Raymond has given 100% returns in 1 year; analysts suggest buying the stock, say valuations compelling

Raymond share price: Shares of Raymond, the established apparel brand in India, hit a record high on Tuesday (September 5), after global brokerage Jefferies and domestic broking firm Motilal Oswal Securities initiated coverage on the stock with a 'buy' rating and a target price of Rs 2,600.

In the opening deals, the stock hit an all-time high level of Rs 2,151.20 on the BSE.

Jefferies, in its note, said that Raymond has addressed past investor concerns on debt and corporate structure, and the growth focus is visible across businesses.

Analysts at Motilal Oswal Securities, in their coverage report, have written that Raymond is an established apparel brand in India that resonates with consumers seeking premium apparel. However, despite its rich heritage, the brand’s market penetration has remained significantly underexplored.

Furthermore, the report adds that over the last two to three years, the company has revitalised its standing through strategic initiatives such as:

a) strengthening the senior leadership team across various management tiers;

b) committing to technological advancements and instilling financial prudence with a healthy 21 per cent reduction in net working capital (NWC) over FY19–23 and turning net cash from peak net debt of Rs 16 billion;

c) undertaking a comprehensive restructuring of the group’s structure by divesting the FMCG business and announcing the demerger of lifestyle businesses and real estate; and

d) leveraging the brand and scale in each category to drive the quality of growth. These efforts are likely to be the key growth drivers going forward. We expect consolidated revenue and PAT growth of 10 per cent–19 per cent over FY23–25.

The report highlighted that historically, Raymond’s key concern has revolved around its weak balance sheet, a factor that has hindered its growth potential. In the last two to three years, it has taken strong measures to reduce receivables, particularly in the branded textile and apparel business, and lower its leverage. The NWC days were reduced to 69 from 110 days, with the lifestyle segment seeing a decline to below 2 months of NWC from nearly 3.5 months, they note.

The reduction in NWC days is positive for the company. Working capital days mean how many days it takes for a company to convert its working capital into revenue. So, the fewer days a company takes to convert its working capital into revenue, the more efficient it is.

Besides, the company's net debt has declined to Rs 6 billion in FY23 from Rs 16 billion in FY20, it adds.

Improving earnings trajectory

Raymond’s consolidated EBITDA margins have improved over FY20-23. "We expect an improvement in overall EBITDA margin, projecting a 40 bps increase to 15 per cent over FY23-27E. The company has implemented measures to enhance economies of scale and has commenced its margin-accretive operations in Ethiopia. We expect a revenue/EBITDA CAGR of 11 per cent / 12 per cent over FY23–27E while operating leverage should drive a 17 per cent PAT CAGR with a 190 bp margin improvement. The FY23E ROE/ROCE figures stood at 24/18%. We anticipate that the company will sustain these healthy levels going forward," the domestic brokerage said.

Raymond is trading at compelling valuations

Though the stock has doubled in the last one year, it is trading at a price-to-earnings (P/E) ratio and EV/EBITDA of 15x and 9x on FY25E, respectively. This is significantly lower than other retail and discretionary companies, which are valued at nearly 45–50x on a one-year forward basis, the report said further.

Hence, the brokerage has assigned a 'buy' call on the stock. It says the combined value of the real estate, engineering, and lifestyle businesses works out to be Rs 2,600 per share.

Jefferies, too, has set a target price of Rs 2,600.

Raymond's share price

The stock has jumped over 100 per cent in the past 12 months, as per Trendlyne data. In comparison, the S&P BSE Sensex has gained nearly 11 per cent.