Raymond Presentation Final

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Raymond International Textiles

Globalization within Emerging Markets

2Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha

Case Outline

• Background: Textile Industry & India

• Raymond: Company & Expansion Strategy

• Country Analysis for the Manufacturing Site Location

• Investment Project Evaluation

• Proposed Case Solution


Background on the Textile Industry

Market liberalizationJanuary 2005 – global markets with textile and apparel

liberalized when World Trade Organization’s Arrangement on Textiles and Clothing expired

Expected market trends

World textile and apparel exports projected to grow from $166 billion (2000) to $248 billion (2008)

China – will grow significantly (CAGR +17%) increasing its overall share of world exports from 22% to 50%

Rest of Asia – stagnation (CAGR -1%) share from 32% to 21%Rest of the world – stagnation share from 46% to 29%

Required competenciesfor globalizing textile industry

Success = Low input cost base + high productivity + improved quality + transportation infrastructure for fast shipment


India – Country Background

• Sixth largest country and world’s most populous democracy• Three decades of socialist controls finally relaxed in late 80’s & 90’s spurring

foreign trade and investment • Current Prime Minister, Manmohan Singh, credited with the successful

implementation of wide-ranging economic reforms • Duties on capital-goods imports reduced further in Jan 2004 and Indian companies

now allowed to invest abroad up to their net worth. However, restrictions on capital outflows still exist

• Real GDP growth forecasted between 6-8% with inflation currently under control

+ large domestic market, tradition, skilled employees

+ abundant raw materials (cotton)

- regulation and taxes favor small-scale family workshops

- inflexible labor laws (government approval needed for firing)

- underdeveloped transportation infrastructure (ports)

- production scattered all over India complicating ‘fast’ exports

Competitive position in Textiles


Case Outline







Raymond - Company Background

• Public company incorporated in India in 1925.• Revenues for 2003-04 were $300 million with 54% of its revenues

from Raymond Textile.• Manufactures wool and wool blended fabric. Raymond Textile is

the 3rd largest producer of worsted fabric in the world.• 60% domestic market share.Demand mainly from customized

tailored garments customer and in-house demand from the garments division.

• Currently exports 11% of its production. Demand from large garment manufacturers and retail stores which outsource fabricating.

• Manufacturing facilities comprise 3 integrated plants located within India.

• Distribution through 310 exclusive retail stores, 30,000 multi-brand outlets and 100 wholesale dealers.


Company’s Foreign Expansion Strategy

Why Exports?Export target of 32% of production by 2007.• Stagnant domestic market in terms of market size and market share

constraining future growth.• Lowering of import restrictions in January, 2005 would lead to

increased competition domestically and make exports more competitive.

Why foreign investment?• Increasing price competitiveness of products

– Export prices are lower than domestic prices where Raymond commands a high premium due to its brand recognition.

– Increased competition from China has driven export prices down.• High operating costs and longer delivery lead times in India • Develop overseas manufacturing expertise as a long term strategy.• Diversify operational risk – Currently 100% in India• Access to ASEAN markets


Case Outline







Raymond evaluates Thailand, Malaysia and China to select location for its worsted fabric

production facility

Australia is the major worldwide producer of

raw wool

Japan, Korea and USA are major export markets for worsted fabric converted

into apparel

Raymond: Global Value Chain & Location Countries


ThailandMalaysiaChina

Business environment

Economic stability

Domestic market-worsted

Flexibility of labor

Infrastructure facilities

Clarity in policies

Political risk

Currency risk

Fiscal incentives

BestBetterGood

Country Selection Criteria

Adding Cultural Fit to the criteria above Thailand seemed to be the best location for the project


Case Outline







Investment Project - Project DescriptionThe proposed project will be the first of its kind in the nature of a

composite and vertically integrated worsted textile mill in Thailand.

Facility:

Fully integrated mill including in its scope production/process facilities for wool scouring, wool combing, dyeing, spinning, weaving and finishing fabrics.

Products: 4 million meters of worsted suiting fabrics for export All-Wool, Wool-Rich and Polyester-Wool blended fabrics of very fine count. Product Mix include 70% top-dyed an 30% piece-dyed materials

Location: Large, new, private industrial park at 140 KM northeast of Bangkok

Capacity: 70% on the 1st year, 100% 2nd year onwards

Inputs: Major raw materials are imported, manpower and utilities are local


Investment Project - Project Description

Investment incentives:

Zero import duty on machinery as well as significant duty waiver/reduction for raw material imports

Income tax exemption in the first 8 years followed by 50% reduction in the next 5 years

No withholding tax on dividends for first 8 years followed by 50% reduction in the next 5 years

Guarantee from the government against nationalization and price control


Capital Requirements and Financing Structure

• Company set up as 100% subsidiary incorporated in Thailand (Raymond Textiles Thailand Limited)

• 67% capital expenditures (PP&E) in USD, the rest spent in THB

• Capital expenditure accumulated during operation’s set up

Capital Requirements THB 1.75 B

18%

67%

3%

7% 5%Land and Buildings

Plant andEquipamentPre OperativeExpensesWorking Capital

Contigencies

Sources of Financing: 50% Equity, 50% Debt

50%

25%

25%

Equity

USD debt

THB Debt

• THB 0.873 B will be borrowed from local banks (50% USD, 50% THB)

• Interest rates ranging from 5% (USD) to 6% (THB)

• The term loans to be re-paid in 8 half-yearly installments after a 2 year moratorium

• No parent guarantee will be provided


Raymond’s Project Evaluation

Financial projections Year 0 Year 1 Year 2 Year 3 Year 4Revenue US$ 657,954 1,066,791 1,066,791 1,066,791 Raw material cost Domestic THB (3,750) (5,357) (5,357) (5,357) Foreign AUS$ (254,909) (364,156) (364,156) (364,156) Labor costs Domestic THB (61,527) (75,553) (75,553) (75,553) Foreign Ind.Rupee (28,800) (28,800) (28,800) (28,800) Public Utilities THB (51,134) (73,049) (73,049) (73,049) Depreciation THB (127,205) (127,205) (127,205) (132,205) SG&A THB (74,016) (104,483) (104,483) (104,483) Interest charges (60,130) (60,130) (56,856) (43,761) Miscellaneous (fees, other manuf.) 16,186 (72,771) (72,771) (72,771) Total cost (645,285) (911,504) (908,230) (900,135)

Profit before tax 12,669 155,287 158,561 166,656 Tax (@ 15% from year 9) - - - - Profit after tax 12,669 155,287 158,561 166,656

• STEP 1: Raymond laid out financial projections (in real terms) till Year 13

• STEP 2: Project’s real IRR of 12.86% was calculated

• STEP 3: The company compared IRR with its internal hurdle rate - undifferentiated across projects or geographies


Decision at Hand

Should Raymond go ahead with the proposed worsted textile project in Thailand?

Does the project evaluation reflect all relevant benefits and risks?


Case Outline





• Proposed Case Solution– Cost of Equity Calculation– Valuation: WACC Approach– Valuation: Sensitivity Analysis– Real Options– Currency Risk Mitigation Measures


Cost of Equity Calculation

Assumptions:• Beta for Textile & Apparel

based on average of S&P500 (0.47) and MSCI World (0.786) as of December 1999

• 5-year US Treasury rate (3.88% nominal) used as a risk free-rate

• US market risk premium assumed at 4.0%

• Thai inflation forecast 2.4% (consensus estimates 2004-2007 average)

• US inflation forecast 2.2% (EIU)

Calculation of US cost of equityLeverage: D/(D+E) 0.00 0.50Unlevered Textile & Apparel Beta 0.630 0.630Levered T&A Beta 0.630 0.911US based, US$ denominated 6.40% 7.52%

Calculation of Thai cost of equityICCRC rating of USA 93.7 93.7ICCRC rating of Thailand 59.5 59.5US$ cost of equity before risk mitigation 14.44% 15.56%US$ cost of equity after risk mitigation 12.79% 13.91%Inflation differential (Thai - US) 0.20% 0.20%THB cost of equity - nominal 12.99% 14.11%

Conversion to real cost of equityThailand's inflation 2.4% 2.4%THB cost of equity - real 10.59% 11.71%

1

2

3


Valuation – WACC Approach

• STEP 1: Calculate FCFU (free-cash flow to unlevered firm) Based on provided pro forma statements and CAPEX forecasts

• STEP 2: Calculate WACC for every year based on current capital structure – changing due to debt repayment !!!

• STEP 3: Discount FCFU backward (right to left) to obtain projects NPV of THB 350 million ($8 mil.)

FCFU calculation Year 0 Year 1 Year 2Profit before tax 12,669 155,287 Add back: interest 60,130 60,130 Profit before interest and tax (PBIT) 72,799 215,417 Profit after tax (PIT) 72,799 215,417 Add back: depreciation 127,205 127,205 Add back: preliminary expenses 4,473 4,473 CFO - cash flow from operations 204,477 347,095

Capital Expenditure (1,571,982) - - Increase in working capital (174,018) (113,283) (16,003) CFI - cash flow from investment (1,746,000) (113,283) (16,003)

FCFU (1,746,000) 91,194 331,092

WACC calculation Year 0 Year 1 Year 2Debt/(Debt+Equity) - assumes dividend repatriation 0.50 0.50 Effective tax rate 0.0% 0.0%Cost of Debt 5.50% 5.50%Cost of Equity 11.71% 11.71%WACC - real 8.61% 8.61%

NPV SummaryNPV of FCFU at end of period 2,101,183 2,281,990 2,379,314 Year 0 investement outflow (1,746,000) Project's NPV 355,183


Valuation – Sensitivity Analysis

Value of investment incentives

• Tax holidays: 0% tax rate for 8 years and 15% for next 5 years 15% (regular rate is 30%)

• Raw material import tariff reduced from 30% to 1%

Without incentives project’s NPV = -THB 314 million, thus the value of incentives is about THB 670 million ($15 mil.)

Cost of inputsIf effective cost of imported inputs (wool) increases by

14.4% throughout projects lifetime, NPV will fall to THB 0

Selling priceIf effective THB selling price decreases by 5% on

average throughout project’s lifetime (13 years) its NPV will fall to THB 0

THB exchange rateIf Thai Baht effectively appreciates by 7.6% on average

throughout project’s lifetime, NPV will fall to THB 0


Real Options – Identification and Discussion

Type of option Analysis

Option to expand / extend

Growth option

Operating scale / utilization option

Output mix option / product flexibility

• The company owns additional 20 acres of land for future capacity expansion within the zone

• Plant’s lifetime can be extended beyond the projected 13 years with investment upgrades

• Long term growth strategy of establishing presence in the Asian markets. Perception of “Made in Thailand” better than “Made in India” due to lower costs and faster delivery time

• Producing outside India increases access to new markets (e.g. Pakistan) inaccessible directly due to trade embargos with India

• The company can change utilization of different production lines (different micron diameter features) to meet fluctuations in demand

• Machinery is dedicated to specific micron diameters, only partial product modifications possible, e.g. dying

Value

High

High

Medium

Low


- 400,000 800,000 1,200,000

Inflows

Outflows

Revenues $ Revenues THB Expenses $Loan repayment $ Expenses THB Loan repayment THB

Currency Risk Mitigation Measures

Currency risk mitigation measures:

• Increase US$ denominated share of loans (up to 100%)

• Maintain the US$ debt for a longer period

• Hedge open position using fixed-term currency contracts

US$ THB

Covered foreing currency exposure

0%5%

10%15%20%25%30%35%40%45%50%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7


THANK YOU !!!

Raymond Presentation Final

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