Real Estate Demerger Aims To Unlock Value, But Aerospace Challenges May Affect Future Performance

Key Takeaways

• Demerger of the real estate business could unlock value, enabling focused growth and strategic initiatives to boost future revenue and earnings.
  
• Real estate and engineering segments positioned for growth through strategic expansions, joint development agreements, and integration efforts enhancing margins and opportunities.
  
• Demerger, weak export demand, and acquisition hurdles risk financial stability, while regulatory shifts could impact real estate earnings.

Catalysts

Engages in the real estate and engineering businesses in India.

• The planned demerger of Raymond's real estate business and its listing as an independent entity could unlock value and allow for targeted growth and strategic initiatives in the real estate sector, impacting future revenue and earnings through increased focus and resource allocation.
  
• Continued robust demand in the real estate market, particularly in Thane and Mumbai, supported by infrastructural development and government policies, is expected to drive growth in booking values and revenue for Raymond's real estate segment.
  
• The company is pursuing future expansion in real estate through joint development agreements (JDAs), with a targeted 20% to 25% growth in booking value year-on-year, which is likely to bolster revenues.
  
• Raymond's engineering business expects growth in its aerospace segment after resolving production delays with a major aircraft manufacturer, which could positively impact revenue and margins from increased order volumes.
  
• The integration of Maini Precision business and the restructuring of Raymond's engineering segment into two new subsidiaries could drive efficiencies and synergies, enhancing net margins and growth opportunities in the defense and auto components industries.

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 34.1x on those 2028 earnings, up from 5.5x today. This future PE is greater than the current PE for the IN Real Estate industry at 31.5x.
• 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 15.33%, as per the Simply Wall St company report.

Raymond Future Earnings Per Share Growth

Risks

• The demerger of the real estate business could lead to a dilution of Raymond Limited's overall business focus, potentially impacting consolidated revenue and profitability.
  
• Weak demand in export markets for the auto ancillary and engineering consumables segment, especially in Europe due to the auto market slowdown and geopolitical issues, may affect revenue growth and net margins.
  
• The acquisition of Maini Precision and accompanying debt could introduce financial risk if anticipated synergies and revenue uplift fail to materialize, impacting earnings and cash flow.
  
• Challenges in the aerospace sector due to production issues with major manufacturers may lead to unstable order fulfillment, affecting revenue consistency and operational margins.
  
• Dependency on governmental policies and infrastructure spending for the real estate arm's performance may expose the business to regulatory risks and could impact future earnings if policy shifts occur.

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 34.1x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹1416.4, the analyst price target of ₹3905.0 is 63.7% 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.