Relaxo Footwears tanks 7%, hits 52-week low on weak Q2 performance

In Q2, EBITDA margins declined to 8.9 per cent, down 445 bps YoY and 400 bps on QoQ, due to higher raw material cost.

Shares of Relaxo Footwears hit a 52-week low of Rs 908 on declining 7 per cent in Thursday’s intra-day trade owing to weak September quarter results. The company's earnings before interest, taxes, depreciation, and amortization (EBITDA) margins 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 cost.

The stock fell below its previous low of Rs 928, which it touched on May 12, 2022. In the past one year, Relaxo Footwears has underperformed the market, by declining 35 per cent, as compared to 2 per cent rise in the S&P BSE Sensex.

In Q2FY23, the company’s revenue for the quarter declined 6 per cent YoY to Rs 670 crore. This was a result of 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 the 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, the management 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’s raw material prices had escalated nearly 2.5 times during Q1FY23 but now have started cooling off with prices correcting around 35 per cent from their peak. The company has taken an aggressive price correction on its product portfolio in September 2022 following the decline in raw material prices. The company may have utilized majority of its higher cost raw material inventory during the quarter which significantly pressurised the margins in Q2FY23 (the same has also reflected in reduction in inventory by ~Rs 70 crore in H1FY23).

Easing raw material prices could enable the company to revert back to 50 per cent plus gross margins in the ensuing quarters. However, with correction in ASP’s, key monitorable remains recovery in Relaxo’s volume trajectory which has stagnated in the past couple of quarters to around 40 million pairs, ICICI Securities said in a note.