Raymond Ltd, a household name in the Indian textile and apparel industry, experienced a dramatic 40% drop in its share price on Thursday. The stock opened at Rs 1,906 on the National Stock Exchange (NSE), down from its previous closing value of Rs 3,156.10. This significant decline has left investors and market watchers intrigued and concerned. Let’s delve into the reasons behind this sharp fall and explore what lies ahead for Raymond Ltd.
The Cause: Demerger of Lifestyle Business
The primary reason for the precipitous drop in Raymond’s share price is the demerger of its lifestyle business. As of today, the Raymond stock is trading at a value that excludes the lifestyle business, which has been separated and will be listed independently on stock exchanges around August-September. Existing Raymond investors are set to receive four shares of Raymond Lifestyle for every five shares of Raymond they hold. Today is the record date for this transaction.
This strategic move is part of Raymond’s broader plan to create three distinct entities, each focused on a specific sector: lifestyle, real estate, and engineering. By doing so, Raymond aims to unlock greater value for its shareholders and streamline its operations for better efficiency and growth.
Market Reaction and Valuation Adjustments
Following the demerger announcement, the market responded by adjusting the valuation of Raymond Ltd to reflect its new structure. MOFSL had earlier estimated the per share value of Raymond Ltd post-corporate action at Rs 1,415, comprising Rs 1,200 per share value for the real estate segment and Rs 215 for the engineering business. In contrast, the demerged lifestyle business could be listed at an estimated Rs 2,930 per share, according to MOFSL.
InCred Equities provided a slightly different valuation, estimating the fair value of the lifestyle business at Rs 1,982 per share, the real estate business at Rs 1,086 per share, and the engineering business at Rs 499 per share.
The Bigger Picture: Raymond’s Strategic Roadmap
Raymond’s decision to demerge its lifestyle business is part of a grander vision. The company plans to demerge its real estate business as well, a process expected to take 15-18 months. After this, Raymond Ltd will consist solely of the engineering business. The share exchange ratio for the lifestyle listing is 4:5, meaning investors will receive four shares of Raymond Lifestyle for every five shares of Raymond they hold. For the real estate listing, the ratio will be 1:1.
Arihant Capital Markets described this strategy as creating three “pure-play businesses” to unlock heightened value. This segmentation allows each business to focus on its core competencies and growth strategies, potentially leading to better financial performance and investor returns.
Real Estate Business: Immense Potential
Raymond’s real estate business holds significant promise. Out of 100 acres of legacy land in Thane, 40 acres are currently under development. This development has a revenue potential of Rs 9,000 crore, while the remaining 60 acres could generate an additional Rs 16,000 crore over the next eight years, totaling Rs 25,000 crore.
The company has also entered into Joint Development Agreements (JDAs) with a revenue potential of Rs 7,000 crore, expected to accrue in 4-5 years. With Rs 500 crore cash on books and no significant capital requirements for the next two years, Raymond’s real estate business is poised for substantial growth. Arihant Capital Markets projects that in the next three years, this business will achieve an annual run rate of Rs 4,000 crore with a stable EBITDA margin of 25%.
Engineering Business: Growth in Aerospace and Defense
Raymond’s engineering business, bolstered by the acquisition of MPPL, is positioned for substantial growth, particularly in the aerospace and defense sectors. In FY24, this segment generated a revenue of Rs 300 crore with a 25% margin, a significant improvement from Raymond Engineering’s mid-to-low teen margins.
The consolidated engineering business will comprise two subsidiaries: Raymond Engineering and MPPL. MPPL is expected to double its revenues in 3-4 years, while Raymond Engineering aims to achieve the same in five years. The ‘Make in India’ initiative has spurred heightened demand from major players like Hindustan Aeronautics Limited (HAL), and Raymond is also a preferred supplier to global aerospace giants such as Boeing, Airbus, and Comac.
Future Prospects: Optimism Amidst Volatility
Despite the initial shock of the share price drop, there is a silver lining for Raymond investors. The demerger strategy is designed to create value through focused and specialized business operations. The real estate and engineering segments hold significant growth potential, and the upcoming listing of the lifestyle business provides an opportunity for investors to realise substantial gains.
As Raymond transitions through this transformative phase, investors should closely monitor the progress of the demerger and the performance of the newly formed entities. The success of this strategic move hinges on the effective execution of the demerger and the ability of each segment to achieve its growth targets.
Conclusion
Raymond Ltd’s 40% share price fall may have initially unsettled investors, but it is a calculated move within a broader strategy to unlock value through the demerger of its lifestyle, real estate, and engineering businesses. While the immediate impact has been a sharp decline in share price, the long-term prospects for Raymond look promising as the company aims to create specialised, high-growth entities. Investors should stay informed and patient as Raymond navigates this significant transition, with the potential for substantial rewards on the horizon.
