Detailed Rationale
CRISIL Ratings has reaffirmed its rating on the long-term bank facilities amounting to Rs 1438.31 crore of Raymond Ltd (Raymond) at 'CRISIL AA/Stable' . These are the facilities which will move to Raymond Consumer Care Limited (RCCL) post the demerger of the Lifestyle business of Raymond. Also, its ratings on Rs 720 crore long-term bank facilities which will continue with Raymond, post the de-merger, continue on ‘Rating Watch with Developing Implications (RWDI)’. The ratings, on the short-term debt facilities totaling Rs.1370 crore, including Rs 550 crore of commercial paper, which will also move to RCCL, have been reaffirmed at 'CRISIL A1+'.
On November 3, 2023, Raymond announced acquisition of 59.25% stake in Maini Precision Products Ltd (MPPL) for Rs 682 crores, to be undertaken through its step-down subsidiary, Ring Plus Aqua Ltd (RPAL). The acquisition of stake will be subject to approval from the Competition Commission of India, and others including lenders and is expected to be completed in the fourth quarter of the current fiscal. This will be followed by formation of a “Newco” which will hold all the legacy engineering businesses (under RPAL and its immediate parent, JK Files and Engineering Ltd, which is 100% held by Raymond) as well as the acquired business of MPPL and will be led by Mr. Gautam Maini, the promoter of MPPL. The transfer of businesses into “Newco” would also be subject to regulatory approvals including the National Company Law tribunal (NCLT), post which 66.3% stake in the “Newco” will be held by Raymond, 28.5% stake by the promoters of MPPL, and the balance by the minority shareholders of RPAL. The acquisition is expected to strengthen the business risk profile of Raymond’s engineering business, building scale and size under one entity and would enhance capabilities in precision engineering products for automotive and aerospace sectors, with a significant presence across international as well as domestic markets. The purchase of stake in MPPL is being funded through a mix of debt (~Rs.342 crores) and internal accruals, and even factoring addition debt including working capital debt of MPPL (~Rs. 300 crore), the Raymond group would continue to remain net cash positive. Hence, the financial risk profile of consolidated Raymond, as well as RCCL and new Raymond (post de-merger) will continue to remain healthy.
CRISIL Ratings has also noted the recent news of an inspection by The Directorate General of GST Intelligence on the sale of FMCG business by the Raymond group and will continue to monitor any developments in this regard.
The business risk profile of RCCL will continue to benefit from the strong legacy of branded lifestyle B2C business run through the Branded Apparel and Branded Textile segments operated through a strong distribution network as well as a healthy B2B business run through the Garmenting and High Value Cotton Shirting segments which is expected to drive continued healthy operating performance and cash generation over the medium term. RCCL’s financial risk profile will be marked by strong debt protection metrics with mainly working capital debt, and healthy liquidity surplus thereby resulting in net debt free status. CRISIL Ratings expects the healthy traction seen in operating performance of the Lifestyle business to continue over the medium term while maintaining the healthy financials risk profile, post de-merger.
The continuing Raymond will house the engineering business which is strengthened post MPPL’s acquisition as well as the real estate business (representing ~30% share of reported EBITDA during fiscal 2023), and the joint venture denim business, Raymond UCO Denim Pvt Ltd (rated ‘CRISIL BBB-/Stable/CRISIL A3’). It will have real estate related debt (Rs.267 crore as of Sept-2023) as well as acquisition debt of Rs 342 crore and MPPL’s working capital debt; and will also be net debt free and will enjoy the financial flexibility with about 52 acres of development ready (excluding current development and that given to Thane Municipal Corporation) prime land in Thane, Mumbai; this rating continues to be on ‘Watch with developing implications” pending completion of the de-merger process.
The business risk profile of the continuing Raymond is expected to be moderate compared to the consolidated entity, albeit marked by healthy presence in the real estate business with diversification benefits of a healthy engineering business. In the engineering business, Raymond enjoys established market position in the tools & hardware, automotive components and aerospace & defense segments enjoying improving and healthy EBITDA margins. Also, while Raymond is a relatively newer entrant in the MMR region, it has demonstrated strong sales, collection, and construction traction by delivering 3 towers in the value “Ten X” project 2 years ahead of RERA schedule. Financial risk profile of continuing Raymond is expected to be remain healthy with net debt free status and healthy financial flexibility with healthy cash surplus and 52 acres of development ready prime land bank. Company is committed to grow in the MMR region only via asset-light JDA route and not resort to land purchases. It will continue to maintain a healthy liquid surplus.
Earlier, on April 27, 2023, Raymond had announced the slump sale of the FMCG business operated through its 47.66% held associate company, RCCL to Godrej Consumer (GCPL, rated ‘CRISIL A1+’) for Rs 2,825 crore with plans to use part of the net sale proceeds of ~Rs 2,200 crore for debt reduction at Raymond. Thereafter, Raymond has received the part sale proceeds from RCCL and prepaid external debt resulting in halving of external debt to ~Rs 1,151 crore on September 30, 2023 from Rs 2,101 crore on March 31, 2023. Also, aggregate liquid surplus has improved to Rs 1,712 crore as of September 30, 2023 from Rs 1,410 crore as of March 31, 2023. CRISIL Ratings continues its engagement to monitor the de-merger progress, take business updates, and understand the complete details of assets, and liabilities post de-merger.
On April 27, 2023, the company had also announced the proposed demerger of its Lifestyle businesses into RCCL and convert RCCL into a listed entity by issuing 4 shares of RCCL for every 5 shares held in Raymond. RCCL hence will house the lifestyle business comprising Branded Textile, Branded Apparel, Garmenting, and HV Cotton Shirting segments (representing ~70% share of the combined reported earnings before interest, tax, depreciation and amortization (EBITDA) of Raymond for fiscal 2023), besides working capital debt, and some long-term debt. Given the sizeable receipt of proceeds from GCPL, the entity is expected to have a net debt free balance sheet and a strong financial risk profile. Post demerger of the lifestyle business into RCCL, promoters will hold 54.87% stake in RCCL, followed by public with 45.13%. There will be no change in the shareholding of Raymond Ltd, where promoter shareholding will continue at 49.11%, and public will hold 50.89%, post listing.
CRISIL Ratings will also continue to monitor the business restructuring process which is subject to regulatory and other approvals and will take another 6-9 months to complete. CRISIL Ratings will resolve the watch following detailed discussion with management, completion of de-merger, further clarity on business and financial profile of the demerged business.
The ratings also reflects, continued improvement in Raymond’s operating performance across the lifestyle business, well supported by other segments, and improving profitability, driving healthy cash generation from the business, which is expected to continue going forward. Rationalised cost structure, tight control on working capital and improved cash flow management has led to lower net debt and better debt metrics; for instance the ratio of net debt to EBITDA has improved to 0.64 times in fiscal 2023, from ~1.75 times in fiscal 2022, while other debt metrics too have witnessed strong improvement.
Operating income grew by 33% on-year to Rs 8,234 crore in fiscal 2023, backed by broad-based growth across all segments including lifestyle segments (both business to business and business to consumer), engineering, and real estate. Pre-IndAS 116 EBITDA improved to Rs 1,084 crore at 13.2% margin against EBITDA margin of 10.2% seen in fiscal 2022, benefitting from better revenues, improved fixed cost absorption, and ability to pass-on raw material price increases to customers. Raymond has managed its working capital efficiently and maintained gross debt (excluding lease liabilities) at Rs 2,101 crore as on March 31, 2023 versus Rs 2,067 crore as of March-2022 despite the increase in scale. Liquid surpluses have improved to Rs 1,410 crore as on March 31, 2022 (Rs 958 crore in March-2022). Consequently, debt metrics such as net debt to EBITDA and adjusted interest coverage ratios improved to 0.64 times and 5.20 times, respectively, as of March 31, 2023 from 1.75 times and 3.70 times in fiscal 2022.
Further, revenue in the first six months of fiscal 2024 grew by 3% to Rs 4,025 crore with support from lifestyle segments while EBITDA margin stood at 11.3% mainly owing to reduced sale from high-margin real estate segment. Operating performance is expected to ramp in the second half of this fiscal with new project launches in the real estate segment, healthy growth in lifestyle with new store addition and engineering segments driving the improvement leading to 10-12% growth in overall sales with EBITDA margin remaining at 12-13% with support from price increases taken, moderation in raw material prices, a leaner cost base and improved fixed-cost absorption.
The ratings continue to reflect the company’s dominant position in the domestic worsted suiting business, established brands in the apparel business, diversified revenue streams and good traction in real estate project, integrated operations with a strong retail network, adequate and improving financial risk profile, and strong liquidity. Financial flexibility is also enhanced by owned land bank of 52 acres at a prime location in Thane (Maharashtra). These strengths are partially offset by exposure to volatility in raw material prices and foreign exchange (forex) rates, intense competition in the domestic apparel business, and susceptibility to demand and implementation risks associated with the real estate projects.