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“Raymond Q2 FY 2016 Investor Conference Call”
October 29, 2015
ANALYST: MR. SREEKANTH P.V.S. – ANTIQUE STOCK
BROKING LIMITED
SANJAY BEHL:
MR. M SHIVKUMAR – CHIEF FINANCIAL OFFICER-
RAYMOND LIMITED
MR. SANJAY BEHL – CEO OF LIFESTYLE BUSINESS-
RAYMOND LIMITED
MR. VISHAL JAIN – HEAD INVESTOR RELATIONS-
RAYMOND LIMITED
MS. SEEMA KHATRI – INVESTOR RELATIONS-
RAYMOND LIMITED
Raymond Limited
October 29, 2015
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Moderator: Ladies and gentlemen, good day and welcome to the Raymond Limited Q2 FY 2016
investor Conference Call, hosted by Antique Stock Broking Limited. As a reminder all
participant lines will be in the listen-only mode and there will be an opportunity for you to
ask questions after the presentation concludes. Should you need assistance during the
conference call please signal an operator by pressing “*” then “0” on your touchtone phone.
Please note that this conference is being recorded. I would now like to hand the conference
over to Mr. Sreekanth PVS. Thank you and over to you Sir!
Sreekanth P.V.S: Thank you. Good evening ladies and gentlemen. On behalf of Antique Stock Broking, I
welcome you all to Q2 FY 2016 post results conference call of Raymond Limited. I take
this opportunity to thank the management of Raymond for the call. I now hand over the call
to Mr. Vishal from Raymond Limited. Over to you Sir!
Vishal Jain: Thank you Sreekanth. Good afternoon everyone and thank you for joining our Q2 FY 2016
earnings conference call. I hope all of you would have received a copy of our results
presentation and for those who have not it is available on our website www.raymond.in
along with our investor relations policy. I would urge you to kindly go through this along
with the disclaimer slide. We have with us Mr. Shivkumar, CFO, and Mr. Sanjay Behl –
CEO of Lifestyle business. I will now hand over to Shiv before we open up for Q&A. Over
to you Shiv!
M. Shivkumar: Good afternoon. Thank you for joining us. The second quarter of financial year 2015-16
witnessed subdued consumer demand with extended end of season sale for the Diwali
festival is delayed by 20 days this year compared with last year.
Our consolidated Sales for the quarter grown by 3% to Rs.1492 Crores, EBITDA for the
quarter declined by 18% to Rs.149 Crores and the margin stood at 9.9%, decline in
EBITDA is on account of higher ASP spends Rs.12 Crores, sustained investment in retail
network expansion and store renovation Rs.12 Crores, besides under performance in the
engineering businesses about Rs.8 Crores.
During the quarter, we have made a provision of Rs.32 Crores towards impairment in the
carrying value of the forging business assets held through auto component business. This
has been reported as an exceptional item and being a non-cash item, it does not have any
impact on our business.
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Our consolidated net profit for the quarter stood at Rs.9 Crores vis-à-vis Rs.68 Crores in the
last year.
Our consolidated sales for the half-year ended September 2015 have grown by 2% to
Rs.2601 Crores. EBITDA for the half year declined by 10% to Rs.220 Crores and the
EBITDA margin stood at 8.5%. Our consolidated net loss for the half-year ended stood at
Rs.4 Crores compared to profit of Rs.35 Crores in the last year.
Capex for the half year stood at Rs.169 Crores comprising of Rs.90 Crores towards
capacity expansion in Denim and Shirting business. Rs.28 Crores toward acquisition of
Robot System which is the garmenting business in Bangalore and the balance pertaining to
store rollout and maintenance capex.
Our net debt during the quarter increased by Rs.320 Crores and stood at Rs.1744 Crores
and net debt equity stood at 1.14. Increase in debt is partly due to capex of Rs.169 Crores
and partly due to increase working capital requirement phenomenon, which is temporary
due to season build up of inventories.
Our net working capital levels increased marginally and stood at 119 days as against as at
September 2015 compared to 116 days last year. Our annualized ROCE for half-year ended
September 2015 is about 7.8% compared to 9% last year.
Business performance, coming to individual business performance in the branded textile
segment sales during the quarter has remained flat at Rs.697 Crores, B2C Shirting Fabric
continues to gain traction and grew 15% during the quarter led by volume growth of 9%;
however Suiting Fabric business declined marginally by 1% due to volumes.
Export constitute 14% of sales, EBITDA margin declined by 1.1% to 18.5 for the quarter,
margins were impacted due to increased proportion of B2C Shirting, higher promotional
expense and sustained investments in retail, renovation and brand building.
In the branded apparel segment we have seen topline growth of 16% during the quarter led
by growth across all brands, our formal brands PA and RPA has been given good traction
and grew during the quarter in excess of 18%.
Raymond MTM has been gaining good traction and grew by 38% to Rs.12 Crores during
the quarter As of September 30; we have 106 MTM stores including 65 Shopping Stops
compared with 82 as of September 2014.
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Blended sales across secondary channel, EBOs and LFS during the quarter grew by 15%
year-on- year. Our e-commerce sales through online channel partners have been to the tune
of about Rs.6 Crores during the quarter. Loss at EBITDA level in the branded apparel
segment is due to investment and retail network expansion especially MTM besides lower
gross margin.
Coming to the retail channel our exclusive growth network of stores stood at 1017, like-to-
like secondary sales growth has been 6% during the quarter. Secondary sales throughput
across the entire network of stores grew by 11%. During the quarter, we opened 17 stores
and closed 15 nonperforming stores on a half-year basis we opened 37 stores and closed 23
stores. We completed 10 stores renovation during the quarter, additionally 24 stores are
under renovation as at September 30th with 51 stores having been renovated till date since
July 2014Same stores sales growth for stores post renovation has been in excess of 25%. At
the end of this fiscal year we expect to complete renovation of 100 stores, which we set out
to during July 2014.
Garmenting segment grew by 5% to Rs.158 Crores led by higher volumes, EBITDA grew
by 7% to Rs.17 Crores due to higher capacity utilization, acquisition of Robot Systems with
capacity of 1.26 million pieces per annum was completed on September 10 for total
consideration of Rs.28 Crores.
B2B Cotton Shirting business grew by 22% to Rs.130 Crores led by volume growth in the
domestic market excluding one of income of Rs.6.4 Crores towards electricity duty refund
for the same period which we received last year, EBITDA improved by 14% to Rs.13
Crores, capacity expansion project of 10 million meter is on track and we expect to
complete it by end of December.
Our Denim business degrew marginally by 1% to Rs.231 Crores; however, EBITDA
improved by 12% to Rs.27 Crores due to lower cotton prices, capacity expansion project of
9 million meters is on track and expect to complete it by March 2016.
Tools and hardware segment performance has been impacted due to subdued domestic and
export market. The auto component segment performance has also been impacted due to
unfavorable product mix depreciating euro and loses in forging business.
To sum up, we are hopeful of improved performance in H2, we remain confident about the
strategic direction of our business and will invest for growth through brand building,
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modernization, expansion of retail network and also capacity expansion on the export
driven business.
Thank you we are now open to questions.
Moderator: Thank you. We will now begin the question and answer session. Ladies and gentlemen we
will wait for a moment while the question queue assembles. The first question is from the
line of Resham Jain from B&K Securities. Please go ahead.
Resham Jain: Thank you Sir for the opportunity. Sir I have few questions on Worsted fabric business. Out
of the total 38 million meters what we have in Worsted fabric, what is the total capacity
utilization currently?
Sanjay Behl: 100%.
Resham Jain: What is the capacity utilization in worsted fabric business?
Sanjay Behl: 100% close to everything, by every, all three factories are running three shifts a day, 365
days a year.
Resham Jain: Okay and out of the total worsted fabric sold by Raymond out of that how much is in house
and how much is outsourced?
Sanjay Behl: Are you talking worsted fabric about?
Resham Jain: Worsted fabric.
Sanjay Behl: Worsted is blend of a polyester and woolen fabric.
Resham Jain: I mean suiting fabric sorry?
Sanjay Behl: In terms of suiting fabric there is varying capacities in varying amount of processes that we
have, so we have about 35 million meters of finishing capacity, so out of the 43 to 44
million fabric that we do in a year about 35 million meters finished inside Raymond and the
rest is finished outside Raymond and that could be either traded goods that we would
import either from any part of the world or would be finished outside Raymond, which is
largely PV fabric. In terms of spinning, our capacity is close to 22 million meters, so you
can say 50% of spinning of Raymond textile fabric which is a suiting fabric, which is sold
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and done in house. Varying capacities are between 22 and 35 million meters in terms of
dying, in terms of finishing, various processes.
Resham Jain: Right and any pressure you are seeing in the margins of suiting business especially what we
are hearing is that there are lot of imports which is happening at a much lower price than
the Indian players anything for Raymond specifically, which need to be?
Sanjay Behl: One thing which is worrying us, our space has a potential risk in the category is the extent
of import, which is happening from or I would say dumping, which is happening from of
Chinese fabric in India and that is coming at far lower end. They are coming through
various routes, because India has a duty on the Chinese import to about 30% or so, in this
space it comes not through direct channel, but finds its way via Bangladesh and then that
does impact the overall realization from the market for various suiting, so that is one
component which is there, other than that it is not the alarming trend, whether it is an Italian
fabric, which is available in India or a apart of European Acoustic fabric which comes to
India from various channels it is more or less okay, but I think this whole increase that we
are seeing currently is on the, typically the lower to medium belly market and thankfully
Raymond does not have a strong presence there, but it does get impacted even then, which
is at the lower in the medium belly of the market where we are seeing some re-routing of
Chinese fabric either through some other means or via Bangladesh.
Resham Jain: Thank you Sir.
Moderator: Thank you. The next question is from the line of Nihar Shah from Enam Holdings. Please
go ahead.
Nihar Shah: Sir, just a couple of question from my side, you know, can you may be give us some
qualitative or quantitative data points on, what has been the delay of Diwali impact on the
results and if I have to sort of normalize for that, how the results might look?
Sanjay Behl: Qualitatively the feel is that typically we would work on 45 days prior to Diwali in terms of
dispatches for Diwali season, so last year Diwali was on October 22, most of the September
would have got consume with high value fabric full price sales for Diwali being dispatched
by the end of quarter two, in this case, half of the benefit will come in September about half
of that will go. But I cannot give a quantified guidance on this specifically because it totally
depends on order to orders and channel member to channel member there, but it does have
a reasonable impact for company like Raymond which does have a little higher seasonality
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compared to industry when it comes to Diwali and wedding seasons. So that would be good
qualitative feel that it have a reasonable impact on that and that impact you would now see
coming up in this quarter.
Nihar Shah: How have you seen sort of the early indications from the festival season compared on a
year-on-year basis?
Sanjay Behl: I think the festivity started early October on the sense of that we saw traction, retail traction
was towards sharp during October 12 or 13 period in India and then really building up from
thereon. So second week October we have started seeing a pickup in retail footfall. A retail
footfall has picked up by anywhere between 12% and 15% across the country for our kind
of industry. So this is the third weekend we witnessed most sharp spike in retail footprints.
Our observation is that it has achieved a double-digit growth for almost entire business at
least consumption led businesses.
Nihar Shah: So it is a double digit same store sort of sales growth that we sort of expert at least for Q3?
Sanjay Behl: Yes in terms of pre-Diwali that is the kind of impact whether it redeems post Diwali for
another six to eight weeks we do not know but we can say that three weeks prior to Diwali
every weekend we should expect we had about three of them and we will have another one
or two big weekends coming up. So we are having about a double-digit growth in both
footfall and consumption.
Nihar Shah: My second question is just a data point. Just wanted to get an idea of what is the capex plan
for the second half of the year and then may be if possible even for next year?
M Shivkumar: We also said at the beginning of the year we will be somewhere about across the group will
be 250 to 275 Crores and I still maintain that at this point of time.
Nihar Shah: So the second half in terms of capex intensity is a little bit lower than the first half of the
year?
Sanjay Behl: Primarily because shirting is over, which is the large capex which was planned. 150 Crores
of expansion was towards shirting this year and I think that as Shiv has indicated in the
opening statement that by December we would have got full capacity commercially kind of
started. So that is a phasing issue no more than anything else. I think its going to be within
the region of 250 to 275 Crores is what was the earlier guidance.
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Nihar Shah: My last question is once the 100 stores that you are planning to renovate sort of ends by the
end of this year is there a plan to sort of pause and consolidate or do you want to sort of
continue with that going to may be next 50 or 100 stores as well?
M Shivkumar: Sanjay, I will just take this question. I said 100 this is beginning. This is we are referring to
the renovation of the existing store Raymond Shop we have completed 51 stores & 24 are
renovation the balance 25 will happen in H2 that is how it is makes up to 100 for the year.
Nihar Shah: Beyond that 100 that do you wanted sort of see how the performance of the renovated
stores sort of sustains or do you have enough data points to say this is been a good strategy
and you would like to continue and sort of expand the renovation plant.
Sanjay Behl: Shiv did mention the like-to-like store growth of upwards of 25% and this is the data for 51
stores ranging from a year to six months growing a 25% like-to-like. Sales growth is
definitely a strategy which is working because initially when we started we had a three-year
plan to do 250 stores at a guidance of 15% like-to-like that is how the business model was
built in. The biggest 100 stores knocked off in the first year of our renovation plan out of
the three years and we get 25%. So there is every reason for us to really feel confident
about the kind of growth we are getting and continue with this program. So we see us
continuing next year with almost similar amount of exertion about 25 to 30 stores we got on
average per quarter but it does not get phased out equally every quarter because of the lean
periods which are two out of the four quarters for us. Specifically we would look at about
60 to about 80 stores in a year happening for the next two years beyond next year.
Nihar Shah: Thank you so much and good luck for the quarters ahead.
Moderator: Thank you. The next question is from the line of Ali Asgar Shakir from Elara Capital.
Please go ahead.
Ali Asgar Shakir: Thank you Sir for giving me the opportunity. First of all Sir just wanted to understand in
your apparel business what is the quantum of EBITDA loss that is due to the MTM
business as well as ad expense increase and a follow up with that is that what is the
breakeven point in terms of the store count or revenue base where MTM will turn
profitable?
M Shivkumar: The first one the MTM is about 10 Crores and on other & 7 crores on account of margin
because of the season related sales we had discount season and all that. The total shrink has
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been 12 Crores profit versus 5 Crores loss 17 Crores. So 10 Crores is explained in the form
of MTM and balance some extend of stores, something on margins and also expansion all
put together.
Ali Asgar Shakir: If I got the amount right 10 Crores is the loss due to MTM you said right.
M Shivkumar: Yes that is right.
Ali Asgar Shakir: Ad expenses and what did you say I did not get that point is?
Sanjay Behl: Gross margin, 7 Crores additional that is the swing component filling into the shipped
number is on account of three things. It is very minimal on account of A&P increase in
apparel business, it is largely on account of extended EOS sales, combination of channel
mix and the product mix. These are the three things which have contributed to about a
percentage and half dilution in operation margins for the business that is about 7 Crores
there. The second question was about MTM and you said we have bought 100 stores and at
what level of stores do we see a breakeven is that your question?
Ali Asgar Shakir: May be revenue however you look at it where do we see what would be the point where we
think that we will breakeven.
Sanjay Behl: I think a lot of times breakeven is a little bit the management call more than a market
condition because if we say that okay we are happy with the kind of elasticity or the extent
of critical mass for this business we can always control our investments and operating
expenses and make the business breakeven but considering as to where we are looking this
business to grow, we will continue to invest for the next two years in retail expansion, in
brand building, in product investments there this 100 stores will look more like a 250 kind
of a store mass before it really starts kicking on, because the idea or the internal operating
strategy is to build scale for this business, primarily on account of three, four factors. One,
it is the highest realization for Raymond at this point of time and It will continue to be so
because it is totally positioned at the premium end and average selling price of the suite is
of upwards of Rs.30000 for Raymond Made to Measure. So that is really is a huge benefit.
The second thing strategically which complements this business and a reason why we are
investing so aggressively in this business is we get benefited by the value chain model from
the fabric end to retail end. So a lot of stock actually which get converted into Made to
Measure on a body of the customer is actually Raymond fabric whether it is a suiting,
trousering or a shirting fabric so you get a value chain margin advantage as a second
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benefit. The third benefit is that retail expanses are optimized on a very large universe. So
to that extent my fixed cost remaining same and variable cost getting benefited in terms of
my company owned and company operated outlet at least to start with itself is a huge
benefit of optimizing for the square feet area that I have already in my exclusive brand
stores. So there are these fundamental reasons why we are saying that this business needs to
be scaled up like any business and you would agree that which has a 50% to 60% gross
margin profile if you want to breakeven we can just decide that okay this is the point at
which we want to stop spending for the retail expansion and we want to pretty much start
juicing and milking that current portfolio and we will make it profitable but that is not at
least at this point of time. So if it is a guidance that you are seeking you are looking at
anywhere between four to eight quarters before you start seeing a reasonable amount of
breakeven margins approaching for the business because that is when we would have
reached a critical mass first level scale that we want for this.
Ali Asgar Shakir: This 250 stores that you said as a target that should be achieved in the next four to eight
quarters I mean what should be that timeframe?
Sanjay Behl: It is exactly four to eight quarters. We will be adding 25 to 30 stores a quarter and it would
take us at least six quarters if not less to add 250 stores.
Ali Asgar Shakir: The next question I have is on your store addition. So there is a healthy store addition of 17
stores but the net increase has been flat due to the 15 closures. So in that context how do
you see our retail expansion strategy taking shape?
Sanjay Behl: In fact I am actually encouraged to see that number because what we are doing is we are
really pulling down the tail very, very aggressively and in fact we have come down to the
end of the tail now. The guidance that we are working on if any stores which is more than
two years into operations we want to work out a 90% to 95% stores to be profitable unless
there is a very specific reason for it to have a value for the store to exist at an operating loss
and there is some other way to compensate in terms of justifiable return from the store so
clearly while you seeing this aggressive number and you will see not just this quarter but
actually take the last six or eight quarters, this number would be upwards of 100 stores that
have been shut down, which is really the tail have been completely kind of taken away and
this number will progressively keep coming down. So the net delta that you would see of
net store addition will go up because the topline number of new store will go up and the
bottom store almost kind of cleaned up now.
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Ali Asgar Shakir: How do you see the growth outlook in your textile business? Would you attribute a
weakness in textile business to the sharp industry shift towards readymade garment which
would imply downward trend to continue or is this quarters low growth more only due to
Diwali shift and we can expect better growth in coming quarters?
Sanjay Behl: It is not a straightforward either or kind of an answer. I think a combination of both and lot
more what you said but just to put it simplistically for this call, I am not as respondent on
textile as in sectoral shift that you talked about. I think textile business has a significant
amount of leverage to be exploited from Indian market perspective and I am not saying
quarter-to-quarter, I am talking about sectoral perspective here. So even in long-term I see a
lot of growth still there because the value of textile as a competitive price value still
continues to be far more favorable than apparel. There are other reasons why apparel will
continue to be a majority part of the wardrobe and will continue to grow in Indian
consumption story by a strong double digit and we are also party to that growth with our
portfolio brands but textile growth will be aided by apparel growth since we are the
preferred fabric supplier given our manufacturing capability and continuing to grow to
cater internal demand as well as the external industry demand. Then there are Made to
Measure kind of propositions which are growing and can take a lot of feed into suiting
fabric inside that business then there could be custom tailoring that is really handled with
the kind of stores retail footprint that we have, it is only Raymond which has over 800
Raymond Shops with tailors inside the shop is a proposition. So if we can close that
proposition well then there is still a huge amount of fabric value yet to be exploited. So that
is on the generic level answer to the question that you said on readymade versus fabric. On
specifics going forward do you see an improved performance going forward with festivity
Diwali kicking in the answer to that is yes. The quantum of that we cannot of course at this
point of time provide you on this call but we do see some upside coming because of one
Diwali, second wedding season in India, which is a fairly prolonged wedding season, which
is going to start starting November. We do see some positive upside to this business.
Ali Asgar Shakir: Just last bookkeeping question, if I may just slip in. What is the net revenue impact of the
stores under renovation during this quarter after adjusting the 20% like-to-like growth that
you see in renovated stores? Sir I am saying that because of the amount of stores that have
remained closed during this quarter on a YoY basis?
Sanjay Behl: Net revenue it is still in double-digit positive revenue growth because what get shutdown it
is only 2% of the total stores and what is growing is a very strong part. So 100 stores
contribute to about 25% of revenue the one which or the 50 stores contribute to about 15%
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to 20% of the revenue of the total retail universe growing at 25% plus and what is shutdown
is only 2% of the total store. So net impact is still extremely positive. In fact this is the
higher year of the retailed growth in Raymond on both like-to-like and overall store level.
Ali Asgar Shakir: Thank you.
Moderator: Thank you. The next question is from the line of Anita Rangan from HSBC Asset
Management. Please go ahead.
Anita Rangan: Good afternoon. Just wanted to know in terms of the tools and hardware and auto
component business I mean what is the visibility because already you have taken
impairment on one assets and it is actually being a drag on the overall consolidation
performance. So at some point are you looking at divesting this business or selling it and
realizing value? How do you plan to take this forward because you said typically non-core
for the existing textile business?
M Shivkumar: There are two things. One is Tools & hardware and Auto component. What we have taken
decision for impairment is one part of the Auto component r the other part of the auto
segment business is intact; having said that we have got its own problems on account of
export front and also the depreciating Euro. Euro used to be about 85 and now it went to 65
now about 71 that is part of the issue. Apart from that there was a demand pull down in
most of it so it will take about eight quarters before it comes back to its original growth
trajectory.
Anita Rangan: Sir there is no plan to like sell this business or like divestment or anything like that?
M Shivkumar: We always look at shareholder value all the time non-core has also stated those businesses
which are not which are profitable it cannot scale up or those which are not profitable we
will consider divesting.
Anita Rangan: Thank you.
Moderator: Thank you. The next question is from the line of Dhruv Brijka from Crescita Group. Please
go ahead.
Dhruv Brijka: Thank you for the opportunity. I would like to ask that the cotton shirting business, which
will be expanded to the tune of 10 million meters capacity how are you planning to fund
what, is the funding metrics for it.
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M Shivkumar: We have funded through the banking channel and lot of it is available through the loan
mechanism, which gives us substantially lower interest cost for the funding.
Dhruv Brijka: If you can just give me a number what is the percentage of loans or the internal accruals
that has been taken into account for this?
M Shivkumar: The loan is going to be whatever we spend 80% of it will come under the TUF scheme and
TUF scheme has got subsidy both with respect to capital subsidy and the interest rate
subsidy. So for the loans that we are talking about these loans come at about 5% lower than
the rate that we would have normally taken in the other process and balance are all internal
accruals.
Dhruv Brijka: Okay the rest is internal. What is the total amount, which has been put into this capacity
expansion?
Vishal Jain: We are looking at spending somewhere close to around Rs 130 to Rs 150 crore depending
on the project going on. So that should be the size of the project.
Dhruv Brijka: Similarly for the Denim expansion that you have planned 9 million meters till March 2016
what is the total expansion in terms of like if you put that?
Vishal Jain: For that we would be spending close to Rs 100 to Rs 120 Crores.
Dhruv Brijka: Would it be same like for the cotton shirting the metrics distribution?
Vishal Jain: Yes.
Dhruv Brijka: Just one more thing if I did not get the numbers of for the store additions for this quarter,
was it 70 store additions?
Vishal Jain: During the quarter basically we added 17 stores and during H1 we added close to 37 stores.
Dhruv Brijka: Okay 17 that is 17 right.
Sanjay Behl: Yes.
Dhruv Brijka: Thank you so much.
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Moderator: Thank you. The next question is from the line of Mahantesh Maralinga from Finquest
Securities. Please go ahead.
Mahantesh Maralinga: Good afternoon. Just had a couple of questions. Just clarify that on the decline sales was
mainly partly due to the shift in the festive season from October onwards to November in
the textile business. Is it the reason for a slowdown in sales?
Sanjay Behl: It is one of the reasons.
Mahantesh Maralinga: Because it was they growing at a healthy Q4 FY 2015 at around 22% to 26%. The last two
quarters in Q1 and Q2 the growth rate has sharply come down to 5.3% year-on-year and
negative in Q2. So just attribute to few factors that is the reason for that?
Sanjay Behl: That is one of the reasons. The other big reason is also that we have changed I think this is
what we talked about last quarter also that we are looking at profitable mix more than a
volume and a revenue both right now. The focus is actually shifting to overall profitability
and for that we have discontinued a lot of low value lines of segments we have
discontinued as product categories that is also impacting.
Mahantesh Maralinga: But your margins have been remaining at the same level instead of discontinuing the low
margin products?
Sanjay Behl: I think the shirting business and the blend between shirting and suiting business if you see
the shirting business has grown 25% in first half and suiting business is actually been under
marginally down. Shirting business has lower ASP and the gross margin compared suiting
business. So again what is the right picture is the absolute margin rather than looking at the
percentage gross margin that has grown by 7% in first half.
Mahantesh Maralinga: Which margin grew by 7%?
Sanjay Behl: Fixed margin at absolute level has grown by 7% in H1 compared to the percentage gross
margin if you look at obviously it will have a mix impact of shirting and suiting.
Vishal Jain: So basically if you look at the absolute EBITDA for H1 versus last year it has grown by
7%.
Mahantesh Maralinga: Okay it is 100 basis points or 7% points.
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Sanjay Behl: 7%
Mahantesh Maralinga: Coming to the brand Apparel segment it has been weak for the past two quarters. So it is
mainly due to the advertising a store rollouts or due to the weakness in the consumer
sentiment and the lower discounting or higher discounting of that?
Sanjay Behl: Apparel segment the story is for getting a higher than the industry rate of topline growth.
Last quarter and this quarter if you see it has grown at 16%, H1 has grown at 17%. This is
significantly ahead of the revenue growth profile of branded segment players in Apparel
industry. All the four brands have grown double digit this first half. Park Avenue has grown
by 25% in first half. Raymond has grown by 20% in first half. These are significantly
higher topline growth, which means consumer acceptance of our brand extremely high.
ColorPlus has grown 10%. Parx has grown 11%. So all our apparels brands have grown
double digit. Now looking at the operating margins the reason has already been explained
in terms of reconciliation is the combination of factor. One is continued investment in retail
which has already been talked about partly coming on Made to Measure account, partly
coming on account of the renovating ColorPlus, Park Avenue and expanding our retail
universe and this strategy is not going to change. So you should not expect a very dramatic
shift in overall Apparel mix of performance in the next four to six quarters. The story will
continue to be a strong double-digit growth and in terms of continued investment whether it
comes in retail, brand, channel that we will continue to make. So to me I think it is a
strengthening of performance if you look at a little longer term perspective from Raymond
perspective from 2008-2009 to 2013 as one period of helping the last six quarters, this is the
eighth quarter or seventh quarter of strong double digit growth across all four brands for
Raymond Apparel portfolio. So that is significantly healthy kind of sign in terms of
consumer acceptance of a product. Managing margins I think is going to take sometime in
terms of giving you the return on this investment in this investment we think strategically is
the right thing to do in retail expansion, in renovation of retail, in brand building, which
will continue to grow over the next quarters.
Mahantesh Maralinga: But when do you see some meaningful margins coming out of the business I mean at least
around 3% to 4%, 6%?
Sanjay Behl: Meaningful margin you take a competitive benchmark and if you take any of the
competitive benchmark they came at a revenue scale of 1.5 to 2 times of where we are.
There are companies which are market leading companies that took 20 years to get you
even positive EBITDA or operating margins and as we are talking about Raymond with the
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strong brand portfolio. So to me I think a meaningful margin is that is what we are looking
at in our Apparel segment separately. We are in the current phase of building our Made to
Measure business. We are in the current phase of building Raymond critical mass we are
very strong on Park Avenue and formal segment however we feels that there is going to be
growth. So I would say pretty much four to six quarters you should take before you can get
substantive margins
Mahantesh Maralinga: So from Q1 FY 2018 you are looking at some profits being made from your business?
Sanjay Behl: In terms of gross margin profile it is already one of the healthiest in the country than any
brands.
Mahantesh Maralinga: In terms of EBITDA I am talking of?
Sanjay Behl: EBITDA is a decision, again as you want to get from the fact is management decision but
you are right it take up at least four to six quarters from today.
Mahantesh Maralinga: Broadly if I take a timeline it will be around Q1 FY 2018 alone whereas you can see some
margins coming in from the businesses?
Sanjay Behl: In terms of substantial margin yes you can say that it could take 1.5 to 2 years.
Mahantesh Maralinga: Coming to the brands sales can you just give me the actual numbers from the different
brands this quarter?
Sanjay Behl: In terms of real actual absolute growth?
Mahantesh Maralinga: Yes absolute value.
Sanjay Behl: It was 146 Crores for Park Avenue, 76 Crores of ColorPlus, 64 Crores of Raymond Apparel
and 43 Crores of Parx.
Mahantesh Maralinga: Okay 146 Park Avenue, 76 ColorPlus, Raymond Apparel 64 and Parx 43 right?
Sanjay Behl: Yes 329 Crores totally.
Mahantesh Maralinga: Okay and coming to the impairment like going ahead do you see any impairment from the
other part of the auto business also coming into play or these are only core that you saw
some impairment there?
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M Shivkumar: We will not have any more impairment based on the current business viability and
sustainability of margins there is nothing further we may need to provide for it.
Mahantesh Maralinga: Coming to the ad spends just quantify the ad spends in H1 this year and H1 last year?
Vishal Jain: So the ad spends are actually gone up by 29 Crores to 110 Crores in H1 this year.
Mahantesh Maralinga: So 29 Crores higher than last year right.
Sanjay Behl: That is right.
Mahantesh Maralinga: If you take quarter-to-quarter and since Q2 to last year Q2.
Vishal Jain: We are up by 12 Crores.
Mahantesh Maralinga: What was the ad spend in Q2?
Vishal Jain: 56 Crores.
Moderator: Thank you. The next question is from the line of Rahul Khandelwal from Systematix
Shares & Stock Brokers. Please go ahead.
Rahul Khandelwal: Sir I just want to know more about the Robert Systems expenditure that we have made what
is it for and how are we utilizing that?
Sanjay Behl: I will tell you what is it is for in terms of utilizing the specific numbers, I think Shiv has
already told you the consideration value 28 Crores has been made. That is called Silver
Spark, which is subsidiary of Raymond. It has been done to expand our capacities of suiting
and jacketing capacity by another 1.2 million units per year. This capacity makes us the
largest manufacturer or largest converter when it comes to jackets and we will have the
largest capacity in India. Most of this capacity is currently we are servicing the internal
Raymond demand but a very large portion of this is actually for export purposes.
Rahul Khandelwal: When you expect these to start contributing to revenue?
Sanjay Behl: Started already running facility. September so this month it will contribute already.
Rahul Khandelwal: Any advice on the raw material cost especially in cotton because I know it is pretty low
currently going ahead do you still expect these to stay similar?
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Sanjay Behl: Commodities I think cotton is a pretty much as you rightly said has already come to the
crux there and it is likely to say in the second half. So our estimate is pretty much in the
same guidance of first half will sustain. We do not expect it to bounce back to or increase
any further and so is our guidance for raw materials like wool or polyester. Quarter cost are
the guidance for our second half also.
Rahul Khandelwal: Okay and just a last question on the e-commerce. Any guidance on whether you are
planning to enter into e-commerce or how you are planning to contract against that?
Sanjay Behl: We are present on all the top market places today. We have all the five of them in fact if
you take whether it is Snapdeal, Amazon, Flipkart, Myntra, and Jabong you will find entire
Raymond portfolio products placed and positioned across all these marketplace players.
Quarter two we had six Crores sales coming from e-commerce and we can pretty much take
a nominal growth given that we are not discounting our portfolio on these sites and we are
continuing to maintain our market price. You can take a nominal growth on this number
and then calculate whatever is going to happen as we go forward.
Rahul Khandelwal: Thank you so much.
Moderator: Thank you. The next question is from the line of Abhishekh Rangnathan from Ambit
Capital. Please go ahead.
Abhishekh Rangnathan: Thank you for taking my question. Couple of them; one is on the
inventory in which side have we seen the inventory build up which side of the business is it
textiles, fabrics B2B?
Sanjay Behl: It is actually more on side of textile because the dispatches, which typically would be high
value dispatches, would get off to with Diwali season there. So something, which happened
in last year September, is likely to happen more in October. So, just a marginal difference
not much.
Abhishekh Rangnathan: Actually if you look at the standalone textile, standalone balance
sheet reflects a higher jump in inventory than the consolidated. That is where my question
came from. Other way round actually standalone is just minimal the standalone jump is 35
Crores the surplus in the other subsidiary?
M Shivkumar: It is also Apparel. Because in the working capital in inventory specifically in the Apparel
business for the upcoming season.
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Abhishekh Rangnathan: So it is a festive season build up?
Sanjay Behl: Yes festive season build up.
Abhishekh Rangnathan: The second thing on MTM. So you mentioned that MTM made
losses for this quarter or opening of stores we are continuing opening of stores and MTM
contribute to losses. You added about some four or five stores this quarter. So is that the
reason or the entire portfolio of store is not actually not really contributing profits at this
point of time?
Sanjay Behl: 70% of the store portfolio is under one year. So it is like it is not these four stores, which
have contributed to such a massive loss, and this stores which have come up a quarter
before, two quarters before, three quarters or four quarters before because it will take some
time they will end up making money for us. So typically a store benchmarking would take a
two to three year or operating breakeven kind of benchmark for our kind of industry is
considered to be present so I think 70% of the MTM new stores have come up in the last six
quarters and are still yet to be profitable.
Abhishekh Rangnathan: In terms of your roadmap of 250 stores on EBO side after 250 stores
what? I mean you mentioned that you want to benchmark with a competition here after
adding 250 stores from year on you will be around 450 to 500 Crores or may be after
conclusion you will still pay around 450 stores. Is that the scale you want to reach? Is that
the network of EBOs, which you aspired to have across the brands. What is the target,
which you would want to actually get the brand on far, or almost the same size that
benchmark competition etc?
Sanjay Behl: These benchmark of competition I do not think physical store is the only possible way to
really reach there. So there is no ways that we have benchmarking about number of stores
to competitors to reach the sales. We are looking at the first cut in the first two years, three
years which is we said by 2018 and kind of number you have mentioned is the right number
that is where we would like to reach and we would like to then parallelly we are working on
the digital commerce as a channel and as a provider to meet specifically Tier IV, Tier V
town kind of requirement. So we are looking at a customized omni channel model and I use
the customize as a prefix to that because we will have to really have our own kind of flavor
of what kind of omni channel balance do we need for our industry and specifically for suite
of products and services and I think is not just a store alone and it is going to be the digital
commerce. It is like one of the services if you go and book your appointment for Made to
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Measure in which you have what we call it a concierge service where you actually book an
appointment and we reach to your place of convenience and your time of convenience, your
place of preference to take your measurements and to deliver that to your place or
preference whatever the way you call it. So there are one of the other services, other retail
avenues reaching through with the Smartphones, through Tab, through digital platforms or
through things like book an appointment and we will reach you instead of you reaching us,
which also will build a tremendous amount of penetration for our kind of products services.
So it is not a strictly comparable portfolio that Raymond has with most the competitors. So
we are really projecting forecasting about where are we likely to kind of head versus other
people. Our objective is definitely not to match the numbers of competitors when it comes
to number of doors but definitely the throughputs from our doors as well as other revenue
that are possible in this digital age we would exploit everything and see what is the best
blend and the most cost effective blend for us to reach most of our customers and the target
group, people.
Abhishekh Rangnathan: The reason I asked is that we do not necessarily have to open any
more stores thereafter. I thought the idea was actually to build your own store portfolio and
then actually get into franchising piece, which you are very familiar with as a business. So,
any ideas of franchise EBO network is what I was actually trying to get to.
Sanjay Behl: That is the part of businesses also. Even this may be still part of franchisee. Physical reach
could be company owned as well as franchise owned both, even now in these stores we are
building all these numbers that you are looking at half of them are franchise only, even new
stores we talked about.
Abhishekh Rangnathan: Again 250 odd stores which are going to open and half of them are
franchisee?
Sanjay Behl: Easily, we may not know.
Abhishekh Rangnathan: One number which I misses the capex breakup if you could actually
share what the capex has been and the breakup for the same?
Vishal Jain: So basically to look at in the H1 we spend closed to 170 Crores. For the capacity expansion
we have spend close to 120 odd Crores, which comprises of the shirting capacity expansion
and Denim capacity expansion and acquisition of the Robert System and Rs 10-15 odd
Crores on the stores rollout and the balance is on account of the maintenance capex.
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Abhishekh Rangnathan: So 120 on capacity expansion and the robotics Robert acquisition all
put together?
Vishal Jain: Yes.
Abhishekh Rangnathan: And about 10 Crores?
Vishal Jain: Rs 10 crores for Stores roll out and 30 Crores for regular maintenance capex.
Abhishekh Rangnathan: Last question if I may Sanjay is that on the product portfolio is there
in many things achieving these growth on a back of investment in the store network on
A&P what are the changes which have taken place on the product side in terms of mix, in
terms of positioning, in terms of diversity let us say accessories and so on. What are the
changes, which we are seeing and we are likely to see?
Sanjay Behl: What you are seeing or what is currently undergoing in product positioning is that we are
moving away from mass premium positioning for Raymond Apparels to bridge to luxury
position in the mind of consumer and from a being a formal kind of largely set up to more
classic heritage and formal set of Raymond Apparels from just being short trouser, jacket
kind of a largely settlement to a full wardrobe solution and service company for Raymond.
So that the fundamental shift that you will see transitioning from three to five years on
Raymond, a journey which is underway for the last about eight quarters already for us and
that is giving us strong 20% kind of target every quarter after quarter as you are seeing in
terms of Raymond Apparel. We have discontinued 20% to 30% of lines in Raymond
Apparels, which are lower price point and exited them completely. So all shirts under
Rs.2000 price point in Raymond have been exited as a decision and we will only invest in
high count. We will only invest in better fabric, we will only invest in bridge to luxury kind
of blend structures and design portfolio for building our Raymond Apparel brand and this
not just a product but also the retail. The future of Raymond retail is going to be a store
with very different kind of look, feel, ambience and experiential including the technology
integration that is going to happen. In Park Avenue we are taking fashion formal position
there. Again we are going behind wardrobes the big change that you would likely to see
next season as we go. It will be representation of the Park Avenue dress casual the casual
kind of Park Avenue. There is already a new advertising on air right now, which actually
clarifies the brand position of Park Avenue, which actually showcases the entire wardrobe
not just in fact we are looking a larger piece of the pie including accessories which you
mentioned and FMCG and deodorants and how would bring this pool, Park Avenue Male
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which is more like to work hard and place order kind of a position if I have to put in a very
generic way. So that is really the Park Avenue position, which is happening. A little more
agile, contemporary younger and less in terms of the scale when you see the classic heritage
of Raymond this is going to be a different cut of the brand. On ColorPlus we are focused
very clearly on three fundamental functional filters. One is color, second is craftsmanship
and third is comfort. So that was three Cs for ColorPlus. Again there is a huge campaign
actually currently on air and you would seen may be one or three or may be two out of thee
commercials running there. All three of them are in air, one is on comfort, one is
craftsmanship and one is on color and on the color when we talk in ColorPlus is not there is
a traditional definition of color but I am talk about bits, then I talk about 20 shades of bits
and that is way difference to the customers. So that is the third brand, which is purely going
to focus on smart casual segment. It will be cut above in terms of presentation when it
comes on these three particular filters, functional filters. The focus here it is going to be
hardest. It is going to be the product excellence when it comes to smart casual products
there. Our Parx, which is our fourth product, we are evaluating whether it is casual brand. It
is a fashion casual space that you wanting to occupy. It is much younger brand with 18 to
22 years kind of brand. It is largely knitwear & Denims. It is a huge value in terms of price
point, a sweet price point and utility of the fabrics that we are going to sell in this brand.
We will be contemplating the channel for this clearly cannot be exclusive brand channel. It
needs to go through very large portion through digital and through multibrand or more
profitable channel mix because you are going to having a very sweet price point on this
one. So each of the four brands very, very sharp positioning, the whole value chain from
consumption to presentation or the procurement of raw material to presentation the
customer and the consumption of the product will have its unique cut of a brand blend,
which will define the future of the brands as we go ahead.
Abhishekh Rangnathan: That is good.
Moderator: Thank you. The next question is from the line of Nirav Savai from ICICI Securities. Please
go ahead.
Nirav Savai: Thanks for the opportunity. Sir I have got couple of questions. First one is what can be the
impact of TPP agreement. Now most of your imports comprise of wool. So if you can just
throw some light on that?
Sanjay Behl: TPP is unlikely to start immediately in terms of import of wool because TPP does not cover
Australia and it is because it is a good channel and most of our wool is coming from one
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country, which is Australia. So TPP impact the larger global balance of export and makes
Vietnam that is what I am going to articulate is that it makes Vietnam a preferred
destination of imports for US and Japan relative to China which basically mean that if you
produce the garment in Vietnam it gets lesser duty landing in US and landing in Japan
versus the duty that today’s impose which is 25% to 30% depending on what garment are
you doing from India to US. If that becomes a competitive advantage that Vietnam is going
to get versus the China or in India then most of the sourcing gets build from India to
possibly Vietnam. So it is the export part of the component, which is, rather input part and
the output part, which is under little, bit of a possible risks today if TPP coming into the
play.
Nirav Savai: So you are saying the export business might impact?
Sanjay Behl: Correct absolutely because your export competitiveness for the industry as a result of TPP
may change in terms of the sourcing balance the way the world is currently structured and
that could happen at the end of 2016. The TPP is likely to get implemented in end of 2016
or 2017 but that is still about a year and a half away from where we are sitting. So what we
are doing just very quickly in terms of trying to counter that is I think last time also we said
of this front we already have it in the statement there we are taking the manufacturing
offshore out of India. We have taken a decision that we are going to be putting or fairly
large capacity in one of the African countries which is Ethiopia and that would that has a
10-year contract signed in terms of bipartite country contract of zero duty between US and
Ethiopia, Europe and Ethiopia and Japan has preferential duty from Ethiopia. So by having
a sourcing destination for these countries in that and for having a manufacturing destination
for Raymond there for garmenting we would derisk our kind of a model as we go forward
for the next five to 10-year perspective.
Moderator: Thank you. Ladies and gentlemen that was the last question. I would now like to hand the
floor over to Mr. Sreekanth P.V.S for closing comments.
Sreekanth P.V.S: Thank you everyone for joining us on the call.
Moderator: Ladies and gentlemen with that we conclude this conference. Thank you for joining us. You
may now disconnect your lines.