Raymond Shares Hit Record After Jefferies, Motilal Oswal Initiate Coverage With 'Buy'

Shares of Raymond Ltd. hit an all-time high on Tuesday after Jefferies Financial Group Inc. and Motilal Oswal Financial Services Ltd. initiated coverage on the stock with a 'buy' rating.

Jefferies initiated a 'buy' with a price target of Rs 2,600 apiece, implying an upside of 28% over the next 12 months. Motilal Oswal also had a similar target price.

The coverage was initiated after the established apparel brand decided to demerge its real-estate and lifestyle businesses and sold its FMCG business, operated by Raymond Consumer Care, to Godrej Consumer Products Ltd.

The management decided to restructure the business in a bid to unlock value and have a greater focus on the businesses separately. Raymond also infused cash of Rs 2,200 crore, including the promoter's stake in Raymond Consumer Care, into the group.

• Expects Raymond to grow its revenue at a 13% compound annual growth rate over the financial year 2023–26, with modest margin expansion. This will likely translate to a 16% Ebitda CAGR.

• Free cash-flow generation improved through better profitability and improvement in the working capital cycle.

• Expects the apparel segment to grow in double digits in the medium term.

• With surplus land under its belt, Raymond forayed into the real estate business in 2019. Plans are underway to develop its 100-acre land parcel in Thane in the first phase. The engineering business, encompassing tools and hardware, contributes 9% to the Ebitda.

• A slowdown in demand, a sharp rise in key input prices, and an increase in competition can risk the brokerage's price target.

• In the long term, the brokerage expects Raymond to deliver healthy earnings growth, which can drive a re-rating, especially after the demerger of lifestyle businesses.

• As per the base-case scenario, Jefferies expects Raymond to expand its franchise and assume an 8% revenue CAGR in the branded textiles category, with a 30-basis-point margin expansion over fiscal 2023–26.

• With a revenue base of Rs 1,300 crore, the brokerage expects a 20% revenue CAGR over fiscal 2023–27 by adding a net 150 exclusive brand outlets annually, with a focus on the capex-light franchisee model for Raymond, Park Avenue, ColorPlus, Ethnix, and other product extensions.

• It termed the branded textile business a "cash cow" that is expected to register a 7% revenue and 6% Ebitda CAGR over fiscal 2023–27. The garment segment holds a strategic advantage with the China+1 strategy as most apparel brands seek to diversify.

• The brokerage also forecasts a 10% revenue CAGR over fiscal 2023–27, supported by new capacity expansion.

• Motilal Oswal sees a large opportunity in the real-estate business with a healthy balance sheet, strong cash flow potential, and emphasis on capital allocation to aid in achieving the annual project addition targets of Rs 2,500–3000 crore.

• Expects cumulative operating cash flow of Rs 1,300 crore over fiscal 2023–25. After adjusting for cumulative capex of Rs 400 crore, it should generate a healthy cumulative free cash flow of Rs 900 crore over fiscal 2024–25.

• Motilal Oswal predicts an improvement in the overall Ebitda margin, projecting a 40-basis-point increase to 15% over fiscal 2023–27.

• The combined value of real estate, engineering, and lifestyle businesses works out to be Rs 2,600 per share.

Shares of Raymond surged 10.63% to Rs 2,188 apiece, compared to a 0.28% advance in the benchmark NSE Nifty 50 as of 11.57 a.m. The share price advanced as much as 13.26% intraday to hit a record high of Rs 2,240 per share.

The stock has risen 49.15% on a year-to-date basis. The total traded volume stood at 24 times its 30-day average. The relative strength index was at 76, implying that the stock may be overbought.

All seven analysts tracking Raymond maintain a 'buy' rating, according to Bloomberg data. The average of 12-month price targets given by analysts implies an upside of 10.7%.