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Weakness in volume continues

Relaxo Footwears’ (RLXF IN) Q3 performance was a miss on revenue/EBITDA/PAT by 12.6%/16.0%/21.8% respectively. This underperformance was led by a volume drop of 14.9% YoY against our estimate of 2% YoY growth. Subdued demand scenario, changes to distribution network systems and negative operating leverage hit overall performance. RLXF is calibrating a strategy to expand its distribution reach through its “Relaxo Parivaar” app, which may gain stability in the medium term. It is improving its online presence while following “Brand as a Seller” model and launching exclusive products that can support growth. Taking into consideration 9MFY25 performance, the relatively muted demand scenario and increased competitive intensity, we pare down our earnings estimates by 13% for FY25E, 11% for FY26E and 9% for FY27E. On revised earnings, we arrive at a lower TP of INR 549 from INR 600, on 50x FY27E P/E (unchanged). Given the sharp correction of ~30% in the past three months and limited upside, we upgrade RLXF to Reduce from Sell.

Volume decline continues while ASP saw an uptick:

Q3 revenue fell 6.4% YoY to reach INR 6,669 mn led by volume contraction of 14.9% YoY, partly offset by improvement in average selling price (ASP) by 9.9% YoY. ASP rose led by price hikes in Q4 and improvement in sales traction in the e-commerce channel wherein RLXF is following ‘Brand as seller model’ generating better pricing. RLXF has resorted to a strategy of retaining its prices, the impact of which is visible in volume drop in the past three quarters. To drive growth, RLXF is working on streamlining its network of distributors and retailers through “Relaxo Parivaar” app, which has reached across its network (related impact will be visible in the next 6-9 months). This calibrated strategy could support gradual improvement in volumes and increase its distributor network. RLXF opened seven EBOs in Q3 to reach 410. We expect a revenue CAGR of 6.6% led by volume CAGR of 2.0% and price CAGR of 4.5% in FY24-27E.

Price chart

Margin to reach 15.9% by FY27E:

EBITDA declined 4.3% YoY to INR 834mn, and margin expanded 27bps YoY to 12.5%. Margin expansion was led by slightly higher gross margin (+10 bps YoY) from increase in average realization. We expect margin to reach 13.8% in FY25E, 14.9% in FY26E and 15.9% in FY27E, primarily led by improvement in demand scenario in the long term and operating leverage from average realisation.

Upgrade to Reduce with a lower TP of INR 549:

We expect a revenue CAGR of 6.6%, an EBITDA CAGR of 11.2% and an earnings CAGR of 10.9% in FY24-27E. RLXF continues to sustain robust balance sheet. ROCE is likely to improve to 13.0% by FY27E, led by margin improvement. We lower our TP to INR 549 from INR 600, based on 50x (unchanged) FY27E P/E. Given the sharp correction of ~30% in the past three months and limited upside, we upgrade RLXF to Reduce from Sell. Key trigger for RLXF is a revival in demand.

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