Raymond International Textiles

1. Raymond International Textiles Globalization within Emerging Markets

2. Case Outline • Background: Textile Industry & India • Raymond: Company & Expansion Strategy • Country Analysis for the Manufacturing Site Location • Investment Project Evaluation • Proposed Case Solution

3. Background on the Textile Industry January 2005 – global markets with textile and apparel liberalized when World Trade Organization’s Arrangement on Textiles and Clothing expired Market liberalization 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

4. 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

5. Case Outline • Background: Textile Industry & India • Raymond: Company & Expansion Strategy • Country Analysis for the Manufacturing Site Location • Investment Project Evaluation • Proposed Case Solution

6. 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.

7. 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

8. Case Outline • Background: Textile Industry & India • Raymond: Company & Expansion Strategy • Country Analysis for the Manufacturing Site Location • Investment Project Evaluation • Proposed Case Solution

9. 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

10. China Malaysia Thailand Business environment Economic stability Domestic market-worsted Flexibility of labor Infrastructure facilities Clarity in policies Political risk Best Currency risk Better Fiscal incentives Good Country Selection Criteria Adding Cultural Fit to the criteria above Thailand seemed to be the best location for the project

11. Case Outline • Background: Textile Industry & India • Raymond: Company & Expansion Strategy • Country Analysis for the Manufacturing Site Location • Investment Project Evaluation • Proposed Case Solution

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

13. 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

14. 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 • 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

15. Raymond’s Project Evaluation • 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

16. 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?

17. 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

18. Cost of Equity Calculation 1 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) 2 3

19. 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.)

20. Valuation – Sensitivity Analysis • 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.) Value of investment incentives Selling price If effective THB selling price decreases by 5% on average throughout project’s 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 project’s lifetime, NPV will fall to THB 0

21. Real Options – Identification and Discussion Type of option Option to expand / extend Growth option Operating scale / utilization option Output mix option / product flexibility Analysis Value • 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 High High Medium Low

22. 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

23. THANK YOU !!!