Buy Raymond Lifestyle Ltd For Target Rs.3,000 By Motilal Oswal Financial Services Ltd
Weak quarter; demand recovery to be in focus in 2H
* Raymond Lifestyle’s (RLL) 2Q revenue/EBITDA declined by 5%/17% YoY due to subdued discretionary demand. Higher depreciation and interest costs led to a 27% YoY decline in adjusted PAT.
* RLL’s net working capital (NWC) increased to 105 days (from 78 days as of Mar’24 end) as it stocked up inventory ahead of the festive and wedding season. This also led to RLL’s debt rising to INR5.7b from net cash of INR0.2b in FY24. The management expects NWC to normalize and RLL to attain net cash position by end-FY25.
* RLL has corrected ~30% from listing and is trading at a reasonable valuation (~25x FY26 P/E and 13x on FY26E pre-IND AS 116 EBITDA). The key near- to medium-term catalysts for re-rating are 1) growth recovery in 2H due to a higher number of wedding days and 2) RLL’s strategy of EBO expansion.
* Our FY25-26 revenue estimates are broadly unchanged, but we cut our FY26E EBITDA/PAT estimates by 7%/15% on weaker margin/higher interest costs. We build in a CAGR of 9-11% in revenue/EBITDA/PAT over FY24-27. We value RLL at a PE multiple of 30x on Dec’26E, resulting in a TP of INR3,000 per share, as our earnings cut is partly offset by rollforward. Reiterate BUY
Revenue/EBITDA down 5%/17% YoY on muted discretionary demand
* RLL’s consolidated revenue declined 5% YoY to INR17.1b on account of muted customer demand.
* RLL opened 53 new stores in 2Q (including 11 Ethnix by Raymond stores), taking the total retail store network to 1,592 (up 10% YoY). ? Gross profit declined 1% YoY to INR7.6b as gross margin expanded 210bp YoY to 44.7%
* EBITDA declined 17% YoY to INR2.1b on adverse operating leverage and higher employee costs (+9% YoY) and other expenses (+7% YoY). Margins contracted 190bp YoY to 12.6%.
* Depreciation and amortization rose 28% YoY, while finance costs jumped 24% YoY.
* Reported PAT plunged 70% YoY, dragged down by lower EBITDA/other income and higher D&A/finance costs.
* Further, RLL booked an exceptional item of ~INR0.6b pertaining to stamp duty on demerger. Adjusted PAT stood at INR1b, down 27% YoY.
* Net working capital days stood at 105 in 2QFY25 (vs. 78 at end-Mar’24) on account of inventory stocking in the retail and distribution network, ahead of the festive and wedding seasons.
* 1HFY25 FCF outflow was INR5.1b (vs. INR5.8b outflow YoY) as YoY lower OCF (~INR2b lower YoY) and higher capex (~INR0.5b higher) were offset by favorable working capital change (INR2b) and lower tax outgo (~INR1b).
* As a result, RLL’s net debt increased to INR5.7b from net cash of INR0.2b at end-Mar’24.
Highlights from the management commentary
* Demand outlook: 3Q is seeing robust demand with the onset of the festive and wedding seasons. RLL witnessed double-digit YoY growth during Diwali and expects the growth to remain robust in 2H on account of a higher number of wedding days.
* Ethnix by Raymond: The management expects the wedding wear industry to clock 12-13% growth p.a. Further, the industry is split nearly equally between branded and unbranded, with branded players growing at faster pace. RLL plans to increase the Ethnix store footprint to 300+ stores over the next 2-3 years (from ~136 stores currently) and expects to generate INR3.5b in annual revenue in the next few years.
* Working capital: NWC increase was primarily driven by inventory stocking ahead of the festive and wedding season. Further, the increase in debt was largely due to higher NWC, which should normalize by FY25 end.
Valuation and view
* RLL has corrected ~30% from listing and is trading at a reasonable valuation (~25x FY26 P/E and 13x on FY26E pre-IND AS 116 EBITDA) as compared to our coverage universe and other retail/discretionary consumption plays (~35-40x FY26E EV/EBITDA).
* A growth recovery in the branded apparels segment owing to a higher number of wedding days in 2H and RLL’s strategy of expanding EBOs remain the key near- to medium-term re-rating catalysts.
* Our FY25-26 revenue estimates are broadly unchanged, but we cut our FY26 EBITDA/PAT estimates by 7%/15% on weaker margin/higher interest costs. We build in a CAGR of 9-11% in revenue/EBITDA/PAT over FY24-27. We value RLL at a PE multiple of 30x on Dec’26E, resulting in a TP of INR3,000 per share, as our earnings cut is partly offset by roll-forward. Reiterate BUY
For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
