After the completion of the buyback offer, Raymond scrip slipped by over 30 per cent and is moving sideways in the last two months. With the company focussing towards its core business of textiles and sitting on huge liquid assets, we may see some new stories emerging from the company like acquisition of brands or companies in the short term. Adding to this, the company's performance is also expected to improve due to increase in operating margins as well lower interest costs. Considering these factors, Raymond scrip will be re-rated by the market and looks attractive for investment at the current level of Rs 102.

Background

Raymond is the Flagship Company of the Vijaypat Singhania group. The company was formed in 1925 to takeover the Wadia Woolen Mills' plant situated at Thane, Maharashtra. In 1979, a new plant was commissioned in Jalgaon and another in 1992 at Chindwara. The combined current capacity is over 25 million meters of fabric per year. Raymond established itself as a leading player in woolen textiles and diversified into unrelated businesses like Cement and steel. Last year, the company divested both these businesses. One the other hand, the company merged its denim business into the company. Apart from the textile business, Raymond has another division manufacturing files and tools. Raymond is the world's largest manufacturer of engineers' files and is a market leader for decades in the domestic sector.

Business

After divesting its cement and steel divisions, Raymond is now almost a pure textile company. The textile business will contribute over 85 per cent of the total turnover and the remaining from the files and tools business. Raymond is the leader with 40 per cent market share in the worsted suiting industry. Raymond produces over 25 million metres of pure wool, wool-blended and polyester viscose fabrics, in addition to half a million blankets and shawls. Apart from the fabric division, ready-made garment business is expected to be the future money-spinner of the company. Raymond mainly sells its ready-made garments under the three main brands Park Avenue, Parx and Manzoni through the wholly owned subsidiary Raymond Apparel. The company sells its products out of 260 exclusive outlets. It plans to add another 350 outlets by 2003.

The burgeoning readymade garment business has much higher margins than the fabric business once a brand is established. Raymond's ready-made garment brands are growing at the rate of 40 per cent commanding a market share of 10 per cent. However it is quite behind the market leader Indian Rayon (acquired from Madura Coats). The company is strong in the formal wear segment of ready-made garment business. Now the company plans to increase its presence in the casual wear after the merger of its denim business. The company is also looking for acquisitions to buy out some major brands or companies in this segment. Raymond has also for the first time planned to foray in the women's ready to wear segment. Though, women's wear segment is growing at a much lower rate than the men's segment, it has a good growth potential as it is still at a nascent stage of growth.

Files & Tools is a low value business but a profitable one for Raymond. The company is the largest manufacturer of files in the world holding 27% of international market and holds 90 per cent of the Indian market. The company has recently increased its capacity by acquiring the files division of Kolkatta based HGI Industries. In the recent past, Raymond has drawn up ambitious plans for its tools division to increase its presence in international market. Company has entered into marketing alliance with Starrett, American Tool Company, Joran for selling high-speed steel drills. The company has entered into niche market of diamond-coated needle files, which has better price realisation, and has great demand in jewellery market.

Restructuring Benefits

The divestment of Cement as well as Steel business has resulted in the company receiving Rs. 1127 crs in 2000-01. The company has utilised this to partly retire debt and has invested in some liquid assets like mutual funds to the tune of Rs 500 crore. The company has brought down the debt-equity ratio to 0.60:1 from 0.95:1 in the previous year. This should help the company cut down its interest costs and cushion the bottomline. The company also made a buyback offer to trim its equity by 18 per cent to Rs 61.38 crore, thereby improving its earnings per share. The company's improved liquidity position also helps in the company to plan out its future growth strategy for its core business of textiles. The company could go in for acquiring international brands to fuel growth in the garments business.

Operations

Last year was not a good one for the fabric business, which showed a negative growth. However, the garments business showed a 23 per cent topline growth, which is quite good considering the stiff competition in the industry. The overall sales for the full year 2000-01 declined by 12.12 per cent to Rs 1,457.06 crore which also resulted in lower operating profits. The margins also took a beating due to the poor performance of the steel division. However, from the current year margins should improve substantially due to the divestment of the steel division and the company's efforts to cut down the costs through modernisation of its plants in the last one year. Declining interest costs should further help in improving the bottomline. In the current year, the company may also see an increase in other income due to the huge investments made in some high quality mutual funds at attractive levels.

Conclusion

Raymond scrip is almost trading at 35 per cent discount to its buyback price of Rs 160 per share. With the company focussed to make Raymond a global textile brand, the current valuations look cheap. Considering the company's mega plans on the retail business, the company should be in line with valuations of other FMCG companies. The company's scrip is currently trading at a price earnings multiple of around 20 times on its last year earnings. However, considering the company's potential to show higher growth rates and the stock trading at a discount to its book value, Raymond scrip looks attractive for investing with minimal downside.

"Declaration    

ICICI Securities Ltd and its research team donot have any positions in any of the scrips recommended and which are currently displayed on the site Icicidirect.com. ICICI Securities Ltd does not do any deals for its own account except for testing and demonstration purposes. ICICI Securities Ltd also has an internal employee trading policy in place which restricts the team who analyze and gives information on various companies and investment opportunities, to place orders on scrips which have been displayed as part of information to its customers."