Analysis: Change in product mix to drive growth for Relaxo

Stock is trading 12.7 times FY14 estimated earning, which is inexpensive

Branded footwear maker, Relaxo Footwear (Relaxo) is likely to face near-term challenges to growth, given the weak macro-economic scenario. Despite a subdued December 2012 quarter, analysts remain bullish on the stock and expect it to deliver returns of 18-20% from current levels. Relaxo’s under-leveraged balance sheet, strong long-term growth prospects and reasonable valuations make it a preferred pick of most analysts. The stock is trading at 12.7 times FY14 estimated earnings which is inexpensive.

“We are confident of Relaxo’s future, taking into consideration its strategy regarding brand building, improving product mix leading to higher realisations and margins. The new PU plant will go along with its strategy to improve the product mix as well as margins”, says Suman Memani, analyst at Anand Rathi Research.

While the company will gain significantly from the downtrend in rubber prices, any unprecedented sharp rise in the same will be a key risk to its profitability.

Q3: 'Flite' interrupted

Reflecting the slowing consumer spending given the tough macro-economic conditions, Relaxo’s December 2012 quarter revenue (at Rs 224 crore) growth moderated to 9.2% over the same quarter of last fiscal as against double digit growth figures posted in the September 2012 quarter. Its key brands - Hawaii and Flite did not perform as anticipated as high inflationary pressures impacted consumers’ spending power.

However, sharp reduction in rubber prices led to a robust gross margin expansion of 825 basis points to 54.9% over last year. This benefit was more than offset by higher employee costs (up 38.9%) and other expenses (up 30.1% incurred largely towards starting production at the company’s Bahadurgarh unit).

The advertising and consultant fees also expanded as the company re-vamped its key brands. Consequently, the EBITDA margin shrinked 40 basis points over last year to 8.9%. This, alongwith marginal uptick in depreciation and tax resulted in flattish net profit of Rs 6 crore for the quarter. Post this performance, analysts have trimmed their earnings estimates by 16-20% for FY13 and FY14.

Relaxo’s Bahadurgarh unit manufactures the Flite PU – Relaxo’s fashion footwear brand and the full benefit of this plant are likely to be visible in FY15. Apart from improving asset turnover, the focus on Flite will improve margins given that it enjoys higher realisations.