Raymond: Risky buy

Recommendation: Risky buy

Anup Menon

RAYMOND'S stock is trading at around Rs 117.90. It has been slowly rising since September, touching a high of Rs 123.05 in late November.

Though the company's recent earnings performance has not been heartening, the numbers are not likely to present a true picture of what may be in store. One has to take into account the transformation in the company's operations.

The recent restructuring of operations, which resulted in the sale of the cement and steel businesses, augurs well for the company from the long-term perspective. Thus, the company's operational risk profile has gone down significantly. The key to future valuations would be the company's ability to keep its financial risk profile under control. From the point of view of an investment, investors with a penchant for risk can consider exposures in the stock.

Earnings performance: On an absolute basis, Raymond's performance for the first half of fiscal 2000-01 was not very impressive. Moreover, the financials are not comparable with that of the corresponding previous period due to the impact of the restructuring on the financial statements. For the first half of the current fiscal the company managed total sales revenues of around Rs 570.10 crore. In the same period, the company declared a net loss of around Rs 185.69 crore. However, after adjusting the loss of Rs 175.95 crore on account of the sale of the steel division, net loss stands at around Rs 9.74 crore.

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Business: Until September, Raymond was a much-diversified company with business interests in fabrics, steel, cement and tools. With effect from September, the company sold its steel and cement divisions and decided to concentrate on its core fabrics business which has good brand equity. For the year ended March 2000, fabrics contributed close to 42 per cent of the company's total turnover.

The cement and steel divisions have been victims of the state of the economy. As far as the company is concerned, the steel company was a complete write-off as it had not made profits since inception. The company has managed to sell the plant even though it has had to incur a one-time loss on account of the same.

The cement unit was in better shape compared to the steel unit. This unit was sold to the global cement major Lafarge for a profit. Raymond expects the net impact of the sale of both divisions to be favourable. With the sale of the cement and steel units, the company will be left only with the fabrics and tools businesses.

Prospects: The company's prospects for the near- to medium-term look encouraging. Its textile business has been doing well. It is a leading player in the domestic worsted textile market and has been foraying into the growing readymade garments market.

Aggressive marketing strategies and a good distribution system have been key to the company's success. However, a cause for worry would be the growing competition in the industry with more players entering the industry.

Another important aspect of the restructuring would be the large cash component available to the company. It is critical that the company employ the cash well by improving its strength in the textiles market. With the competitive nature of the textiles business, building brands and investments for product promotion will be crucial. Given the resources at its disposal, Raymond should be able to entrench itself in the fabrics industry. Given these factors, the company's performance in the near- to medium-term should improve. However, investors averse to risk can wait for things to stabilise before taking exposures in the stock.