Stock Review: Relaxo Footwear

 

North-based Relaxo Footwear is one of the largest footwear manufacturers in India. With a production of 90 lakh footwear per year, it is second only to Bata India, and will benefit from the declining rubber prices. Investors with a medium to longterm investment horizon can consider buying this scrip.

BUSINESS

The company operates through brands Relaxo, Sparx and Flite and a majority of its sales are through a distribution network of retailers. The company also has 130 retail outlets, mainly in North India.

It plans to add 15-20 retail outlets every year.

Relaxo is also trying to expand geographically by trying to market aggressively in south India and also export its products to Europe, Africa and other Asian countries. Exports were just 3 % of the total sales last year.

FINANCIALS

In the last five years, Relaxo's net sales have grown at a CAGR of 29%, while its net profit has grown at 49%. But FY11 was not a good year for the company. Net sales grew by 23% to Rs 686 crore, but its profit after tax declined by 29% to 26.7 crore.

The profitability decreased due to high raw material prices, and higher depreciation and interest outgo. Its debt to equity ratio was 1.2 as on March 31, 2011.

INVESTMENT RATIONALE

Prices of rubber, which is one of the most important raw materials, rose by 100% in the last fiscal. As a result, Relaxo's operating margin declined from 14.5% in FY10 to 10.5% in FY11. However, the rubber prices seem to have softened now and are on a downward trajectory.

The company has hiked prices across products. This will boost overall margins. The company is also working hard to bring down its working capital cycle by taking higher advances from the distributers. Working capital increased in FY'11 due to higher capital blocked in raw material inventory. All these steps should help to improve profitability and thus the return on equity.

VALUATIONS

At the current market price of 300, the company is trading at a price to earning multiple of 12.4 on a trailing twelve-month basis. This looks very cheap when compared to its peer Bata India which is trading at multiple of 35.