Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities and non convertible debentures of Raymond Limited (Raymond) to ‘Stable’ from ‘Negative’ while reaffirming the rating at 'CRISIL AA-‘; the short-term rating and commercial paper has been reaffirmed at ‘CRISIL A1+'.

 

The outlook revision reflects the expectation of continued strong operating performance over the medium term led by healthy textile, apparel, engineering and real estate segment demand backed by growing mobility, opening of institutions, higher affordability and upcoming festive and wedding season. The improvement in operating performance, which began from the second quarter of fiscal 2022, continued into the first quarter of fiscal 2023, and is expected to continue going forward. Rationalised cost structure, tight control on working capital and cash flow management led to lower net debt and improvement in debt metrics in fiscal 2022. Continuing healthy demand and improved operating performance coupled with reduction of debt through monetisation of non-core businesses or from raising equity, can lead to further strengthening of debt metrics in the near to medium term. Raymond has filed the draft red herring prospectus (DRHP) for the initial public offer of its engineering business to raise about Rs 500-600 crore; proceeds are likely to be utilized for debt reduction.

 

Operating income (including Raymond UCO) grew by 77% on-year to Rs 7,238 crore in fiscal 2022, backed by broad-based growth across all segments including lifestyle segments (both business to business and business to consumer), engineering, and real estate. Pre-IndAS 116 EBITDA (earnings before interest, tax, depreciation and amortization) improved to Rs 653 crore at 9.0% margin against operating loss last year benefitting from better revenues, improved fixed cost absorption, and ability to pass-on raw material price increases to customers. Raymond (including Raymond UCO) managed its working capital efficiently and maintained gross debt (excluding lease liabilities) at Rs 2,443 crore as on March 31, 2022 versus Rs 2,471 crore last year despite the increase in scale while strengthening its liquidity to Rs 969 crore as on March 31, 2022 versus Rs 635 crore last year. Consequently, debt metrics such as net debt to EBITDA and adjusted interest coverage ratios improved to 2.26 times and 3.30 times, respectively, in fiscal 2022 from 5.45 times and 2.17 times in fiscal 2020 (company reported operating losses in fiscal 2021).

 

Improvement in operating performance has continued in fiscal 2023 as well with operating income of Raymond (including Raymond UCO) more than doubling to Rs 2,034 crore during the first quarter against the covid-impacted period last year. A leaner cost base and improved fixed-cost absorption drove pre-IndAS 116 EBITDA to Rs 190 crore (9.3% margin) against loss reported during the same period last year despite higher raw material prices. Continued focus on working capital and liquidity management led to consolidated gross debt (excluding lease liabilities) of Rs 2,427 crore as of June 30, 2022 compared to Rs 2,443 crore as on March 31, 2022. Liquidity remained strong at Rs 742 crore as on June 30, 2022 (in the form of cash equivalent and marketable securities), against Rs 969 crore as on March 31, 2022.

 

The ratings continue to reflect the company’s dominant position in the domestic worsted suiting business, established brands in the apparel business, diversified revenue streams and good traction in real estate project, integrated operations with a strong retail network, average-but-improving financial risk profile, and strong liquidity. Financial flexibility is also enhanced by owned land bank of 80 acres at a prime location in Thane (Maharashtra) apart from 20 acres under current development. These strengths are partially offset by exposure to volatility in raw material prices and foreign exchange (forex) rates, intense competition in the domestic apparel business, and susceptibility to demand and implementation risks associated with the real estate projects.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Raymond and its 19 subsidiaries, including Raymond Apparel Ltd, Raymond Luxury Cottons Ltd, JK Files (India) Ltd, Silver Spark Apparel Ethiopia PLC and Raymond UCO, which is a 50:50 joint venture (JV) having high synergies with Raymond. This is because the entities have financial fungibility, common management, and are into similar businesses. CRISIL Ratings has also included Raymond’s share in the profits of its associates, including PT JayKay Files Indonesia, JK Investo Trade (India) Ltd and Radha Krishna Films Ltd. The group is collectively referred to herein as the Raymond group.

CRISIL Ratings has not included lease liabilities as recognized under IndAS116 in debt and thereby has adjusted EBITDA by excluding lease rental components in depreciation and finance costs.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Dominant position in the worsted suiting business

Established track record of over nine decades, strong brand image and large retail network helped Raymond establish healthy position in the worsted suiting business. Raymond is India’s largest manufacturer of worsted fabrics and wool blends, and enjoys a dominant market share. It had 1,058 retail outlets branded as The Raymond Shop (TRS) as on June 30, 2022, across India and abroad.

 

Diversified revenue streams, with good traction seen in real estate project

The revenue profile of the group is well diversified, with significant presence in branded textiles (38% of group’s revenue in fiscal 2022), branded apparel (12%), garmenting (10%), and denim (14%), high value cotton shirting (8%), engineering (11%) and other businesses. The company owns well-known brands such as Park Avenue, Raymond ready-to-wear, ColorPlus, and Parx, and has introduced the made to measure (MTM) store concept to offer custom-fit solutions. Raymond is also present in the engineering segment (11% of revenue in fiscal 2022); it manufactures and markets steel files and cutting tools, hand and power tool accessories (tools and hardware) and manufactures ring gears, flexplates and water pump bearings (auto components). It is the largest manufacturer of steel files, wherein the company is the market leader with a domestic market share of about 65%. A couple of years ago, Raymond also forayed into real estate development on 20 acres of its own land piece in Thane, launching its value project (Ten X) on which it has sold 66% of total inventory. It also launched its premium project (Address by GS) which has successfully sold ~49% of the launched inventory within two quarters of opening. With construction continuing at a healthy pace and delivery of 3 towers in the value project expected 2 years ahead of schedule as per RERA, the company recorded Rs 707 crore in revenue during fiscal 2022 at a healthy margin of 21%. The company has recently entered into a joint development agreement (JDA) to develop a land parcel in Bandra East (Mumbai) having revenue potential of about Rs 2,000 crore over the next 5-6 years having peak funding requirement from Raymond of about Rs 300 crore. Contribution from real-estate to total revenue which stood at ~10% to the group in fiscal 2022 is expected to ramp-up to ~15% over next 2-3 years.

 

Strong retail network

Having one of the largest retail store networks across India and overseas (1,058 TRS, 36 MTM stores, and 278 exclusive brand outlets as on June 30, 2022) has helped the company reinforce its market position. Raymond is expanding its dealership network to Tier 3 and 4 cities and towns, and has 20,000 touch points across the country. Fiscal 2022 saw the second consecutive year of net store closures at 135 stores continuing with its cost-rationalisation measures and rental cost savings, In fiscal 2021, net store closures stood at 151 stores.

 

Strong liquidity

Liquidity is strong and supported by large unencumbered liquid investments and cash of Rs 742 crore as on June 30, 2022 at Raymond (including Raymond UCO). The liquid surplus has been maintained over time despite pressure on profitability in the recent past. Over the medium to long term on a steady-state basis, liquid surplus of Rs 500-600 crore is expected to be maintained. Working capital bank limit utilisation was 49% on average during the six months through June 2022. Capital spend was moderate in the past two fiscals but is likely to increase to Rs 125-150 crore annually in fiscals 2023 and 2024, to be spent mainly on maintenance of plant and equipment and new store openings. Debt obligation is expected at Rs 394 crore in fiscal 2023 and Rs 450 crore in fiscal 2024 for the group and is expected to be met through a mix of accruals and part refinancing.

 

Average-but-improving financial risk profile

The financial risk profile has improved in fiscal 2022 as well as first quarter of fiscal 2023 in line with strong cash generation. Also, despite improving, debt protection metrics remain moderate; for instance, adjusted interest coverage and net cash accrual to adjusted debt ratios of the group improved in fiscal 2022 and stood at 3.30 times and 0.17 times, respectively, against fiscal 2020 levels of 2.17 times and 0.15 times. Gearing and net debt-to-EBITDA ratio improved in fiscal 2022 to 1.29 times and 2.26 times versus 1.40 times and 5.45 times, respectively in fiscal 2020.

 

Earlier, operating performance had deteriorated in fiscal 2021 owing to the Covid-19 pandemic with the company reporting operating losses and gearing of 1.45 times. Improvement in operating performance and monetisation of smaller businesses should further improve debt protection metrics over the medium term. Raymond has filed the DRHP for the initial public offer of its engineering business to raise Rs 500-600 crore; completion and utilisation of the proceeds should lead to overall improvement in the financial risk profile and remains a monitorable.

 

Weaknesses

Exposure to volatility in raw material prices

Volatility in cotton and wool prices led to fluctuation in profitability. Raymond imports bulk of its wool requirement from Australia and New Zealand; it maintains a hedge book for major portion of its related forex exposure. For instance, in the past, material increases in the price of wool and cotton (owing to increase in minimum support price in India) had resulted in moderation of overall operating margins in fiscal 2020 and fiscal 2019, respectively; albeit partly offset by the company’s ability to pass-on the increases to customers. Again, in fiscal 2022, prices of cotton and dyes increasing to multi-year highs put a dent on the margins of the denim business. However, company’s ability to pass-on raw material price increases to customers in lifestyle segment due to strong brand, and to some extent in the value real-estate business provides an off-set.

 

Intense competition in the domestic apparel business

The industry is highly fragmented with intensifying competition from organised players. Brand penetration is likely to increase in the long term among leading players such as Grasim Industries Ltd (Grasim; ‘CRISIL AAA/Stable/CRISIL A1+’; erstwhile Aditya Birla Nuvo Ltd merged with Grasim) and Aditya Birla Fashion & Retail Ltd (‘CRISIL AA/Positive/CRISIL A1+’), with various brands, including Louis Philippe, Van Heusen, Allen Solly and Peter England; Siyaram Silk Mills Ltd (‘CRISIL AA-/Stable/CRISIL A1+’) and Arvind Ltd (Arrow). The apparel retail industry is expected to witness a strong growth of 21-23% in fiscal 2023, driven by strong same-store sales, new store launches, and higher contribution from online channels.

 

Exposure to demand and implementation risks in the residential real estate business

Raymond entered the real estate sector in fiscal 2019 by way of monetising 14 acres of prime land parcel in Phase 1 (Ten X project) comprising 10 towers having 2.8 million square feet (sq ft). With its prime location, attractive price point in the one- and two-bedroom-hall-kitchen segments and competitive pricing, the project has received healthy traction, with 2,066 units booked as on June 30, 2022, in the 10 towers launched. During fiscal 2022, it also launched its Phase 2 (Address by GS project) on 6 acres (totalling 20 acres) of the land comprising two towers with 1.1 million sq ft of saleable area in the premium segment. It has received 281 bookings on the 435 units launched as on June 30, 2022. Construction is progressing at a healthy pace in both the projects. The company has recently entered into a joint development agreement (JDA) to develop a land parcel in Bandra East (Mumbai) having revenue potential of about Rs 2,000 crore over the next 5-6 years having peak funding requirement from Raymond of about Rs 300 crore.

 

Phase-wise booking, development strategy and tie-ups with reputed contractors, such as Capacite Infraprojects Ltd, reduce implementation and funding risks, leading to low reliance on external debt. However, with sizeable units remaining to be sold and new JDA project, the company will be exposed to demand and implementation risks over the medium term. The company though is expected to be better placed compared with peers due to attractive pricing of its value project and demonstration of faster execution capabilities. That said, given the vast size of the project, the pace of progress, ramp-up in operations and sales booking will be key monitorables.

Liquidity: Strong

Liquidity is supported by sizeable unencumbered liquid investment of Rs 742 crore in mutual funds, fixed deposits and cash balance as on June 30, 2022 (including Raymond UCO). Bank limit utilisation was 49% on average during the six months through June 2022. Term debt obligation for the group is expected at Rs 394 crore in fiscal 2023, and Rs 450 crore in fiscal 2024. The company is expected to undertake capital expenditure (capex) of Rs 125-150 crore annually. Term debt obligations and capex needs are expected to be met through cash accrual and part refinancing, as the company may prefer to conserve cash surpluses.

Outlook: Stable

The Raymond group’s business risk profile is expected to gradually strengthen over the medium term, supported by an established market position in the lifestyle business, healthy growth in the real estate businesses, focus on enhancing product portfolio and operating efficiencies. The financial risk profile will also benefit from good cash generation, controlled working capital management and prudent capex spending, enabling continued improvement in debt metrics.

Rating Sensitivity Factors

Upward Factors

• Steady improvement in business levels and sustenance of operating profitability of key business segments at healthy levels, resulting in good cash generation
• Improvement in debt metrics, for instance net debt to EBITDA of below 1.75-2 times, supported by cash generation and continuing prudent working capital management or debt reduction through monetisation of land bank or divestment of stake in non-core businesses.

 

Downward Factors

• Sluggish business performance, with steep moderation in operating profitability impacting cash generation 
• Material increase in debt, due to stretched working capital cycle or larger-than-expected capex, leading to moderation in debt metrics; for instance net debt to EBITDA above 3-3.5 times
• Sizeable unanticipated delay in execution and slower-than-expected sales pick-up in the launched residential real estate projects
• Material decline in liquid surplus owing to higher-than-expected outflow by way of dividends, share-buy-back, or higher than anticipated capital expenditure

About the Group

Incorporated in 1925, Raymond is one of the leading integrated producers of worsted suiting fabrics globally. On a standalone basis, the company manufactures 38 million metre of fabric per annum. It offers more than 20,000 designs and colours of suiting fabric, and exports to over 40 countries.

 

The company operates in two major segments: lifestyle and non-lifestyle. The lifestyle segment includes suiting, garments, apparel and shirting, while the non-lifestyle segment includes the denim, engineering (tools and hardware, and automotive components) and real estate businesses. The tools and hardware business comprises manufacturing of steel files and cutting tools, and marketing of hand and power tool accessories. Raymond has 19 plants across Maharashtra, Gujarat, Madhya Pradesh and Karnataka. As on March 31, 2022, the promoters held 49% stake and public held 51% (including financial institutions).

 

Consolidated operating income (excluding Raymond UCO) for the first quarter of fiscal 2023 stood at Rs 1,728 crore with net profit at Rs 82 crore, compared with revenue of Rs 826 crore and net loss of Rs 157 crore during the same period last fiscal.

Key Financial Indicators (Raymond + Raymond UCO)

Particulars	Unit	2022	2021
Operating income	Rs crore	7,238	4,082
Adjusted profit after tax (PAT)	Rs crore	233	-359
Adjusted PAT margin	%	3.2	-8.8
Adjusted debt/adjusted networth*	Times	1.29	1.45
Adjusted interest coverage	Times	3.30	-0.13

*Excluding lease liabilities

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
INE301A07011	Debentures	22-May-20	9.50%	22-May-23	65	Simple	CRISIL AA-/Stable
NA	Debentures*	NA	NA	NA	210	Simple	CRISIL AA-/Stable
NA	Cash Credit	NA	NA	NA	791	NA	CRISIL AA-/Stable
NA	Proposed Cash Credit Limit	NA	NA	NA	394	NA	CRISIL AA-/Stable
NA	Term loan	NA	NA	30-Jun-28	250	NA	CRISIL AA-/Stable
NA	Term loan	NA	NA	31-Mar-26	300	NA	CRISIL AA-/Stable
NA	Term loan##	NA	NA	31-Mar-27	200	NA	CRISIL AA-/Stable
NA	Term loan	NA	NA	03-Dec-24	3.31	NA	CRISIL AA-/Stable
NA	Term loan	NA	NA	13-Jan-27	100	NA	CRISIL AA-/Stable
NA	Term loan#	NA	NA	31-Mar-26	22.92	NA	CRISIL AA-/Stable
NA	Term loan#	NA	NA	31-Mar-26	23.13	NA	CRISIL AA-/Stable
NA	Term loan#	NA	NA	30-Apr-26	22.59	NA	CRISIL AA-/Stable
NA	Proposed Rupee Term Loan##	NA	NA	NA	500.05	NA	CRISIL AA-/Stable
NA	Non-Fund Based Limit@	NA	NA	NA	227	NA	CRISIL A1+
NA	Proposed Non Fund based limits@	NA	NA	NA	323	NA	CRISIL A1+
NA	Bill Discounting	NA	NA	NA	45	NA	CRISIL A1+
NA	Factoring/Forfaiting	NA	NA	NA	225	NA	CRISIL A1+
NA	Commercial paper	NA	NA	7-365 days	550	Simple	CRISIL A1+

*Yet to be placed

@Interchangeable with letter of credit, bank guarantee, buyer’s credit and supplier’s credit

#Facility type being Emergency Credit Line Guarantee Scheme

##Facilty type being Construction Finance