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Revenue soft; moderation in RM costs doubles PAT

* Relaxo Footwears (Relaxo) posted a soft 7% YoY revenue growth (in line), but improvement in gross margin (GM) translated into 54%/2x YoY surge in EBITDA/PAT (5%/14% beat) in 2QFY24. Price cuts taken in the last couple of quarters improved its competitive edge and drove healthy volume growth (+23% YoY); while moderating RM prices supported its margins.

* Price reduction, clearing of old high-price inventories, moderating RM prices, and renewed focus on sports footwear (with the introduction of a new range) should bolster its improving growth outlook. We largely retain our estimates and model a revenue/PAT CAGR of 13%/49% over FY23-25. Relaxo has a strong cash generation capability with a historically healthy 20%+ RoE. However, the stock – trading at 66x FY25E P/E – appears expensive. Hence, we reiterate our Neutral rating.

Revenue/PAT up 7%/2x YoY (in line/14% beat)

* Relaxo’s revenue grew 7% YoY to INR7.2b (in line), led by 23% YoY volume growth (due to open footwear), while ASP reduced 15% YoY as the company has taken price cuts in the last couple of quarters.

* A stabilization of raw material prices, combined with a notable expansion in sales volume, has led to an improvement in margins.

* GP grew 26% YoY to INR4.1b (7% beat) and margin expanded 900bp YoY to 57.9% during the quarter.

* EBITDA jumped 54% YoY to INR915m (5% beat) and margin improved 400bp YoY to 12.8%. Although margin was below the pre-Covid level (16.8% in 2QFY20), it is demonstrating an upward trend (12.1% in FY23).

* PAT doubled YoY to INR442m (14% beat) and margin expanded 280bp YoY to 6.2%.

Management commentary

* Management expects double-digit revenue growth in 2HFY24 with 14%+ margin, which will improve the ROCE/ROE going forward.

* The company can attain INR10b of closed footwear revenue in the next 2-3 years, given the huge opportunity. The premiumization play would continue from the Sparx category by opening a retail channel.

* The past 2-3 years were very challenging for the industry due to: a) inflation, b) unprecedented rain, and c) geopolitical conflicts. The closed footwear has shown nominal growth of 3-4% YoY in 1HFY24; whereas open footwear has reported 20%+ volume growth.

* Since the RM prices have now cooled off, the company’s focus will be on expanding the distribution channel rather than price cuts. There are 100k MBO outlets in India while the company is present in only 65k MBO.

Valuation and view

* A gradual recovery in rural areas, gross margin improvement, and the introduction of Sparx shoes at aggressive price points should help Relaxo gain market share in the closed footwear segment. These can act as positive catalysts for the stock.

* The company has reduced its ASP, which should now sustain its market share gains from unorganized players.

* Overtime, a) recovery in the open footwear category, b) product mix-led ASP improvement, and c) increasing mix of closed footwear – particularly in the S&A wear – are anticipated to drive a positive outlook.

* We largely retain our estimates and model a revenue/PAT CAGR of 13%/49% over FY23-25.

* We ascribe a P/E of 60x on FY25E EPS to arrive at our TP of INR825. The stock is trading at 66x FY25E P/E and appears expensive. Hence, we reiterate our Neutral rating on the stock.

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