On July 11, 2024, Raymond Ltd.’s shares experienced a significant drop of 40% at the start of trading. This sharp decline was directly related to the stock turning ex-date for the demerger of its lifestyle business. The ex-date is the date on which a stock begins trading without the benefit of a specific corporate action, such as a dividend or, in this case, a demerger.

Understanding the Demerger

The Demerger Process:
Raymond Ltd. decided to separate its lifestyle business from the main company, creating a new entity called Raymond Lifestyle. This strategic move aimed to create focused businesses that can unlock greater value for shareholders. Demergers are often pursued to streamline operations and allow each segment to operate more efficiently and grow independently.

Impact on Share Price:
As a result of the demerger, Raymond Ltd.’s stock was trading at a value excluding the lifestyle business. The previous closing value of Rs 3,156.10 dropped to Rs 1,906, reflecting the removal of the lifestyle segment’s value from the parent company’s stock. The market had to adjust to the new valuation, leading to the initial sharp decline.

Share Allocation:
Existing investors of Raymond Ltd. were to receive four shares of Raymond Lifestyle for every five shares of Raymond Ltd. they held. The record date for this allocation was the day of the price drop, further influencing the stock’s market behavior.

Market Reactions and Analyst Predictions

Trading Recovery:
Despite the initial plunge, Raymond Shares showed signs of recovery during the trading session. It managed to rise to Rs 2,009.80, a 3.07% increase from the opening price. Such fluctuations are common as the market adjusts to new valuations and investors reassess their positions.

Valuation Estimates:
Analysts had varied estimates for Raymond Ltd.’s post-demerger value. MOFSL estimated the stock’s value at Rs 1,415 per share, breaking it down into Rs 1,200 for the real estate business and Rs 215 for the engineering business. They also suggested a potential listing price of Rs 2,930 per share for the lifestyle business.

InCred Equities provided a different perspective, valuing the lifestyle business at Rs 1,982, the real estate business at Rs 1,086, and the engineering business at Rs 499 per share. These variations highlight the differing methodologies and assumptions used by analysts.

Strategic Plans and Future Outlook

Real Estate Demerger:
Raymond Ltd. plans to further demerge its real estate business within the next 15-18 months. After this demerger, the remaining entity will focus solely on the engineering business. The share exchange ratio for the real estate listing is set at 1:1, indicating a straightforward transition for investors.

Revenue Potential and Development:
Raymond’s real estate business holds substantial revenue potential, particularly in Thane. Out of 100 acres of legacy land, 40 acres are under development, with a projected revenue potential of Rs 9,000 crore. The remaining land is expected to generate Rs 16,000 crore, totaling Rs 25,000 crore over approximately eight years. Current joint development agreements (JDAs) are set to realize Rs 7,000 crore in revenue within 4-5 years.

Financial Stability:
The real estate business is in a strong financial position, with Rs 500 crore in cash reserves and minimal capital requirements for the next two years. It’s projected to reach an annual revenue run rate of Rs 4,000 crore within three years, maintaining a stable EBITDA margin of 25%. The company plans to continue using the JDA route for expansion, avoiding new land acquisitions.

Engineering Business Growth:
Raymond’s engineering business has shown promising growth, particularly after the acquisition of MPPL. This acquisition has opened opportunities in the aerospace and defense sectors. In FY24, the engineering segment generated Rs 300 crore in revenue with a 25% margin. The consolidated engineering business includes two subsidiaries: Raymond Engineering and MPPL. MPPL is a high-growth, high-margin business, expected to double its revenue in 3-4 years. Raymond Engineering is also projected to double its revenue in five years, driven by increased demand from major players like HAL and international companies such as Boeing, Airbus, and Comac.

Strategic Benefits of the Demerger

Focused Business Segments:
The primary strategic benefit of the demerger is the creation of three focused business segments: lifestyle, real estate, and engineering. Each segment can now operate with greater independence and efficiency, potentially leading to enhanced shareholder value.

Unlocking Value:
By separating the businesses, Raymond Ltd. aims to unlock the intrinsic value of each segment. Investors can better assess the performance and potential of each business, leading to more accurate market valuations and investment decisions.

Enhanced Growth Opportunities:
The lifestyle and engineering businesses, in particular, are poised for significant growth. The lifestyle segment’s separate listing allows it to attract dedicated investors and resources, while the engineering business benefits from the strategic acquisition of MPPL and increased demand in the aerospace and defense sectors.

Conclusion

Raymond Ltd.’s 40% share price drop on July 11, 2024, was a direct consequence of the stock turning ex-date for the demerger of its lifestyle business. While this sharp decline initially unsettled investors, the subsequent recovery and strategic benefits of the demerger underscore the company’s potential for enhanced growth and value creation. As the demerged entities begin to operate independently, investors will have the opportunity to evaluate each segment’s performance and make informed investment decisions.