Raymond International Textiles

Globalization within Emerging Markets

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

Market liberalization

January 2005 global markets with textile and apparel

liberalized when World Trade Organizations
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 competencies
for globalizing textile
industry

Success = Low input cost base + high productivity + improved

quality + transportation infrastructure for fast shipment

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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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
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
5

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 multibrand outlets and 100 wholesale dealers.

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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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
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
8

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
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
11

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
12

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

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 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 halfyearly installments after a 2 year
moratorium
No parent guarantee will be provided

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

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

Leverage: D/(D+E)
Unlevered Textile & Apparel Beta
Levered T&A Beta
US based, US$ denominated

0.00
0.630
0.630
6.40%

0.50
0.630
0.911
7.52%

Calculation of Thai cost of equity

ICCRC rating of USA
ICCRC rating of Thailand
US$ cost of equity before risk mitigation
US$ cost of equity after risk mitigation
Inflation differential (Thai - US)
THB cost of equity - nominal

93.7
59.5
14.44%
12.79%
0.20%
12.99%

93.7
59.5
15.56%
13.91%
0.20%
14.11%

Conversion to real cost of equity

Thailand's inflation
THB cost of equity - real

2.4%
10.59%

2.4%
11.71%

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)

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Valuation WACC Approach

FCFU calculation
Year 0
Profit before tax
Add back: interest
Profit before interest and tax (PBIT)
Profit after tax (PIT)
Add back: depreciation
Add back: preliminary expenses
CFO - cash flow from operations

Year 1
Year 2
12,669
155,287
60,130
60,130
72,799
215,417
72,799
215,417
127,205
127,205
4,473
4,473
204,477
347,095

Capital Expenditure
Increase in working capital
CFI - cash flow from investment

(1,571,982)
(174,018)
(1,746,000)

(113,283)
(113,283)

(16,003)
(16,003)

FCFU

(1,746,000)

91,194

331,092

WACC calculation
Year 0
Debt/(Debt+Equity) - assumes dividend repatriation
Effective tax rate
Cost of Debt
Cost of Equity
WACC - real
NPV Summary
NPV of FCFU at end of period
Year 0 investement outflow
Project's NPV

2,101,183
(1,746,000)
355,183

Year 1

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.)

Year 2

0.50
0.0%
5.50%
11.71%
8.61%

0.50
0.0%
5.50%
11.71%
8.61%

2,281,990

2,379,314

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

Rodrigo Camargo, Michal Cermak, Christian Costa, Tushar Gupta, Monisha Saldanha
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Real Options Identification and Discussion

Type of option

Analysis

Option to expand /
extend

Growth option

Operating scale /
utilization option
Output mix option /
product flexibility

Value

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

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

High

Medium

Low

Currency Risk Mitigation Measures

US$

Currency risk mitigation

measures:

THB

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

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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