Is Raymond's Future Hanging By A Thread?

BUSINESS GROUP
Is Raymond's Future Hanging
By A Thread?

Sell steel and cement. Even cosmetics. Not synthetics. For, textiles maketh Gautam Singhania the Complete CEO.

By R. Sriram

G. Singhania, CEO, Raymond: "Readymades is the future of textiles" His screen-saver sports Marilyn Monroe, his office in Worli (Mumbai) gleams in granite and marble, and his showcase is decked with models of the latest choppers and aeroplanes. But the 33-year-old Gautam Singhania's world has changed. For one who makes no secret of his love for racing, Singhania will now have to manoeuvre tricky corners of a different kind.

In the lobby waits 52-year-old Shitin Desai, the Vice-Chairman of investment bank DSP Merrill Lynch. Ostensibly, Desai is there to congratulate Gautam, who was appointed the Managing Director of Raymond, the flagship of the Rs 2,111-crore Raymond Group, on June 29, 1999. The courtesy call is all very well, but Desai, like many other investment bankers, is eyeing the prospects of business from Raymond's proposed restructuring.

Hurt by expensive, unrelated diversifications in the past, the Raymond (or JK West) Group has been trying to re-focus for a couple of years now. Singhania wants to kick-start the process, prune losses, and consolidate the group's core business of textiles. How?

Says Gautam: ''The problem area is steel. It is not doing well due to difficult market conditions. We want to divest.''

He also adds: ''We may sell cement, but at a price. The business has a certain value.''

And then he intones: ''If we find a good professional partner for JK Helene Curtis (his male cosmetics business), we are willing to offer it some stake in the business.''

Finally, in response to the buzz that the loss-making Raymond Synthetics will be the first business to be sold to Reliance Industries, Gautam counters: ''It is a good business. Prices are moving up, and we hope to rectify the situation in some time.''

Most of Raymond's businesses are in terrible shape. Apart from steel, the group's polyester and denim businesses are making losses. The cement business is barely afloat. At the same time, Raymond is staring at a paradigm shift in its core textiles business. Clearly, Gautam has to act-and fast. And his choices are limited. At best, the group must follow its policy of disinvestment. For survival.

But that is exactly what Gautam, and his father, Vijaypat Singhania, 61 (his elder son, Madhupati, 42, has become a non-resident Indian), have been trying to achieve for the last 2 years. ''At the right price, any of my businesses could be up for sale,'' Vijaypat Singhania disclosed to BT in December, 1997. In April, 1998, he took a step forward by agreeing to transfer the steel business to a 74:26 joint venture with the German steel major, Thyssen, for Rs 406 crore. But, 3 months later, the deal fell through. Differences over pricing and valuation forced Raymond to relaunch its hunt for partners.

In the meantime, the group has slid further into a financial mess. Flagship Raymond's Return On Capital Employed (ROCE) in 1998-99 was just 8.50 per cent. The company has debts of Rs 905.03 crore, most of it is thanks to the Rs 600-crore steel project completed in 1995-96. In 1998-99, Raymond's interest cost was Rs 114.01 crore. And the loss-making Raymond Synthetics (accumulated losses: Rs 62.47 crore) also has a staggering interest cost of Rs 48.30 crore.

Given that the steel and cement divisions were part of the commodity businesses worst-hit by the recession, Gautam has his work cut out for him. While he refused to disclose the names of companies he was talking to for the steel division, BT learns that Thyssen is still in the reckoning. But at what price? The steel industry is going through a tight financial squeeze. Moreover, Raymond makes silicon steel, mainly used in the power industry, which hasn't really taken off thus far.

Ditto with cement. Located in Bilaspur (Madhya Pradesh), Raymond Cement has been struggling to keep its head above water for the last 2 years. In 1998-99, production dropped from 1.90 million tonnes to 1.50 million tonnes, and so did turnover from Rs 350.87 crore to Rs 327.58 crore. Over-supply in the region-Madhya Pradesh consumed 5.10 million tonnes of cement last year, while its production was 20 million tonnes-has hurt profitability.

No wonder buyers are proving hard to get. Last year, Raymond was close to striking a deal with the British cement giant, Blue Circle, but it did not go through. This year, ABN AMRO Bank was hired to bolster Raymond's efforts-it got few unviable bids. The problem is Raymond's asking-price, which BT learns is between Rs 400 crore and Rs 450 crore, which many companies have found steep. Raymond may now lower its price to Rs 300 crore apiece for the cement and steel plants.

Raymond Synthetics, which has a capacity to make 66,000 tonnes of polyester filament yarn at its plant in Allahabad (Uttar Pradesh), is another headache. While the unit is not an integrated one, the consuming markets are situated in faraway Gujarat and Maharashtra. But the group insists it will retain this business. Affirms Pradeep Bhandari, 44, Veep (Finance), Raymond: ''Polyester is the future in India.''

That leaves the textiles business, the bread-winner for the group, contributing nearly 40 per cent to the turnover. In terms of cost-leadership, economies of scale, and brand power, Raymond's textiles division-which has the capacity to produce 22 million metres of fabric per annum-has proved to be competitive. But growth-rates have been dipping. From a heady 12-15 per cent in 1992-95, growth last year was a paltry 2-3 per cent. The denim business is also in trouble; Calitri of Italy pulled out of the venture last year, leaving Raymond in charge. Last year, Raymond Calitri posted net losses of Rs 19.71 crore which, together with 1997-98 losses of Rs 23.03 crore, eroded its net worth.

Clearly, Raymond has to march into readymades. Singhania admits the market is changing. ''People do not have the time to get their clothes stitched. They are moving to readymades,'' he says. ''It is quite a profitable business. I don't think companies have a choice nowadays,'' adds V. Ramanan, 41, a textile analyst at BNP Prime Peregrine. Against the fabric market's 2-3 per cent, the readymades business is growing at 12-15 per cent per annum. Over the next 3 years, Singhania expects the contribution from readymades to rise from the current 3.17 per cent of textile sales to 25 per cent.

In March, 1999, Raymond finally introduced Parx-a brand of cotton and denim readymades. Explains Singhania: ''With the launch of Parx, we will cater to 3 distinct segments with different brands: the basic fabrics market with Raymond, the executive shirts brand in Park Avenue, and the casual-wear and readymade brand in Parx.''

But Raymond has a long way to go. The readymades businesses of Arvind Mills (Arrow, Excalibur, Ruf-And-Tuf, and Newport) and Coates Viyella (Van Heusen, Louis Phillippe, Allen Solly, and Peter England), are estimated to be over Rs 300 crore each in turnover. It also faces competition from smaller brands, like SM Garments' ColorPlus. In contrast, Park Avenue's annual sales are Rs 67.11 crore. With this level of competition, the Raymond Group will have to increase the level of advertising noise to create a brand image.

This will require funds. And the sale of the steel and cement divisions, and JK Helene Curtis will help Raymond retire a portion of its debt and improve its ROCE. So, Gautam's calibre won't be tested on how well he can grow the Raymond Group, but how fast he can prune it. But then, pruning times is something that a car-racer like Gautam should be comfortable with.

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