Friday, June 15, 2012

>RAYMOND: Moving towards an asset-light model:

  Strong branded retail play: Leveraging on its strong five decade old brand, Raymond is spurring ahead and expanding its retail presence which is currently at 853 stores, up from 584 in FY09 and targeting 100 stores/year, going forward. The might of the brand is further accentuated by the fact that 78% of its stores are franchises. Besides, its franchise model involves outright purchase of stocks by franchise owners, thus, limiting the company¡¦s working capital.

  Focused restructuring paves the way: Raymond has been on a strong upward trajectory post its FY08-11 restructuring. Strong scale-up in revenues and cost savings have emanated from the series of restructuring activities undertaken which includes transfer of its Thane operations, closure of its loss-making denim factories, realignment of its brand strategy, as well as stabilisation of ERP. With the restructuring complete, we expect a clear runaway, going forward.

  Moving towards an asset-light model: Keeping a strong eye on return ratios which are currently low, Raymond targets to remain asset-light by focusing on its franchise-strategy on the retail side as well as outsourcing of routine manufacturing processes.

 All-round growth: Besides the textile & garments segment, which is expected to grow at 15% CAGR over the next two years, the company expects strong growth of 28% CAGR for its engineering division as well which includes the tools & files as well as the auto components segment.

  Valuations: We have used a host of consumption names with retail bend for comparison since there is no strict peer group for the company. These trade at an average PER of 26x FY13 & 23x FY14, albeit with much higher return ratios than Raymond. Accounting for the same, we are valuing Raymond at a PER of 12x FY14 which gives us a value of Rs467/share. Further, the prime land in Thane owned by the company provides an option-value of Rs244-326/ share, although not included in our target price. We initiate coverage on the stock with
a ¡¥BUY¡¦.