CRISIL's ratings on the bank facilities and debt instruments of Raymond Ltd (Raymond) continue to be on 'Rating Watch with Negative Implications'.
 
CRISIL had placed the 'CRISIL AA-/CRISIL A1+' ratings on 'Watch with Negative Implications' in November 2019, following the announcement on November 7, 2019, 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) will remain with Raymond.
 
The ratings factor in the likely impact of the lockdown measures taken by the state and central governments to contain the pandemic on Raymond's business and financial risk profiles. The one-time stock corrections in the branded apparel business adversely impacted the company's operating performance, with Rs. 209 crores of revenue and Rs. 106 crore of operating profit (EBITDA) hit in the last quarter of fiscal 2020. Consequently, consolidated operating income (including Raymond UCO Denim Pvt Ltd [Raymond UCO]) declined 2.2% while the earnings before interest, tax, depreciation and amortization [EBITDA] margin moderated to 5.0% in fiscal 2020 from 8.2% in the previous fiscal.
 
CRISIL expects the impact on Raymond's operating performance to be severe in the first two quarters of fiscal 2021, and a gradual recovery in the subsequent quarters, resulting in moderate operating performance for the fiscal. Most measures to control costs, including employee costs, sales and marketing costs, and rental costs, along with lower raw material prices will help sustain operating margin at 5-6% in fiscal 2021. 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 established position of its brand, wide pan-India distribution network and diverse product offerings. 
 
As per the proposed scheme, the demerged entity, Raymond Lifestyle, will house the existing core Lifestyle businesses of Branded Textile, Branded Apparel (under Raymond Apparel Ltd) and Garmenting (totaling 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 at 6.4% margin). 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 for the demerger, and Raymond Lifestyle will be listed, with its shareholding mirroring that of Raymond.
 
Raymond's (including Raymond UCO), gross debt (excluding lease liabilities) was Rs 2,857 crore as on March 31, 2020. Out of the total consolidated debt at Raymond (Excluding Raymond UCO), close to Rs 1,823 crore (75% share) as of March 31, 2020 and around 60% of cash and liquid investments will be transferred to Raymond Lifestyle. The credit risk profile of Raymond Lifestyle's will benefit from its dominant position in the domestic worsted suiting business, higher operating margin, and strong retail presence, supported by established brands. Post 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 demerger is likely to have gross debt of around Rs 1,050 crore in fiscal 2020, translating into a high debt to EBITDA ratio, with benefits from its real estate projects expected over a 5-year period. Nevertheless, the gradual monetisation of the land bank and expected cash flow from the real estate project should provide offset against modest debt protection metrics over the medium term.
 
The pandemic has delayed the demerger and it is now likely to be completed by the end of fiscal 2021. The Company has received approvals from stock exchanges and filed application with NCLT post which necessary approvals from the minority shareholders, lenders, and creditors would be taken.
 
CRISIL remains in discussion with Raymond's management to better understand the division of its assets and liabilities and bifurcation of 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, established brands in the apparel business, diversified revenue streams, integrated operations with a strong retail network, and strong liquidity. These strengths are partially offset by its 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.
 
Raymond continued to maintain strong liquidity, as reflected in large unencumbered liquid surplus which of Rs 550 crore including mutual funds, fixed deposits and cash balance, as on July 31, 2020.

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Raymond and its 19 subsidiaries, including Raymond Apparel Ltd, JK Files (India) Ltd, Silver Spark Apparel Ethiopia PLC, and Raymond UCO, which is a 50:50 JV having higher 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. Lease liabilities arising from adoption of IndAS 116 'Leases' has been considered as debt by CRISIL with lease rental split into depreciation and interest components.

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

Strengths
* Dominant position in the worsted suiting business: An established track record of over 9 decades, a strong brand image, and a large retail network have helped Raymond establish a healthy position in the worsted suiting business. Raymond is India's largest manufacturer of worsted fabrics and wool blends, enjoying a dominant market share. It had 1,135 retail outlets branded as The Raymond Shop (TRS) as on March 31, 2020, across India and abroad.
 
* Diversified revenue streams: The revenue profile is well-diversified, with significant presence in Branded Textiles (38% of gross revenue in fiscal 2020), Branded Apparel (21%), Garmenting (11%), and Denim (12%), High Value Cotton Shirting (8%) and other businesses (10%). The company owns well-known brands such as Park Avenue, Raymond ready-to-wear, Colorplus, and Parx, and has also introduced the 'made-to-measure' (MTM) store concept to offer custom-fit solutions. Raymond is also present in the engineering segment, where it manufactures steel files and cutting tools along with marketing of hand and power tool accessories (Tools and Hardware) and is a manufacturer of ring gears, flexplates and water pump bearings (Auto components) (8% of revenue in fiscal 2020). It is the largest manufacturer of steel files, where the company is the market leader with a domestic market share of about 65%. The company has recently forayed into real estate development on a 20 acres of own land in Thane, which is expected to provide meaningful contribution to the group's cash flow over the medium term. 
 
* Strong retail network: Having one of the largest retail store networks across India and overseas (1,135 TRS, 67 MTM stores, and 436 exclusive brand outlets as on March 31, 2020) has helped the company reinforce its market position. Raymond has been expanding its dealership network to Tier III-VI cities, and towns, and has over 20,000 touch points across the country. Following the unlocking guidelines and opening up of business establishments, 99% of its TRS stores have opened up as of August 2020. In line with its cost control measures, Raymond is closing loss making stores and renegotiating lease rentals amidst the pandemic led slowdown.
 
* Strong liquidity: Liquidity is strong and supported by large unencumbered liquid investments and cash of Rs 550 crore as on July 2020. The liquid surplus has been maintained over time despite pressure on profitability in the recent past.
 
Bank limit utilisation averaged 83% during the twelve months through July 2020. The company has availed moratorium for upto 6 months on most of the bank facilities as per the Reserve Bank India's Covid-19 Regulatory Package and will repay the interest accumulated during the moratorium period by March 2021. Capex needs are moderate and limited to maintenance capex in fiscal 2021. Raymond's long-term debt obligation is well spaced out, with repayment expected at Rs 232 crore (post moratorium) in fiscal 2021 compared with Rs 372 crore in fiscal 2020. The debt obligation will be met through a mix of cash accrual and additional debt.
 
Weaknesses
* Average financial risk profile: The financial risk profile is constrained by modest debt protection metrics and return on capital employed (RoCE). With moderation in operating performance owing to the one-off stock corrections, the financial metrics have further moderated in fiscal 2020, with debt to EBITDA ratio at 7.6 times, adjusted interest coverage ratio at 2.17 times and RoCE of 9.1% in fiscal 2020. In fiscal 2019, the debt to EBITDA ratio stood at 4.8 times, adjusted interest coverage ratio was at 2.59 times, and RoCE was 11.5%. The operating performance is expected to remain moderate in fiscal 2021 on account of the nationwide lockdown for a large part of the first half, leading to further weakening  in debt protection metrics. However, the pandemic's impact on the company's business and financial risk profiles is likely to be temporary, with fast recovery to pre-pandemic levels expected in fiscal 2022. Improvement in the company's financial risk profile and key debt protection metrics will be a key monitorable.
 
* Susceptibility to volatility in input cost: Volatility in cotton and wool prices has also led to fluctuations 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 first quarter of fiscal 2020, increase in wool prices was largely responsible for a decline of 245 basis points in the operating margin in the branded textiles segment margin, thereby weakening the overall operating margin of the company. However, softening of wool prices in the second and third quarter led to 220 basis point improvement in operating margin in the third quarter of fiscal 2020. Similarly, in fiscal 2019, increase in minimum support price of cotton, a key raw material, led to erosion in profitability of textile and denim players. Easing of commodity prices such as cotton and wool are likely to benefit the company going forward along with softened oil prices. The company is also expected to reap benefits of low imports from China as global supply chain will see a shift.
 
* Intense competition in the domestic apparel business: The industry is highly fragmented with intensifying competition among organised players. Brand penetration is likely to increase over 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/Stable/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 overall readymade garments industry is estimated at Rs 4,738 billion in fiscal 2020, with export accounting for 23%, as per CRISIL Research. In fiscal 2021, the pandemic is expected to reduce domestic market growth by 10%, while export is expected to decrease by 15% on account of global economic slowdown.
 
* Exposure to demand and implementation risks in the residential real estate business: Raymond entered into real estate development in fiscal 2019 to monetise the 14 acres of prime land parcel (out of the total 120 acres owned) in Phase 1 (10 towers) in Thane. The initial four towers, comprise development of 1.12 million square feet to be completed by fiscal 2024. With its prime location, attractive price point in the two-bedroom-hall-kitchen segment, and competitive pricing, the project has witnessed healthy sales traction, with booking of 950 units up to March 31, 2020, on the six towers launched. 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, given the initial stage of the real estate project and subdued sales environment amid the pandemic, the company will be exposed to demand and implementation risks in the near to medium term. Progress on the project and ramp-up in operations and sales booking will be key monitorables.

Liquidity is strong, enhanced by proceeds from the sale of land, and is supported by sizeable unencumbered liquid investment of Rs 550 crore including mutual funds, fixed deposits and cash balance, as of July 2020. Bank limit utilisation averaged 83% during the twelve months through July 2020. Raymond's long-term debt obligation is well spread out, with repayment of Rs 232 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 fiscal 2021.

Rating Sensitivity Factors
Upward Factors
* Significant and sustained improvement in operating margin to more than 8.5%
* Improvement in the capital structure, with debt to EBITDA ratio below 3.5 times and interest coverage above 3.5 times

Downward Factors
* Regulatory issues in demerger or moderation in the business risk profile, leading to profitability below 5% on a sustained basis
* Weaker-than-expected credit metrics, with debt to EBITDA ratio remaining above 4 times and interest coverage below 2 times on a sustained basis
* Lower-than-expected sales and cash flow from business operations and real estate project.

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. Tools and hardware business comprises manufacturing of steel files and cutting tools, and marketing of hand tools and power tools accessories. Raymond has 19 plants across Maharashtra, Gujarat, Madhya Pradesh, and Karnataka. As on June 30^th, 2020, the promoters held about 48% stake and public hold 52% (including financial institutions).

Any other information: Not applicable