Rating Rationale
December 01, 2020 | Mumbai
Raymond Apparel Limited
Rating continues on 'Watch Developing' 
 
Rating Action
Total Bank Loan Facilities Rated Rs.50 Crore
Long Term Rating CRISIL A+ (Continues on 'Rating Watch with Developing Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL rating on the long-term bank facility of Raymond Apparel Limited (RAL) continues on 'Rating Watch with Developing Implications'.
 
The rating was placed on watch following the announcement regarding restructuring of the various businesses and demerger of the lifestyle business of the current parent, Raymond Ltd (Raymond; 'CRISIL AA-/CRISIL A1+/Watch Negative').
 
On November 7, 2019, Raymond announced that its board of directors has approved a scheme of rearrangement and amalgamation, wherein the Lifestyle business (including RAL) being demerged into a separate company and the other businesses comprising Real estate (including the 120 acre owned land bank at Thane, Maharashtra), Auto Components, Tools and Hardware, High Value Cotton Shirting, Fast Moving Consumer Goods, and the Denim joint venture, would remain with Raymond.
 
Operating performance of Raymond was impacted from March 2020 on account of the nationwide lockdown to contain the Covid-19 pandemic, along with store closures for the initial few months as well as slow demand recovery in the textile and apparel segments thereafter. Consequently, revenue in the branded apparel segment of Raymond (comprising RAL) declined to Rs 71 crore versus Rs 1,619 crore in the corresponding period of the previous fiscal, while Post IndAS 116 earnings before interest, tax, depreciation and amortisation (EBITDA) loss stood at Rs 113 crore compared with Rs 89 crore in the corresponding period of previous fiscal.
 
Earlier, following one-off stock corrections amounting to Rs 209 crore in revenue and Rs 106 crore in operating profit (EBITDA) being hit in the last quarter of fiscal 2020, RAL's operating performance moderated with a 2% decline in operating income to Rs 1,605 crore in fiscal 2020, while EBITDA loss stood at Rs 82 crore compared with profit of Rs 74 crore in fiscal 2019.
 
CRISIL expects faster recovery in Raymond's operating performance in the second half of fiscal 2021; however, high losses in the first half of fiscal 2021 would constrain the overall operating margin in fiscal 2021. The impact of the pandemic on the company's business and financial risk profiles is likely to be temporary, with gradual recovery expected to pre-pandemic levels from fiscal 2022 given the strong brand and continued benefit of cost reduction.
 
As per the proposed scheme, the demerged entity, Raymond Lifestyle, will house the ongoing core lifestyle businesses of Branded Textile, Branded Apparel (under Raymond Apparel Ltd) and Garmenting (totalling revenue of Rs 5,379 crore or 82% share of Raymond's consolidated fiscal 2020 revenue and about 78% of EBITDA, including non-operating income). Raymond Lifestyle will operate as a branded consumer business owning the Raymond, Park Avenue, ColorPlus, Parx, Ethnix and NextLook brands and will become the new parent of RAL.
 
Raymond's (including Raymond UCO's), gross debt (excluding lease liabilities) was Rs 2,857 crore as on March 31, 2020. Of the total consolidated debt at Raymond (excluding Raymond UCO), close to Rs 1,823 crore (75% share) as on March 31, 2020, and around 60% of cash and liquid investments will be transferred to Raymond Lifestyle. The credit risk profile of Raymond Lifestyle will benefit from its dominant position in the domestic worsted suiting business, higher operating margin and strong retail presence, supported by strong brands. Following the demerger, the rated NCDs are likely to be under Raymond Lifestyle, whose overall credit quality may not vary significantly from that of the current consolidated entity.
 
Raymond, including Raymond UCO, post the demerger is likely to have gross debt of around Rs 1,050 crore, translating into a high debt to EBITDA ratio, with benefits from the real estate projects expected over a five-year period. Nevertheless, gradual monetisation of the land bank and expected cash flow from the real estate project should offset the modest debt protection metrics over the medium term.
 
The pandemic has delayed the demerger, which is now likely to be completed in the first half of fiscal 2022. The company has received approvals from stock exchanges and filed applications with National Company Law Tribunal (NCLT), following which necessary approvals would be taken from the minority shareholders, lenders and creditors.
 
CRISIL remains in discussion with Raymond's management to better understand the division of its assets and liabilities and bifurcation of the debt facilities. CRISIL will remove the ratings from watch once there is better clarity and announce the final rating action once key regulatory approvals, mainly from the shareholders and creditors, have been obtained. Simultaneously, CRISIL will announce its final rating action on RAL.
 
The rating continues to reflect RAL's strong market position with well-known apparel brands, a moderate capital structure, business and financial synergies and support from Raymond. These strengths are partially offset by exposure to intense competition in the domestic branded apparel industry, changing customer preferences and volatility in raw material prices.

Analytical Approach

* CRISIL has also applied its criteria for notching up ratings for support from the parent.

Key Rating Drivers & Detailed Description
Strengths:
* Strong market position, supported by well-known apparel brands: The company is one of the leading players in the domestic branded apparel market, with brands catering to a wide spectrum of segments. Park Avenue is one of the prime brands in men's apparel, while Colorplus is among the top brands in the premium casual space. Other brands include Raymond Ready-To-Wear and Parx (casuals). The company has taken steps to become a full wardrobe solutions provider and has also launched Ethnix, Khadi and Next Look, which are targeted at the ethnic wear, handloom and value segments, respectively.
 
* Business and financial synergies with Raymond: RAL, which accounts for around 25% of Raymond's revenue, would generate about 30% of Raymond Lifestyle's revenue. It should continue to receive strong business and financial support from the parent given the critical positioning in the overall business strategy. This is reflected in conversion of preference equity investment of Rs 34.3 crore into equity shares in fiscal 2020 and Rs 75 crore of inter-corporate deposits as on March 31, 2020, by Raymond.
 
* Moderate capital structure: RAL had networth of Rs 147 crore as on March 31, 2020, after factoring in net losses because if one-of stock correction in fiscal 2020.  Losses in fiscal 2020 led to increase in gearing (excluding lease liabilities) to 3.3 times as on March 31, 2020, from 0.90 time at the end of the last fiscal. Interest coverage ratio has moderated to negative 2.13 times from 2.64 times in fiscal 2019. In the absence of significant capital expenditure (capex) and expected improvement in operating performance from the second half of fiscal 2020, the financial metrics are expected to improve gradually over the medium term. Improvement in the company's operating performance and, hence, capital structure will remain a key monitorable.
 
Weaknesses:
* Exposure to intense competition and changing customer preferences: The Indian market, with a burgeoning youth population, has attracted prominent global brands in the readymade garments segment. The company faces intense competition from global and domestic brands and needs to stay updated on the latest trends, as fashion styles tend to change rapidly. The ability to fulfil customers' changing preferences in a timely manner should help stay ahead of the competition.
 
* Volatility in raw material prices: Raw material cost accounts for 40-50% of the sales for readymade garment manufacturers. Hence, the operating margin will depend on the ability to pass on any hike in raw material prices to customers without any time lag. Also, while there is a slump in demand on account of the pandemic, commodity prices have softened, leading to low input costs, which would support in the overall profitability in fiscal 2021.
Liquidity Adequate

RAL's standalone liquidity is moderate, with negligible cash surplus and high bank limit utilisation. However, on a consolidated basis with Raymond, liquidity is comfortable on account of sizeable surpluses at Raymond. RAL does not have debt obligations, and timely support from Raymond, if required, is expected to be forthcoming for any contingencies. The company had availed of moratorium on interest for up to six months on bank facilities as per the Reserve Bank of India's Covid-19 Regulatory Package and will be repay the accumulated interest during the moratorium period by March 31, 2021.

Rating Sensitivity factors
Upward factors
* Significant and sustained increase in the EBITDA margin to 6-7% 
* Considerable improvement in the debt metrics, including equity infusion, leading to debt to EBITDA ratio remaining below 3.3-3.5 times on a sustained basis 
* Improvement in the parent's credit risk profile

Downward factors
* Continuing tepid operating performance, with the EBITDA margin sustaining below 3-4%
* Stretched working capital cycle or sizeable capex leading to debt to EBITDA ratio of above 4.5 times
* Weakening of the parent's credit risk profile or delay in financial support
About the Company

Incorporated in 1948 as a wholly owned subsidiary of Raymond, RAL has strong brands, such as Park Avenue, Raymond ready-to-wear, ColorPlus and Parx, in the men's ready-to-wear category. The company sells its products through various distribution channels, such as exclusive brand outlets, Multi Brand Outlets, and large-format stores, besides the Raymond retail outlets.

On October 26, 2016, the board of directors approved a scheme of arrangement between the company and its wholly owned subsidiary, Colorplus Fashions Ltd (CFL). Pursuant to this scheme, CFL would demerge its business into RAL, which would help reduce administrative, selling and marketing costs as well as other overheads. The scheme has been sanctioned by the National Company Law Tribunal, Mumbai Bench, and is effective from August 1, 2017.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 1605 1633
Adjusted profit after tax (PAT) Rs crore -84 22
Adjusted PAT margin % -5.2 1.3
Adjusted debt/Adjusted networth Times 3.32 0.90
Adjusted interest coverage Times -2.13 2.64

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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
NA Proposed Term Loan NA NA NA 50.00 NA CRISIL A+/Watch Developing
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  50.00  CRISIL A+/(Watch) Developing  02-09-20  CRISIL A+/Watch Developing  16-11-19  CRISIL A+/Watch Developing  28-09-18  CRISIL A+/Stable  31-08-17  CRISIL A+/Stable  CRISIL A+/Stable 
        05-06-20  CRISIL A+/Watch Developing  04-10-19  CRISIL A+/Stable           
        13-02-20  CRISIL A+/Watch Developing               
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Term Loan 50 CRISIL A+/Watch Developing Proposed Term Loan 50 CRISIL A+/Watch Developing
Total 50 -- Total 50 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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