Shares of Raymond and Godrej Consumer Products (GCPL) were down up to 6 per cent on the BSE in Friday’s intra-day trade after GCPL on Thursday announced the acquisition of the consumer products business of Raymond Consumer Care (RCCL), a subsidiary of Raymond, in an all-cash deal of Rs 2,825 crore.
Shares of Raymond slipped 6 per cent to Rs 1,608 on the BSE in intra-day trade. The stock had zoomed 56 per cent from a level of Rs 1,104 on March 28, to close at Rs 1,717.35 on Thursday.
Raymond announced the demerger of its lifestyle business to RCCL which will be listed as a separate entity. RCCL will operate the branded textiles, branded apparel, garmenting and high value shirting business. Further RCCL will sell its FMCG business to GCPL for a consideration of Rs 2,825 crore (5.4 times annual sales of Rs 524 crore).
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Post the demerger, Raymond which will continue to be listed would primarily be a real estate company with investments in denim and engineering business. Shareholders of Raymond will get 4 shares of RCCL for every 5 shares held.
The proceeds from the sale of FMCG business would be utilized for repayment of debt and infusing of funds in the Lifestyle business. With infusion of funds from the sale proceeds, the lifestyle business would be able to pursue its growth ambitions and scale up its various businesses at a faster pace.
The move to demerge the Lifestyle Business from Raymond will enable the business to be net debt free and will become an independently listed entity. RCCL will retain its condom manufacturing facility and will continue to do contract manufacturing in Aurangabad, Maharashtra for both domestic and international markets, Raymond said.
This acquisition allows us to complement our business portfolio and growth strategy with under-penetrated categories that offer a long runway of growth, GCPL said.
Meanwhile, shares of GCPL were down 3.5 per cent to Rs 920 on the BSE in intra-day trade. The stock of personal care products company has dipped 6 per cent in past two trading days. It had hit a record high level of Rs 994.45 on April 24, 2023.
GCPL would be able to expand distribution sharply which should drive strong growth in the medium-term. This along with a 20 per cent margin will also make the deal EPS accretive on our back-of-envelope calculation, analysts at Jefferies said.
However, the past deals by GCPL, mainly in overseas market have seen mixed results and even today; the company is grappling to resolve issues in Africa (& even Indonesia). In case of Raymond portfolio, male grooming is a tough category with low brand loyalty & high competition, the brokerage firm said.
Market share trends from the past as well as Marico's Paras Pharma deal are instances to this point. Sexual wellness too is a completely new line of business for GCPL, where there are strong healthcare firms in competition. Finally, this also raises concerns on management bandwidth, given there is still job at hand on India HI, Indo business among others, Jefferies said.
“On first-impression basis, we are not able to fully appreciate the need for GCPL to acquire Raymond’s FMCG business. While there is perhaps merit in GCPL eyeing the male-grooming pie but we reckon that its own Cinthol is as strong a brand as Park Avenue, if not stronger”, according to analysts at JM Financial Institutional Securities.
There are cost-synergies to be had for sure, but that is mainly because the overhead structure of the acquired business, as it stands today, is quite inefficient, in our view, the brokerage firm said.
The gross margin profile of the acquired business appears lower vs GCPL’s existing India margin (high-50s at steady-state). Assuming the company is able to quickly scale-up operating margin in the business to 17-18 per cent (achievable, in our view), the business would need to double in size for it to be earnings-accretive for GCPL. This could be a 3-year process implying that the acquisition is, based on preliminary workings, earnings-dilutive for the next couple of years, analysts said.