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Relaxo Footwears’ sales grew by 11% YoY led by volume growth (atleast 22-25% volume growth as per our estimates). Volumes improved significantly led by price correction efforts. Price corrections were taken to reduce the meaningful price differential that had occurred during the 1HFY23 between Relaxo and its peers. We expect Relaxo to recoup the lost market share during FY23. Healthy growth was across closed and open footwear. Gross margins improved by 327bps led by softening of RM prices and exhaustion of high cost inventory during previous quarters. However, EBITDA margin expansion was restricted to 166bps due to higher other expenses. We believe with price rationalization volume growth will remain healthy at +18/12% for FY24/25 respectively with marginal increase in ASPs. EBITDA margins too will improve sequentially by 360/170bps respectively in FY24/25. We believe worst is over for Relaxo and expect it to rebound strongly over the next two years. Valuations, however continue to remain expensive at 80/59x FY24/25 on our estimates. We maintain ADD rating with target price of Rs972 valuing at 60x FY25E EPS.

Meaningful demand and margin recovery

Relaxo’s volumes got impacted by severe inflation and GST rate hike (effective Jan’22) during 9MFY23. However, with price correction measures taken by the company, it has recouped almost entire lost market share in 4QFY23/1QFY24. Price correction measures were largely taken in open footwear category (75% of total sales) while prices for closed footwear (~25% of total sales) were kept largely unchanged. The strong demand trend continued in 1QFY24 and our channels indicate it is expected to remain strong for remainder of the year. One of the key RMs of Relaxo, EVA, had risen sharply to Rs250/kg in 4QFY22. It has now stabilized at Rs160/kg. With further softening of RM in subsequent quarters and sharp demand revival (expected to be more meaningful in 2H), we expect 18/12% of volume growth and margins to improve to 15.7/17.4% in FY24/25 respectively.

Capacities in place to drive medium term growth

Relaxo has incurred ~Rs2.8bn to increase capacity from 0.75mn to 1mn pairs per day during FY23. The company has also doubled its sports shoes capacity from 50k pair per day to 100k pair per day in FY23. Shoes, now an Rs4bn category for Relaxo, grew by 25% in FY23 and expected to reach sales of Rs10bn in next 2-3 years. Blended current capacity utilization stands at ~50%. We believe that the company has enough capacity in place for next two years and hence need minimal of capex in FY24/25. We estimate Relaxo’s volumes to grow at CAGR of 15% with marginal ASP growth CAGR of 2% over FY23-25. Apart from healthy volume growth, premiumization trend will pick up pace for Relaxo on medium to long term. With strong manufacturing base in place, healthy distribution and retail reach and strong brand recall value we remain confident on Relaxo’s long term story. India’s 80% of footwear pyramid is priced below Rs1,000 – provides a huge play field for Relaxo to grow consistently.

Valuation

We expect sales/EBITDA/PAT to grow at CAGR of 17/41/61% respectively over FY23-25E. We maintain ADD rating with unchanged target price of Rs972 valuing at 60x FY25E EPS.

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