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Stock Analysis, IPO, Mutual Funds, Bonds & More

Raymond demerger may help unlock value, lift valuation multiples

The demerger also suggests that the relatively new business of real estate is doing sufficiently well to sustain itself.

, ET Bureau|
Nov 11, 2019, 07.40 AM IST
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While this may unlock one-time value, the long-term trend will continue to be influenced by the performance of its core business.
Mumbai: The demerger and separate listing of Raymond’s apparel and garment business will allow unlocking of value, giving investors sufficient clarity on the utilisation of cash generated from this revenue stream and allowing them to assign higher valuation multiples.

The demerger also suggests that the relatively new business of real estate is doing sufficiently well to sustain itself.

After the announcement, Raymond’s stock hit the 20 per cent upper circuit and closed at Rs 808. The stock should be able to sustain the gains in the near term. Analysts believe that the lifestyle business, which sells brands such as Raymond, Park Avenue and Parx, can be conservatively assigned a oneyear forward earnings multiple of 20 times. Its peer Aditya Birla Fashion & Retail trades at 38 times.
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Analysts expect Raymond’s lifestyle business to accrue Rs 32 in EPS in FY21, and assigning a value of 20-22 times would translate into Rs 672 a share. At the same time, the management has said that it expects more than Rs 1,100 crore net profit from the real estate business over the next five years, which translates into Rs 170 per share, less the discount of receiving it over the five years.

In addition, the two other assets that will add value per share are the remaining land parcel (near 80 acres) and the consumer business. The company recently sold 20 acres for Rs 700 crore to a fund, at Rs 35 crore per acre. Assuming a conservative Rs 25 crore per acre and then discounting it to half would value the remaining land parcel per share at Rs 150 and FMCG too could be assigned a similar value.

Based on the calculations, the total value per share comes to a little more than Rs 1,000 once the demerger is successfully exercised.

While this may unlock one-time value, the long-term trend will continue to be influenced by the performance of its core business. In the past six months until the demerger announcement, Raymond’s stock corrected over 25 per cent after its weak performance in the core lifestyle business.

In the second quarter of FY20, Raymond’s turnover (mostly contributed by the core business) grew by a mere 1.9 per cent year-on-year, Ebitda by 6.7 per cent, and adjusted net profit by 18 per cent. Ebitda margin was at 11 per cent.

Out of 120 acre land now owned by Raymond in Thane, it is building 10 towers for affordable housing and two premium towers over 20 acres. Since the launch about seven months ago, it has sold 700 apartments, or 25 per cent of the inventory, in the affordable space. Schools and trusts occupy 20 acres and the remaining 80 acres will be available for future development.

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