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Healthy execution revs up operational performance

Relaxo Footwears continues to successfully march towards normalcy with strong execution and healthy margins. Revenue for Q3FY21 grew 12% YoY to | 672.0 crore (up 17% QoQ). It witnessed robust demand for low ticket sized products like slippers/open sandals (~80% of product portfolio). Strong distribution network encompassing mainly tier II/III cities supported in sharp revenue recovery.

Relaxo continued to benefit from benign raw material prices with gross margins improving 110 bps YoY to 58.9% (down 250 bps QoQ). However, the management remains cautious on the upward movement of RM prices. On account of positive operating leverage and tight leash on operating overheads (employee, other expense as a percentage to sales fell 44 bps, 368 bps YoY, respectively), EBITDA margins expanded significantly by 520 bps YoY to 22.1%.

Absolute EBITDA grew 46% YoY to | 148.7 crore. Other income grew 82% YoY to | 4.0 crore (| 1.7 crore pertains to lease rent waiver). On the back of robust operational performance, PAT for the quarter grew 66% YoY to | 90.1 crore. Given the robust balance sheet and being the market leader in value priced segment (in terms of volumes), Relaxo is well placed to further consolidate its market share and emerge stronger post pandemic.

Product mix suited to capture change in consumer preference

As most people are working from home, sales of sandals, flip flops saw a significant surge in demand. Relaxo being a dominant player in the aforesaid categories, through its strong portfolio of brands (‘Flite’, ‘Bahamas’, ‘Hawaii’) saw a swift recovery in volumes and captured market share from unorganised players. While sale of shoes continues to be laggards (sports, canvas), green shoots are visible with gradual opening up of the economy.

Relaxo, over the years, has established a healthy distribution network, with 800+ distributors catering to ~50000 retailers. It has geo-tagged ~100000 outlets, which signifies an immense opportunity to penetrate new territories through appointing new distributors and dealers. Also, it has strengthened its e-commerce platform by leveraging partnerships with major players and expects share to increase by 300-400 bps YoY to 12% by FY21E.

Valuation & Outlook

Resilient performance during challenging times builds our confidence in the business model and ability to gain market share. Though we believe current gross margins (59-61%) may not be sustainable in nature, we expect EBITDA margin improvement to sustain driven by operating leverage and cost control measures. Factoring in the performance of Q3FY21, we revise our earnings estimates upwards by ~7% for FY22/23E.

We bake in revenue, earnings CAGR of 12%, 20%, respectively, in FY20-23E. Over the years, Relaxo 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%+. We believe robust FCF generation (~| 590 crore in FY21- 23E), and sharp improvement in RoIC (to cross 30% in FY22E) will be the key triggers for sustaining premium valuations. Hence, we upgrade the stock to BUY (from HOLD) with a revised target price of | 950 (previous TP: | 890).

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