CRISIL's ratings on the bank facilities and debt instruments of Raymond Limited (Raymond) continue to be on 'Rating Watch with Negative Implications'.
 
CRISIL had placed the 'CRISIL AA-/CRISIL A1+' ratings on 'Rating Watch with Negative Implications' in November 2019 following the announcement that month that the company's board of directors had approved a scheme of rearrangement and amalgamation, wherein the Lifestyle business was to be demerged into a separate company. The other businesses - Real Estate (including the 120 acre land bank in Thane, Maharashtra), Auto Components, Tools & Hardware, High Value Cotton Shirting, Fast-Moving Consumer Goods (FMCG), and the Denim joint venture (JV)' remain with Raymond.
 
Raymond's operating performance 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, consolidated revenue (including Raymond UCO Denim Pvt Ltd [Raymond UCO]) declined 73% to Rs 1,027 crore in the first six months of fiscal 2021, while operating loss stood at Rs 424 crore compared with operating profit of Rs 248 crore in the corresponding period of the previous fiscal. Raymond has, however, rationalised its costs and managed its working capital efficiently, resulting in gross debt (excluding lease liabilities) reduction to Rs 2,779 crore as of September 30, 2020, from Rs 2,857 crore as on March 31, 2020. Furthermore, the company continues to maintain strong liquidity of Rs. 552 crore as of September 30, 2020. Operating loss in the first half of fiscal 2021 included stock corrections of Rs 42 crore.
 
Raymond's cost control initiatives resulted in 30-35% of fixed cost savings, including employee costs, sales and marketing costs and lease rentals, thus limiting the fall in losses. In the first half of fiscal 2021, Raymond achieved fixed cost savings of about Rs 300 crore, expected to continue at a similar level in the second half of this fiscal.
 
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. Demand pick-up amid the festive and wedding season is expected to result in positive operating profit or earnings before interest, tax, depreciation and amortisation (EBITDA) from the third quarter of fiscal 2021 and will remain a key monitorable. The pandemic's impact on the company's business and financial risk profiles is likely to be temporary, with recovery expected to pre-pandemic levels from fiscal 2022 given the strong brand and continued benefit of fixed 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.
 
Each shareholder of Raymond will be issued shares of Raymond Lifestyle in a 1:1 ratio, in consideration of the demerger, and Raymond Lifestyle will be listed, with its shareholding mirroring that of Raymond.
 
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.
 
The ratings continue to reflect Raymond's dominant position in the domestic worsted suiting business, well-established brands in the apparel business, diversified revenue streams, integrated operations with a strong retail network and healthy liquidity. These strengths are partially offset by the average financial risk profile, susceptibility to volatility in key raw material prices and foreign exchange (forex) rates, intense competition in the domestic apparel business and demand and implementation risks associated with the real estate project.

For arriving at the ratings, CRISIL 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 JV that has high synergies with Raymond. This approach reflects the similarity of some businesses, financial fungibility and common management. CRISIL 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 Raymond. 

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

Liquidity is strong, enhanced by proceeds from the sale of land, and is supported by sizeable unencumbered liquid investment of Rs 552 crore, including mutual funds, fixed deposits and cash balance, as of September 2020. Bank limit utilisation averaged 85% over the six months through September 2020. Raymond's long-term debt obligation is well spread out, with repayment of Rs 234 crore (post moratorium) due in fiscal 2021, compared with Rs 372 crore in fiscal 2020. The company is also expected to undertake only modest capital spending, mainly for refurbishment of machinery, in fiscals 2021 and 2022. In fiscal 2021, with negative accrual, the debt obligation is expected to be refinanced in a timely manner.

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 and engineering businesses (tools and hardware and automotive components) and real estate. The tools and hardware business comprises manufacturing of steel files and cutting tools and marketing of hand tools and power tool accessories. Raymond has 19 plants across Maharashtra, Gujarat, Madhya Pradesh and Karnataka. As on September 30, 2020, the promoters held about a 48% stake, and the public held 52% (including financial institutions).

Consolidated revenue (including Raymond UCO) in first six months of fiscal 2021 stood at Rs 1,027 crore, with net loss of Rs 435 crore compared with revenue of Rs 3,787 crore and profit after tax (PAT) of Rs 60 crore in the corresponding period of the previous fiscal.

Any other information: Not applicable