In today’s Finshots, we look at the Raymond demerger and how it might just unlock a whole lot of value for the group’s businesses.

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The Story

Raymond.

What’s the first thing that comes to mind when you hear this?

Probably textiles, suiting, and lifestyle with the tagline ‘The Complete Man’, right? And while that’s its most iconic business, Raymond is much more than that. It’s also an engineering company and a real estate developer. And now, Raymond wants to make sure everyone knows it.

A few months ago, the company decided to demerge all its businesses into standalone entities. For starters, it listed Raymond Lifestyle, its apparel division, on the stock exchanges. And next up is its real estate arm, which could hit the bourses next year. When that happens, the original Raymond Limited will focus solely on engineering, dealing in tools, hardware, auto components and even aerospace and defence.

If you’re wondering why Raymond’s doing this, it’s simple. The company started off as a woollen mill in 1925. Two decades later, Lala Kailashpat Singhania took over and expanded into engineering with JK Files, making steel files for shaping and smoothing materials like metal or wood. Then in 2019, Raymond entered the real estate game, monetising its family property in Mumbai.

As you’ve probably noticed, these three businesses couldn’t be more different from each other. They’re like chalk and cheese. And as an investor, that can be a bit of a headache.

Imagine wanting to bet solely on the booming lifestyle sector, but finding yourself tied to real estate and engineering too. Not exactly ideal, right? But now, with Raymond Lifestyle spun off as a separate entity, you finally have the freedom to make that choice. And soon, the same clarity will come for its realty and engineering businesses too.

But that’s not the only reason for the split.

See, managing three wildly different businesses under one roof isn’t easy. Each has its own unique demands, be it resources, skills or managerial expertise. And lumping them together often means the company’s overall performance doesn’t truly reflect the strength of its individual segments. Investors undervalue it. Growth capital dries up. It could be a lose-lose situation.

So yeah, by demerging, Raymond would rather avoid the “conglomerate curse” or a situation where involvement in unrelated industries drags down its stock value. This move lets each business get the attention it deserves, and the investors it needs.

In fact, over the past year, a wave of demergers has swept through the corporate world. At least a dozen companies like Raymond (which spun off Raymond Lifestyle), Borosil, TVS Holdings and more have jumped on the bandwagon. And guess what? An Economic Times study shows that post-demerger, the combined market value of these companies and their new entities has surged by anywhere between 14% and a staggering 450%.

So how’s Raymond planning to unlock value now, you ask?

Since Raymond Lifestyle successfully broke away and listed on the stock exchanges, what remains of the Raymond stock now is its real estate and engineering businesses. So, let’s kick things off with the real estate side of things — Raymond Realty.

The real estate arm contributes 17% of the group’s revenue, bringing in nearly ₹1,600 crores in FY24. At first glance, that might look like a drop in the bucket compared to the lifestyle business, which makes up a hefty 74%. But here’s the thing. This segment has a secret weapon — higher operating profit (EBITDA) margins.

In FY24, Raymond Realty posted EBITDA margins of 23%, way higher than the group’s average of 17%, and miles ahead of the lifestyle business at 16%. So it’s actually the real estate division that’s bringing in the lucrative operational profits in the entire business. But when everything’s lumped together, as it is now, this outperformance often gets overlooked.

But with the demerger, the potential is big. Raymond Realty has entered into four Joint Development Agreements (JDAs) with an estimated revenue potential of ₹32,000 crores over the next eight years. And even in the near term, it’s shaping up well. If you break it down, Raymond Realty could rake in about ₹4,000 crores in the next few years, even in a worst-case scenario. That’s because over the past three years, the segment has delivered an impressive 50% year-on-year revenue growth on average, with EBITDA margins projected to climb to 25% by the end of the decade.

What makes this even more exciting is Raymond’s asset-light model. Instead of sinking big bucks into buying land, Raymond partners with landowners, redevelops their properties and takes a share of the profits. This approach works beautifully, especially in the Mumbai Metropolitan Region, its area of focus right now, where ageing buildings are ripe for redevelopment.

It doesn’t stop there. In FY24, Raymond became net debt-free. It sold off its FMCG (fast moving consumer goods) business — Park Avenue and Kamasutra condoms, to Godrej Consumer Products Ltd (GCPL) for a cool ₹2,800 crores. This financial freedom means that Raymond can now channel funds into developing and marketing projects rather than getting bogged down in land purchases or lengthy legal and regulatory approvals. And by cutting these costs, Raymond not only accelerates its project timelines but also boosts its return on investment (ROI).

But, of course, the asset-light model isn’t all sunshine and rainbows. While it’s been working well for Raymond, there might come a time when they’ll need to rethink their approach, especially for the long term and when looking at how competitors like DLF are doing things.

DLF, as you may know, is the largest listed real estate player, and they’ve got a diversified model. They don’t just focus on selling land or developing spaces but also earn from renting out commercial properties, like office buildings and malls. This additional stream of income gives DLF a higher operating profit margin of close to 40%, which is much stronger than Raymond Realty’s current performance.

So, for Raymond, this could be something to keep an eye on.

And what’s left after it hives off its realty business?

Its engineering arm!

And this part of the business has serious growth potential. Right now, the engineering segment brings in just about 9% of the group’s revenue. But that could change, especially since Raymond already owns JK Files, the world’s largest manufacturer of steel files, and has recently acquired Maini Precision Products. If you didn’t know, Maini makes components for the aerospace, defence, automotive and industrial sectors. It’s also a key exporter, operating in 25 countries and supplying top global auto brands.

Once the realty business is split off, Raymond will focus its engineering division into two key subsidiaries ― one for aerospace and defence, and the other for auto components, EVs and engineering consumables. With aerospace and defence in the mix, there’s massive potential for growth. That’s because India relies heavily on imports for aviation and defence supplies. But with the government’s push for “Make in India”, Raymond could tap into this gap.

Of course, external challenges like global inflation and geopolitical uncertainties, like the Russia-Ukraine war and Middle East tensions, could pose risks to growth.

Can Raymond outsmart the odds by splitting its business and doubling down on what it does best?

Guess we’ll only have to wait and see.

Until next time…

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