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Long term story remains intact…

About the stock: Relaxo is India’s leading footwear manufacturing company, boasting of largest capacity of 7.5 lakh pairs per day. Relaxo is a dominant player in the open footwear space (~80% of sales), with its strong portfolio of brands (‘Flite’, ‘Bahamas’, ‘Sparx’, ‘Relaxo).

* Market leader in value priced segment selling ~19 crore pairs annually

* Relaxo has, over the years, maintained balance sheet prudence with controlled working capital cycle (NWC days: 60 days), healthy asset turn of 2.5x and generating RoCE of 20%+.

Q1FY22 Results: Disruptions owing to store closures (general trade channels) have put the brakes on growth momentum for Relaxo Footwears in Q1FY22.

* Revenue declined 34% QoQ to | 497.1 crore (up 37% YoY)

* On higher RM expenses and increase in marketing spends, EBITDA margins declined 850 bps QoQ (down 240 bps YoY) to 13.3%

* Ensuing PAT declined 70% QoQ (up 28% YoY) to | 31.0 crore.

What should investors do?

Relaxo has been an exceptional performer with the stock price appreciating at ~ 37% CAGR in the last five years.

* We continue to remain structurally positive and maintain BUY rating

Target Price and Valuation: We value Relaxo at | 1330 i.e. 65x FY24E EPS.

Key triggers for future price performance:

* Robust FCF generation (~| 825 crore in FY22-24E) and profitable revenue growth will be key triggers for sustaining premium valuations

* Despite selling ~19 crore pairs, Relaxo’s current market share is <10%. Given its robust balance sheet and strong brand patronage, we believe there is enough headroom for long-term growth & market share gains

* While the north region remains the main fortress for the company (50%+ revenues), west and south remain relatively underpenetrated markets. Relaxo has geo-tagged ~100000 outlets (currently present in ~50000 outlets), which signifies immense opportunity to penetrate in new territories

* We model in revenue and earnings CAGR of 18% and 20%, respectively, in FY21-24E with higher RoCE of ~30%

Alternate Stock Idea: Apart from Relaxo, in our retail coverage we also like Bata.

* Bata appears well placed to benefit from normalisation of demand scenario. Strategies like cost reduction, higher focus on omni channel and calibrated expansion of retail network can be structurally positive for Bata

* BUY with a target price of | 1925

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