Relaxo Footwears extends slide on weak Q2 results; stock hits 18-month low

Shares of Relaxo Footwears slipped 3 per cent to hit an 18-month low of Rs 882.45 on the BSE in Friday’s intra-day trade. The stock has fallen 10 per cent since November 3 after the company reported a weak set of numbers for the quarter ended September (Q2FY23). The scrip of the footwear company was trading at its lowest level since May 2021.

Thus far in the calendar year 2022, Relaxo Footwears has underperformed the market by declining 33 per cent as compared to a 4 per cent rise in the S&P BSE Sensex.

In Q2FY23, the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) margin declined to 8.9 per cent, down 445 bps year-on-year (YoY) and 400 bps on quarter-on-quarter (QoQ), due to higher raw material prices.

Revenue for the quarter declined 6 per cent YoY to Rs 670 crore. This was due to a decline in volumes of the categories serving the mass segment who were under inflationary pressures with reduced affordability. Volumes declined 15 per cent YoY to 39 million pairs. Profit after tax was down 67 per cent YoY to Rs 22 crore as compared to Rs 69 crore in Q2FY22.

The management said that consumers were facing inflationary pressures, which affected their affordability and they had started moving to cheaper alternatives even at the cost of quality. Hence, the company took an aggressive price correction in September 2022 to be competitive in the market, it said.

In the last few months, there was a sudden fall in a few of the key raw material prices, so the company took corrective price revisions, further impacting the margins. This price rationalization approach would help the company to clear high-value inventory in Q3FY23, ultimately improving volume numbers, the management said.

Relaxo has witnessed an over 30 per cent decline in its share price on a YTD basis owing to unprecedented inflation scenario (35 per cent of its RM is based on crude derivatives) and uncertainties on the demand outlook, analysts at ICICI Securities said in a result update.

While the brokerage remains structurally positive on the business model given its strong brand salience in tier II/III towns and healthy balance sheet to weather the crisis, it believes that premium valuations and near term headwinds may limit upside. Also, with high cost inventory still existing, Q2FY23 margins may not have completely bottomed out yet, it added.

Relaxo remains a strong category leader and it is well-poised to gain market share within an immature ecosystem. However, in the near to medium term, its ability to pass on RM inflation may remain challenged, courtesy demand pangs. Hence, profitability is likely to remain under pressure. Against this backdrop, a lofty valuation (62x Sep-24 P/E/40x Sep-24 EV/EBITDA) does not allow us to become constructive on the stock, said analysts at HDFC Securities.