Buy Relaxo Footwears; target of Rs 560: Sharekhan

Sharekhan's research report on Relaxo Footwears

During FY2017, Relaxo Footwears (Relaxo) delivered subdued revenue growth of about 2% to Rs. 1739.8 crore affected by slowdown in the consumer demand and demonetisation (impacted H2FY2017 sales). Relaxo registered double digit revenue growth in Q1FY2018 largely on account of pre- ponement of sales prior to implementation of GST. However, the same kind of growth is not expected in Q2FY2018 and is likely to revive in the subsequent quarters. Overall the management expects double digit revenue growth (mid-to-high teen) for FY2018 driven by improvement in sales volume and better realisation (due to improvement in revenue mix).  Some of revenue growth drivers in the medium to long term would be the increased presence in new/emerging channels like e-commerce, modern trade (MT accounted for 10% of total trade in FY17), aggressive expansion in new/ under-penetrated geographies like South India, Madhya Pradesh (MP), Rajasthan and increasing exports to Middle East and Africa (FY2017 exports were about Rs 50 crore and the company has recently set up an office in Dubai to tap that market).

Outlook

Relaxo has a superior portfolio of footwear brands (at present, Relaxo manufactures 6,75,000 pairs per day with capacity utilisation  of 60%). Its relentless focus on driving sales through the expansion of distribution and improving the brand presence (275 company- owned and company-operated stores and 50,000+ retailers across India) augurs well for the company to achieve good growth in the backdrop of better demand environment.  Also the company is planning to add more value added brands in its portfolio (largely catering to children and women) in the coming years. Implementation of GST will turn out to be a silver lining for the company as a large shift from unorganised players is expected to happen in near future. Relaxo’s stock price is currently trading at 32.2x its FY2019E earnings.  We maintain our Buy recommendation on the stock with an unchanged price target of Rs.560 (36x FY2019E earnings).

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