Demerger And Real Estate Expansion May Boost Future Value Despite Margin And Market Risks

Key Takeaways

• Demerging the real estate business could enhance growth and market valuation, driven by robust market conditions and new projects.
  
• The Engineering segment is set for growth through operational consolidation and new products, boosting efficiency and earnings.
  
• Weak export markets and geopolitical issues threaten revenue growth, while margin pressure and aerospace uncertainty pose risks to earnings and stability across segments.

Catalysts

Engages in the real estate and engineering businesses in India.

• The demerger of Raymond's real estate business, which is expected to be completed by fiscal '26, could unlock value by allowing the segment to pursue its growth independently, potentially boosting revenues and overall market valuation.
  
• The real estate market in Thane and Mumbai is experiencing robust growth thanks to infrastructural developments and favorable government policies, which might increase property bookings and drive higher revenue growth for Raymond's real estate segment.
  
• Expansion and new launches in the real estate segment, including a new tower in Thane and the Address by GS 2.0, are generating positive responses, suggesting strong future demand and revenue prospects.
  
• The Engineering segment, particularly in the aerospace business, is poised for growth as production issues at a major aircraft manufacturer are resolved, which should enhance order flows and improve earnings.
  
• Consolidation of operations in the Engineering segment and introduction of new products could lead to increased efficiencies and sales growth, positively impacting net margins and long-term earnings.
  

Raymond Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Raymond's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.6% today to 8.5% in 3 years time.
• Analysts expect earnings to reach ₹11.6 billion (and earnings per share of ₹174.56) by about March 2028, down from ₹17.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2028 earnings, up from 5.2x today. This future PE is greater than the current PE for the IN Real Estate industry at 31.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.39%, as per the Simply Wall St company report.

Raymond Future Earnings Per Share Growth

Risks

• The export markets for Raymond's auto ancillary and engineering consumables segment are weak, particularly due to the slowdown in the European auto market and ongoing geopolitical issues like the Red Sea crisis, which could negatively impact revenue growth and earnings from these sectors.
  
• The engineering segment's EBITDA margin has decreased from 13.8% to 12% due to changes in the product mix, which suggests pressure on profitability and net margins within this segment.
  
• There is ongoing uncertainty in the aerospace business with production issues affecting order deliveries, although recovery signs are visible, this poses a risk to future earnings and revenue stability.
  
• While the real estate market in Thane and Mumbai is robust, there is always a risk of potential slowdown due to fluctuating government infrastructure spending or moderation in market demand, which could impact revenue projections and future booking values.
  
• Changes in approval processes or government policies affecting real estate development could impede project launches or progress, potentially dampening expected revenue from the real estate segment.

Valuation

• The analysts have a consensus price target of ₹3905.0 for Raymond based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹136.6 billion, earnings will come to ₹11.6 billion, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 15.4%.
  
• Given the current share price of ₹1330.05, the analyst price target of ₹3905.0 is 65.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.