Raymond royalty issue: Raymond royalty: We will take the best call in shareholders’ interest, says Gautam Singhania

Raymond demerger is something we have been thinking about for five or six years and even the land monetisation process has taken its time. But sometimes things take their own time no matter what. What we could not do in a very good market, we actually did in a very bad market and therein lies the irony, says Gautam Hari Singhania, CMD, Raymond. Royalty payment to parent company may be capped at Rs 25-crore a year. Excerpts from an exclusive interview with Ajaya Sharma of ETNOW.

What were the triggers for the recently announced de-merger which has excited the Street so much that your stock rallied almost 40% in the last few months?
We want to create shareholder value and this is in line with that. Now to come to where we have come today, a series of things had to happen and one of them had to be a trigger. Two things really had to happen; a) A trigger of land demonetisation in this case, of getting some funds so that we could reduce debt and; b), if we had to do the demerger, the old company needed a business to sustain itself. Over the last 12 months, you have seen the real estate commit to itself. So two separate businesses with two separate revenue streams, combined with the debt reduction, has really made the demerger possible. It is something we have been thinking about for five or six years and even the land monetisation process has taken its time. But sometimes things take their own time no matter what. What we could not do in a very good market, we actually did in a very bad market and therein lies the irony.

Let us talk about the lifestyle business first. The latest data shows that it did EBITDA of about Rs 600 crore. How is the growth profile of this business as also the margin profile? What is the road ahead?
Let us look at what we are trying to do, philosophically. The lifestyle businesses has had quarter on quarter growth. Okay this last quarter has been challenging which has been challenging for everybody. But philosophically, what are we doing? We were spinning the lifestyle business off into a separate company. We are putting the right governance into place, the right focus. We are giving the right ROC in that business. The ROC in the business already 18%. It will go over 20-21%. Add to current multiples, it should have a billion dollar market cap. So, two boxes get ticked really from an investor point of view, an ROC of higher than 15% and a billion dollar valuation which in our opinion will bring in a completely different set of investors in that business.

I want to assure my shareholders that we are here to listen. We do things at a pace which is very fast and maybe, some things get missed out but we are open to dealing with the issues.

-Gautam Singhania

Number two, investors like single-focussed businesses and this one is coupled with a good governance structure that we put into place. In the Raymond Group over the last couple of years, we have focussed on governance and increasing shareholder value. All of this is more important than the Rs 600 crore number that you are talking about. It will drive the business to another level and that is what we want to achieve. Once we decide something, we do it very swiftly.

Yes that is correct. I mean earlier this high quality business was getting subdued valuations because the overall business was housed in one company.
We were getting conglomerate discount.

Yes, billion dollars is roughly the fair value whereas your main company valuation was a little under a billion dollar. So. that is why the unlocking is happening.
That is why unlocking is happening because the multiples will change. The minute it is a focussed business, you would not get the conglomerate discount and multiples change.

What is the arrangement for royalty between the old company and the new lifestyle business which has been demerged.
It is unfortunate that when you do so many things people focus on the one thing that might not suit people. I have been very candid and that is a subject under discussion. We have taken on board the feedback that we have got on it. There are reasons we have done it the way we have done it, In the short term, till the real estate creates a proper revenue steam in the old company, I will need a revenue stream in the old company to support the debt there. Now we could have waited another two years to do this but I would rather say we are there, let us get going. We might not get 110% value but we will certainly get a great amount of value. The matter is under discussion internally. We have taken on board all the investor feedback that we have got and we will deal with it.

The reason I was asking was that the market has got this issue on its mind that what percentage of overall profitability will you retain in lifestyle and if it be a reasonable kind of arrangement?
No, all the lifestyle profitability will go lifestyle.

No in the sense that royalty payment the lifestyle business will make to the old company.
There are many companies where royalty payment is done for the brand and it is capped. It is not that it is unlimited. It is already capped which has been communicated to the market. Having said that, we have heard the feedback from the market and I want to assure you that we will discuss it internally and take the best call in the interest of shareholders. Please understand I am the largest shareholder, I would be interested in the best whatever it is. Number two, you are a minor shareholder in both companies. If the benefit is in company x or y, you are still getting the benefit.

You are also in discussion with…
I want to also clarify something that the brand is not held personally, it is held by the company. Whether you are holder in the old company or the new company, you are still having the benefit in either one of your two arms.

The feedback which we got from the market is a lot of your older shareholders want to add and that is why the run up in the stock because they believe that the tilt will be higher in the new lifestyle business. Are you also getting good feedback about this end of the business?
I certainly believe that there will be a new class of investors that will come into a focussed business. Having met two important criteria — one on ROCE and one on minimum market size of the company, there will be a different set of investors that would get attracted to the real estate business. The real estate business will be significantly larger in the old company.

Are you in discussion with institutional shareholders who may want to know more about it? Are you doing road shows?
Reaching out to shareholders has been a continuous process. It will only intensify now once the demerger has gone through. Post the demerger announcement, I have met several shareholders personally. My team has done a couple of conference calls and I will continue to meet investors and explain what the story is. As a company, I want to assure my shareholders that we are here to listen. We do things at a pace which is very fast and which you have also said we have done very quickly. Maybe, some things get missed out but we are open to dealing with the issues.

How is the FMCG end of your business looking right now? After consolidation, there are a lot of synergies coming in and you have plans there as well?
The FMCG business is growing pretty well. There will be 20-25% growth in that business. The consolidation has played out well for us because of significant cost savings. We are the largest selling deo company in the country between our two brands. It all comes back to shareholder value creation.

Apart from what we have done on the business side, we have done a lot on the governance side, I have stepped off as chairman of that company. I am just a board member. We have five independent directors and an independent chairman. And I think that is the future the way the businesses should go.

How is the potential of this segment of the business? The analyst community sees it as a Rs 1,000 crore company in the next couple of years. Perhaps you are looking at a listing at a later date?
Our gross sales on the FMCG this year itself is Rs 800 crore.

So it can easily cross Rs 1,000-1,100 crore?
Certainly. We are dreaming big in this now. We have put the building blocks in place and now we are going to build on that.

There is also an indication that perhaps a listing of this business will come by in the next two to three years?
Listing is the only way to create shareholder value and as the stated policy of the group is to create shareholder value, listing will be inevitable. When it will happen, who knows? But the idea is to create value out of the business.

Let us talk about the realty end of the business? When you launched real estate plans, there was already a lot of inventory in the Thane region. Other players were present. How has the experience been for bookings so far?
The response has been extremely good. With God’s grace, we have done well in the real estate space. Seven, eight days ago we launched the one BHK apartments which have done well. More importantly, around our land the ecosystem that will be built is something that people are looking forward to.

Raymond is conscious of its brand and we are giving the right product at the right price, right location and right facilities. It is a good mix and the proof of the pudding is in the eating.

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