Recommendation from Leather Products Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

RELAXO FOOTWEARS LTD. :AIMING TO PUT ITS BEST FOOT FORWARD

HERE IS WHY
✓Strong brand recall
✓Robust distribution network
✓Expectation of strong performance in FY23

Relaxo Footwears Ltd. is the largest footwear manufacturing company in India. Its products include rubber slippers, canvas shoes, sports shoes, sandals, school shoes and other types of footwear. It has a portfolio of 10 brands including major sellers like Relaxo, Sparx, Flite and Bahamas. The company sells its products through retailers served through distributors, retail outlets, exports and e-commerce trade. It has nine state-ofthe-art manufacturing facilities: six in Bahadurgarh (Haryana), two in Bhiwadi (Rajasthan) and one in Haridwar (Uttarakhand). The company reported net sales of ₹2,653.3 crore in FY22 compared to ₹2,359.15 crore in FY21.

That is a growth of nearly 12.4 per cent which was possible due to calibrated price hikes taken during the year to mitigate some impact of high raw material prices. The EBIDTA stood at ₹439.5 crore in FY22 as against ₹520 crore in the previous year and witnessed a decline of over 15.5 per cent. Also, the PAT saw a decline of 20.2 per cent with an increase from ₹291.6 crore to ₹232.7 crore from FY21 to FY22, respectively.

A decrease of nearly 89 per cent can be seen in the cash flows from operating activities, inching down from ₹513 crore in FY21 to ₹56 crore in FY22. In Q4FY22, revenue decreased by 6.62 per cent YoY to ₹698.19 crore from ₹747.68 crore in Q4FY21.

On a sequential basis, the top-line was down by 6.1 per cent. According to the company’s press release, revenues were disrupted by the corona virus variant Omicron, GST rate hike from 5 to 12 per cent with effect from January 1, 2022 on footwear priced below ₹1,000 and subdued demand due to inflation. However, the opening up of schools, colleges and offices is positive news for the company. Its PBIDT excluding other income was reported at ₹111.13 crore, down by 31.76 per cent as compared to the year-ago period and the corresponding margin was reported at 15.92 per cent, contracting by 586 basis points YoY.

The margins took a blow mainly due to steep increase in raw material prices and extra support to trade towards GST rate differential on inventory. PAT was reported at ₹62.93 crore, down by 38.41 per cent YoY. The PAT margin stood at 9.01 per cent in Q4FY22, contracting from 13.66 per cent in Q4FY21. Looking at some of the key metrics, the ROE and ROCE stood at 14 per cent and 19.2 per cent, respectively. Its fixed asset turnover has increased from 2.7 times to 2.9 times. Being a growth stock, it has a high PE of 104 compared to the industry average of 56.6. It is almost debt-free with minimal debt-to-equity ratio of 0.10 times.

The footwear giant has a robust distribution network with more than 60,000 retailers and MBOs, 650 distributors and 394 EBOs. It exports its products to about 30 countries. With its strong in-house manufacturing capacity along with wide distribution network, it can focus on cost optimisation for competitive pricing. The company has performed poorly in the latest quarter and overall FY22 hasn’t been that impressive. All this has already been factored into the stock price. A company like Relaxo Footwears can make a strong comeback in FY23 by capitalising on its strengths and creating value for shareholders. By virtue of all these factors, we recommend our readerinvestors to BUY this scrip.