Liberty Shoes | Q3FY15 Result Update | Corporate restructuring to be the key catalyst; Maintain BUY with TP of Rs 338 :: IndiaNivesh

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Liberty Shoes Ltd reported disappointing results for Q3FY15. Net Sales was broadly in-line with expectations with variation of ~5%. However, EBITDA margin contraction against our expectation of expansion led to disappointing bottomline performance. Net Sales grew 20.5% yoy to reach Rs 1444 mn in Q3FY15 from Rs 1198 mn in Q3FY15 (INSPL est: Rs 1526 mn). This was driven by domestic sales growth of 21.7% yoy reaching Rs 1380 mn in Q3FY15. Exports grew 10% yoy to reach Rs 121 mn in Q3FY15. During the quarter, the company added 16 stores new exclusive stores in Company Owned & Company Operated (COCO) & franchise format. EBITDA of the company grew by 19.5% yoy to reach Rs 117 mn in Q3FY15 from Rs 37 mn in Q3FY14 (INSPL exp: Rs 137 mn, missed by 14.6%). EBITDA margin stood at 8.1% in Q3FY15 against 8.2% in Q3FY14, contraction of 7 bps yoy (INSPL expectation: 9%). The contraction against our estimates was on account of higher raw material and employee cost which was partially offset by lower employee cost. Adj. PAT (adjusted for minor exceptional items) stood at Rs 42 mn in Q3FY15 against Rs 37 mn in Q3FY14, an increase of 14% yoy (INSPL exp: Rs 52 mn, missed by 20.5%). Effective tax rate was higher at 4.9% in Q3FY15 against -0.5% in Q3FY14, which led to lower than proportionate growth of Adj. PAT against EBITDA. For 9mFY15, the net sales grew by 14.2% yoy to reach Rs 3898 mn in 9mFY15 from Rs 3414 mn in 9mFY14. Domestic sales grew 13.9% yoy to reach Rs 3671 mn in 9mFY15 from Rs 3224 mn in 9mFY14. Exports stood at Rs 393 mn in 9mFY15 against Rs 317 mn in 9mFY14, implying growth of 24.2% yoy. The company added 53 new exclusive stores in 9mFY15 including both Company Owned & Company Operated (COCO) & franchise formats. EBITDA of the company grew by 7.9% yoy to reach Rs 296 mn in 9mFY15 from Rs 274 mn in 9mFY14. EBITDA margin contracted 44 bps yoy to reach 7.6% in 9mFY15 from 8% in 9mFY14 due to higher raw material cost. Raw material cost increased to 53.2% in 9mFY15 from 51.7% in 9mFY14. Adj. PAT stood at Rs 101 mn in 9mFY15 against Rs 89 mn in 9mFY14, growth of 12.3%. PAT growth was higher than EBITDA growth due to higher other income and lower than proportionate increase in interest cost. Developments on restructuring Liberty Shoes has announced a concrete timeline for ending the existing relationships with group companies, though partially. The company has mentioned that the existing business arrangements with group companies namely M/s Liberty Enterprises and M/s Liberty Group Marketing Division would be expiring on 31 March 2015. The arrangement included two manufacturing facilities at Gharaunda and Karnal including their Distribution network and License Usage of Sub-brands. The companies have jointly engaged M/s KPMG & Associates to formalise the process of acquisition of these assets by Liberty Shoes Ltd. The consultant is likely to submit their report in 6-8 weeks for consideration by Board and same would be effective from 1st April 2015, subject to regulatory approvals.

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