Raymond. Restructuring initiatives bearing fruit; Land bank base case value INR147/share; Reiterate Buy. CMP: INR385 TP: INR462 Buy

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1 14 June 2012 Update Raymond CMP: INR385 TP: INR462 Buy Restructuring initiatives bearing fruit; Land bank base case value INR147/share; Reiterate Buy We met the management of Raymond (RW IN, Mkt Cap USD0.4b, CMP INR385, Buy). Key takeaways: Restructuring initiatives are bearing fruit with FY12 RoE climbing to ~11% from negative to low single digits earlier. There is tremendous scope to increase efficiencies and rationalize costs, including lower working capital, higher focus on key brands, etc. Expect FY13 performance to be muted with PAT down 10% to INR1.3b. We estimate the value of its 125 acres land at Thane plant at INR147/share (based on INR120m/acre sold monetized within 2 years, 14%) Adjusting for real estate value, Raymond trades at FY14E P/E of 8x and EV/ EBITDA of 5x. We reiterate Buy with a target price of INR462 (21% upside), based on intrinsic EV/EBITDA of 6x FY14E and land bank value of INR147/ share. Restructuring initiatives bearing fruit Over FY10-12, the restructuring initiatives undertaken by the management has started showing some encouraging results: RoE in FY12 has climbed up to ~11% Legacy issues at Thane have been successfully resolved resulting in labor cost declining from ~17% of sales in FY10 to ~13.1% in FY12 Rationalization and renewed focus on its branded retail franchisee business. Raymond added 269 new stores (net) over FY10-12, taking its retail store count to 853 in FY12 from 584 stores in FY09. The management has a target 1

2 of having presence across all Class 1-5 cities/ towns. In this regard it has identified ~435 towns where it would like to have its TRS (The Raymond Store) format retail presence over the next 3-4 years. Backdrop: Raymond always promised high potential on paper, given its decades old positioning in the domestic men s apparel segment and the tremendous brand recall its flagship brands enjoyed. Nonetheless, for most of the last decade (FY02-10), Raymond s financial performance was dismal with RoEs at negative to low single digits. This was primarily due to 1) legacy issues (high labor cost at its key manufacturing plant at Thane), 2) series of very bad investment decisions (UCO NV/Gas/Fedora etc) and 3) lack of focus. A confluence of all the above factors put the company under tremendous stress during FY09-FY10. This forced the management to few very tough decisions such as (a) closure of key UCO NV plants in US and Europe, (b) exit few of its troublesome JV s (Gas, Fedora), and (c) a renewed focus on revitalizing its core business. 14 June

3 Raymond has strong presence across the value chain Tremendous scope to increase efficiencies and rationalize costs Raymond has addressed some of its key legacy issues, thereby reducing cost and unlocking assets for value creation. The scope for further cost reduction across its businesses is huge. While the management is very positive on the growth prospects for its key businesses, shareholder returns can be substantial from successful cost rationalization alone: Scope to lower working capital cycle and improve supply chain management: Raymond currently has long working capital cycle, which can be reduced for most of the business segments. The management has recently appointed a leading consultant to work for implementing and achieving internal cost rationalization targets over the next few quarters. Increased focus on few brands: Raymond has now identified four key apparel brands to focus on Park Avenue, Parx, Color Plus and Raymond Premium Apparel. It will direct bulk of its advertisement and promotional initiatives (INR1.7b advertisement expenditure in FY12). In this regard, over the last one year it has slowly phased out several unprofitable brands such as Manzoni (Premium luxury), Zapp (Kid s wear) and GAS (JV brand). Capital structure: Since FY01, Raymond has INRs4-5b investment in liquid MFs/equity MFs, earning very low returns. (The management has in the past 14 June

4 rationalized the holding of such cash to several factors including VRS, war chest for acquisition, spread between TUF loan, etc.) FY13 performance to be muted Raymond s 4QFY12 results saw EBITDA margin drop 200bp YoY and 720bp QoQ to 10.2%, while adjusted PAT dropped 98% YoY. This was due to (1) input cost pressures (Raymond imports bulk of its wool requirement), and (2) poor consumer demand for its branded garment business. The outlook for 1HFY13 remains challenging given the continuance of several of the above factors. We expect Raymond s performance to improve from 2HFY13. We model Raymond s FY13 EBIT to be flat at INR2.6b and PAT down 10% to INR1.3b. Real Estate value unlocking Post closure of its Thane plant, Raymond has managed to free up ~125 acres for commercial development. However, the management has not shared any concrete plans with regard to monetization timeline, development plan or cash flow utilization. The most positive scenario for shareholders would be that Raymond continues to remain focused on its core business, monetizes the land through outright sale/jv and distributes bulk of proceeds through payout. We have done a sensitivity analysis of the possible land bank monetization value and arrived at a base case value of INR147/share. This assumes sale of the entire INR120m/acre (last large transaction in that area) within two years (post-tax cash proceeds discounted at 14%). Valuation and view Raymond faces near-term challenges of rising input prices and poor consumer demand, particularly in its branded apparel business. However, over the longer term, it is one of the strongest plays in the branded garment segment, well positioned to capitalize its strong franchise value. It is in the last stage of finalizing its plans for its freed land bank at Thane, which could unlock significant value (base case value INR147/share). Raymond trades at FY14E P/E of 13x and EV/EBITDA of 6.8x, before adjusting for its real estate value. Adjusting for real estate value, it trades at FY14E P/E of 8x and EV/ EBITDA of 5x. We reiterate Buy on the stock with a target price of INR462, implying a 21% upside from current levels. Our target price is based on intrinsic EV/EBITDA multiple of 6x FY14E and land bank value of INR147/ share. 14 June

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