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Inventory re-stocking enables volume recovery…

About the stock: Relaxo is India’s leading footwear manufacturing company, boasting of largest capacity of 10.0 lakh pairs per day. Relaxo is a dominant player in the open footwear space (~76% of sales), with its strong portfolio of brands (‘Flite’, ‘Bahamas’, ‘Sparx’, ‘Relaxo).

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

* Relaxo, over the years, has maintained b/s prudence with controlled working capital, healthy asset turns of 2.5x and generating RoCE of 20%+

Q4FY23: Revenue for Relaxo Footwear improved both YoY and QoQ. The company reported positive revenue growth YoY after two consecutive quarters of decline.

* Revenue for Q4FY23 grew 10% YoY to ? 765 crore (up 12% QoQ). Volumes grew 24% YoY to 5.2 crore pairs. Owing to price cuts and higher sales of open footwear average realisation fell 12% YoY at | 147/pair

* Gross margin declined 200 bps YoY to 52.2% (53.0% in Q3F22). However, positive operating leverage led to EBITDA margin decline being restricted to 50 bps YoY to 15.4% (Q3FY23 : 10.6%)

* PAT for the quarter remained flat YoY to | 63.3 crore (up 110% QoQ)

What should investors do? Relaxo’s stock price has declined by 12% over the last 12 months. However, the stock price over the last three months delivered positive price momentum with an increase of ~15% owing to softening of input prices and positive impact of price corrections taken on volume growth. Though near term demand appears moderate, we do remain structurally positive on the business model given its strong brand prominence in tier II/III towns and healthy balance sheet, which would enable sustained growth over longer term. However, premium valuations may limit upsides. Hence, we maintain our HOLD rating on the stock with a revised target price. Further sustained positive momentum in volume growth would be a key monitorable for an improvement in operational performance

Target Price and Valuation: We value Relaxo at | 930 i.e. 60x FY25E EPS

Key triggers for future price performance:

* Despite selling ~17 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 and 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 ~60000 outlets), which signifies immense opportunity to penetrate new territories

* We model revenue CAGR of 17% in FY23-25E with volumes recovering to ~22.8 crore pairs in FY25E (FY21: 19.0, FY22: 17.5, FY23: 17.1 crore pairs)

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

* Bata India has a strong b/s, diversified branded product portfolio and pan India network. We have a target price of | 1640

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