Sell Relaxo Footwears Ltd For Target Rs.425 by Motilal Oswal Financial Services Ltd
Another weak quarter; Downgrade to Sell
* Relaxo Footwears (RLXF) reported another weak quarter with revenue declining 6% YoY due to a 15% YoY dip in volume.
* The volume decline was majorly on account of weak consumer demand in the mass and value segments. Over the past few quarters, RLXF has also been facing competitive pressure from unorganized retailers.
* RLXF has been working on revamping its distribution system (consolidating the distribution network), which has led to a loss in volume market share; however, management expects the benefits to accrue after 2-3 quarters.
* We cut our FY25-26E revenue by 4-5% and EBITDA by 5-10% due to uncertainty in volume recovery and ~100bp cut in gross margin assumption.
* We build in a 5-7% CAGR in revenue/EBITDA/PAT over FY24-27E as we optimistically model a volume recovery from FY26.
* However, given the continued volume decline amid market share loss and weaker demand in the mass footwear segment, we downgrade the stock to Sell with a revised TP of INR425 (premised on 45x FY27E P/E).
~11%/16% miss on revenue/EBITDA as volume decline persists
* Revenue declined 6% YoY to INR 6.7b (11% miss), on account of subdued overall demand, especially in the mass and value segments.
* Volume declined 15% YoY (vs. 10% YoY in 2Q) to 40m pairs, while ASP was up 10% YoY to INR166/pair.
* Gross profit declined ~6% YoY to INR3.8b (15% miss) as gross margin expanded 10bp YoY (-390bp QoQ, 290bp miss).
* RLXF continued to exhibit good cost controls, with employee expenses flat YoY and other expenses declining 10% YoY.
* EBITDA at INR834m, declined 4% YoY (17% miss), as weaker revenue growth was partly offset by good cost controls.
* EBITDA margin expanded ~25bp YoY to 12.5% (90bp miss).
* Depreciation/finance costs rose 7%/11% YoY, while other income increased ~14% YoY during the quarter.
* PAT declined 14% YoY to INR330m (27% miss) due to weaker EBITDA and higher tax rates.
* PAT margin contracted ~45bp YoY to 4.9% (110bp miss).
* 9MFY25 revenue/EBITDA/PAT declined by 3%/6%/18% YoY.
Management commentary
* Demand environment: Consumer demand remains weak, particularly in the mass and value segments. This led to ~15% YoY volume decline for RLXF.
* Distribution strategy: The company is focused on revamping its distribution system. It has launched the “Relaxo Parivaar” app, which has helped the company to streamline its network of distributors and retailers. The distribution system is likely to stabilize, and management expects the benefits to be visible in the next 2-3 quarters.
* Online strategy: RLXF continues to improve its online presence through the “Brand as a Seller” model and is regularly launching exclusives across online channels.
* Cost optimization: The company’s focus remains on cost optimization efforts. They are targeting operational efficiencies in the manufacturing facilities as well as the vendors.
Valuation and view
* A gradual recovery in rural demand sentiments is crucial for RLXF’s volume growth. Recovery in the open footwear category, product mix-led ASP improvement, and an increase in the mix of closed footwear – particularly in the S&A wear – remain the key growth drivers for RLXF.
* RLXF has been working on revamping its distribution system (consolidating the distribution network), which has led to a loss in volume market share, but management expects benefits to accrue after 2-3 quarters.
* We cut our FY25-26E revenue by 4-5% and EBITDA by 5-10% due to uncertainty in volume recovery and ~100bp cut in our gross margin assumption.
* We build in a CAGR of 5-7% in revenue/EBITDA/PAT over FY24-27E as we optimistically model a volume recovery from FY26.
* Despite a sharp correction over the past few months, RLXF still trades at an expensive ~70x FY26E P/E.
* Given the continued volume decline amid market share loss and weaker demand in the mass footwear segment, we downgrade RLXF to Sell with a revised TP of INR425 (premised on 45x FY27E P/E, in line with its five-year average multiple pre-Covid).
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