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Relaxo Footwears Ltd (RLXF) has built a robust position in the mass open footwear segment with a vast presence covering both trade & D2C channels. Notably, RLXF is the only company among its peers to manufacture 100% of its products in-house. We reckon RLXF should benefit from the premiumization trend with increasing penetration of the “Sparx” & “Flite” brands. We initiate coverage on Relaxo Footwears Ltd however, owing to premium valuations we assign a SELL rating to the stock

Wide product assortment in the open footwear segment: RLXF, a Fortune 500 (India) company, has established itself as a pioneer in the mass segment (50%+ share of total footwear industry), open footwear category, offering quality products at affordable prices. The company’s product portfolio includes rubber-based hawai slippers, EVA slippers, PU slippers, casual shoes, sports shoes, sandals, and school shoes across all customer segments in the mass & economy price categories. Being the market leader in the open footwear category and deriving ~80% revenues from the same has enabled RLXF to capture a volume share of ~7-8% (~20% share in organized, non-leather footwear). A resurgence in open footwear demand over the last 15-18 months (grown faster than closed footwear) has seen RLXF’s volumes grow by 14%YoY in FY24.

Consolidation of the organized sector coupled with BIS implementation: With the organized segment to grow faster at ~13%CAGR Vs total footwear at ~8%CAGR, the share of organized footwear is expected to increase to ~40% of the total footwear industry. RLXF is poised to be one of the biggest beneficiary’s owing to expected shift in consumer demand from unbranded to branded products. Moreover, implementation of BIS norms should further accelerate growth. RLXF has already implemented BIS across its supply chain. The company sources natural rubber from indigenous markets & imports EVA to manufacture footwear and no disruptions are expected relating to raw material procurement going forward.

Tailwinds from premiumization trend: Started as a manufacturer of rubber-based hawai slippers, RLXF launched its premium flagship brands ‘Sparx’ & ‘Flite’ in FY05. The two brands have been rapidly scaled up and as of FY24 contribute ~75% to RLXF’s topline. Subsequently, the ASP increased from ~Rs48 in FY08 to ~Rs150 (lower on account of price cuts to push volume in subdued demand scenario with extremely volatile RM costs in the last 2-years) in FY24 at a ~7.4%CAGR. We reckon improving demand environment and a shift in consumer sentiment towards premium products will expand blended realizations which should lead to better gross margins of ~59-60%

Fully integrated manufacturing with a wide distribution network: RLXF is the largest manufacturer of non-leather footwear in India with 9 facilities. Owing to increasing demand, the company expanded its capacity from 7.5lac pairs/day in FY19 to 10.5lac pairs/day in FY24. RLXF controls 100% of its manufacturing monitoring every stage from designing to packaging. The final products are distributed via company’s vast network of ~650 distributors to 70,000+ retailers/MBOs. Additionally, the company operates 399 EBOs (~9% of sales) and sells products via e-commerce marketplaces (~10% of sales). North & East contribute to ~70% of sales however, RLXF has been strategically entering new geographies. The company commenced export in FY07 and as on Jun’24, RLXF derives ~4-5% of sales from exports to 34 countries.

Growing contribution of the S&A segment: The S&A segment is expected to be one of the fastest growing categories at ~15%CAGR. RLXF entered the segment with its Sparx brand in FY05 and has rapidly ramped it up. Sparx’s contribution to revenue increased from ~4% in FY08 to ~38% in FY24 of which ~55-60% comes from closed footwear (S&A segment). Currently, the Sparx facility is operating at 55-60% utilization and the company continues to focus on growing the share of S&A segment going ahead.

Rich valuations: We expect Revenue/EBITDA/PAT growth of 10%/16%/22%, respectively over FY24-FY26E. Historically, RLXF has traded at a premium multiple of P/E(x) of 90x (avg 1-year forward multiple), since FY18. At CMP, the stock trades at P/E(x) of 82x/68x on FY25E/FY26E EPS of Rs10/Rs12, respectively. We initiate coverage on Relaxo Footwears Ltd with a SELL rating, valuing the company at P/E(x) of 60x on FY26E EPS, for a target price of Rs 718.

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