Markets
Can Raymond’s stock triple to match Vedant Fashions' valuation?
Summary
- Raymond's P/E multiple lags Vedant Fashions', but with the upcoming listing of its subsidiaries, some value unlocking is expected. However, whether its stock can triple to match Vedant's higher multiples remains uncertain.
Berkshire Hathaway started as a struggling textile company until Warren Buffett took it over in 1965. He transformed it into a holding company with a portfolio of successful businesses. However, Buffett often referred to his investment in Berkshire as one of his costliest mistakes. He noted that despite significant investments in capital expenditures and technology, textile companies are often like "chronically leaking boats."
The nature of the textile business doesn't change significantly over time, as they consume capital throughout their lifetime and reward investors in only short, intermittent bursts.
Raymond Ltd, a key player in the Indian textile space, will complete 100 years of existence in 2025. Having been listed for over four decades, the stock has delivered a compounded rate of return of 22% over the past decade. However, without the massive 1,085%+ returns in the last three years, investors would have seen virtually no returns during this period.
Meanwhile, its younger rival, Vedant Fashions, has been listed for only two years, so the stock's performance in a downcycle is yet to be tested. It has returned 40% since its listing, though its high valuation of over 75x has raised concerns among investors.
It's important to distinguish Raymond and Vedant Fashions from ordinary textile companies, such as yarn makers or contract manufacturers. Both Raymond and Vedant Fashions boast strong brands in men's wear and robust retail franchises. By the end of FY24, both had debt-to-equity ratios of less than 1, making them very different from typical low-margin, high-debt textile companies.
It's worth noting that there have been multibagger success stories like Page Industries, where a strong brand, pricing power, and a quality moat have enabled textile manufacturers to generate wealth. However, these instances are rare
Global textile industry shifts
Now, to evaluate what kind of textile business can continue to thrive despite the inherent challenges, let us consider the dynamics of the industry.
Since the pandemic, global textile brands have reconsidered their reliance on outsourced manufacturers, initially prompted by the China+1 policy. Political instability in Bangladesh has further triggered a shift in global textile supply chains, with major brands now exploring other countries like India, Vietnam, Cambodia, and Sri Lanka.
The textile industry has been operating at a 72-75% spinning capacity with muted demand growth. Pricing power may only return once capacity utilization reaches 80-90%. Meanwhile, India remains a leading supplier of terry towels and bedsheets to the US, with a market share of over 40%. Yet, challenges like the Red Sea crisis, soaring freight costs, and delayed shipments have affected revenues.
Navigating growth and restructuring
The challenges facing Indian textile makers continue to threaten margins and growth prospects. However, Raymond and Vedant Fashions have successfully navigated these headwinds in recent times. Raymond, part of the Singhania group, manages a diverse portfolio that spans engineering, aerospace, fashion, and real estate.
As part of its ongoing restructuring, subsidiaries Raymond Lifestyle (worsted fabric) and Raymond Realty are set to debut independently on the stock exchange. This restructuring aims to dismantle Raymond’s conglomerate structure, which has led to 'subdued valuations' for its businesses.
Raymond Lifestyle, known for its premium suits and wedding wear, is focusing on expanding in the menswear market, leveraging India’s massive wedding industry to drive its next growth phase. Once listed, Raymond Lifestyle will compete with rivals like Vedant Fashions, the owner of the popular wedding wear brand Manyavar, and Aditya Birla Fashion and Retail. While Raymond leads in men's formal wear, its competitors dominate the celebration wear segment.
Vedant Fashions primarily caters to the Indian celebration wear market and holds a dominant position in the unorganized wedding wear sector with brands for both men and women. Raymond, on the other hand, operates a vast retail network with 1,590 stores in India and 49 overseas stores across nine countries. It is also one of the largest vertically integrated manufacturers of worsted suiting fabric globally.
In 2023, Raymond sold its FMCG business, which included the Park Avenue brand, to Godrej Consumer, using the proceeds to reduce debt and generate cash flow. Unlike Raymond, Vedant Fashions outsources much of its manufacturing but retains control over critical aspects like design, fabric procurement, and quality control. The company operates an asset-light franchise model, securing 35-40% of receivables through security deposits from franchisees. This approach has enabled Vedant to maintain a lean balance sheet, while Raymond continues to carry some debt.
Raymond’s lifestyle business generates cash, while its real estate segment is more capital-intensive. Once the subsidiaries are listed separately, the distinct nature of each business will be more clearly reflected in their financial fundamentals.
Valuation and investor considerations
The stark difference in the P/E multiples of Raymond and Vedant Fashions has caught the attention of investors.
Vedant Fashions' valuation, nearly three times that of Raymond, should not be viewed as an anomaly. Investors speculating that Raymond’s P/E multiple of 25x could triple to match Vedant’s nearly 80x multiple are taking on considerable risk.
While the separate listing of Raymond’s subsidiaries will likely unlock some value, it would be prudent to wait for Raymond Lifestyle's financial performance post-IPO before expecting any significant valuation rerating.
Happy Investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
