Visit Note | Liberty Shoes Ltd. (LSL) | Maintain BUY rating on the stock retaining our target price of Rs 336 - IndiaNivesh,

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Liberty Shoes has witnessed sharp correction in its stock price post Q2FY15 results
majorly on account of disappointment on margin front. The company reported
EBITDA margin of 6% against FY14 EBITDA margin of 8.2%. We met the senior
management of Liberty Shoes Ltd (LSL) to assess the current operations and future
prospects. We returned positive on the stock considering the corporate restructuring
process reaching an advanced stage. Following are the key takeaways from the
meeting:
 LSL pays approximately 5.5% of its net sales in form of royalty and other
franchise fees to its group companies namely, Liberty Enterprise, Liberty Group
Marketing Division and Liberty Footwear Company, for using their assets and
network. The company is considering a restructuring plan wherein it can do
away with these payments, which is at advanced stage. This restructuring
would enable the company to save on these expenses, thereby improving its
profitability. We have not factored these benefits in our estimates. We believe
this restructuring would be a key catalyst for the stock rerating.
 The marginal volatility visible in Q1FY15 and Q2FY15 due to postponement
of an institutional order is behind now. The company is looking for stable
margins of ~8% for FY15E and FY16E period.
 The company stated that the store expansion target of reaching 800 stores
by FY17E is intact and progressing well. The benefits of synergy with retail
subsidiary, Liberty Retail Revolutions Ltd, are likely to visible over medium
term.
 The introduction of Goods and Services Tax would benefit the company in
terms of lower competitive intensity from unorganised players. Introduction
of GST is not likely to be a huge benefit on financial basis at the rate of 24% as
it appears to be on higher side.
 The management has been focussing on inventory reduction to lower working
capital requirement and optimise inventory in the stores. It has integrated all
the back-end facilities with front-end sales system through SAP to plan and
replenish inventory on a timely basis. The benefits would accrue to the
company over a period of time. We expect invemtory days to reduce to 68
days in FY16E from 84.5 days in FY14.
 The current debt on the books is Rs 1332 mn resulting in debt to equity of
1.05x. Currently the company does not have any major capex requirement
apart from maintenance capex for its manufacturing facilities and initial capex
for store openings. Most of the stores would be opened under asset light
franchise format limiting the requirement of high capex.
Valuation
At CMP of Rs 262, the stock trades at PE of 26.6x and 15.6x its FY15E and FY16E
earnings of Rs 9.9 and Rs 16.8 per share respectively. In our opinion, the current
price factors the disappointment on the result front and offers buying opportunity
for the investors. Its competitors BATA and Relaxo Footwears are trading at CY15E
PE of 32.3x and FY16E PE of 31.8x Bloomberg consensus estimates respectively,
which makes LSL attractive at current levels. We maintain BUY rating on the stock
retaining our target price of Rs 336 (valuing the stock at 20x FY16E earnings).
LINK
http://www.indianivesh.in/Admin/Upload/635561336913141250_NiveshDaily%20-%202%20January%202015.pdf