Add Relaxo Footwears Ltd For Target Rs. 850 - Motilal Oswal Financial Services Ltd
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* Relaxo Footwears (Relaxo) posted a healthy 11% YoY revenue growth that translated into 25%/46% YoY growth in EBITDA/PAT (10% miss) in 1QFY24. Price reductions have sharply improved its competitive edge that drove healthy volume growth, while softening RM prices have aided its margins.
* Price reduction, clearing of old high-price inventories, softening RM prices and renewed focus on sports footwear with the introduction of a new range will bolster its improving growth outlook. We have largely maintained our estimates and modeled a revenue/PAT CAGR of 18%/51% over FY23-25. Relaxo has a strong cash generation capability with a historically healthy 20%+ RoE. However, the stock is trading at 66x FY25E P/E and appears expensive. Hence, we reiterate our Neutral rating.
Revenue/PAT up 11%/46% YoY; RM costs moderate
* Relaxo’s revenue grew 11% YoY to INR7.4b in 1QFY24 (5% miss), led by volume growth as the company has taken price cuts in 3QFY23/4QFY23.
* COGS rose only 3% YoY, possibly due to moderating RM costs that led to 17% YoY increase in gross profit at INR4.2b (in line). Gross margin improved 330bp YoY to 57.4% during the quarter.
* EBITDA jumped 25% YoY to INR1.1b in 1QFY24 (7% miss) due to higher employee and SG&A costs.
* EBITDAM improved 170bp YoY to 14.6%. Although below the pre-Covid level (16.4% in 1QFY20), it is exhibiting an upward trend (12% in FY23).
* PAT rose 46% YoY to INR563m (10% miss). PATM was up 180bp YoY to 7.6%.
Channel checks and management commentary
* Demand upbeat: After the recent price cuts, inventories have been cleared and Relaxo’s products are becoming highly competitive. It has faced shortages in meeting distributor demand in certain cases, indicating strong demand. Competition from local players has largely subsided and Relaxo has again started gaining market share.
* Focusing on Closed footwear: Sparx closed footwear, which generates 15% of revenue, is targeted to double in the coming season. The company has widened its design portfolio (visible in the recent trade exhibition) with a focus on product appeal vs. its old philosophy of comfort and durability. This has led to higher orders, which may support growth from 2HFY24.
* Improving distributor margin: In the low-ASP products, Relaxo offers modest margin but distributors are compensated with higher inventory turns. However, it is now focusing on improving distributor margin for highASP products at 7-8%, in line with peers. This will encourage growth in the closed footwear segment, which has a lower inventory turnover.
* Management commentary: In 1QFY24, growth is supported by both open and closed footwear, with all channels reporting encouraging progress. Decline in RM prices and improved operating efficiency have led to higher profitability in 1QFY24. Management expects further moderation in RM costs in the upcoming quarters.
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