Is the value bet still strong in Raymond Lifestyle Ltd?

In this issue we explore the buzz sorrounding Raymond Lifestyle Limited, examining its business, sectoral tailwinds, risks and the valuation opportunity owing to the demerger.

Hi everyone and welcome to the first issue of my newsletter. Its been a pleasure putting together and presenting this research to all of you. There’s are many things I want to improve in the newsletter, in terms of both aesthetics and utility. Hence going forward, do expect incremental improvements in subsequent editions.

Now on to the story. Let’s go!

Post Raymond Lifestyle Ltd.’s (RLL) demerger from Raymond Ltd, there has been a lot of buzz around the stock with various individuals and brokerage houses researching the opportunity.

I first came across the RLL opportunity here and found complementing resources here and here. Upon further reading I found the opportunity profitable and averaged my buy-ins during Oct-Nov. Since then the stock price has declined further and I am revaluating the situation whether I should buy more.

Hence, in this post, I’ll explore the potential opportunity and risks of RLL in the backdrop of a muted Q2 FY25, four months post its demerger and subsequent listing on the exchanges.

Investment Thesis

Since its debut, RLL’s stock has tanked ~30% ⬇️. The culprit? Forced selling. What is that?

See, during a demerger when a smaller company (in our case RLL which demerged from Raymonds Ltd) is carved out; the first thing which happens is that a certain set of shareholders like MFs, PMSs, PFs & family offices exit the newly listed Co. This could be due to various reasons. Sector specific limits, market cap too small for them, not interested in ‘textile biz’ etc. All this leads to rampant selling with the stock getting beaten blue and black; left, right and center.

This results in a demand-supply imbalance, leading to a steep fall in the stock price. But it's essential to remember that this doesn't reflect the actual value of the company. The markets, are quick to correct such anomalies, and stock prices tend to bounce back swiftly 💹.

Similar patterns have been witnessed with Shipping Corporation of India, Aarti Surfactants, Motherson Sumi, Piramal Enterprises, and GMM Pfaudler.

Second, RLL’s current valuations are lower than comparable companies. However, because the Co. operates in various segments of the textile value chain, directly weighing multiples against one another isn’t a like-for-like comparison. We’ll explain both these points later on in the article.

Also, the Bangladesh & China + 1 opportunity, RLL’s foray in new segments and cost rationalization measures enable positive optionality in revenue growth and margin expansion.

The Business

B2C

1. Branded Textile: Includes suiting, shirtings, made to measure and home fabrics biz. The division can be further split into wedding and non-wedding segments, with future expectations inclined towards higher revenue share and higher margins in the wedding segment via the Ethnix brand. Price ranges from ₹300 to ₹3 lakhs per metre. As of July'24, RLL had 20,000 SKUs with presence across 600+ cities and towns, 1000+ TRS stores & 1430+ MBOs.

2. Branded Apparel: This consists of Raymond's range of ready to wear brands such as Raymond, Color Plus, Park Avenue & Parx. Present across 409 EBOs, 4525 MBO counters and 1400 Large Format Stores (LFS) as of July'24.

RLL has introduced 3 new categories branded apparel segment, i.e. Ethnix (Festive & Wedding collection), Sleepwear brand Sleepz and an inner wear brand. More on these later.

B2B

3. Garmenting: is the business where the Co does not build its own brand but where they garment for other brands. In June'24, the company announced that it will invest roughly around INR 200 crores of capex to expand its garmenting capacity to 10 million units over the next 24 months which is underway.

4. Cotton Shirting: The firm produces high-value cotton and linen shirting and bottom-weight textiles for leading local and international brands.

The Business Model

Source: (Credit Rating report Dec 9, 2024)

As of FY24, branded textile, branded apparels, garmenting and high value cotton shirting contributing ~50%, 23%, 12% and 15% respectively.

As on September 30, 2024 RLL had 1,592 stores which includes 1,083 The Raymond Shop (TRS), 46 made-to-measure (MTM) and 463 exclusive brand outlets (EBOs). In FY24, the company opened 200+ stores increasing its market presence, which assisted growth in sales despite muted demand scenario. In H1FY25, the company opened 74 new stores and intends to add 600+ stores in the next three years.

Over 80% of branded apparels, EBOs and MTM stores are company-owned, whereas ~75% of TRS are on franchise basis (an asset-light franchise model). The company usually incurs only minimal capital expenditure needed to open a store (with land/store space owned by franchisee). Renovation costs are incurred by the franchisee for their stores. The entire stock requirement of franchisees is bought from the company without recourse; there are no returns of unsold stock.

Therefore, the entire investment risk in the inventory is borne by franchisees. In EBO’s the sales are booked when end-consumer purchases from stores, whereas in MBOs, sales are booked when Raymond sells to the MBO. The company plans to expand retail store network by opening 600+ stores in the next three years mainly focusing on expanding its EBO network.

H1 FY25 updates

(Source: Q1 FY25 & Q2 FY25 concalls)

1. Negligible wedding dates, elections, month of Shraadh and lower footfalls due to heat wave led to muted consumer sentiment. In Q2 FY25, sales have declined by 5% whereas profits before tax and exceptional items have declined by 45%. Increase in finance costs, salaries and depreciation and RM costs plus a one-time exceptional loss of 58 Crs due to stamp duty on demerger led to a slump in profitability.

2. Debt in Q2 grew by 325 Crs to 1700 Crs due to increased working capital due to planned placement of inventories in retail and distribution networks in anticipation to the festive and wedding demand. This is expected to reduce as sales begin to materialise.

3. Management in an earlier con call mentioned that 50-60% of branded textiles business is directly linked to weddings. The mgt explained that there are two wedding seasons in the year. 1st half of the FY and during the Nov - Jan period. Muted weddings in the first half of the year led to sales decline. Also in recent times more weddings have been shifted to the second half of the year.

4. The mgt pointed out that they intend to reach 150 stores by end of this year at least from the earlier stated 215. This is because although identifying the correct clusters might be easy, getting the correct, available properties are difficult.

5. The company launched the Sleep segment with product pricing b/w ₹500 to ₹999 and the Co has appointed ~60 distributors to reach out through the MBO outlet.

Sectoral Tailwinds

1. China & Bangladesh +1: Diversifying supply chains away from China has been ongoing since the COVID crisis. However, the recent turmoil in Bangladesh (B) presents a new opportunity. Mgt explained that India is a $7 Bn export market, B is at $48 Bn. However, no one is going to shift their wholesale sourcing from B as B has its own strength. But even if they shift 10% that will have a big impact on India. Plus two thirds of B’s market is woven where B does not produce any fabric of its own. India is the only one with vertically integrated facilities. Even if some players derisk themselves from B to the tune of a mere billion dollars it provides opportunity for Raymond; given it is a fully integrated company coupled with its recent capex in garmenting.

2. FTA agreements: If the FTA agreements with EU, UK & Australia goes through that will open a significant export market for RLL. FTAs generally lead to higher cross border investments, technology transfers, removal of tariffs but also bring in foreign competition. Although, data suggests that our trade deficit has widened after entering trade agreements with FTA partners (Japan, South Korea, ASEAN), the country's comparitive advantage in textile is absolute. More so for RLL given its fully integrated setup. For context, India's garment exports to Australia, UK and EU were valued at approximately $300 mn, $1.5 Bn and $4.5 Bn in 2023 respectively. A 20% increase in the same would translate to an additional billion dollar opportunity.

3. Govt. Schemes: The govt. incentivizes the textile industry via various schemes such as TUFs, PLI, Duty Drawback scheme, EPCG etc. However, given RLL's scale its highly likely they are already using it. Hence I won't dig too much into as any incremental benefits from these schemes are likely to be marginal.

Company Tailwinds

1. Entry into newer segments: The Co. has entered into three new segments: Festive and wedding wear (via Ethnix), sleepwear & innerwears. I don't think TAM and all those things matter much. Although Ventura estimates the men's wedding market to be 75k crores (not a typo) while management estimates the nascent sleepwear segment to be around 10k-12k crores. However, I believe retail is a game of pure distribution and reach and mostly that will determine sales. As of Sept'24, the company expanded its Ethnix business which is now present in 129 stores. It plans to expand this retail footprint to 200 stores in the next 6-8 months. As for the sleepwear segment with product pricing b/w ₹500 to ₹999 and the Co has appointed ~60 distributors to reach out through the MBO outlet.

2. Operational Efficiency: RLL optimized costs, closed underperforming stores, and rationalized working capital days. In FY20, company reported 1638 Stores, whereas in FY24 it had 1518 Stores, up from 1351 from FY22. Stuff like enhancing sourcing efficiency and leveraging scale benefits are also something that the company's CEO stresses on. All such measures should improve EBITDA margins.

3. Expanding distribution via new stores: The Co is progressing towards expanding the retail footprint by adding 200 more stores over the next 18 months following an asset light franchise model.

The management has guided a revenue growth of 12-15% in the upcoming years with EBITDA roughly doubling by FY2028.

Risks

1. Competition: Every market has competition; the textile market even more. The company has competition in every segment. In addition to large players (like Tata, Reliance, ABFRL) the entry of niche, aspirational lifestyle brands further complicates the mix. For instance, although RLL suffered decline in revenues and profitability in Q2 due to muted demand (as described earlier), Vedant Fashions (Manyavar) clocked a 24% revenue and a PAT growth of ~37% implying improving EBITDA margins during the same period. ABFRL, Lux, Dollar, Go Fashions all recorded an increase in revenue and profit during the same period. There is a reasonable chance that other brands can take market share away from Raymonds.

2. External factors: Increasing RM costs, muted demand and geopolitical challenges choking export opportunities.

3. Corporate governance: Demerging the lifestyle business is a definite plus. However, the promoter's high remuneration and ongoing personal issues do pose risks. Earlier in December IIAS estimated Mr. G Singhania's annual salary including allowances for medical, leave travel etc. to be in the range of ~12 Crs (2-3% of PAT). The report further states that there is no specified upper limit to the salary which could exceed even 5% of RLL's profit. Also, the promoter family has a history of corporate governance and personal dispute issues which is very well covered in Raymond Ltd valuepickr thread.

4. Goodwill & Intangibles: As per H2 FY25, unaudited financials the company had ~5,200 Crs worth of goodwill and intangible assets in a ~13,600 Cr balance sheet. This mostly consists of the value of RLL’s brands. I am not sure whether the value is high but what I do know is that it isn’t conservative. Any impairment in the future will materially impact RLL’s P&L.

Valuation

We’ll explore three approaches here:

⚡Fund flow angle: With a market cap of ~12,600 Cr as of 1st Jan 2025, RLL’s market cap is higher than the bottom 23 companies in the Nifty Small Cap 250 index. Assuming it maintains this position by the next index rebalancing on 31st Jan 2025, index funds benchmarking against it would likely buy the stock, pushing the price up⬆️.

For a more descriptive dive into this angle, read

Rahul Rao

‘s post here.

⚡Relative Undervaluation: Although EV/EBITDA has its own cons like not factoring growth rates, capex and liquidity among others, it is still widely used as a proxy measure for valuation. The following table pits RLL among its competition to compare their EV/EBITDA:

Note: I had made this table during mid-Nov when most of the Q2 results were out, so its valid as of today as well. For RLL we have used the FY24 EBITDA and for all other Cos. we have used the higher of FY24 vs. TTM FY25 EBITDA so as to make the multiples smaller. This makes the multiples more conservative.

As observed, RLL has the lowest EV/EBITDA multiples compared to peers.

⚡Forward PE: RLL had a revenue of 7,000 Cr and blended EBITDA of 16% (INR 1100 Cr) across all segments as of FY24. Assumming a PAT margin of 9%, PAT for FY24 would be 630 Crs. If its able to maintain this same PAT for FY25, the company at its current market cap of 12.5k Cr would be valued at a forward PE of 20x. This is a reasonable valuation assumming no growth or margin expansion.

Summary

1. All the valuation methods hint at some undervaluation. Note I have refrained from estimating future growth and have left any upside optionality entirely out of the valuation picture.

2. The new segments and stores combined with operational efficiency can lead to revenue and margin expansion.

3. Alternatively, competition and external events can stifle the same.

4. The industry is enjoying tailwinds which can lead to favorable rerating by the market in the short term.

5. A key monitorable will be the Q3 performance (festive season) both in terms of revenue growth and cost optimizations.

Final verdict: In my opinion, one should avoid companies (or only buy at deep discounts) with recurrent governance issues. However, it is also a fact that the Indian markets value growth above anything else and have in many cases positively rerated stocks with promoter issues. Given RLL is valued at reasonable discount (not deep) and given its upside optionality are still uncertain I would NOT add to the holdings at current valuations. However, I would buy more if it falls by 10-15% provided its fundamental remains strong and upward.

Cheers,
Folok

Disclaimer: Remember, this is not investment advice, and my perspective may be skewed as I hold RLL stock in my portfolio📝.