Liberty Shoes - A Multibagger in Making

I have always been a fan of turnaround stories, be it SKS, Hawkins (2004) or singer india. Liberty Shoes Ltd, is one such stock. Liberty is among the top 5 largest producers of shoes in the world with a production capacity of 50000 pairs per day and second largest in India, behind Bata. Around last year the management decided to do a major shakeup in business and strategy and appointed an external consulting agency to do a complete overhaul of business and business processes. As a part of this they also appointed Hritik Roshan as their brand ambassador. In the last six months they have been launching some unique and high end products e.g. their signature collection etc. They have also show very good increase in exports in the last six months.

All this has resulted in great growth in the first six months of the present financial year. In the first six months income has grown 42% and profits have grown 150%. This performance is expected to continue in the remaining half of the present fiscal. The promoter of the company was recently on CNBC TV18, where he declared that the present fiscal would see around 500 cr topline and his body language was excellent. This interview was given in the last week of December and that obviously means that sep-dec quarter must have been a cracker to have this confidence to declare a target of 500cr (on their new website they have mentioned that their vision is to do 1000cr of sales). The bottomline is also expected to keep pace as the rubber prices have fallen quite a bit.

Valuations: Right now with a market cap of just 250cr its trading at around 0.6 times its last year sales while something like bata trades at more than 3 times the sales. As per the promoter Other than working capital debt, the company is debt free. Considering that there would be substantial increase in sales and profit, the valuation will catch up with Bata. Liberty Shoes is currently at a situation where Bata was 5 years back. Liberty has a production capacity of 50000 pairs per day. Company is selling its products via marketing network comprising of 150 distributors, 450 exclusive showrooms (to be 500 by end of this FY )and more than 6000 multi brand stores. In addition to this ,company having strong presence in all major online stores.

Recently management hinted their plan to consolidate the business under the listed entity in effort for value creation. Also, its retail arm Liberty Retail Revolution merged with the company which is planning to add 100 new stores every year .At present it is running more than 450 show rooms .It seems all the efforts of management started to show positive results. As an icing on cake, the stock recently broke out after consolidation of more than five years. When this happens and is aided by earning expansion, the stock normally goes up by 5-10 times in next three years. At present market cap is just 250 cr (149 rs). This stock came up on my platform a couple of weeks back and a quick research convinced me to add it to my portfolio.

Comments invited.

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Looks interesting.

Can you pl elaborate following:

  1. Whats the strategy which has resulted into turn around? Why it will remain successful in next 1-3 years?

  2. Any arithmetic on EPS projection and PE rerated

Above helps to build up some conviction.

They have imporved their Designing and quality control facilities, e.g. they have CAD systems with 3D design facilities. They also have added the custom made designer footwear to their products stable. They have started merging subsidaries with themseleves to give better synergies, cost rationalization etc. Most importantly they have started building a ‘Brand’ in Liberty which was missing all these years. They do not have capex for next couple of years. Bata works with NPR of double digits and this is still around 2.3% but improving dramatically. If this year the turnover is around 450cr (promoter saying 500cr) and next couple of years its 40% growth sales, then we can assume a 1000cr topline with 7% NPR would translate in great market cap growth. Lets not forget its just trading at just .6 times sales…and bata 3.5 times, relaxo around .8 times. Relaxo is not comparable with Liberty in my opinion though.

The potential of market gap growth is humungous and markets tends to value a ‘Brand’ much higher.

How do you rate the management? They have been around since last 20 years at least but not sure they have been able to deliver and become bigger. I am not very sure that this optimism about their capability will last few years…it might fizzle out soon.

I might be wrong but considering their past, I would prefer to be a bit skeptical.

Hi J2ee,

Seems a good future is on cards… but have few queries on this one.

1). Why the company is not paying any tax ?

2). Last two quarters its NP margins were around 2.5-3%. What changes will drive their NPM towards 7% in the future?

3). What sort of planning did the company has such that it can target 1000cr by 2016/17? I mean it seems very aggressive target given that it is just a 450-500cr company now.

Not every company can be ITC or infy. Some companies have their share of ups and downs like hawkins, bata etc (even ttk was just another company for far too long). This company also had the same issues. But all this is the thing of past. The management woke up to the rewards of Stock Market to Bata India. Their young blood has brought in new energy and thought process in the company. Their re-strcuturing has started showing results as evident from their NPMs. Ofcourse it may take a bit of time but the process has already started yielding returns. Look at their website and you will understand what i mean. Not only its attractive but there’s wealth of information there.

Till 2006 Liberty was a very liberal dividend payer. They used to distribute around 25-30% of their profits.

The best research to do about it is by going to the markets and shopping for shoes. I have seen wonderful footfalls in pune and bombay. Their showrooms also ooze class. If in the present scenario they have managed to increase their sales so much, i beleive when the economy improves and domestic consumption increases, this brand will be a clear winner.

The sales would be increases by increasing no. of showrooms, improving product line, and increasing exports. They plan to add around 100 showrooms every FY.

Anyways, nothing is guaranteed, but if recent past and present is anything to go buy, i beleive we have a winner here.

I think Sandeep has asked the right set of questions, specifically how the NPM is going to change? Other questions that I have are around the strategy of opening 100 more stores every year. How is this money going to happen? Is this going to be a franchise model or is the company going to acquire some more debt? With liberty what I have seen is how they have gone down in brand perception. At one of time they used to be leaders in formal shoes segment but have lost their branding completely. I would be interested in knowing how the management feel about it and what are their efforts towards building the brand? Further it would be interesting to know the advertisement spend as a percent of profit/sales. Incase of Relaxo footwear another company that I was tracking a large percentage of profits were spent in advertising (~30% to 40%), although I found it ineffective the impact was huge. It also told me that the NPM margins are actually higher if the company had a better advertising strategy.

quick reply, as i said in my previous post, there is no capex planned for next two years. Most of the new stores would be through franchisee route and others by internal accurals. they “could” (market speculation and company is not denying it) also do a place to a PE investor in the near future for funds raising, although promoter have hinted that they good stake in the company and also as of now, no plans for equity dilution.

I would strongly advice all of you to go to their site and navigate around. There is everything available to answer your queries. One could also get an answer to how they are planning to brand their company and rationale behind subsidiary amalgamation.

Apologies guys, I am kind of busy professional, though i am trying my best to keep up with the probing questions. I welcome it but my limited time may allow me to skip a few questions. I trust my platform a lot to question its validity of picking liberty as a good buy for next 1 year (and will keep on revising it), so I am invested in it and have a lot of faith in this investment. By the way, 1000cr till 2017 is my projection, not company’s projection (considering 40% CAGR). They want to be 1000cr company pretty soon but have not outlined the timeline. We can talk to them about it. The way they have grown in this environment i do not see a major reason to doubt their intentions. I have seen the company transform in last 18 months so i believe the change is for good.

Hi J2ee,

Any reasons for their meager tax payments?

Its doesn’t matter… but somewhere i read that dolly khanna had brought a chunk in liberty…

An interesting article I read about Liberty sometime back -

Liberty Shoes promoter Adarsh Gupta gets six months jail

value pick guy recently recommended Liberty and also Superhouse. Looks like footwear is getting hot…

http://value-picks.blogspot.in/2013/12/liberty-shoes-update.html

did you go through the company announcement on this?

Link: http://m.economictimes.com/news/news-by-industry/cons-products/fashion-/-cosmetics-/-jewellery/liberty-shoes-promoter-adarsh-gupta-gets-six-months-jail/articleshow/24452353.cms

i have a lot of regards for dolly khanna …she’s somebody with midas touch backed by some great research…

Hi,

I actually did read the company’s clarification. And to me it sounded rubbish :slight_smile:

Adarsh Gupta is an executive director of Liberty Shoes Ltd. The jail sentence was passed against him, as an owner of Liberty Enterprises, which is an entity completely owned by the him/other promoters. Obviously it has nothing to do with the listed entity of Liberty Shoes, but has everything to do with the management quality.

Please note that I am not passing judgement on the soundness of the business and the ethics of the promoters as yet, because I am still trying to study the company. But this makes me sit up and take notice of the company paying “franchisee fees” to Liberty Enterprises to use its production facilities and another similar arrangement with another group company Liberty Group Marketing Division (LGMD).

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I doubt whether management would be able to make sales of 1000Cr.

I personally find liberty footwear very uninteresting. Would prefer other brand over it. I also did a survey in our company and hardly any one preferred liberty.

I kind of link it…the kids wear and fortune collections…anyways, that more of a taste and problem is that it would take time for the perception to change. I mean the day most of the employees in your company start liking the brand, it wont be available at 250cr market cap right :slight_smile: …nevertheless on 1000cr we’ll see. I would be happy with a 40% Sales CAGR (profits will follow) and if the company is able to do something near 500cr this fiscal, then I would feel even better. Lets see now.

Also, as i said earlier, Technically this stock is in great orbit. Breakout after 4-5 yrs of consolidation on such huge volumes is normally very bullish. My platform says in the next three months the stock should touch atleast 210 and then 310 in next six months. Lets see.

j2ee,

what is this platform/software that you are talking about?

)- HG

ahh…ok, nothing really. This is a software platform as you rightly understood, that I have created over the years. It basically does research on my behalf (i mostly do not get too much time for decent research). Gathering results, analyzing results, looking for breakouts, predicting breakouts, identfying similar patterns and then it tries to build on knowledge to identify potential winners. So as you must have understood by now, its an Artificial intelligence based platform (neural network) and employs a host of machine learning algorithms. What started out as a small personal project to learn AI, turned out better than my own targets. Thats the beauty of Machine learning right, its engrossing and the end product is normally better that the person who created it :wink: …but still lot of work needs to be done…

)- HG

from one techie to another…nice :slight_smile: