Relaxo Footwear: a wannabe brand play

Hi nadkarni & sandeep,

apologise for delay in reply as i am stuck due to some health issue & will only be checking updates once a week till it gets resolved…

investing in a particular co. at a part.valuations is one’s own judgement and what might appeal me might not appeal to else…i can only provide my view —

feedback frm. agm of relaxo held on 17th is very positive with manag. guiding for 20 % top. growth in fy13 and 25% for fy14…

credit is compltely discont. in domestic sales from now on debtors will only be for exports…

debt is not going to be raised from now on all capex will be met by inter.accr.

will update of all other details once i resume fully…

i don’t find any consumption play of such scale avlbl. at less than 1 times sales and so still bullish on this co. as still val. have a long way to catchup…

rm risks will remain but their absolute effect will decline because of rising scale…

rgds.

discl.- i have holding in this co. so my views may be bised

One of the most comprehensive Research Report on Relaxo Footwear released by Anand Rathi on 5th October 2012 which covers almost all aspects – a must read – Target price put is Rs. 960 – attached is the link :

October 2012 Print and Television Media Schedule for all three brands – Hawaii, Flite & Sparx released…

Co. continues to market all brands aggressively which should help in it getting good discount in media deals because of clubbing of slots as also should enable its sales to be more robust than its peers in festive season…Q3FY13 and Q4FY13 should be good ones…

Price Update of Key Raw Materials as at 17th October 2012 :

EVA - INR 107-108 per kg. (sellers keen to seal even November contracts at this rate signifying weakness ahead)

Rubber - INR 184 per kg.

Feel free to get back to me in case of any query.

Rgds.

Sharekhan replaces Mcleod Russel with Relaxo Footwears as its Top Picks expecting 22 % upsides from current levels for Relaxo.

October 26, 2012

For the current month, we are making two changes in the

Top Picks basket. We are introducing Mahindra and Mahindra

(M&M) in place of IRB in accordance with the recent change

in our automobile (auto) analystâs view on the sector (from

bearish to positive). Our auto analyst believes that the

volume growth would pick up in some segments of the sector,

like tractors and passenger cars, from the next quarter.

The removal of IRB is more of a cautionary step due to the

weakening of sentiments towards the stock in the wake of

two controversies related to the IRBâs management in a

short time.

The other change is the replacing of Mcleod

Russel with Relaxo Footwear. We are bringing in Relaxo

Footwear because we believe it is a good proxy play on the

domestic consumption story as well as a likely beneficiary

of the prevailing soft rubber prices.

Relaxo Chairman Mr. Ramesh Dua’s AGM speech released, can be downloaded from company’s website. He seems quite bullish amidst recessionary environment and is confident of crossing 1000 cr. revenue mark this fiscal. If Q2FY13 is good then in all probability, company should start trading at minimum 1xFY13e sales post results with a mcap of 1000 cr. + as Q3Fy13 and Q4FY13 are bound to be robust because of festive quarter and seasonal qrtr. respectively.

Discl. - I have Relaxo as part of my core portfolio and my views have to be taken in that regard.

Company has also released good trendy collection ahead of festive season as is evident from the catalogues of its key brands recently published. This should enable the company to remain ahead of the peers and grab an even larger marketshare. Catalogues can be accessed from company’s website.

Relaxo board will meet next week on Monday, 5th November 2012 to announce Q2FY13 results. Given below are the conservative estimates for Q2FY13 :




Q2FY13e

Q2FY12




Revenue

238 - 246

200.47




EBITDA

30 - 32

16.86




PAT

13.5 â 14.8

4.3




EPS

11.2 â 12.3

3.58



Also, since we are already past 1HFY13, its prudent to introduce here the Q3FY13e and Q4FY13e as well as entire FY13e numbers for Relaxo so asto judge the fortunes of this promising company in a better way.


Q3FY13e numbers are immune to raw material price fluctuations as already one month for Q3FY13 has passed as also there is normally one and a half quarter inventory kept at company level ahead of festive (Q3FY13) and busy season (Q4FY13). Rubber prices are still soft and EVA prices are at its lowest with no significant improvement insight because of sluggish Chinese demand.


For Q4FY13, unless there is any sharp run-up in key raw material prices (more than 25 % - Rubber = INR 225 /kg + from current INR 180 /kg ; EVA = INR 138 /kg + from current INR 110 /kg), margins should be better than our estimates as we have taken a very conservative approach and even not assumed any significant benefit out of ground activation of company's key brands planned from Q3FY13-end. We have adopted an approach of incorporating all possible reasonable negatives and omitting any significant positives while basing our estimates purely based on ground-level feedbacks, dealer checks and indications received from media and brand tracking industry sources.


Provided below are our Q3FY13, Q4FY13 as well as entire FY13 estimates for Relaxo Footwears Ltd. :




Q3FY13e

Q3FY12




Revenue

268 - 275

205.79




EBITDA

35 - 36

19.14




PAT

16 â 16.8

6.02




EPS

13.3 â 14

5.03






Q4FY13e

Q4FY12




Revenue

305 - 310

242.72




EBITDA

41 - 43

34.3




PAT

19.8 â 21.5

18.78




EPS

16.5 â 17.9

15.65






FY13e

FY12




Revenue

1060 - 1080

864.67




EBITDA

137 - 143

95.2




PAT

64.3 â 68.1

39.9




EPS

53.6 â 56.8

33.25


Discl. : I have Relaxo as part of my core portfolio and so my views have to be taken in that regard.

News Article appearing in today’s Financial Chronicle newspaper…

Relaxo plans expansion, brand revamp

ByG Balachandar Nov 07 2012 , Chennai

Delhi-based footwear firm, Relaxo plans aggressive capacity expansion and brand revamping to boost the topline and is racing to cross Rs 1,000 crore mark in revenues in the current financial year, supported by new initiatives.

The company has been clocking consistent growth over the past several years. Its revenues and profits have recorded CAGR of about 30 per cent and 32 per cent respectively, resulting in 20 per cent plus return on equity (ROE) over the past five years. It clocked net sales of Rs 860 crore and net profit of Rs 40 crore in 2011-12.

aGoing forward, the company is committed to continue expanding manufacturing capacities, product and brand portfolio and market presence. The company is inching closer to cross Rs 1,000 crore revenue milestone in the current financial year. In this direction, a series of initiatives are being taken by the company to revamp and manage our next level of growth,a Ramesh Kumar Dua, managing director of the company said.

The company is planning a capex of Rs 60 crore for establishing a PU (polyurethane) footwear plant and this project is likely to be completed by the end of this financial year. With this plant, the companyas total capacity will go up by about 30,000 pairs per day, taking the total capacity to about four lakh pairs per day. It has already launched Flite-PU fashion range of footwear and that have reported to have well received among footwear buyers.

In addition, it is also planning to build a warehouse with an investment of Rs 25 crore. Further, the company has also lined up a plan to open 25-30 retail stores (Relaxo Shoppe) every year in an attempt to expand the direct reach to customers, build the brand and increase in sales. At present, the number of exclusive stores stands at 158, up from 149 at the end of FY2012. This year, the total number of stores is expected to touch about 175. These exclusive outlets contributed Rs 61 crore to the total revenues of the company. Relaxoas flagship brands are Hawaii, Flite, Sparx and Schoolmate and these are catering to different categories of customers.

aThe company is promoting its brands aggressively to increase their visibility. For that, it has roped in three Bollywood stars for the endorsement a Salman Khan to endorse Hawaii, Katrina Kaif to endorse Flite and Akshay Kumar to endorse Sparx. This is expected to help the company to maintain its market share in the mass segment through Hawaii brand and further penetrate the lower and upper-middle class segment through existing products and upcoming launches of Flite and Sparx brands,a said Tejashwini Kumari, analyst at Angel Broking.

Relaxo competes with both branded as well as the unorgansied market. Hawaii, the mass product faces stiff competition from the unorganised market. On the other hand, Sparx faces competition from branded shoes.

The company has a strong foothold in the slippers market and a very wide distribution channel of 50,000 distributors and retailers across the country. However, its 158 company-owned outlets are spread only in north a Delhi, Rajasthan, Gujarat, Haryana, Punjab, Uttar Pradesh and Uttarakhand. It has seven factories a five in Bahadurgarh (Haryana) and one each in Bhiwadi (Rajasthan) and Haridwar (Uttaranchal).

Hi Mahesh,

The results seem to be below your conservative estimates.

Of concern to me is the huge increase in Inventory… double the PBT.

Though the company states that it is an active policy to increase inventory it is not convincing because the ratio of RM to sales has not increased y.o.y.

regards,

Akbar

Relaxo Footwears Ltd. [ NSE â RELAXO ; BSE â 530517 ] declared its Q2FY13 Results on 5th November 2012 which were inline with our estimates, especially on topline front, but EBITDA was lower than our estimates. Given below are the highlights of the numbers and our prima-facie analysis post numbers :


(fig. in ` cr.)

Q2FY13

Q2FY12

YoY Growth

Q1FY13

QoQ Growth







Revenue

243.27

200.41

21.38 %

249.52

(-2.50 %)







EBITDA

25

16.8

48.81 %


31.27

(-20.05 %)








PAT

10.28

4.3

139.06 %

15.06

(-31.73 %)








EBITDA Margin

10.27 %

8.38 %

+ 189

basis points

12.53 %

(- 226)

basis points







PAT Margin

4.22 %

2.14 %

+ 208

basis points

6.03 %

(-181)

basis points




  1. Company posted Q2FY13 Revenue at INR 243.27 cr. which translates into a YoY growth of 21.38 % but a sequential QoQ decline of 2.5 %. Q2 is traditionally the weakest quarter for the company in terms of sales and this time even the festive season has shifted to Q3. At a time when even the strongest footwear company Bata is facing the headwinds of recessionary environment taking a toll on consumption because of which Bata was able to grow its revenues at only 15.4 % YoY in September'Qrtr.'FY13, Relaxo has turned out an impressive sales performance vis-a-vis its peers.


  1. Company's EBITDA for Q2FY13 came at INR 25 cr. which translates to a YoY growth of 48.81 % but a QoQ decline of 20.05 % mainly because of sharp rise in Employee Costs which rose by 301 basis points (w.r.t. Revenue) YoY as also sharp rise in Advertisement Expenses (covered under 'Other Expenses') which rose by 230 basis points (w.r.t. Revenue) YoY.


  1. PAT for the quarter stood at INR 10.28 cr. which translates to a YoY growth of 139.06 % but a QoQ decline of 31.73 % mainly because of lower EBITDA for the reasons mentioned above.


  1. EPS for the quarter (not annualised) stood at INR 8.57, a YoY increase of 139.38 %.


  1. During Q2FY13, company opened 6 new Exclusive Retail Stores ('Relaxo Retail Shoppe') to take the total tally to 160 operational stores at the end of Q2FY13.


  1. Company continued to focus on aggessively promoting its three key brands (Hawaii, Flite & Sparx) across all media during the quarter. Company kicked-off aggressive promotional campaigns for 'Hawaii' brand with its brand ambassador Salman Khan starting July 2012 ; for 'Flite' brand with its brand ambassador Katrina Kaif starting August 2012 ; for 'Sparx' brand with its brand ambassador Akshay Kumar starting September 2012. These initiatives will benefit the company in capturing larger marketshare during Q3 and Q4.

  2. Key Raw Material prices remained stable during the quarter with average Q2FY13 EVA landed price at INR 117.5 per kg. ( down 17.05 % YoY & 5.36 % QoQ ) while average Q2FY13 Rubber price at INR 181.16 per kg. ( down 13.95 % YoY & 5.91 % QoQ ). As on 2nd November 2012, EVA landed price is hovering around INR 114 per kg. while Rubber price is hovering around INR 177 per kg.

  3. Peer comparison for Q2FY13 is provided below for reference :



Q2FY13 Revenue

Q2FY12 Revenue

YoY Growth in Q2FY13 Revenue

Q2FY13 EBITDA Margin

Q2FY12 EBITDA Margin

YoY Growth in Q2FY13 EBITDA Margin








Relaxo

243.27

200.41

+ 21.38 %

10.27 %

8.38 %

+ 189

basis points

Bata

429.05

372.43

+ 15.2 %

13.13 %

14.24 %

(- 111)

basis points

Liberty Shoes

70.70

79.69

(- 11.28) %

7.71 %

8.11 %

(- 40)

basis points





Prima-facie View post Q2FY13 Results :


We maintain our view that Relaxo Footwears Ltd. is one of the good opportunities available in the domestic-consumption-oriented basket. Our use of word

'good' (in current Q2FY13 Update) instead of word

'best' (used in IC as well as Q1FY13 Update) is because :


  • share price has exhibited a sharp 71.8 % appreciation from our IC rate of INR 480 in a short span of just 4 months,

  • Relaxo-story is now relatively well recognised by the markets which is evident from many recent IC reports on the company by prominent brokerage houses ; this is a double-edged sword which leaves little room for the management to commit any error,

  • management has disappointed on EBITDA margins front for the second consecutive quarter which is not a good sign as company is currently passing through one of the best times in its history wherein its scale is increasing at a fast pace while its key raw material prices are stable with a negative bias ; although company is doing the right thing by using the resources (derived out of favourable scenario) for making expenditure on increasing the scale, still, such low EBITDA margins doesn't augur well when key raw material prices are at their two year lows.


In the backdrop of recently declared quarterly results (Q2FY13 & Q1FY13) and at the current appreciated valuations, Relaxo only deserves a 'Hold' and therefore we feel it prudent to downgrade it to a 'Hold' from earlier 'Buy'. Current valuations don't factor-in any shock that could arise out of key raw material price appreciation and consistent low EBITDA margins of 12.53 % & 10.27 % of Q1FY13 & Q2FY13 respectively is one of the key reason for this downgrade. Any substantial consistent improvement in EBITDA margins can only justify a 'Buy' at current levels which we not see coming atleast for next three quarters barring odd upward blips that might arise because of festive Q3FY13 and seasonally best Q4FY13.


Company's valuations might stabilise in the short term at 1xFY13e.Sales (1070 cr.) and beyond this valuations, margin of safety diminishes very fast as unless the company exhibits pricing power as is there with any branded FMCG player, including Bata, markets might not assign rich valuations to Relaxo on a sustainable basis for the long term. Since Bata itself is available at a price-to-earning multiple of 22 on CY13e numbers (Bata has a December-year-ending), Relaxo will always trade at a discount to it as it lacks both, the management bandwidth and brand recall value relative to Bata. Provided below is a broad comparison of expected financials and valuations of Bata & Relaxo at Bata's CMP and Relaxo's 1xFY13e.Sales market price :




Relaxo

Bata




CY13e Revenue

( year-ending December'2013 )


-

2225 cr.

FY13e Revenue

( year-ending March'2013 )


1070 cr.

-

CY13e PAT

( year-ending December'2013 )


-

248.2 cr.

FY13e PAT

( year-ending March'2013 )


63.1 cr.

-

CY13e Debt to Equity

( year-ending December'2013 )


-

0

FY13e Debt to Equity

( year-ending March'2013 )


0.8

-

CY13e RoCE

( year-ending December'2013 )


-

30.8

FY13e RoCE

( year-ending March'2013 )


21.7

-

CY13e RoE

( year-ending December'2013 )


-

30.9

FY13e RoE

( year-ending March'2013 )


28.8

-


Number of Retail Stores expected till December 2012


1485


168



Valuations






Mcap/Sales

CY13e (for Bata) & FY13e (for Relaxo)


[ @865 for Bata & @891 for Relaxo ]



1.00


2.51


Price/Earnings

CY13e (for Bata) & FY13e (for Relaxo)


[ @865 for Bata & @891 for Relaxo ]



16.94


22


Price/Book.Value

CY13e (for Bata) & FY13e (for Relaxo)


[ @865 for Bata & @891 for Relaxo ]



4.55


6.0


EV/Sales

CY13e (for Bata) & FY13e (for Relaxo)


[ @865 for Bata & @891 for Relaxo ]



1.11


2.4


EV/EBITDA

CY13e (for Bata) & FY13e (for Relaxo)


[ @865 for Bata & @891 for Relaxo ]



9.24


12.9



Four things need to be noted from above :


(a) Inspite of superior CY13e RoE and RoCE, Bata is trading at just 24 % premium to Relaxo in terms of P/E, P/BV and EV/EBITDA.


(b) Bata is a debt-free company and can fund future growth quite easily with its internal accruals while Relaxo will require funding in the form of equity or debt to grow aggressively and narrow the sales-gap with Bata.


(c) Bata is less susceptible to raw material price fluctuations as it enjoys better pricing power because of its focus on high margin products as also its strong brand value whereas Relaxo's margins fluctuate wildly in case of any sudden raw material price escalation (as we have seen in past â ex. FY11) as it has relatively less pricing power because of its focus on mass products. Although this will augur well in the short term for Relaxo in the form of increasing scale because of current downtrading by consumers, however, in the long term this is not a sustainable model to work with.


(d) Bata has relatively strong ground presence in the form of its December2012e '1485'

Retail Stores spread across entire country as compared to Relaxo with December2012e '168' Retail Stores. Because of this factor, Bata deserves to trade at much higher

premium over Relaxo.



We had initiated coverage on Relaxo with a 'Buy' on 23rd June 2012 at its then market price of INR 480. At that time Relaxo was trading at more than 60 % discount to Bata as also at par with its smaller peer Liberty Shoes which was an anomaly which needed to be corrected. However, now, when Relaxo is approaching 1xFY13e.Sales, it has already started trading at premium to Liberty as also considerably narrowed gap in valuations that existed with undisputed leader of footwear segment viz., Bata. We feel that we need to give ourselves some time to check how well Relaxo's management delivers on their aggressive growth plans, and valuations seem to have run-up too sharp too fast and are not atall in the comfortable zone which concurs with the basic principle of investing viz., âPreservation of Capital'.


When markets start discounting FY14e numbers much ahead of time by ignoring all possible risks involved and assign such valuations as 16.94 P/E on FY13e and 13.78 P/E on FY14e for a company which is unlikely to go beyond 12.8-13.5 % EBITDA range (as guided by the management) for atleast next two years even in most favourable operating environment with extreme susceptibility to key raw material price fluctuations, its time for us to be fearful and therefore we signal a clear 'Hold' on Relaxo till it approaches 1xFY13e.Sales (market price = INR 891) and make a planned exit in case the valuations keep running up sharp and fast as they have done so in past 4 months. Company is good, business visibility is good, business strategy is good but current valuations are such that they are not worth possible risks involved.


Discl. : I have booked profits in 65 % of my holding post results but holding on to remaining quantity.

Hi Mahesh,

Why the stock is coming down post results? The results might be below expectations but still on full year basis it should do EPS in excess of Rs. 45 and there is no major hurdles for 25-30% growth in FY14.

Regards,

Apurva

Hi Apurva,

Its a low liquidity counter and therefore if anyone wishes to exit even a small lot it will have large impact on price…you are right in your saying that Relaxo should easily do EPS of 45 +, infact 52+ easily…but, markets also focus on relative valuations where Relaxo moved much closer to Bata thats why this correction was to happen…Q1 and Q2 results are much lower than expected when we consider the fact that RM prices are at their two year lows…on one side this is positive as co. is doing right thing of increasing scale even in this dull environment which is evident from it outperforming all its peers…however, in case of sudden appreciation in RM prices it will have huge impact on the company and thats why FY14 numbers can’t be predicted with certainty…having said all these, long term story remains intact and company is good for 3 years investment…

Rgds.

Discl. : Have booked profits in 65 % of my original holdings in Relaxo post Q2 resultsand planning to exit further 20 % of my holding on next rally…, however, this doesn’t imply any wrong in Relaxo-story, its just that because of dismal (lower than expected w.r.t. RM benefits which otherwise should normally accrue) margins of Q2 I felt a need to allocate my funds to better less riskier opportunities available elsewhere. I plan to hold 15 % of my original holding on a long term basis (more than 3 years)

Feel free to get back to me in case of any query.

Rgds.

Hi Mahesh

Thanks for the reply.

Few more queries

  1. What worst can happen in respect to their dispute with Bata for “Sparx” brand
  2. Since last 3 years their advertisement expenses is around Rs. 55 crs, do you expect it to increase significantly due to this celebrity endorsement?
  3. Out of the total Raw material (~55-60% of total sales) how much is contributed by EVA and rubber? How is the pricing power with company, can it pass on the fluctuations with immediate effect? From which source we can prices of EVA and Rubber?
  4. Apart from volume growth do you see any significant increase in realization per piece (i mean can the company benefited from branding exercise by introducing higher priced products in future - that has played a big role in Bata’s case)
  5. If possible break up between outsourced and manufactured products. what can be EBIDTA margin in best and worst cases scenarios.

I really appreciate your deep understanding for the company and source of information. Please keep helping us by resolving such queries.

Thanks,

Apurva

resultsand rally…,

Hi Apurva,

please find my replies in bold…

  1. What worst can happen in respect to their dispute with Bata for “Sparx” brand

Ans. - Well worst could be losing completely the brand ‘Sparx’ but this scenario is unlikely as we here from legal sources who are close to bata itself…even bata is not interested in regaining the brand under its belt and is more interested in extracting maximum compensation from relaxo which the sources put at 25-30 cr. which relaxo wants to settl at 10-12 cr…relaxo will surely have to pay the compensation and whaever the amount will be a one time expense for relaxo…

  1. Since last 3 years their advertisement expenses is around Rs. 55 crs, do you expect it to increase significantly due to this celebrity endorsement?

Ans. - There are two aspects to this – first is pure Adv. expense and second allied expense which is covered under Promotions…Adv. expense for the current fiscal should be ~35-40 cr. (v/s FY12’s 29.6 cr.) because of signing of celebrities as well as engaging high profile PRs and brand consultants (Samsika)…now, if they go for ground level distributor/retail promotions too then it will also raise expense covered under Promotions…however, these expenditures are ok and might be kept well under limits but main thing to look is how much co. ca increase scale this fiscal and FY13 is going to be one of the most aggressive marketing year for relaxo…

  1. Out of the total Raw material (~55-60% of total sales) how much is contributed by EVA and rubber? How is the pricing power with company, can it pass on the fluctuations with immediate effect? From which source we can prices of EVA and Rubber?

Ans. - EVA contributes ~33 % to total RM cost and Rubber contributes ~14 %…Pricing power is not there in Hawaii range…to some extent pricing power is in Flite range…for Sparx pricing power is relatively high…

**
**

RM fluctuations are normally passed on with one or two qrtr. lag but not entirely if the rise is too large…

**
**

Rubber prices can be tracked via commodity exchanges or Business Line paper in which daily spot prices are given…For tracking EVA prices you will need subscription to some market intelligence providers like ICIS.

**
**

  1. Apart from volume growth do you see any significant increase in realization per piece (i mean can the company benefited from branding exercise by introducing higher priced products in future - that has played a big role in Bata’s case)

Ans. - Not in the short to medium term…Infact the reason for signing Salman and Katrina for low realisation products like Hawaii and Flite was to increase the volume and not realisations…so, first focus will be to increase volumes in FY13 and 1HFY14 and then focus can come on realisations but I doubt how will the company be able to significantly increase realisations…

  1. If possible break up between outsourced and manufactured products. what can be EBIDTA margin in best and worst cases scenarios.

**
**

Ans. - Outsourced products are hardly 9-10 % of total sales and this ratio is unlikely to change significantly going forward…

**
**

We downgraded Relaxo to hold mainly because in best case scenario it forego margins for scale…in q3 and q4 margins might be much better but overall its very difficult to predict the margins for relaxo as its focussing completely on volume game for the time being…

**
**

Rgds.

Q3/Fy-13 Results out…

Total Income up 9.2% to 224.9 Cr from 242.72 Cr.
EBIDTA up 6.6% to 19.94 Cr from 18.7 Cr.
Net Profit FLAT at 5.97 Cr v/s 6.02 Cr.

EBIDTA margin is 8.9% v/s 10.3% (SQ-12) and 9.1% (DQ-11)
NET Profit margin is 25.7% v/s 4.2% (SQ-12) and 2.9% (DQ-11)

Total Raw material costs as a %ge to Income is 45.1% v/s 47.1% (SQ-12) and 53.4% (DQ-11)
Employee costs to Income is 15.9% v/s 15.3% (SQ-12) and 12.5% (DQ-11)
Other expenses to Income is 30.1% v/s 27.3% (SQ-12) and 25.1% (DQ-11)

Financial costs to EBIT is 34.1% v/s 21.1% (SQ-12) and 36.7% (DQ-11)
Tax Rate 32.1% v/s 31.5% (SQ-12) and 29.6% (DQ-11)

9M/Fy-13 v/s 9M/Fy-12:
Total Income up 15.3% to 716.99 Cr from 621.95 Cr (Fy/11-12: 864.67 Cr)
EBIDTA up 27% to 76.22 Cr from 60 Cr (Fy/11-12: 94.24 Cr)
Net Profit up 48.3% to 31.32 Cr from 21.12 Cr (Fy/11-12: 39.91 Cr)

Reported 9-month EPS 26.10 v/s 17.6 (Fy/11-12: 33.25)
Recorded TTM diluted EPS: Rs. 41.75

At 10:50 am on 04/02/2013, stock on BSE trading flat at Rs. 810/-

Relaxo Results announced…

revenue at 224 cr. a real surprise on the negative side as it means for entire festive season, despite heavy spend on aggressive promotions, revenues have infact degrown QoQ and this is also contrary to management talk post q2fy13 results…

EBITDA margins at 8.9 % despite raw material prices ruling at their historical lows, again a cautionary thing…

Post Q2fY13 results I had downgraded Relaxo to a Hold…Now, post Q3FY13 results, downgrading Relaxo again to a Sell as the market price should settle at maximum 620-640 range with rate of Buy in the range of 500-520…Reasons being :

(1) Raw material prices should start ascending upwards from 1HFY14…

(2) Entire benefit of Raw material price correction is lost due to aggressive promotions which has had no proportionate impact on scale of operation…This will prove very detrimental in the medium term in case raw material prices ascend fast.

(3) Depreciation cost should rise going forward as the new PU plant has got operational in current Q4FY13…

(4) There are only three meanings to subdued results in festive season : one, the consumer sentiment is so bad that sales are getting impacted…or, second, competitive pressures are so high that Relaxo’s sales are getting impacted…or, third, Relaxo product quality is rejected by the consumers because of which after initial ramp-up, scale has gone flat…

(5) Fourth quarter is seasonally the best and might throw positive surprises in both topline and bottomline…i have assumed atleast 300 cr. topline with atleast 21 cr. PAT in Q4FY13 for basing my price range of 620-640 for Hold and 500-520 for Buy…Q3FY13 results are so bad that current market price deserves a sell despite likely fourth quarter positive surprise…

Selling continuously post announcement of results and will exit completely today from Relaxo…

Rgds.

Q4/Fy-13 Results out…

Total Income up 20.6% to 292.84 Cr from 242.72 Cr.
EBIDTA DOWN 2% to 33.59 Cr from 34.25 Cr.
Net Profit DOWN 28.2% to 13.49 Cr from 18.79 Cr.

EBIDTA margin is 11.5% v/s 8.9% (Q3-13) and 14.1% (Q4-12)
NET Profit margin is 4.6% v/s 2.7% (Q3-13) and 7.7% (Q4-12)

Total Raw material costs as a %ge to Income is 45.7% v/s 45.1% (Q3-13) and 51.4% (Q4-12)
Employee costs to Income is 9.6% v/s 12.1% (Q3-13) and 10.4% (Q4-12)
Other expenses to Income is 33.2% v/s 33.9% (Q3-13) and 24.2% (Q4-12)

Financial costs to EBIT is 19.6% v/s 34.1% (Q3-13) and 15.4% (Q4-12)

Tax Rate 38.1% v/s 32.1% (Q3-13) and 23.8% (Q4-12)

Steep increase in other expenses hurt EBIDTA.
And Higher tax due to deferred tax liability impacted net profits.

Fy-13 v/s Fy-12:
Total Income up 16.8% to 1009.83 Cr from 864.67 Cr
EBIDTA up 16.5% to 109.81 Cr from 94.24 Cr
Net Profit up 12.3% to 44.81 Cr from 39.91 Cr

Reported Full-Year EPS 37.34 v/s 33.25

At 11:30 am on 13/05/2013, stock on BSE trading at Rs. 627/- up 7.3%

Relaxo Q4FY13 results out…

Revenue up 20.64 % YoY to INR 292.83 cr. (v/s our estimate of INR 305 - 310 cr.)

EBITDA at INR 33.58 cr. down 1.92 % YoY (v/s our estimate of INR 41 - 43 cr.)

PAT at INR 13.48 cr. down 28.4 % YoY (v/s our estimate of INR 19.8 - 21.5 cr.)

For FY13…

Revenue up 16.78 % YoY to INR 1009.82 cr. (v/s our estimate of INR 1060 - 1080 cr.)

EBITDA at INR 109.79 cr. up 16.5 % YoY (v/s our estimate of INR 137 - 143 cr.)

PAT at INR 44.80 cr. up 12.28 % YoY (v/s our estimate of INR 64.3 - 68.1 cr.)

Prima facie view on results…

Good thing first…Revenue growth of Q4 is good at 20.64 % amidst all the consumer spending slowdown that we have witnessed…However, one thing to note here is that Q4 is seasonally the best quarter for Relaxo as majority of Hawaii sales happen in Q4…This is not to take away the fact that the revenue growth Q4 at 20 % + is exceptional in current environment…Revenue growth trend for coming two quarters will be interesting to watch…

Q4 EBITDA is under tremendous pressure mainly because of sharp rise in ‘other expenses’ which rose 65.7 % YoY which pressured EBITDA to a negative 1.92 % degrowth despite 20 %+ positive growth in revenues…Sharp rise in OE can be partly attributed to initial expenses of PU plant getting operationalised during the quarter as well as ecom operations of the company getting final shape in the quarter…

CMP of INR 625 discounts FY13 earnings at 16.7 times with EV/EBITDA at ~8.67…This is atbest a Hold rate and definitely not a Buy rate…Upsides till 660 is reasonable but beyond that it should go into an uncomfortable zone with maximum upsides getting capped at maximum 820-840 range which happens to be ~11 times EV/EBITDA…Safe Buy can be initiated in the stock below 530 based on the FY13 results that are out and FY14e results…

It will be prudent to wait for two more quarters and see management’s execution which has somewhat faltered since 2HFY13 as the environment on ground is really a challenging one…

Company Press Release that should be out soon and AR and AGM commentry will be key monitorables…

Rgds.

Q1/Fy 13-14 Results out…

Total Income up 25.7% to 313.62 Cr from 249.52 Cr.
EBIDTA up 41.3% to 44.2 Cr from 31.28 Cr.
Net Profit up 43.2% to 21.57 Cr from 15.06 Cr.

EBIDTA margin is 14.1% v/s 11.5% (MQ-13) and 12.5% (JQ-12)
NET Profit margin is 6.9% v/s 4.6% (MQ-13) and 4% (JQ-12)

Total Raw material costs as a %ge to Income is 44.1% v/s 45.7% (MQ-13) and 48% (JQ-12)
Employee costs to Income is 9.6% v/s 9.4% (MQ-13) and 11.8% (JQ-12)
Other expenses to Income is 32.2% v/s 33.5% (MQ-13) and 27.7% (JQ-12)

Financial costs to EBIT is 14.5% v/s 19.6% (MQ-13) and 15.5% (JQ-12)
Tax Rate 32.8% v/s 38.1% (MQ-13) and 31.8% (JQ-12)

EPS 17.98 v/s 12.55
Recorded TTM (sum of 4 quartr) diluted EPS: Rs. 42.77

At 11:25 am on 31/07/2013, stock on BSE trading flat at Rs. 783/-

This is one of few emails/calls received over Relaxo over the last few days. I thought it prudent to share the email/article on Relaxo/and my response - so a balanced discussion can emerge.

http://tinyurl.com/prfs7zw

_"Over weekend when I talked to friends every oneasked me about Relaxo footware. Prof SanjayBakshi wrote note on it which is in above link.

Today every one wants to buy free cashflow, high ROE,negative working capital, brand companies and theyare good compounders but if only brand stocks were tobe bought no other sector stock could have got listedand investors would have never bought any other sectorin history other than brand stocks:-)._

I personally think as happens every time this cycleof high ROE will also peak in next 1 year."

Relaxo is a good story to ride when the RM situation is in its favour (rubber prices low). The best part about it is its working capital management - a look at receivables and the story is clear to all.

What is not clear to all - is that it can be a poor story when the rubber cycle reverses - as we have seen in 2011/12 after a fabulous 2010 - the best year it had in last 10 years with EBITDA at 17%. But post that EBITDA is back to first 13% and then 11%. While it has grown sales at 22% CAGR in last 3 years, if it had really created brands - EBITDA CAGR logged should have been much higher (atleast kept ahead of sales) - not the measly 12% CAGR that we see. The Cash Flows CAGR picture is even more telling, but no one thinks of highlighting that.The full story is not being told.

A successful BRAND = Pricing Power, irrespective of economy or RM situation that may be hurting. Does Relaxo have that, you have only to check 2011 data to understand the sensitivity there is of its OPM to RM price volatility. Let a price war erupt in flip-flops or slippers and it will be clear if brand power exists!

Its ofcourse true that Relaxo has been a good story among many others, and has created wealth. But one should compare apples to apples - not overhype it -and not conveniently hide/gloss over the inherent issues in business quality. There are umpteen businesses with much higher business quality than Relaxo that I can cite (at similar valuations, or better) - and therefore will be much better value creators over the long term - since they are clearly more sustainable businesses, and have proved much better compounders. We should learn to ride a Relaxo for sure - but not like the brand story - it is being made out as.

I inherently like to disregard articles/posts that do not show the full picture - but only play the portions that help to tell the story you want to tell. Please be forthright enough to show the beautiful side along with all the warts, and the dirty corners too - and let the viewers decide if the story is still bewitching. Just not done!

As mentioned before I agree with your Consumption boom cycle wearing down theory in next couple of years - in general. In specifics there will be exceptions like a Nestle, and a GSK consumer, and maybe even a a Page Industries - for these are successful brands - with little competitive intensity (as yet) - and real pricing power - unlike the soap and shampoo brands we often see going under.

If one is wary of riding a normal FMCG (-ve working capital brands, but without pricing power) now, certainly this is not the time to ride a Relaxo over the next 2-3 years (at current valuations)!