ValuePickr Forum

Raymond - The Complete Man

Instead of looking at historical metrics (PE, RoE, etc.), I am trying to look at this business from future perspective.

  • Raymond has an overall sales of ~ Rs 5600 Crores while the company is value at about ~Rs 2400 crores currently.
  • All the Raymonds brand have high recall - Raymond, ColorPlus, Park Avenue, Parx
  • This group also owns Kamasutra through a Joint Venture
  • It has been renovating its stores. Renovated stores are growing at ~25% to 40% when compared to single digit growth of other stores. Made to Measure (MTM) is at initial stage - positioned as highly luxurious (1.5 times of branded apparel) is at initial stage and could be an interesting driver.

I read the transcript of recent Analyst Call. Apart from the strength of core business, one thing that caught my attention was commentary by Mr. Bahl on the fact that the Management Team for Real Estate Business (starting with development of Thane Land). If you google for Abhishek Kapoor - CEO Raymond Real Estate, you will be able to locate his linkedin profile. His profile mentions - "Setting up the Real Estate business for the Group, starting with 146 Acre mixed use project in Thane.

Phase I is Residential Development with total construction area of over 3 million sq ft to be launched in 2016. With projected revenues of over $ 4 billion from the over all development this will be one the landmark projects in MMR region".

It comes out ~Rs 27000 crores (approx 185 crores per acre which seems very very reasonable in Mumbai (each apartments cost more than 1.5 to 2 crores)). A good portion of the cost in a Real Estate project is the land cost, which is nil in this case. The whole company is valued at Rs 2400 crores. Revenue from current business itself is 5600 crores. The renovated stores are generating 25% growth when compared to single digit growth of others. Plus add the revenues from the Real Estate development. Is one therefore looking at a multibagger in making here?

Disclosure: Own Raymond in the portfolio.

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I went through their latest quarterly presentation and AR. They have not even mentioned once of such a huge coming up project.

In AR on page 111, they have listed in business segments :
"Others : Non Scheduled Airline operations and Real Estate development"
Can you tell a source which can be used to authenticate this information or I missed somewhere in AR.

Fair question Avneesh. This is not mentioned anywhere directly.

  • Look for the transcript of investor call. I am including it here.
    Raymond_Q1FY17 Transcript.pdf (358.1 KB)

  • On Page 15, Mr. Bahl talks about having the Management Team in place for Real Estate Development

  • This made me look up on google for who that team is. On the linkedIn page of Mr. Abhishek Kapoor (He has been working on this since May 2015)
    https://www.linkedin.com/in/abhishek-kapoor-0b49bb13

  • He talks about this being a $4B project. I did quick back of envelope calculation. It turns out to be ~27,000 crores which in turn is ~Rs 185 Crores per acre - this seemed reasonable to me, given the prices in Mumbai.

  • This is also in sync with the announcement in 2013 that they are open to develop this land on their own (after unsuccessful attempts to sell it)

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I truly do not understand why Raymond is into the auto components business and more importantly, why it doesn’t exit it to focus on what is it’s main focus.

They did exit their loss making forging business couple of quarters back. In the concall, management did indicate that they are in looking to exit these non-core businesses. I think it is matter of time (few quarters to an year or two) that they get right buyer/offer.

The location of plant is Pokhran Road No. 1, Jekegram, Thane. I tried to look for any development at the location on Google Map. Could not find any excavation or construction. May have missed it by mistake. Please point to it, if I missed it by any chance.


Also I think @prasad17j you are over estimating yield of land at 185cr/acre. They were trying to sell it for 2250cr i.e 18cr/acre according to this news report.


I. Company has debt of 1742cr

II. Profit margins are fluctuating wildly. For FY16 company has posted OPM of 7.x%. Many spinner are doing better margin than this. Look at Nitin Spinners.

III.Return on equity is 6%.

Hi @Gaurav_Agarwal - I dont think they would have started work. Given the size of the project, they must be working on the plan and getting approvals. I am sure, they would inform theinvestors and exchanges before official launch.

Rs 185 crores per acre could be the revenue and not profit (for a residential/commercial building of say 40 floors in Mumbai) - I was linking it back to the number mentioned in Mr. Kapoor’s linkedIn profile (as an indication of the size of project being planned).

Their numbers look bad because :
(1) of the auto components and files business which I believe will be hived off eventually
(2) They have been expensing the store renovation expenses & not capitalizing it - which is a good conservative accounting practice

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As a consumer, Raymond has a very high brand value in my minds and their new stores are swanky and no longer carry that formal garment store image in my mind. Infact Raymond has upped its game in the wedding garments section as well and is directly competing with the likes of Manyavar and local designers for kurta pyjamas, light work sherwanis, designer suits, etc.

Recently Raymond tied up with an NGO called Goonj to offer free stitching to buyers who donate old trousers. This kind of marketing is new for Raymond and goes on to show that they are levelling up with competitors.

If Raymond was a garment only business, it would be really really attractive to me as an investor but their debt pile and foray in wild segments worries me.

Agree with you on the brand value. Ever since I began working two years ago, I get my clothes tailored from Raymond. I buy the fabric in the store and get it tailored there too. Have found that buying clothes off the rack for a lean frame ends up in you looking like a sloppy dresser. Not to mention that cost of good fabric plus tailoring is usually more economical than buying ill-fitting ready-made luxury clothing. So, Raymond has my business definitely! However, I doubt this segment is their focus.

Just came across the demerger news so thought of posting it here.
http://www.bseindia.com/corporates/AnnPdfOpen.aspx?Pname=A3883F0C_4EBD_4A17_8D82_30ADF6169282_174535.pdf|1

What does this demerger mean? I don’t have much idea on the company per se, but it looks like a subsidiary (RAL) has merged its subsidiary (Colorplus) into itself. Not sure how much benefits would this accrue to end shareholders of Raymond.

Is this news true? Can the company do this?

Well, Why can’t? Though, I’ve not dug into it to ascertain the truth.

Well difficult to know whats going on, there seem to be too many vested interests. There was also some news few months back still the stock continued its bull run.

Discl. Holding

See the latest press release:

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/9cd52d26-9cc0-4b57-9e83-cf6c7504f911.pdf

There is also a note doing the rounds on whatsapp groups as below. Caveat is that the authenticity is not yet established (looks like a press release of this could come out shortly). If it is true, then its of quite significant nature. Discl, invested in last 3 months. Bought this week in the fall post the article referred above.

RAYMOND LTD

Date:
25-May-2017

Management Participants:
• Gautam Singhania – Chairman & Managing Director
• Sanjay Bahl - CFO
• Pankaj Madan – President/Corporate Affairs
• J Mukund - Investor Relations
• Seema – Investor Relations

Attendees Included:
• Siddharth Iyer
• Vaishnavi Mandhaniya - Elara Capital
• Enam Holdings
• Nirmal Bang

Vision

• Gautam Singhania is committed on improving transparency and corporate governance at Raymond. He desires to set the highest standards of same within India at Raymond

• He believes Raymond has the potential and aspires to get it into the league of companies alike Page Industries, Britannia, Eicher Motors, etc.

Management Control

• While Gautam Singhania has been associated with the company for a long while, the company was actually being closely held and run by his father, Vijaypat Singahnia, until as recently as 5 years back

• The management control together with transfer of ownership (promoter shareholding) to Gautam Singhania has only happened over time in the last 5 years

• Gautam Singhania has 2 daughters, aged 5 and 10 years respectively. He does not foresee them engaging into the business and believes in leaving behind financial or monetary wealth as his legacy

Promoter Shareholding

• Gautam Singhania has been regularly purchasing shares from the open market over the last 1-2 years. Given availability of cash, he would be interested in further increasing his shareholding in the company

• Given the deep value and knowledge of it being at an infection point, he believes Raymond is an excellent investment opportunity for long-term shareholders

JK House

• JK House (built in 1945) was in a dilapidated state in 2006 when Municipal Corporation of Greater Mumbai revoked the occupancy certificate and mandated to demolish & rebuild the structure

• To incentivize the tenants to consent to the redevelopment, Raymond (then controlled by Vijaypat Singhania in 2006-07) entered into tripartite agreement with the tenants – namely Gautam Singhania, Vijaypat Singhania, Veenadevi Singhania & Akshaypat Singhania, to sell apartments at INR 9k per sq foot.

This was against the backdrop of a market rate of ~INR 27k per sq foot and 1/3rd – 2/3rd norm prevalent for conversion of tenancies into ownership

• The redevelopment effort which was supposed to conclude in 3-4 years had multiple overruns due to delays in approvals and was eventually completed only in 2016. Over this time period, market rates came close to ~INR100-150k per sq foot in the Breach Candy area where it is located

• Given the material change in valuation over time, long delays in the redevelopment, significant cost overruns (estimated 5-6k versus actuals 11k) and provisos of the Companies Act, 2013; Raymond (now controlled by Gautam Singhania) decided to protect shareholders interests and not execute the above-mentioned agreement

• In light of the stance from Raymond, 2 of the 4 tenants – namely Veenadevi Singhania & Akshaypat Singhania have filed a suit in Bombay High Court and initiated arbitration or legal proceedings against the company to claim their ownership/tenancy rights. The building remains inaccessible to them

• Vijaypat Singhania has served a notice to the Board of Directors that it is not appropriate or mandated for it to see an approval from the shareholders for execution of this agreement and requested for ownership rights. The building remains inaccessible to him

• While Raymond could have executed the agreement per direction from the Audit Committee and/or the Board of Directors, the management – including Gautam Singhania, have based on legal opinion chosen not to execute and put the shareholders’ interests above promoter interests. The management guidance to the shareholders is to wholesomely reject the resolution

• Gautam Singhania himself is an interested party or beneficiary and will incur substantial financial loss together with rest of his family if the said agreement is not executed. He claimed to have even offered to buy apartments for his family in his personal capacity to avoid the litigation with Raymond.

• Given the substantial monies at stake and the significance of a shareholders rejection to a resolution in the court of law, the Audit Committee and Board of Directors decided to put the same for voting at the AGM. The AGM is scheduled for 5-Jun 11 am, and the company will file an affidavit later on the same day when the court reopens

• The legal proceedings can be long drawn and the company may well get sued for breach of contract. However, the company, based on legal opinion, believes it has a strong case and will in any case be definitely be better off than executing the agreement as-is

• In a nutshell, Gautam Singhania wants to put shareholders’ interests above everything else and this instance will demonstrate his firm commitment to set the highest level of corporate governance standards at Raymond under his management control
• A total capital expenditure of INR 275 crores has been incurred on JK House. The building comprises of a 20k sq ft flagship store of Raymond which itself is valued at INR 200 crores. A valuation report obtained by the company from JLL put the overall value of J K House at INR 1,500 crores

Advisory Board

• Given the compliance and regulatory requirements, members of the advisory board prefer not to be associated with designated positions in the Board of Directors

• However, for all practical purposes, the advisory board acts as a Quasi board and has been constituted with renowned industry experts to help unlock the full potential of Raymond

• The key motivation for the advisory board members is to be part of this transformational journey at Raymond and pride of being associated with its success in the future

• While Gautam Singhania is a participant of the Advisory Board, the decisions of the advisory board are binding and are not overruled even by Gautam Singhania himself

• Ravi Venkatesh, and not Gautam Singhania, is the Chairman of the Advisory Board

Thane Land

• Of the 140 acres land, 20 acres is to be utilized towards amenities, including existing school, hospital, etc. The TDR available against the same will be utilized in the development of balance land

• A total of 120 acres of land is available for residential or commercial development. The company is evaluating all options for the same and pursuing regulatory approvals

• If made an offer at the right valuations, the company is even open to outright sale of a piece or parcel of the land – say 10 acres

• Of the 140 acres land, 20 acres land is owned by a subsidiary where Raymond holds 47-48% stake. Balance 120 acres is owned by Raymond itself with clear title

• Based on a detailed management review of the Real Estate division recently, it expects formal announcement and traction in FY18

Branded Textiles

• While excise duty applicable on man-made fibres is 0%, the effective tax rate works out at 5-6% with other levies like VAT, Service Tax, etc. Thus, a GST rate of 6% will be neutral

• While a GST rate of 12% will be negative in the short-term, the company is actively working on a contingency plan for the same

• Irrespective of the GST rate, it will be beneficial over the long-term due to shift in volumes from unorganized (including chinese imports) which makes up 40% in men’s textiles to organized industry

Branded Apparels

• Raymond opts for 2% excise duty with no input credit. This, together with VAT, works-out to an effective tax rate of 11% today. Thus, a GST rate of 12% will be neutral

• While a GST rate of 18% will be negative in the short-term, it will be across the industry where 75% belongs to unorganized and thus an industry wide adjustment will take place

• Irrespective of the contingencies, the company is working towards a plan that will help it to achieve a low single digit EBITDA margin like 3-4% in FY18

• The company realizes that Colour Plus brand has been a laggard. It has analysed the root causes for the same, fixes of which are in progress. It has also appointed a new CEO for this brand in last 3-4 weeks

Ethiopia

• Unlike the Trans-Pacific Partnership Agreement (TPPA) which was pending executive approval, the African Growth and Opportunity Act (AGOA) was enacted as a law in 2000, and is renewed until 2025

• The Government of Ethiopia has been in power for the last 20 years, and the Prime Minister is an extremely approachable and humble person

• The cost of sales to Americas & Europe is at least 25% cheaper (labour, power, duties) at Ethiopia versus India. The company’s planned production for FY18 has already been sold-out

Khadi

• The company is targeting a sales of INR 2 crores in FY18, which will provide employment to 2,500 people. It sees a potential of INR 100 crores, providing employment to ~100k people and thus creating great political mileage for the company

• The manufacturing for Khadi is outsourced to KVIC and there is no capital expenditure incurred towards the same. The company provides design and marketing support for the sales

Non-Core Assets - Engineering & Tools + Auto Components

• Despite stiff resistance from his father, Vijaypat Singhania, and the Board of Directors, Gautam Singhania pushed through the sale of JK Cement & JK Steel and helped reduce the debt within the company

• While Engineering & Tools is a difficult business to find suitors, it was on the verge of a sale 2 years back, but the deal fell through on the last day. The company plans to turnaround this division over next year and then seek offers for sale

• The Auto Components business has turned around over the last year and is ripe for sale. The company is seeking offers for sale for the same

• While the big-ticket size sales, proceeds of which will be used to reduce debt, are work-in-progress, the company has made its intent clear with some small-ticket size sales in Auto Components over last 1 year where it was either a loss-making business or synergies did not exists with rest of the business any more

Capital Expenditure

• After the completion of ongoing expansion at Amravati (Linen) & Ethiopia (Garmenting) in FY18, the company will come to a logical end of its planned capital expenditure

• With a master plant in existence across all its product lines, it believes in moving to an asset-light model and outsourcing the manufacturing

• Hereafter, the capital expenditure starting FY19 should effectively halve being restricted to store renovation & expansions

• Given the increased profitability and halved capital expenditure, the company will generate substantial free cash flow that will be utilized to repay debt. It aims to become a debt free entity

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Raymond had asked its shareholders to either reject or approve an offer required to be made by the company under a tripartite agreement entered in 2007 between it, lessor and occupants — all part of promoters and their extended family — of JK House.
Under the agreement, the company was required to sell flats at JK House at a substantial discount to the current prevailing market prices.
In its AGM today, 97.67 per cent of total votes polled was against the resolution, while 2.32 per cent was in favour.
Commenting on the development, Singhania said the decision by shareholders was in the best interest of the company and shareholders.

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Trading at exuberant price to earning of more than 110
Why market is giving such a high pe
There is no margin of safety

Only PE may not be the right way to value companies.

Here the valuation is high due to huge land bank… business in itself has got a huge moat. Very difficult to replicate such strong retail business. But mainly, the land bank in itself is valued around 2500-3000 cr.

I was in one of the flagship Raymond shop in Mumbai to avail their popular trouser exchange program. To my surprise, techno stretch stocks were almost exhausted. There is a huge queue for stitching and they gave me delivery date after 45 days. The staff was too busy selling branded fabric. Sounds interesting for a company which was in the news for wrong reasons but the stock is telling a different story.

Disc - no holding

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