Relaxo Footwear, 7th February, 2013

7/29/2019 Relaxo Footwear, 7th February, 2013

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Please refer to important disclosures at the end of this report 1

EBITDA 19 18 7.2 24 (21.7)

EBITDA margin (%) 8.4 8.6 (16)bp 9.9 (148)bp

Source: Company, Angel Research

Relaxo Footwear (Relaxo) reported lower-than-expected numbers for 3QFY2013.

The revenue for the quarter stood at `223cr, 9.2% higher yoy, but substantially

lower than our expectation of `250cr. This was due to the new initiative of product

specific distribution not getting popular among dealers; hence the impact on

sales. The EBITDA margin witnessed marginal contraction of 16bp yoy to 8.4%

during the quarter which was lower than our expectation of 10.3%. Subsequently,

the profit for the quarter stood flat yoy at `6cr, declined by 41.0% on a sequential

basis, and was 49.9% lower than our estimate of `12cr.

The company incurred a

capex of `60cr for the construction of a PU (Polyurethane) footwear plant which

commenced in January, 2013. This development has increased the capacity by

~30,000 pairs per day totalling to 4.0 lakh pairs per day. In addition, the

company plans to open 25-30 retail stores each year. Moreover, the company

has successfully built a strong brand image with leading celebrities endorsing itsbrands; ie Salman Khan endorsing Hawaii, Katrina Kaif tied up for Flite and

Akshay Kumar roped in to endorse the Sparx brand. We expect capacity

expansion and aggressive marketing to complement each other and drive volume

in the future.

We expect Relaxo to post a revenue CAGR of 15.5% over

FY2012-14E to `1,148cr with an operating margin of 11.6% in FY2014E. The

PAT is expected to grow at a CAGR of 29.8% to `67cr for the same period.At the

current market price, Relaxo is trading at 13.4x FY2014E earnings.

Key financials

% chg 35.9 23.9 25.4 15.0 16.1

% chg 160.2 (28.8) 48.5 26.1 33.7

EBITDA margin (%)

31.4 22.4 33.3 41.9 56.1

P/E (x) 23.9 33.5 22.5 17.9 13.4

P/BV (x) 8.2 6.7 5.2 4.1 3.1

RoE (%) 41.0 22.0 26.0 25.6 26.5

RoCE (%) 21.8 14.3 19.5 20.1 23.0

EV/Sales (x) 1.9 1.5 1.2 1.1 0.9

EV/EBITDA (x) 13.7 15.9 11.6 10.0 7.8


CMP `750

Target Price `897

Investment Period 12 Months

Stock Info

Sector

Net debt (`cr) 144

Bloomberg Code

Shareholding Pattern (%)

Promoters 75.0

MF / Banks / Indian Fls 16.1

FII / NRIs / OCBs 1.4

Indian Public / Others 7.6

Abs. (%) 3m 1yr 3yr

Sensex 4.4 10.9 23.4

Relaxo (6.5) 125.0 306.0

Footwear

Market Cap (`cr) 900

Beta 0.5

Face Value (`) 5

BSE Sensex 19,640

52 Week High / Low 917 / 285

Avg. Daily Volume 2,364

RLXF IN

Nifty 5,959

Reuters Code RLXO.BO

30940000 ext: 6856

[email protected]

Quarter impacted but outlook remains positive

3QFY2013 Result Update | Footwear

February 6, 2012


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3QFY2013 Result Update | Relaxo Footwear

February 6, 2012 2

Exhibit 1:3QFY2012 performance

Net raw material 101 110 (7.7) 115 (11.8) 336 335 0.3(% of Sales) 45.4 53.7 47.3 47.0 54.1

Staff Costs 36 26 38.9 37 (4.5) 110 77 43.1

(% of Sales) 15.9 12.5 15.4 15.4 12.4

Other Expenses 68 51 31.3 66 1.7 195 150 29.6

(% of Sales) 30.3 25.2 27.4 27.3 24.3

OPM (%) 8.4 8.6 (16)bp 9.9 (148)bp 10.2 9.1 111bp

Interest 5 5 (1.6) 4 16.9 12 14 (12.5)

Depreciation 6 6 8.1 6 2.4 19 18 6.1

Other Income 1 2 (30.4) 1 (8.6) 4 4 (3.4)

4.0

(% of Sales) 4.0 4.2 6.2 6.4 4.7

Tax 3 3 11.8 5 (40.2) 15 8 88.5

(% of PBT) 31.8 29.6 31.5 31.7 26.8

PATM 2.7 3.0 4.3 4.4 3.4

Equity capital (` cr) 6 6 6 6 6


Company witnessed pressure on all fronts

Relaxo reported a revenue of `223cr, 9.2% higher yoy, but substantially lower than

our expectation of `250cr, since the new policy of product specific dealership

didnt find acceptance among dealers. Also, there was a substantial price hike in

theSparx brand ofshoes (contributing ~30% to revenue) which was not accepted

by customers. The EBITDA margin witnessed a marginal contraction of 16bp yoy to

8.4% during the quarter; and was lower than our expectation of 10.3%. On a

sequential basis, the operating margin contracted by 148bp from 9.9% in

2QFY2013 on account of higher employee cost and other expenses (mainly

advertisement expense) as a percentage of net sales. Subsequently, the profit for

the quarter stood flat yoy at `6cr; it declined by 41.0% on a sequential basis, and

was 49.9% lower than our estimate of `12cr.

Exhibit 2:Actual vs. Estimate

EBITDA 19 26 (27.1)

EBITDA margin (%) 8.4 10.3 (189)bp



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February 6, 2012 3

Product specific distribution impacted the sales

The company had switched to product specific dealership in order to drive sales.

However, the same was not accepted by dealers and led to a fall in sales. The

management is reviewing the initiatives to overcome the challenges faced during

implementation and is confident that performance of company will be on track in

coming months.

Exhibit 3:Revenue impacted due to experimentation


Exhibit 4:Margin declined fourth time in a row


Investment rationale

Aggressive capacity expansion

The company incurred a capex of`

60cr for the construction of a PU (Polyurethane)footwear plant which commenced in January 18, 2013. This development has

increased the capacity by ~30,000 pairs per day to 4.0 lakh pairs per day. In

addition, the company is also planning to construct a warehouse, with a capex of

`25cr, which is expected to be completed by FY2014E.

Retail store expansion to enhance brand visibility

The company plans to open 25-30 retail stores (Relaxo Shoppe) every year which

will help in increasing direct reach to customers, brand building and increase in

sales.

Brand revamping to boost growthRelaxo has roped in three Bollywood stars to endorse its brands ie Salman Khan

for Hawaii, Katrina Kaif for Flite and Akshay Kumar for Sparx. This has helped the

company in brand building and visibility. However, it will take time for the

enhanced brand image to deliver sales as the company faces stiff completion in all

its segments. For the current year, FY2013E, the total planned advertisement

expenditure is ~`50cr.

Changing revenue mix to drive profit

With the changing revenue mix, the profitability is expected to improve in the

coming years.Sparx has increased its contribution from a mere 4.2% in FY2008 to

24.3% in FY2011; on the other hand, Flite has maintained its contribution at ~25-

30%. Hawaii, being a mass brand, adds to the volume, however, Sparx and Flite

help in improving the companys profitability. Going forward we expect the mix to

154

201

215

199

204

242

248

242

223

13.3

25.6

39.5

10.3

33.5

21.8

15.6

21.6

9.2

0

5

10

15

20

25

30

35

40

45

0

50

100

150

200

250

300

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%)

(`cr)

Revenue (LHS) yoy growth (RHS)

14

17

23

16

18

33

30

24.0

18.8

9.18.5

10.7

7.98.6

13.7

12.1

9.9

8.4

0

2

4

6

8

10

12

14

16

0

5

10

15

20

25

30

35

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%)

(`cr)

EBITDA (LHS) EBITDA margin (RHS)


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February 6, 2012 4

further improve with the new ads and celebrity endorsements helping in increasing

brand visibility. The company is also planning to launch new products in the high

margin segment.

Exhibit 5:Sales break up Brand-wise


Note: * Others includes - Other brands, outsourced, & traded goods, #Expected

49.2 44.4 40.8 35.530.0

31.929.1

28.925.8 35.0

4.27.5 15.3

24.328.0

14.7 18.9 15.1 14.57.0

0.0

20.0

40.0

60.0

80.0

100.0

FY2008 FY2009 FY2010 FY2011 FY2012#

(%)

Hawaii Flite Sparx Others*


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February 6, 2012 5

Financial performance

Assumptions

Exhibit 6:Key assumptionsVolume Growth (%) 4.6 8.6

Realisation Growth (%) 10.0 7.0

Change in raw material prices (%)

Ethyl Vinyl Acetate (EVA) (5.0) 5.0

Rubber (5.0) 5.0

Source: Angel Research

Exhibit 7:Change in estimates

OPM (%) 11.0 12.5 10.7 11.6 (31)bp (90)bp

Source: Angel Research

We expect the companys revenue to grow at a CAGR of 15.5% over FY2012-14E,

from `860cr in FY2012 to `1,148cr in FY2014E, mainly on the back of growth

triggers, which include 1) capacity expansion plans, 2) store expansion,

3) improved sales mix, 4) brand revamping and 5) continuous productdevelopment. With the cooling off of raw material prices, we expect the net raw

material cost as a percentage of sales to decline from 53.4% in FY2012 to 47.2%

in FY2014E. Simultaneously, we expect employee cost and other expenses to

increase on account of expansion and advertisement spending respectively. We

expect a 118bp expansion in the operating margin to 11.6% in FY2014E, mainly

on account of fall in raw material prices, stabilizing ad spends and improvement in

value mix (withSparx and Flite contributing ~60% of sales). The companys profit

is expected to grow at a CAGR of 29.8% over FY2012-14E, from `40cr in FY2012

to `67cr in FY2014E.

Exhibit 8:Revenue to be driven by volume growth


Exhibit 9:Margin to improve with decreasing RM price


306

407

554

686

860

989

1,1

48

29.6

33.335.9

23.925.4

15.0 16.1

0

10

20

30

40

0

200

400

600

800

1,000

1,200

1,400

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013E

FY2014E

(%)

(`cr)

Revenue (LHS) Revenue growth (RHS)

31

41

76

66

90

106

134

10.3 10.1

13.8

9.610.5 10.7

11.6

0

2

4

6

8

10

12

14

16

0

20

40

60

80

100

120

140

160

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013E

FY2014E

(%)

(`c

r)

EBITDA (LHS) EBITDA margin (RHS)


6/12


February 6, 2012 6

Outlook and valuation

Based on 3QFY2013 results, we have downgraded our numbers. However, with

growth triggers like 1) capacity expansion plans, 2) store expansion, 3) improved

sales mix 4) brand revamping and 5) continuous product development intact, we

remain positive on the companys future. We expect Relaxo to post a revenue

CAGR of 15.5% over FY2012-14 to `1,148cr with an operating margin of 11.6%

in FY2014E. The PAT is expected to grow at a CAGR of 29.8% to `67cr for the

same period. At the current market price, Relaxo is trading at 13.4x FY2014E

earnings.

Exhibit 10:One-year forward PE


Exhibit 11:Comparative analysis

Relaxo footwear FY2013E 900 989 10.7 50 41.9 25.6 17.9 4.1 10.0 1.1

FY2014E 900 1,148 11.6 67 56.1 26.5 13.4 3.1 7.8 0.9

Bata India* CY2012E 4,871 1,968 16.1 183 28.5 27.1 27.3 7.2 15.4 2.5

CY2013E 4,871 1,804 32.8 184 28.7 19.3 22.6 5.8 8.2 2.7

Source: Company, Angel Research, *Bloomberg

Risks

Rise in raw material prices and depreciating rupee

The prices of key raw materials EVA and rubber had reached their peak in the

last financial year to ~`149/kg and ~`243/kg respectively, which impacted the

operating margin. However, the prices of both the raw materials have started

declining, with the current price for rubber at ~170/kg and EVA at ~`117/kg. Any

rise in the prices can put margins under pressure. Also, Relaxo imports its entire

EVA requirement, so any further depreciation in the rupee can pose a risk to the

operating margin and thereby impact the profitability of the company.

0

200

400

600

800

1000

Apr-08

Jul-08

Oct-08

Jan-0

9

Apr-09

Jul-09

Oct-09

Jan-1

0

Apr-10

Jul-10

Oct-10

Jan-1

1

Apr-11

Jul-11

Oct-11

Jan-1

2

Apr-12

Jul-12

Oct-12

Jan-1

3

(`)

Price (`) 4x 8x 12x 16x


7/12


February 6, 2012 7

Exhibit 12:Depreciating rupee a concern for EVA cost

Source: Angel Research, Bloomberg

Competition from both, branded and unorganised sector

Relaxo competes with both, branded as well as the unorganised market. Hawaii,

the mass product faces stiff competition from the unorganised market. On the

other hand,Sparx faces competition from branded shoes. The company has priced

its products considering competition. Any price cut by competitors can put pressure

on Relaxos sales and margin.

Company background

Relaxo is a key player in the retail footwear industry, with a strong foothold in the

slippers market and a strong distribution channel of 700 distributors and more

than 46,000 retailers. The company presently has 158 company-owned outlets

across India, with a concentrated presence in Delhi, Rajasthan, Gujarat, Haryana,

Punjab, Uttar Pradesh and Uttarakhand. It has nine manufacturing plants, seven in

Bahadurgarh (Haryana) and one each in Bhiwadi (Rajasthan) and Haridwar

(Uttaranchal). Currently, the company sells its products under three major brands

Hawaii, Flite andSparx.

49.5

53.2

42

44

46

48

50

52

54

56

58

Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13

USD/INR


8/12


February 6, 2012 8

Profit & Loss Statement (Standalone)

% chg 35.9 23.9 25.4 15.0 16.1Net Raw Materials 290 375 459 471 541

% chg 33.0 29.4 22.3 2.6 14.9

Other Mfg costs 33 43 55 63 73

% chg (34.3) 31.8 26.8 15.6 16.1

Personnel 55 74 106 151 176

% chg 65.7 34.5 42.6 42.5 16.1

Other 99 127 150 198 224

% chg 52.8 27.6 18.6 31.6 13.2

Total Expenditure 477 620 770 883 1014

% chg 85.2 (13.2) 35.9 17.4 26.5

(% of Net Sales) 13.8 9.6 10.5 10.7 11.6

Depreciation 15 21 23 25 28

% chg 98.0 (25.5) 47.7 21.2 30.1

(% of Net Sales) 11.0 6.6 7.8 8.2 9.2

Other Income 4 6 5 6 6

(% of sales) 0.7 0.9 0.6 0.6 0.6

% chg 132.0 (40.5) 62.8 32.6 40.0

Extraordinary Expense/(Inc.) (0.0) 0.0 0.0 0.0 0.0

Tax 16 9 14 19 28

(% of PBT) 30.0 24.7 25.4 27.9 29.8

% chg 160.2 (28.8) 48.5 26.1 33.7

(% of Net Sales) 6.8 3.9 4.6 5.1 5.9

% chg 160.2 (28.8) 48.5 26.1 33.7

Dividend 2 2 2 2 2

Retained Earning 36 25 38 49 65


9/12


February 6, 2012 9

Balance Sheet (Standalone)

Equity Share Capital 6 6 6 6 6Reserves& Surplus 104 129 166 215 280

Total Loans 147 156 146 156 145

Other Long Term Liabilities - - - - -

Long Term Provisions - 2 3 4 4

Deferred Tax (Net) 18 22 22 22 22

Gross Block 286 353 379 455 500

Less: Acc. Depreciation 64 84 108 132 160

Capital Work-in-Progress 7 1 21 25 25

Lease adjustment - - - - -

Goodwill - - - - -

Investments - - - - -

Long Term Loans and adv. - 11 12 12 12

Other Non-current asset - - 1 1 1

Current Assets 116 158 169 212 246

Cash 1 2 1 2 9

Loans & Advances 27 16 15 18 23

Inventory 67 117 128 162 179

Debtors 21 23 23 27 31

Other current assets - 1 2 3 3

Current liabilities 69 123 131 169 167

Misc. Exp. not written off - - - - -


10/12


February 6, 2012 10

Cash Flow (Standalone)

Profit before tax 54 36 53 70 96

Depreciation 15 21 23 25 28Change in Working Capital (16) 13 (4) (3) (30)

Direct taxes paid (16) (9) (14) (19) (28)

Others 34 36 (5) (6) (6)

(Inc.)/Dec. in Fixed Assets (80) (62) (46) (80) (45)

(Inc.)/Dec. in Investments - - - - -

(Inc.)/Dec. in LT loans & adv. - 11 1 - -

Others (5) (12) 3 7 7

Issue of Equity - - - - -

Inc./(Dec.) in loans 39 10 (11) 10 (11)

Dividend Paid (Incl. Tax) (2) (2) (2) (2) (2)

Others (25) (41) - - -

Inc./(Dec.) in Cash (2) 1 (1) 1 7

3 1 2 1 2


11/12


February 6, 2012 11

Standalone Key Ratios

P/E (on FDEPS) 23.9 33.5 22.5 17.9 13.4P/CEPS 16.9 18.8 14.3 12.0 9.4

P/BV 8.2 6.7 5.2 4.1 3.1

Dividend yield (%) 0.2 0.2 0.2 0.2 0.2

EV/Sales 1.9 1.5 1.2 1.1 0.9

EV/EBITDA 13.7 15.9 11.6 10.0 7.8

EV / Total Assets 3.8 3.3 3.0 2.6 2.3

EPS (Basic) 31.4 22.4 33.3 41.9 56.1

EPS (fully diluted) 31.4 22.4 33.3 41.9 56.1

Cash EPS 44.3 39.9 52.5 62.4 79.6

DPS 1.5 1.5 1.5 1.5 1.5

Book Value 91.6 112.2 143.7 184.1 238.7

EBIT margin 11.0 6.6 7.8 8.2 9.2

Tax retention ratio 0.7 0.8 0.7 0.7 0.7

Asset turnover (x) 2.0 2.2 2.7 2.6 2.7

ROIC (Post-tax) 15.7 10.9 15.5 15.5 17.5

Cost of Debt (Post Tax) 5.3 7.5 9.6 7.9 7.7

Leverage (x) 1.4 1.2 1.0 0.8 0.6

Operating ROE 29.6 15.0 21.4 21.4 23.2

ROCE (Pre-tax) 21.8 14.3 19.5 20.1 23.0

Angel ROIC (Pre-tax) 22.4 14.5 20.8 21.6 24.9

ROE 41.0 22.0 26.0 25.6 26.5

Asset Turnover 2.3 2.1 2.4 2.4 2.4

Inventory / Sales (days) 35 49 52 54 54

Receivables (days) 13 12 10 10 10

Payables (days) 44 57 60 70 60

WC (ex-cash) (days) 25 21 14 13 17

Net debt to equity 1.3 1.1 0.8 0.7 0.5

Net debt to EBITDA 1.9 2.3 1.6 1.5 1.0

Interest Coverage 5.5 2.9 3.6 4.7 6.6


12/12


February 6 2012 12

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Relaxo Footwear

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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Documents

Relaxo Footwear, 7th February, 2013