Sharekhan recommends buying Relaxo Footwear with a target price of Rs885
Market cap – Rs816 croreCMP- Rs680
Target price-Rs885
Key points
Enviable position present in the lucrative footwear segment: Relaxo footwears Ltd is present in the Indian organized footwear market which is growing at a CAGR of 15-18% over the last 5 years and is expected to continue to grow in the similar range for the next 5 years time frame. The company is present in this lucrative consumption segment with four top of mind recall brands- viz, Hawaii, Sparx, Flite and Schoolmate catering to different target audience across the socio economic as well as demographic strata. Its flagship brand Hawaii enjoys leadership positioning in the rubber slipper market, particularly in north, while its other brands also command significant segment share, visible from the fact that the company with its 29.5% CAGR growth over FY08-12 has outgrown the industry.
Well heeled distribution setup complimented by its growing network exclusive outlets: Relaxo primarily sells its products via distributors, who in turn take the same to the retailers on a Pan India basis. Over the years the company has developed strong distribution network for its products, with an array of over 700 distributors, making the products & brands available in over 46,000 retail touch points on a pan India basis. At present around 90% of the revenue comes from this mode of distribution. Apart from this twofold distribution led model, Relaxo also sells directly to the customers; through its company owned retail shop offering called “ Relaxo Shoppe”. At present, it owns 154 outlets (Relaxo Retail Shoppe) exclusively for its branded footwares contributing around 7% to the sales, and further plans to enhance revenue from this segment by targeting 25-30 stores in each of the next three financial years. To further enhance its brand reach and drive volume growth, Relaxo is undertaking aggressive brand building initiatives, under which it has roped in leading bollywood actors (viz- Salman Khan for Hawaii, Akshay Kumar for Sparx and Katrina Kaiff for Flite).
Soft raw material price outlook to drive margins and earnings going forward: Three raw materials viz- Raw rubber, EVA and synthetic rubber together constitute 55-60% of the total raw material cost. In the last two years, the prices of raw rubber and EVA had seen considerable increase, impacting the gross margin and the consequently operating and net earnings. Off late the prices have cooled off and are currently ruling at their 24 month low, and the outlook for the same is expected to be soft. Sharekhan believe this would act to the advantage of Relaxo driving up the gross margins and earnings. Sharekhan expect considerable improvement in the operating margin for FY13 and FY14. With new strategies in place and raw material prices on the softer track we expect it to deliver a CAGR of over 22% topline and close to 34% earnings growth over FY12-14.
Consistent robust financial performance leading to re-rating of multiples: Recommend Buy: Relaxo Footwears has emerged as an attractive investment opportunity in the domestic consumption-oriented plays due to its growing scale of operations, strong brand positioning and consistent healthy financial performance. In addition to steady growth in volumes and higher blended realization due to favorable product mix, the company is likely to benefit from the softening of the key raw material prices (read rubber) and is a potential re-rating candidate. Thus, Sharekhan recommend 'BUY ' rating on the stock with target price of Rs885.
FY09
|
FY10
|
FY11
|
FY12
|
FY13E
|
FY14E
| |
| Net Sales |
407.5
|
553.7
|
688.1
|
860.4
|
1,044.00
|
1,284.60
|
% change
|
33.10%
|
30.00%
|
30.50%
|
24.20%
|
20.40%
|
22.40%
|
Operating profit
|
51.4
|
90.7
|
83.7
|
109.9
|
140.7
|
179
|
% change
|
34.50%
|
76.50%
|
-7.70%
|
31.30%
|
28.00%
|
27.20%
|
OPM
|
12.6
|
16.4
|
12.2
|
12.8
|
13.5
|
13.9
|
Net earnings
|
14.2
|
37.7
|
26.7
|
39.9
|
50.1
|
71.1
|
% change
|
35.80%
|
165.50%
|
-29.10%
|
49.40%
|
25.50%
|
41.90%
|
EPS
|
11.8
|
31.4
|
22.3
|
33.3
|
41.7
|
59.2
|
PER
|
57.5
|
21.7
|
30.5
|
20.5
|
16.3
|
11.5
|
EV/EBITDA
|
17.1
|
10.1
|
11.4
|
8.6
|
6.8
|
5.3
|
RoCE
|
22.70%
|
28.80%
|
19.60%
|
24.70%
|
27.30%
|
31.90%
|
RoE
|
19.20%
|
30.80%
|
17.40%
|
20.20%
|
19.40%
|
20.20
|
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