Raymond Limited: Deleveraging and Demerger

Discussion Questions

On a typically hot and humid April day in Mumbai, the financial capital of India, Gautam Singhania, Chairman and Managing Director of Raymond Limited, announced a significant restructuring of the 98-year-old company. This restructuring involved the demerger of its lifestyle business and the sale of certain fast-moving consumer goods brands for a cash consideration of ₹28.25 billion.

‘I have managed to kill three birds with one stone,’ Singhania stated. ‘Firstly, we have successfully sold the business, which will make the lifestyle business net debt-free. Secondly, we are strengthening the group business with the demerger. Lastly, the subsequent listing of the lifestyle business will further solidify our position’ (Dhanrajani, 2023).

This was Raymond’s second attempt at a demerger and was subject to various regulatory approvals, including those from shareholders and creditors. After a subdued financial performance in the 2020–2021 fiscal year (FY21) ¹ due to the COVID-19 pandemic, Raymond reported encouraging results in FY22 and FY23. Singhania needed to ensure that the proposed restructuring would accelerate growth further and unlock value.

About the Company

Incorporated in 1925 as a small woollen mill, Raymond established itself as a leading player in the branded textile and apparel segment. Gautam Singhania became the CMD in 1990. While the company’s primary business interests were textiles and apparel, it also diversified into consumer care and engineering. Raymond had a significant presence in both national and international markets, with over 1,300 stores, 20 plants and exports to more than 95 countries (Raymond Limited, 2023a). In 2019, Raymond decided to enter the real estate business by establishing a new division called Raymond Realty. The division launched its first project, consisting of 3,000 residential units in Thane, near Mumbai. Raymond Realty was projected to achieve a top line of over ₹35 billion with a profit margin exceeding 25% over five years (Business Standard, 2023). The company’s product portfolio included textiles, apparel, garmenting, shirting, tools and hardware, auto components and real estate. Raymond Limited also had a joint venture (JV) for manufacturing denim and denim garments and maintained a small presence in the fast-moving consumer goods (FMCG) sector through an associate company (Exhibit 1). The company’s shares were listed on the Stock Exchange, Mumbai (BSE), the National Stock Exchange of India (NSE), and the Luxembourg Stock Exchange Raymond Limited, 2019a). As of 31 March 2019, the Singhania family and associates (promoter group) held 44.28% of the shares, while institutional investors held 23.66%, with the remaining shares held by non-institutional investors (Raymond Limited, 2019b).

In FY19, Raymond reported consolidated revenue from operations amounting to ₹65.82 billion with a profit of ₹1.75 billion. The company had total borrowings (current and non-current) of ₹21.43 billion and net debt ² of ₹1.75 billion. The company had total borrowings (current and non-current) of ₹21.43 billion and net debt of ₹17.41 billion against total equity of ₹20.37 billion (Exhibit 2) (Raymond Limited, 2019a). In November 2019, Raymond took steps to deleverage its balance sheet. J. K. Investo Trade (India) Limited, an associate company of Raymond, sold a land parcel for ₹3.5 billion. Raymond used the proceeds from this sale to subscribe to equity shares and compulsorily convertible preference shares of Raymond Limited, thereby reducing its debts. Consequently, the shareholding of the promoter group increased to 48.2% due to the additional allotment of shares (Raymond Limited, 2020a).

Towards the end of 2019, cases of COVID-19 emerged in China, eventually leading to a global pandemic. In response, the Indian Government imposed a nationwide lockdown on 24 March 2020, which significantly impacted businesses across the country, including Raymond. Although the pandemic began affecting operations towards the end of FY20, its full impact was felt in FY21 (Dhingra & Ghatak, 2021). For FY20, Raymond’s revenue from operations only marginally decreased to ₹65.78 billion, and the profit for the year increased by 15% to ₹2.02 billion compared to FY19. However, in FY21, the revenue from operations plummeted to ₹34.47 billion, resulting in a loss of ₹3.04 billion (Exhibit 2). The textile, apparel and garmenting business, which constituted nearly 80% of Raymond’s overall revenues, was severely affected.

‘We had already stocked inventory, but there was no demand. In a fashion business, unsold stocks quickly become obsolete. Continuing production posed challenges in terms of distribution and inventory management. Conversely, halting production meant facing factory closures’, explained K. A. Narayan, President of HR and a 15-year Raymond veteran (Bhattacharya, 2023). The decline in revenue and profit, coupled with an extended working capital cycle, necessitated higher borrowings for Raymond (Exhibit 2).

Financial Strategies to Combat the Impact of COVID-19

In the first half of FY21, Raymond’s operations came to a complete standstill due to the pandemic. Gautam Singhania seized this opportunity for introspection and implemented immediate measures to navigate through the crisis. ‘We returned to the drawing board and thoroughly reassessed our entire business strategy, prioritizing sustainability’, said Singhania.

Raymond Limited initiated several initiatives to adapt its operations to combat the pandemic’s challenges. Recognizing the critical need for personal protective equipment (PPE) for healthcare workers, Raymond utilized its garmenting facilities to produce and supply PPE kits to government agencies and medical institutions. Leveraging its FMCG capabilities, the company also introduced a range of sanitization products, such as hand cleaners, hand wash and floor cleaners, which were well-received in the market. Additionally, Singhania focused on enhancing cost efficiency and liquidity through effective management of working capital. These efforts were crucial in stabilizing operations during a period of unprecedented disruption (Raymond Limited, 2021a).

Raymond Limited adopted zero-based budgeting to optimize costs and restructured the organization to ensure ongoing efficiencies. ‘As we grow older, we accumulate a little fat here, and a little fat there, and the same thing was happening with the company. We needed to change things’, said Amit Agarwal, Group CFO of Raymond, describing the pandemic as a blessing in disguise.

The cost optimization measures focused on various aspects, including personnel, operations, retail stores and advertising. The company decided to close about 150 stores where revenues were not recovering and the rental-to-revenue ratio was high. Some regional and branch offices were shut down. Manpower was rationalized by eliminating some layers and consolidating others through the use of technology. Efforts were made to enhance productivity levels at plant operations and reduce fabric spoilage, cuts and ends.

Raymond also leveraged digital solutions for cost reduction. For instance, before the pandemic, approximately 4,000 dealers were given an all-expenses-paid annual tour of the company’s Thane plant for trade bookings. This exercise was moved online, saving significant costs. Through these measures, the company managed to cut nearly ₹4 billion in operating costs during FY21 (Bhattacharya, 2023).

Raymond also focused on improving efficiencies in inventory management, production cycles and accelerating collections. The company implemented a rigorous collection drive, refusing to supply materials to dealers who did not reduce their outstanding dues. As a result, Raymond significantly shortened its net working capital cycle (cash conversion cycle). The funds freed from cost-cutting measures, productivity enhancements, better inventory management and a reduced net working capital cycle were used to repay debt. These strategic actions collectively strengthened the company’s financial position and helped navigate the challenges posed by the pandemic (Bhattacharya, 2023). ‘We took some tough decisions during the year that reaped results for us as we pared debt in FY 2020-21, demonstrating our resilience, especially during the pandemic’, said Singhania (Raymond Limited, 2021a). To maintain liquidity, noncritical capital expenditures were deferred. Raymond also reduced its dependence upon short-term debt by increasing long-term debt with 3–10 year maturities (Raymond Limited, 2021b).

Though the pandemic caused some disruption in Q1 of FY22, Raymond was back in the black and continued its progress in FY23. For FY22, the company reported consolidated revenue from operations of ₹61.79 billion and profit of ₹2.65 billion, which improved further to ₹82.15 billion and ₹5.37 billion, respectively, in FY23. Higher profit and efficient working capital management led to higher cash flow from operating activities in FY23. Raymond used the cash flows to reduce the financial leverage (Exhibit 2). Almost all the business segments reported higher profits in FY23 than in FY19. Most importantly, the real estate division recorded revenue of ₹11.15 billion and a profit of ₹2.76 billion in FY23 compared to ₹200 million and a loss of ₹41 million in FY19 (Exhibit 3).

The change in the financial fortune of Raymond was also reflected in its share price. The closing share price of Raymond at the end of January 2020 was ₹643. It fell to ₹223 by the end of March 2020 due to the panic caused by the pandemic and consequent uncertainties. By the end of March 2023, the share price climbed to ₹1,221, outperforming the benchmark sensitive index (SENSEX) of the Stock Exchange, Mumbai (Exhibit 4).

Restructuring of Business

Since 2019, Raymond had undertaken a series of restructurings involving the demerger and consolidation of some of its businesses. In November 2019, Raymond announced the demerger of its lifestyle business consisting of textiles, branded apparel and garmenting to a separate entity to be listed as Raymond Lifestyle Limited. As a result of the demerger, Raymond Limited became a real estate company with other businesses, including high-value cotton shirting, tools and hardware, auto components, denim (JV Company) and FMCG (associate company), predominantly. The objective of the demerger was to create a clear demarcation of lifestyle and other businesses and simplify the group structure. Each shareholder of Raymond Limited was to be allotted one share of the new company in a ratio of 1:1. The proposed restructuring was meant to create two listed companies with a public shareholding of 51.8% each (Raymond Limited, 2020b). The demerger was subject to approval by the National Company Law Tribunal (NCLT), a judicial body under the Companies Act 2013.

On 27 September 2021, the Board of Directors of Raymond Limited reversed its earlier plan and withdrew the demerger scheme of lifestyle business that was announced in 2019. Instead, the Board decided upon the subsidiarization of the real estate business division through a wholly owned subsidiary. The Board also approved the consolidation of the B2C business by transferring the apparel business from Raymond Apparel Limited (a wholly owned subsidiary) to Raymond Limited. The move was expected to strengthen efficiencies, streamline and simplify processes, and bring synergistic benefits in terms of design and innovation, sourcing and retail network. It also approved the consolidation of auto components, tools and hardware businesses into engineering business to improve synergies and explore demonetization options. The engineering business of Raymond consisted of two business segments—tools and hardware and auto components. The tool and hardware business had two step-down subsidiaries—JK Files (wholly owned by Raymond) and JK Talbot (90% owned by Raymond). The auto components business was conducted through another step-down subsidiary—Ring Plus Aqua Limited (RAPL). The entire engineering business was approved to be consolidated into JK Files (India) Limited (Ranipeta, 2021). The engineering and apparel business consolidation was completed by 31 March 2022, whereas the subsidiarization of real estate business was still in process. In the revised group structure, the promoters group held 49% of Raymond Limited (Exhibit 5) (Raymond Limited, 2022).

Raymond had been relentlessly simplifying its structure and creating shareholder value, announcing restructuring plans in both 2019 and 2021 (Jain, 2023). After previously shelving the demerger of the lifestyle business announced in 2019, Raymond once again paused the restructuring plan announced in 2021. However, on 27 April 2023, Raymond unveiled another round of restructuring with the goal of establishing two debt-free listed entities in the lifestyle and realty businesses. This new plan marked a shift from survival mode to growth. ‘The restructuring was a launch pad for more initiatives. The turnaround has happened, but it doesn’t end here. Now the aircraft has to take off’, said Singhania. He also emphasized that the real estate business had been performing well for the past four years and that Raymond had significant plans for its future (Kurup, 2023a).

As per the new restructuring plan, the lifestyle business, which included textiles, branded apparel, garmenting and high-value shirting, was proposed to be demerged into Raymond Consumer Care Limited (RCCL). As a result, Raymond Limited would become a pure-play real estate company with investments in engineering and denim (JV Company). RCCL would be listed in due course as a pure-play B2C lifestyle business. Each Raymond Limited shareholder would receive four RCCL shares for every five shares held. This swap ratio was suggested by independent valuers (KPMG and BDO), with a fairness opinion issued by ICICI Securities Limited, and was approved by Raymond’s Board of Directors.

Additionally, it was announced that RCCL would sell its FMCG business to Godrej Consumer Products Limited for ₹28.25 billion. Since the promoter group majorly owned RCCL, the promoters agreed to deploy the entire proceeds from the sale into the lifestyle business. The new structure was expected to facilitate focused investor opportunities and provide better access to capital, with clear strategies and specialization for sustainable growth and profitability for both lifestyle and real estate businesses.

The proceeds from the sale of the FMCG business were to be used for the repayment of the debt of Raymond Limited, making it debt-free and leaving a cash balance of ₹13 billion as growth capital. RCCL was to retain the condom manufacturing facility and use the capacity for contract manufacturing for domestic and international markets. The promoter group was to receive 26.2 million equity shares in RCCL based upon their shareholding in Raymond Limited and an additional 7.3 million shares in lieu of a 49.68% stake in the existing FMCG company sold at ₹28.5 billion before capital gains tax. After restructuring, the promoter group holding in Raymond was to stay at the current level of 49.11%, whereas the promoter group holding in RCCL was to be 54.87% (Raymond Limited, 2023c).

The Road Ahead

Demerger was a popular method of corporate restructuring in India (Exhibit 7). It involved breaking up a large conglomerate into smaller, more focused companies, allowing each demerged entity to concentrate on its core business. This approach led to simplified structures, improved focus and agility and long-term value creation for shareholders (Financier Worldwide, 2018). Demerged companies often experienced better corporate governance and efficiencies due to increased accountability for performance. Furthermore, demergers attracted investors who preferred investing in specific sectors and focused companies rather than conglomerates. Demerger motivations included pursuing divergent growth strategies, raising funds, simplifying structures, optimizing capital allocation, risk mitigation, succession planning and addressing ESG concerns, all aimed at value creation. ³

Several options existed for executing a demerger, such as spin-offs, split-offs, subsidiarization, equity carve-outs and divestitures. The most common method was a spin-off, separating a business unit by creating a new company. Shareholders of the demerged company received shares of the new company, resulting in identical shareholding patterns for both entities. In a split-up, the demerged company was wound up and liquidated into new companies created during the transaction. ⁴ Subsidiarization involved creating a new wholly-owned subsidiary under the demerged company. Companies could opt for equity carve-outs or divestitures to raise funds through demerger. In an equity carve-out, the demerged company retained a portion of the subsidiary’s share capital, which was monetized through the sale of shares to strategic investors, third parties, or via a public issue. A divestiture aimed at a complete exit from a specific business sector and/or raising funds, typically carried out when an organization wanted to change its investment strategy, shift to a different sector or company, or reduce its debt. ⁵

Singhania stated that the proposed restructuring allowed him to ‘kill three birds with one stone’. However, implementing the scheme was a time-consuming, complex and expensive process. The demerger was subject to regulatory approvals under the Companies Act 2013 and the provisions of the listing agreement. Approval from the NCLT, constituted under the Companies Act 2013 as a judicial body, was also required. The NCLT had the power to convene meetings of shareholders and creditors and invite objections from other statutory bodies, including the income tax department. The demerger would be effective from the appointed date approved by the NCLT (Exhibit 8). The separation of business could cause short-term disruption in business activities and volatility in share prices. Additionally, demergers could reduce economies of scale, potentially leading to lower productivity in the short term. Despite these challenges, the strategic benefits of a focused business structure and the potential for long-term value creation made the demerger an attractive proposition for Raymond (Bhasin, 2023).

‘After the demerger, the lifestyle and real estate businesses were to be managed independently, each facing its own set of risks. The apparel market saw a lot of growth due to the explosion of pent-up demand last year, which has now been exhausted. So, there will be a slowdown in branded apparel growth this fiscal, but it is likely to make a comeback in FY25’, said Abhijit Kundu, Senior Vice President of Research at Antique Stock Broking (Bhattacharya, 2023). The lifestyle business revived after the pandemic-induced slowdown but remained susceptible to inflation. Being inherently working capital intensive, the apparel and textile industry faced vulnerabilities such as variabilities in raw material prices and fluctuations in foreign exchange rates. Additionally, intense competition from both organized and unorganized players, especially in the branded apparel segment, posed significant challenges.

In contrast, the real estate business had been performing well and showed promise for future growth, but it also carried risks associated with market demand, regulatory changes and economic cycles. The separation allowed each business to focus on its core operations and strategic objectives, potentially unlocking greater value for shareholders in the long run (Care Ratings, 2023).

In the real estate sector, Raymond’s move into joint development projects beyond their familiar territory of Thane would require managing relationships with multiple stakeholders, which could pose a challenge (Bhattacharya, 2023). Increasing interest rates were driving up the cost of finance for homebuyers, potentially impacting overall demand in the real estate industry. Additionally, inflationary trends in the prices of steel and cement were concerning. Delays in execution or sluggishness in collections for real estate projects could strain liquidity.

At the group level, failure to reduce debt as planned could negatively affect the company’s credit rating. Both lifestyle and real estate businesses were susceptible to cyclical downturns (Care Ratings, 2023). Export markets, particularly in Western economies, faced challenges such as high inflation, high energy prices, volatile currencies, geopolitical tensions and fears of a potential recession (Bhattacharya, 2023).

Having announced the demerger, Singhania needed to navigate the process efficiently to ensure a successful transition of the lifestyle and real estate businesses as independent ventures. It was crucial to ensure that the potential benefits of the demerger were fully realized while addressing any challenges that arose. The first critical step was convincing shareholders and creditors that the demerger was essential for unlocking value.