Raymond International Textiles

Globalization within Emerging Markets

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 Case Outline

• Background: Textile Industry & India

• Raymond: Company & Expansion Strategy

• Country Analysis for the Manufacturing Site Location

• Investment Project Evaluation

• Proposed Case Solution

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Background on the Textile Industry

January 2005 – global markets with textile and apparel

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

World textile and apparel exports projected to grow from $166

billion (2000) to $248 billion (2008)
Expected market trends 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 competencies Success = Low input cost base + high productivity + improved
for globalizing textile quality + transportation infrastructure for fast shipment
industry

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

Competitive position in Textiles

+ 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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Case Outline

• Background: Textile Industry & India

• Raymond: Company & Expansion Strategy

• Country Analysis for the Manufacturing Site Location

• Investment Project Evaluation

• Proposed Case Solution

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

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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Case Outline

• Background: Textile Industry & India

• Raymond: Company & Expansion Strategy

• Country Analysis for the Manufacturing Site Location

• Investment Project Evaluation

• Proposed Case Solution

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Raymond: Global Value Chain & Location Countries

Japan, Korea and USA are

major export markets for
worsted fabric converted
into apparel

Australia is the major

Raymond evaluates Thailand, worldwide producer of
Malaysia and China to select raw wool
location for its worsted fabric
production facility

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Country Selection Criteria
China Malaysia Thailand

Business environment

Fiscal incentives

Flexibility of labor

Infrastructure facilities

Clarity in policies

Political risk

Currency risk
Best
Economic stability
Better
Good
Domestic market-worsted

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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Case Outline

• Background: Textile Industry & India

• Raymond: Company & Expansion Strategy

• Country Analysis for the Manufacturing Site Location

• Investment Project Evaluation

• Proposed Case Solution

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Investment Project - Project Description
The 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

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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Capital Requirements and Financing Structure

Capital Requirements THB 1.75 B Sources of Financing:

5% 50% Equity, 50% Debt
7% 18%
Land and Buildings 25%
3%
Plant and
Equipament Equity
Pre Operative
Expenses 50%
Working Capital USD debt

Contigencies THB Debt

25%
67%

• Company set up as 100% subsidiary • THB 0.873 B will be borrowed from

incorporated in Thailand (Raymond local banks (50% USD, 50% THB)
Textiles Thailand Limited) • Interest rates ranging from 5% (USD)
• 67% capital expenditures (PP&E) in to 6% (THB)
USD, the rest spent in THB • The term loans to be re-paid in 8 half-
• Capital expenditure accumulated yearly installments after a 2 year
during operation’s set up moratorium
• No parent guarantee will be provided

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Raymond’s Project Evaluation

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

Financial projections Year 0 Year 1 Year 2 Year 3 Year 4

Revenue 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 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

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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Case Outline

• Background: Textile Industry & India

• Raymond: Company & Expansion Strategy

• Country Analysis for the Manufacturing Site Location

• Investment Project Evaluation

• Proposed Case Solution

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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Cost of Equity Calculation

1 Calculation of US cost of equity Assumptions:

Leverage: D/(D+E) 0.00 0.50 • Beta for Textile & Apparel
Unlevered Textile & Apparel Beta 0.630 0.630 based on average of
Levered T&A Beta 0.630 0.911 S&P500 (0.47) and MSCI
US based, US$ denominated 6.40% 7.52% World (0.786) as of
December 1999
2 Calculation of Thai cost of equity • 5-year US Treasury rate
ICCRC rating of USA 93.7 93.7 (3.88% nominal) used as a
ICCRC rating of Thailand 59.5 59.5 risk free-rate
US$ cost of equity before risk mitigation 14.44% 15.56% • US market risk premium
US$ cost of equity after risk mitigation 12.79% 13.91% assumed at 4.0%
Inflation differential (Thai - US) 0.20% 0.20% • Thai inflation forecast 2.4%
THB cost of equity - nominal 12.99% 14.11% (consensus estimates
2004-2007 average)
3 Conversion to real cost of equity • US inflation forecast 2.2%
Thailand's inflation 2.4% 2.4% (EIU)
THB cost of equity - real 10.59% 11.71%

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Valuation – WACC Approach
FCFU calculation Year 0 Year 1 Year 2
Profit before tax 12,669 155,287
• STEP 1: Calculate FCFU
Add back: interest 60,130 60,130
Profit before interest and tax (PBIT) 72,799 215,417 (free-cash flow to unlevered
Profit after tax (PIT) 72,799 215,417 firm) Based on provided pro
Add back: depreciation 127,205 127,205 forma statements and
Add back: preliminary expenses 4,473 4,473
CFO - cash flow from operations 204,477 347,095
CAPEX forecasts

Capital Expenditure (1,571,982) - -

Increase in working capital (174,018) (113,283) (16,003)
• STEP 2: Calculate WACC
CFI - cash flow from investment (1,746,000) (113,283) (16,003) for every year based on
current capital structure –
FCFU (1,746,000) 91,194 331,092 changing due to debt
WACC calculation Year 0 Year 1 Year 2
repayment !!!
Debt/(Debt+Equity) - assumes dividend repatriation 0.50 0.50
Effective tax rate 0.0% 0.0%
Cost of Debt 5.50% 5.50%
• STEP 3: Discount FCFU
Cost of Equity 11.71% 11.71% backward (right to left) to
WACC - real 8.61% 8.61% obtain projects NPV of THB
350 million ($8 mil.)
NPV Summary
NPV 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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Valuation – Sensitivity Analysis

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

If effective THB selling price decreases by 5% on

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

If effective cost of imported inputs (wool) increases by

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

If Thai Baht effectively appreciates by 7.6% on average

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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Real Options – Identification and Discussion
Type of option Analysis Value

Option to expand / • The company owns additional 20 acres of land for High
extend future capacity expansion within the zone
• Plant’s lifetime can be extended beyond the
projected 13 years with investment upgrades

Growth option • Long term growth strategy of establishing presence

in the Asian markets. Perception of “Made in High
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)
Operating scale / to meet fluctuations in demand Medium
utilization option
• Machinery is dedicated to specific micron diameters,
only partial product modifications possible, e.g. dying
Output mix option / Low
product flexibility

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 Currency Risk Mitigation Measures
- 400,000 800,000 1,200,000

Inflows

Currency risk mitigation

US$ THB
measures:
Outflows

• Increase US$ denominated

share of loans (up to 100%)
Revenues $ Revenues THB Expenses $
Loan repayment $ Expenses THB Loan repayment THB
• Maintain the US$ debt for a
Covered foreing currency exposure
longer period
50%
45%
40% • Hedge open position using
35%
30%
fixed-term currency contracts
25%
20%
15%
10%
5%
0%
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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 THANK YOU !!!

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