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Huge headroom for growth for the organized players

* The INR960b Indian Footwear market (FY20) is witnessing a unique transformation over the last few years. India’s young populace with high aspiration and having an improved fashion quotient is driving demand, especially for Casual, Athleisure, Sneakers and Women’s footwear, et al.

* Over one-third of the market is composed of high-ASP products, primarily catered by organized/branded players, where investment in EBO is the key. The resulting heavy investment and execution challenge create an entry barrier, as is evident from a handful of large Footwear brands in the industry.

* In contrast, the lower-ASP product category offers high opportunity in both open and closed footwear organized segments, led by customer shift towards organized market. However, it needs product/distribution strength to command competitive advantage.

* In our Footwear coverage universe, we like: a) Campus – as it has created the right inhouse capability to tap the large-scale opportunity in mass sports footwear market and b) Metro – due to its ability to run an efficient footwear ‘Retail’ network that can drive scale.

* BATA’s recent brand/product refreshment and store addition targets are steps in the right direction, but they are yet to reflect meaningfully on customer reception and improved earnings growth.

* Relaxo is a dominant player in the open footwear segment, but it has lately faced intense competition from the unorganized players. Further, its strategy to drive growth in the closed footwear segment may take time to succeed.

* We initiate coverage with a BUY rating on Campus and Metro and Neutral rating on Bata and Relaxo.

* Key downside risks in the footwear industry: a) high inflation that could soften industry demand, b) rising input costs and GST that could hit gross margin, and c) competition from growing foreign brands.

* Key upside risks in the footwear industry: a) swift recovery in low-ASP category, b) inflation cooling-off early that will increase margin higher than expected.

A steadily growing market undergoing a unique transformation

The Indian Footwear market is valued at INR960b as on FY20, of which, over onethird is composed of high-ASP products predominantly catered by organized/branded players growing at 1.5x the rate of overall market growth (15% CAGR over FY15-20). The market is witnessing a unique transformation over the last few years. India’s young populace with high aspiration and having an improved fashion quotient, is driving demand, especially for Casual, Athleisure, Sneakers and Women’s footwear, et al., as many brands have made deeper inroads in this space through the EBO channel given the huge growth potential. This has amplified consumer spends, reflecting in growing premiumization and steadily improving ASPs.

An efficient retail model to drive scale in the Premium Footwear market

Nearly one-third of the market is composed of premium high-ASP products, where investment in their own retail network is the key. The resulting heavy investment makes it critical to run a very efficient retail model, thereby creating an execution challenge and a strong entry barrier. This is evident from a handful of (EBO) Footwear retailers, with a revenue of over INR10b, which have a sticky customerbase (METRO) and superlative store economics. These features translate into a healthy margin, return ratios, and long runway of growth for the companies.

Mass segment needs strong product capability and deep distribution reach

The low-ASP product categories that constitute two-thirds of the market primarily operate via the distributor model. Plagued by the unorganized players offering commoditized products, the key is to create a strong product capability, sharp pricing and deep distribution reach to incentivize customers to use better quality branded products.

Prefer players – Campus/Metro – with the ability to drive scale

Under our Footwear coverage universe, we like: a) Campus – as it has created the right in-house capability to tap the large-scale opportunity in mass sports footwear market, sharp pricing and deep distribution network to leverage growth; and b) Metro – due to its ability to run an efficient footwear ‘Retail’ network with industry leading store productivity and healthy growth that can drive scale. BATA’s recent brand/product refreshment and deepening reach through franchise, MBO and online modes are all steps in the right direction, but they are yet to reflect meaningfully on customer reception and improved earnings growth. Relaxo is a dominant player in the open footwear segment with in-house capabilities and strong competitive position; but it has lately faced intense competition from unorganized players. Further, its strategy to drive growth in the closed footwear segment may take time to succeed.

Valuation and view

* There are two key underlying prerequisites for a healthy stock valuation: a) the quality of growth, which can be attributed to a strong returns profile and FCF position, and b) the quantity of growth (upwards of 20% PAT growth).

* All the Footwear retailers covered here have scored exceedingly well on the quality front, which is evident from: a) the best-in-class return profile driven by prudent working capital and healthy asset turns and b) the strong cashflows as apparent from the internally funded growth capex for over 10 years.

* Hence, the quantity of growth is the determining factor for valuation. Clearly Metro and Campus have delivered exceedingly well on the growth factor and have a far superior outlook. At P/E of 47x/65x, respectively on one year forward (FY24E), however, the stocks appear rich, factoring in the potential growth over the next two years. Yet, we believe, the next 3-5 years growth in business does offer reasonable upside in the stock given: a) the huge opportunity in the footwear market, b) both Metro and Campus’ superior capability and intention to grow at an accelerated pace, and c) only a handful of players have achieved scale with profitability.

* We ascribe a rich P/E multiple of 50x and 55x to Metro and Campus on FY25E EPS, given their higher growth visibility, to arrive at our TP of INR1,000 and INR640, respectively.

* Bata and Relaxo, on the other hand, are solid players with dominant positions but have seen moderate growth with rich valuations at P/E of 47x and 78x, respectively on one year forward (FY24E). We ascribe P/E of 40x and 60x on FY25E, arriving at our TP of INR1,925/INR1,020, respectively.

* Consequently, we initiate coverage with a BUY rating on Campus and Metro and Neutral rating on Bata and Relaxo.

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