ICICI Direct has buy on Relaxo Footwear, target price Rs 775

ICICI Direct Research has given a buy rating on Relaxo Footwears with a price target of 775 (52x FY22E EPS), over a period of 12 months. According to the brokerage, strong manufacturing capability & robust distribution network have led Relaxo to consistently outperform peers and gain market share. While the volume growth momentum may come down to a certain extent, it will still grow at a steady 8% CAGR in FY19-22E. Sustained improvement in product portfolio is expected to drive realisation, revenue growth. On Monday, shares of the company traded at Rs 3610.75, down 4.72 per cent from Rs 3789.70 on Friday.

Incorporated in 1984, Relaxo is one of India’s largest footwear companies headquartered in Delhi. The company has established eight state-of-the-art manufacturing facilities, with a capacity to manufacture 7.5 lakh pairs of footwear per day (~19.5 crore pairs per year). Apart from its flagship brand ’Relaxo’, the company also has leading sub-brands such as ‘Sparx’, ‘Flite’ and ‘Bahamas’.

Investment Rationale


The company operates at a utilisation rate of 70% and touches 90% during peak demand. In-house manufacturing facility assists in maintaining quality and pricing products competitively. To be ready for future growth, Relaxo is adding capacity of additional 1.0 lakh pairs per day in the Bhiwadi plant within the next three years. The capex for the same is estimated at | 90 crore, which will be funded through internal accruals.

Relaxo has a capital efficient business model, generating healthy asset turns of 3.0x and EBITDA margins of 15 per cent . Stringent control in NWC (60 days) has led to average CFO/EBITDA at 55 per cent . Subsequently, D/E ratio fell from 1.0x in FY13 to 0.1x in FY19, with RoCE of 20 per cent +. ICICI Direct expects Relaxo to be the beneficiary of market share gains through a shift from unorganised to organised players. We expect earnings to sustain healthy momentum & post 28 per cent CAGR in FY19-22E. Healthy performance in a challenging scenario instils confidence in the business model, which would enable the company to command premium valuation multiple on a sustainable basis. We have a buy rating on the stock with a target price of | 775 (52x FY22E EPS).

Key risks and concerns

Significant import dependence for raw material: Currently, ~ 40 per cent of raw materials used by the company are imported (EVA ~ 18 per cent , PU ~ 15 per cent and rubber ~ 7 per cent ). Fluctuation in prices of these crude-linked products and volatility in currency exchange rates can impact the margins of the company. Furthermore, the government had recently hiked the custom duty on footwear (from 25-35 per cent ) and parts of footwear (from 15-20 per cent . Inability to undertake price hike may impact gross margins.

High level of competition may impact margins: Increased level of competition from new entrants as well as unorganised players can impact the profitability metric for the footwear industry.

Liquidity stress in MBO channel: Among various distribution channels, MBOs are facing liquidity stress leading to lower offtake across product categories. From Relaxo’s perspective, it is significantly dependent on the MBO channel with the same contributing ~ 80 per cent of its revenues. Continued liquidity stress in the MBO channel can adversely impact the revenue growth trajectory and also inflate the working capital cycle.

Financials
For the quarter ended 31-12-2019, the company has reported standalone sales of Rs 599.83 crore, down -3.53 per cent from last quarter sales of Rs 621.77 crore and up 8.81 per cent from last year same quarter sales of Rs 551.27 crore. The company has reported net profit after tax of Rs 54.16 crore in the latest quarter.