Sell Relaxo Footwears Ltd for the Target Rs.410 by Motilal Oswal Financial Services Ltd
Subdued demand trends continued
* Relaxo Footwears’ (RLXF) 1QFY26 results reflect persistent volume pressure amid restructuring of distribution, muted demand and heightened competition. However, margins remained resilient, with EBITDA margin expanding ~200bp to 15.2% on the back of robust cost controls.
* Management remains cautious on near-term revenue recovery but expects profitability to improve through the streamlining of backend process and operational efficiencies.
* We cut our FY26-28 revenue estimates by ~5% each, though EBITDA margin assumptions are raised by 60-80bp, driven by cost controls, resulting in broadly unchanged EBITDA estimates over FY26-28E.
* Overall, we build in a CAGR of 5%/11%/17% in revenue/EBITDA/PAT over FY25-28E, but note downside risks from prolonged demand weakness.
* The recent ~10% run-up in RLXF’s stock price over the past month appears to fully price in the near-term margin optimization. At ~56x 1-year forward P/E, valuations remain rich for modest growth.
* We maintain Sell rating with a revised TP of INR410 (based on 40x Sep’27E P/E) and await signs of demand recovery before we turn more constructive.
Volume decline continues; better cost controls drive beat on profitability
* Revenue declined ~12% YoY to INR6.5b (16% miss), due to continued impact from the restructuring of its distribution model, subdued demand trends, and rising competitive intensity.
* Volume fell ~14% to 43m pairs.
* ASP was, however, up ~1% YoY at INR151.
* Gross profit declined 13% YoY to INR4b (14% miss) as gross margin declined ~20bp YoY to 61.8% (~185bp beat).
* Employee/other expenses declined 4%/22% YoY, with overheads as a % of sales declining to 47% (vs. 49% YoY).
* EBITDA at INR1b was flat YoY (3% beat) due to better cost controls and higher gross margins.
* EBITDA margin improved 200bp YoY to 15.2% (~280bp ahead), driven by better gross margin and robust cost controls preventing operating deleverage.
* Depreciation/finance costs grew 1%/7%. Other income more than doubled to INR113m (significantly ahead of our est. of INR71m).
* PBT at INR659m grew 9% YoY (13% beat), largely due to higher other income and slightly higher EBITDA.
* Reported PAT at INR489m was up 10% YoY (13% beat), with margins at 7.5% (up 155bp YoY).
Key highlights from the management commentary
* RLXF witnessed a challenging 1QFY26, due to muted consumer demand in the mass and mid-market segments and intensifying regional competition in general trade from smaller players.
* Despite these headwinds, the company consciously avoided deep discounting to protect its profitability.
* RLXF continues to benefit from the streamlining of backend process, robust cost controls, and operational efficiency.
* Management reaffirmed its strategic focus on sustainable and profitable growth, noting that near-term revenue recovery may take some time.
* However, it believes that ongoing productivity measures are laying the foundation for improved financial performance over the medium term.
Valuation and view
* RLXF’s operating performance remained subdued due to weak demand in the mass and mid-market segments and intensifying regional competition, particularly in general trade.
* Additionally, ongoing distribution restructuring continued to weigh on volume visibility. However, the company’s steady focus on backend efficiencies and cost optimization should support operating margins going forward.
* While the company is focused on improving its product mix (higher share of closed footwear) to boost growth in the near term, the volume revival in open footwear is equally crucial for growth and profitability.
* We cut our FY26-28 revenue estimates by ~5% each, though EBITDA margin assumptions are raised by 60-80bp, driven by cost controls, resulting in broadly unchanged EBITDA estimates over FY26-28.
* Overall, we build in a CAGR of 5%/11%/17% in revenue/EBITDA/PAT over FY25- 28E, but note downside risks from prolonged demand weakness.
* The recent ~10% run-up in RLXF’s stock price over the past month appears to fully price in the near-term margin optimization. At ~56x 1-year forward P/E, valuations remain rich for modest growth. We maintain Sell rating with a revised TP of INR410, based on 40x Sep’27E P/E.
* We await signs of demand recovery before we turn more constructive.
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