibility of exporting garments than fabric. The company is also increasing its capacity to manufacture formal garments such as jackets, suits, and trousers. For the current year, the company expects the denim division to continue with a healthy revenue growth of more than 35%. Worsted textiles division is likely to grow 10%, but the outlook on files division is flat. Raymond plans to invest not only in making garments, but also to brand itself internationally. It plans to do so by its own brands, as well as through acquisition of other brands.

Raymond witnessed a massive 385.4 per cent rise in net profit to Rs 20.92 crore for the first quarter ended June 30 compared with Rs 4.31 crore in the corresponding period of the previous year. Total income increased by 22 per cent to Rs 179.4 crore from Rs 147.34 crore in JQ 2002. Other income increased 611 per cent to Rs 15 crore (Rs 2.11 crore). The textile division’s revenues were up 6.4% at Rs 115.92 crore, while the denim division's revenues were up 53.4% at Rs 42.25 crore, and the files division's revenues were down 6.36% at Rs 28.24 crore (Rs 282.4 million). The company's operating profit margins was down from 13.71% to 12.22%. The files division suffered on two accounts. First, there was a delay in dispatch of export consignments, due to the transport strike in the early part of this quarter. Second, the appreciating rupee made a dent because about 50% of files production is exported. On the operating front, OPM dropped from 13.7% to 12.2%, due to rise in raw material cost.

Investment ratoinale & valuations

Presence in several segments - worsted textiles, denim and apparels - as well as strong brand name and significant cash surplus are the key advantages that would enable Raymond to pursue both organic and inorganic growth opportunities. The stock is undervalued and offers significant potential for appreciation. On a P/E basis too, the valuations are undemanding at 6x FY2004E and with a dividend yield of 4.5%. Buy with a medium term price target of Rs 145 and long-term price target of Rs 185.