Considering Raymond's turnaround, robust business model and strong domestic demand, the stock looks attractive.

Better-than-expected fourth quarter results and a turnaround performance in FY11, may restore confidence in Raymond?s retail business model. Long-term investors can consider buying the stock at the current levels.

Business
Raymond is one of India?s largest and oldest clothing and apparel companies. In the last fiscal, it exited its loss-making overseas operations and shut down its Thane plant. Its strong brand ?Raymond? has allowed it to bypass wholesalers and increase its retail presence. The company has built a robust distribution network, reaching out to over 400 towns. Most of these stores are franchisees and the inventory is bought out by these franchisees without any recourse to the company. This makes it an asset light model.

Investment Rationale
In FY11, Raymond showed a good growth momentum across segments. A strong brand and the successful opening of 104 new stores in the last fiscal helped the company post a net sales growth of 21%. On the back of a good response in the rural market, the company is planning to open 150 more stores in tier III, IV and V cities in the next one to one-a-half years which will boost its earnings. The monetisation of its 120-acre real estate property in Thane, a suburb near Mumbai, can be a potential catalyst, for which the management is exploring various options.

Financials
Last fiscal was a turnaround year for the company as it reported a profit of Rs 55 crore after two consecutive years of losses. Its net sales at Rs 3,035.9 were also 21% higher than the previous year, but margins were a little lower than expected due to high input ? cotton and wool ? prices for its shirting, denim and apparel businesses. In FY11, the operating margin stood at 8% and the net profit margin was 1.8%. Due to high raw material prices, margins will continue to remain under pressure, but the management is confident that it will be able to pass on the burden to consumers.

Concerns
In FY11, raw materials were more than 30% of sales. Rapid increase in prices of raw materials such as cotton and wool could increase this further. Unless the company passes on the cost hikes immediately to consumers, margins would get squeezed in the near term. Raymond has a denim manufacturing plant in Romania, which is now loss-making due to weak demand in Europe. If Europe?s economic prospects continue to be weak, this subsidiary will continue to report losses.

Valuations
The stock currently trades at 37 times its FY11 earnings. Considering its turnaround, robust business model and strong domestic demand, we estimate earnings to double in FY12 from the low base of last year. This means the stock is trading at 17.4 times estimated FY12 earnings. In addition, the sale of its 120-acre land in Thane would bring in cash of Rs 720 crore, assuming a conservative sale price of Rs 6 crore per acre. This would be an additional Rs 117 per share unlocking value.