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Well placed to benefit from large growth opportunity

Relaxo Footwears’ Q4FY21 print signifies the inherent strength of the business model to capture market share and ability to generate robust free cashflows. Revenue for the quarter increased 38% YoY to | 747.7 crore (up 17% QoQ, two-year CAGR: 8%). Demand for low ticket size products like slippers/open sandals (~80% of product portfolio) has been more intense in recent times. Gross margins contracted 300 bps YoY to 56.8% due to rise in RM prices. However, on account of positive operating leverage, tight leash on operating overheads (employee & other expense as a percentage of sales fell 171 bps, 525 bps YoY), EBITDA margins expanded significantly by 400 bps YoY to 21.8% (Q3FY21: 22.1%). Absolute EBITDA grew 46% YoY (10% QoQ) to | 162.9 crore. On account of healthy operational performance and higher other income (up 73% YoY to | 6.9 crore) PAT nearly doubled YoY (up 13% QoQ) to | 102.2 crore. The balance sheet has strengthened significantly with cash & investments at an all-time high of | 345 crore vs. | 4 crore in FY20 (FCF generation: ~| 350 crore vs. | 154 crore).

Strong show in FY21 amid challenging scenario

Despite a tough start to the financial year (Q1 revenues down 44%), the company has displayed a resilient performance in FY21 with revenue degrowth of mere 2% for FY21 (volume growth: 7% YoY to 19.1 crore pairs). Operating margins expanded signifcanlty by 400 bps YoY to 21%. The expansion can be attributed to favourable RM prices (gross margin expansion ~60 bps YoY) and savings in selling and admin expenses. Subsequently, PAT witnessed healthy growth of 29% YoY in FY21.

Well poised to enhance market share

Despite selling close to ~19 crore pairs annually, the company’s current market share is <10%. The mass and economy segment dominates ~80% of the total footwear industry and is mainly dominated by the unbranded segment. Relaxo through its strong brand patronage and healthy balance sheet has been able to sustain market share gain over the years. While the north region remains the main fortress for the company (50%+ revenues) west and south remain relatively underpenetrated markets. Relaxo has over the years made sturdy inroads to fortify its presence across regions through its portfolio of brands. Relaxo has geo-tagged ~100000 outlets (currently present in ~50000 outlets), which signifies an immense opportunity to penetrate new territories through appointing new distributors and dealers.

Valuation & Outlook

Resilient performance during challenging times instils confidence in us on the business model and ability to gain market share. Though there may exist near term headwinds, given the market share of <10% for Relaxo, we believe there is enough headroom for long-term growth. In FY21, Relaxo has maintained balance sheet prudence with controlled working capital cycle (NWC days: 60 days), healthy asset turns of 2.5x and generated RoIC of 30%+. We believe robust FCF generation (~| 530 crore in FY22-23E) and profitable revenue growth will be the key triggers for sustaining premium valuations. Hence, we reiterate BUY rating on the stock with revised target price of | 1200 (earlier | 950).

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