Relaxo Footwears ASP-led recovery masks volume decline and limited growth visibility

Investment View and Valuation

Motilal Oswal Financial Services retains a Sell recommendation on Relaxo Footwears despite the company's sustained recovery in 1QFY27. The broker believes growth visibility remains limited and that the valuation is demanding.

The target price has been revised to Rs 290 from the report CMP of Rs 419, implying 31 per cent downside. The target is based on 30 times September 2028 estimated EPS of Rs 9.7, while the stock was trading at approximately 45 times FY28E P/E.

1QFY27 Financial Performance

Relaxo Footwears reported 1QFY27 revenue of Rs 7,051 million, up 7.7 per cent year on year and 3.7 per cent ahead of Motilal Oswal's estimate. Growth was driven principally by pricing, with average selling price rising 10 per cent year on year to Rs 166 following price hikes in the preceding quarter. Volumes, however, declined 2 per cent year on year to 42 million pairs.

Gross profit increased 16.1 per cent year on year to Rs 4,700 million. Gross margin expanded 483 basis points to 66.7 per cent, exceeding the broker's estimate by 517 basis points, aided by higher realisations and lower raw-material costs.

The gross-margin improvement was largely absorbed by operating expenses. Employee costs grew 17.1 per cent year on year, while selling, general and administrative expenses rose 19.3 per cent. EBITDA increased 8.8 per cent to Rs 1,082 million, broadly in line with the broker's estimate. EBITDA margin rose 16 basis points to 15.4 per cent but was 40 basis points below estimate. Profit before tax grew 13.9 per cent to Rs 751 million, 3.6 per cent above estimate. Reported PAT increased 12.4 per cent to Rs 549 million, in line with estimates, and PAT margin expanded 32 basis points to 7.8 per cent.

Capacity Expansion and Manufacturing Transition

Management indicated that Relaxo Footwears is expanding into fashion-forward footwear. This category requires specialised production lines and more complex manufacturing processes. Changes to conventional assembly layouts and workflows are reducing daily output.

Following ongoing reconstruction and renovation of the RFL-I and RFL-II plants, total manufacturing capacity has been reassessed at 910,000 pairs per day, compared with the earlier estimate of 1.05 million pairs per day. The redevelopment is intended to improve infrastructure and safety compliance and use higher Floor Area Ratio, creating scope for future capacity expansion.

Retail Expansion and Growth Initiatives

Retail expansion, premiumisation and product innovation remain key growth initiatives. Relaxo Footwears opened nine stores in 1QFY27, taking its exclusive brand outlet network to 429 stores. Management is targeting approximately 500 stores by year-end.

Management remains cautious because of elevated input costs and geopolitical uncertainty. Motilal Oswal sees encouraging channel-demand recovery and a more favourable operating environment, but believes the durability of the recovery and volume growth remain uncertain.

Estimates and Forecast Outlook

Motilal Oswal adjusted its estimates to reflect current performance. Its FY26 to FY28E compound annual growth forecasts are 7 per cent for revenue, 11 per cent for EBITDA and 9 per cent for PAT.

Although the broker expects gross-margin and EBITDA-margin improvement over the forecast period, it believes the valuation does not adequately reflect the limited visibility on a stronger growth trajectory.

Key Risks to Recovery

• Geopolitical disruptions could affect the operating environment and recovery durability.
• Rising inflation and elevated input costs may require further price increases to protect margins.
• Higher pricing could weigh on volumes and consumer demand.
• A potentially weaker consumption environment could delay the recovery in channel demand.