Resilient performance amid challenging scenario
Despite Q1FY21 being significantly hampered by Covid-19 headwinds, Relaxo Footwears reported a steady performance, depicting inherent strength of the brand and strong business model. Disruptions owing to store closures (till first week of May) weighed on its performance. However, post lockdown relaxations, green shoots were visible with strong demand for low ticket size products like slippers/open sandals (~67% of product portfolio). Revenue for the quarter de-grew by 44% YoY to | 363.6 crore (vs. estimated decline of 60%). On the profitability front, gross margins fell 420 bps YoY to 50%. However, sharp rationalisation of fixed overheads (other expenses, employee expenses down 61%, 22% YoY, respectively) arrested the EBITDA fall. Subsequently, EBITDA margins contracted merely 70 bps YoY to 15.7%, with absolute EBITDA declining 46% YoY to | 57.0 crore. Other income grew 4.5x YoY to | 6.8 crore (| 5.1 crore pertains to lease rent waiver). Effective tax rate came in at 25% vs. 35% in Q1FY20. Ensuing PAT declined 51% YoY to | 24.2 crore. The overall performance was resilient considering the adverse market environment.
Higher focus on value segment to align with emerging demand trend
Relaxo Footwears has a strong portfolio of brands (Sparx’, ‘Flite’, ‘Bahamas’) that mainly cater to the mass segment (ASP ~| 139). Around two-third of revenues are derived from slippers/open sandals (non-discretionary in nature) while rest are through premium affordable sports shoes. Hence, it has seen better traction in revenue recovery. The company is likely to enhance its focus on value products rather than premium products in the next two quarters. Relaxo has, over the years, established a healthy distribution network, with 800+ distributors catering to ~50000 retailers. Around 80% of revenues are derived through multi branded outlets encompassing mainly tier II/III cities. Non-metro cites have been less exposed to the pandemic outbreak. Hence, the impact would be relatively curtailed. The company has strengthened its e-commerce platform by leveraging partnerships with major e-commerce players (~5% of revenues).
Valuation & Outlook
Given the dominant presence in non-metro cities and being the market leader in value priced segment (in terms of volumes), Relaxo is well placed to further consolidate its market share. Over the years, Relaxo Footwear has maintained balance sheet prudence with controlled working capital cycle (NWC days: 65 days), healthy asset turns of 2.5x and generating RoCE of 20%+. Relaxo, through its strong balance sheet and brand patronage, is expected to tide over the current situation better than small peers. We largely maintain our estimates and bake in revenue & EPS CAGR of 10% & 18%, respectively, in FY20-22E. Given the recent correction in stock price (~20%), we upgrade the stock from HOLD to BUY and maintain our target price of | 715 (56.0x FY22E EPS).
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