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Weak quarter; demand recovery key for re-rating

* Raymond Lifestyle (RLL) reported a weak 3Q with modest ~2% YoY revenue growth. EBITDA declined 37% YoY due to operating deleverage, higher ad spends in branded apparels and adverse segmental mix.

* RLL’s secondary sales were healthy, which led to: 1) a decline in the Net Working Capital (NWC) to 89 days (from 97 days in 2Q) and 2) a net cash balance of INR0.6b (vs. net debt of INR5.7b in 2Q).

* RLL has corrected ~33% in the last three months and is trading at reasonable valuations of ~24x FY26 P/E. However, we believe improvement in execution and sustained growth recovery remain the key for re-rating.

* We lower our FY25-26E revenue by 2-5%. However, our EBITDA cut is higher at ~14-19% as we now build in a gradual margin recovery.

* We value RLL at a PE multiple of 25x on Mar’27E to arrive at our TP of INR1,900 per share. We maintain BUY on RLL, primarily on reasonable valuations.

Below our conservative estimates due to weak margins

* Consolidated revenue was up by a modest 2% YoY at INR17.5b (2% miss).

* RLL opened 61 new stores (incl. 14 Ethnix by Raymond stores) in 3Q, bringing its total retail store network to 1,653 stores (up 9% YoY).

* Gross profit declined 5% YoY to INR7.5b (10% miss) as gross margin contracted 290bp YoY to 42.5% (350bp miss).

* EBITDA declined 37% YoY to INR1.8b (-16% QoQ, 26% miss) due to higher employee (+4% YoY) and other (+21% YoY) expenses.

* EBITDA margin contracted ~620bp YoY to 10.2% (~325bp miss).

* Depreciation and amortization rose 34% YoY, while finance cost jumped 24% YoY.

* Reported PAT declined 60% YoY due to lower EBITDA, higher D&A, and a higher tax rate.

* RLL has once again become net debt free with net cash of INR0.61b (vs. INR5.7b net debt in 2Q). This is driven by better secondary sales, which, thus, improved collections in 3QFY25.

* Further, RLL's net working capital improved to 89 days (vs. 97 days in 2Q).

Highlights from the management commentary

* Demand environment: The 3Q operating environment remained challenging, driven by a slowdown in urban discretionary spending. There has been no significant change in demand trends in January. However, early signs for next year have been positive from the trade channels.

* Secondary sales: Secondary sales were healthy, which led to improvement in collections. Further, bookings at retail channels have been positive and management expects FY26 to be a growth year for RLL.

* Growth strategy: RLL has a threefold strategy for growth: 1) premiumization in Branded Textiles, 2) ramp-up of Ethnix and foray into adjacencies (sleepwear and innerwear), and 3) customer acquisition in Garmenting.

* Margins: EBITDA margins were impacted by weak consumer demand, operating deleverage, higher ad spends in branded apparels, and an adverse segment mix (higher Garmenting and lower Branded Textiles). Management expects margins to gradually recover to ~15% on a sustainable basis once the headwinds and expansions stabilize.

Valuation and view

* RLL has corrected ~33% in the last three months and is trading at reasonable valuations of ~24x FY26 P/E.

* RLL’s focus on increasing its network footprint, ramping up Ethnix, and foray into new segments (inner-wear, sleepwear), along with tailwinds in Garmenting, remain the key growth driver. However, we believe improvement in execution and sustained growth recovery remain the key for re-rating.

* We lower our FY25-26E revenue by 2-5%. However, our EBITDA cut is higher at ~14-19% as we now build in a gradual margin recovery.

* We value RLL at a PE multiple of 25x on Mar’27E to arrive at our TP of INR1,900 per share. We maintain BUY on RLL, primarily on reasonable valuations.

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