Raymond International Textiles

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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

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Background on the Textile Industry
Market liberalization

• January 2005 global markets with textile and
  apparel liberalized when World Trade
  Organizations Arrangement on Textiles and
  Clothing expired

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
Expected market trends
Required competencies for globalizing textile
industry
Success Low input cost base high productivity
improved quality transportation
infrastructure for fast shipment
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India Country Background

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

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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.

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Companys 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

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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

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

• Target Markets
• Association of South East Asian Nations ASEAN
• Other Regional Markets South Korea, Japan and
  USA
• Japan, USA and South Korea want to diversify the
  supply of wool fabrics and garments
• Proximity is crucial for Japan and Korean
• USA sources from Asia due to cost of production
  advantages
• Prices Export Prices are USD denominated and
  based on demand conservative projections from
  marketing

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

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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

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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

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Capital Requirements and Financing Structure

• Company set up as 100 subsidiary incorporated in
  Thailand (Raymond Textiles Thailand Limited)
• 67 capital expenditures (PPE) in USD, the rest
  spent in THB
• Capital expenditure accumulated during
  operations set up

• 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

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Raymonds Project Evaluation

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

• STEP 2 Projects real IRR of 12.86 was
  calculated
• STEP 3 The company compared IRR with its
  internal hurdle rate - undifferentiated across
  projects or geographies

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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?

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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

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Cost of Equity Calculation

• Assumptions
• Beta for Textile Apparel based on average of
  SP500 (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)

1
2
3
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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.)

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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 projects NPV -THB 314
  million, thus the value of incentives is about
  THB 670 million (15 mil.)

Selling price
If effective THB selling price decreases by 5 on
average throughout projects lifetime (13 years)
its NPV will fall to THB 0
Cost of inputs
If effective cost of imported inputs (wool)
increases by 14.4 throughout projects lifetime,
NPV will fall to THB 0
THB exchange rate
If Thai Baht effectively appreciates by 7.6 on
average throughout projects lifetime, NPV will
fall to THB 0
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Real Options Identification and Discussion
Type of option
Analysis
Value

• 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
• Plants 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

High High Medium Low
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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

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