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Relaxo Footwears Ltd>
  • CMP : 824.6 Chg : -5.20 (-0.63%)
  • Target : 745.0 (-3.87%)
  • Target Period : 12-18 Month

06 Feb 2023

Lower volumes denting profitability

About The Stock

Relaxo is India’s leading footwear manufacturing company, boasting of largest capacity of 10.0 lakh pairs per day. Relaxo is a dominant player in the open footwear space (~76% of sales), with its strong portfolio of brands (‘Flite’, ‘Bahamas’, ‘Sparx’, ‘Relaxo).

  • Market leader in value priced segment selling ~19 crore pairs annually
  • Relaxo, over the years, has maintained b/s prudence with controlled working capital, healthy asset turns of 2.5x and generating RoCE of 20%+

Gross margins recovered but EBITDA margins continued to be significantly lower YoY due to negative operating leverage.

  • Revenue fell 8% YoY to ₹ 681 crore (up 2% QoQ). As per our calculation, volumes continued to stay under pressure (~ 4.1 crore pair), down 8% YoY. Owing to price cuts average realisation fell 4% QoQ at ₹ 165/pair
  • Gross margins were at 53% vs. 48.9% in Q2FY23 and 53.2% in Q3FY22 owing to easing of raw material (EVA) prices. However, negative operating leverage led to EBITDA margins contracting by 580 bps YoY to 10.6%
  • PAT for the quarter declined 57% YoY (up 35% QoQ) to ₹ 30 crore
What should Investors do?

Relaxo witnessed ~45% decline in share price on a YTD basis owing to unprecedented inflation scenario (35% of its RM are based on crude derivatives) and uncertainties on the demand outlook. While we do remain structurally positive on the business model given its strong brand prominence in tier II/III towns and healthy balance sheet to weather the crisis, premium valuations and near term headwinds may limit upsides. Also, with high cost inventory still existing in distribution channels, the margin recovery to normal levels is likely to be gradual and would be dependent on clearing of existing high cost inventory across channels. Hence, we maintain our HOLD rating on the stock with a revised target price. Further volume recovery after correction in ASPs, would be a key monitorable as volume trajectory has stagnated in the past few quarters to ~4 crore pairs.

Target Price and Valuation

We value Relaxo at ₹ 745 i.e. 56x FY25E EPS.

Key Triggers for future price performance
  • Despite selling ~18 crore pairs, Relaxo’s current market share is <10%. Given its robust balance sheet and strong brand patronage, we believe there is enough headroom for long-term growth and market share gains
  • While the north region remains the main fortress for the company (50%+ revenues), west and south remain relatively underpenetrated markets. Relaxo has geo-tagged ~100000 outlets (currently present in ~60000 outlets), which signifies immense opportunity to penetrate new territories
  • We model revenue CAGR of 10% in FY22-25E with volumes recovering to ~21.7 crore pairs in FY25 (FY21:    19.0, FY22: 17.5, FY23: 16.1 crore pairs)
Alternate Stock Idea:

Apart from Relaxo, in our retail coverage we also like Bata.

  • Bata India has a strong b/s, diversified branded product portfolio and pan India network. BUY with a target price of ₹ 2065

Key Financial Summary

Particulars FY20 FY21 FY22 5 year CAGR (FY17-22) FY23E FY24E FY25E 3 year CAGR (FY22-25E)
Net Sales 2,410.5 2,359.2 2,653.3 10.0 2,716.8 3,115.1 3,510.8 9.8
EBITDA 409.0 495.5 415.8 12.0 329.8 482.8 572.3 11.2
Adjusted PAT 226.3 291.6 232.7 14.0 158.7 273.0 332.2 12.6
P/E (x) 85.0 66.0 82.9 - 121.6 70.7 58.1 -
EV/Sales (x) 8.0 8.0 7.2 - 7.0 6.1 5.3 -
EV/EBITDA (x) 47.1 38.2 46.0 - 57.5 39.1 32.8 -
RoCE (%) 23.9 26.0 18.3 - 12.4 18.9 20.6 -
RoE (%) 17.8 18.5 13.2 - 8.5 13.4 14.7 -
- - - - - - - - -
- - - - - - - - -
- - - - - - - - -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of Q3FY23 results

  • The management indicated that demand continued to remain subdued and was negatively impacted by high inflation, which impacted the purchasing power of its core customer. The mass category of open footwear (Hawaii and Flite brands) had declined due to customers shifting to cheaper unbranded products. The closed footwear category continues to grow after opening up of markets post Covid. Revenue for the quarter declined 8% YoY (up 2% QoQ) to | 681 crore. Overall ASP for Relaxo was at | 165 in Q3FY23
  •               Revenue trajectory for Relaxo continued to remain sluggish due to existence of high priced inventory with the company’s distribution channels, which impacted volume growth. From September onwards, the company had taken a price correction of 15-20% in the open footwear category. The management highlighted that volumes have marginally improved QoQ post price reduction by the company. The company expects the full impact of price corrections to be visible in ensuing quarters as the high priced inventory is cleared from distribution channels
  • In the previous four quarters, average quarterly volumes have stagnated to ~ 4.0 crore pairs after hitting an all-time quarterly high of 5.7 crore pairs in Q4FY21. Relaxo, in FY21, had recorded its highest sales volume (19.1 crore pairs) as the pandemic led restrictions had given a fillip to demand for open footwear (slippers & sandals). However, as restrictions eased from Q2FY22 onwards, demand for open footwear (~75% of sales) started to moderate


  • EVA, which is a major raw material for the company, has seen huge volatility in prices with prices increasing from | 120 per kg to | 300 per kg and declining to | 160 per kg then moving up again to | 200 per kg. In Q2FY23, owing to high cost inventory, cost of goods sold (COGS) per pair increased to an all-time high of | 88/kg (up 25% YoY). However, in Q3FY23, the COGS per pair has reduced to | 78/kg (Q3FY22 | 77/kg)


  • On the positive side, cuts in prices could result in enhanced volumes in ensuing quarters (leading to positive operating leverage). Factoring in Q3FY23 performance, we revise our EBITDA estimates downwards by 4% in FY23E (EBITDA margin: 12.1%). With stabilisation in RM prices and recovery in volumes, we anticipate EBITDA margins will revert back to 15-16% from Q1FY24E


  • Brand Sparx is performing well as demand for sports and athleisure category continues to be robust. The brand contributes ~38% to revenues with closed shoes contributing ~60%. The management indicated that currently the capacity of sports shoes/sandals is almost fully utilised (capacity: 50000 pairs per day). Hence, it has proposed to add another 50000 sports shoes capacity per day to cater to the strong demand. The plant is expected to be operational from April 2023. For Sparx brand, the company is looking to expand its presence in the north and eastern region as the brand has a good foothold in the southern and western regions. It believes that athleisure footwear segment will grow at a fast clip owing to a shift in consumer behaviour towards fitness based products


  • The online channel contributed 12% of revenues in FY22. The company expects it to increase to 15% over the next two to three years. For the Sparx brand, the contribution from the online channel is between 20% and 25%. The same is expected to increase, going ahead


  • On the overall capex front, the management indicated that capex for FY23 would be ~ | 140 crore while for FY24 it would be at | 80-100 crore



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