Red Tape Ltd. - The next fashion giant?

[Mohit_baid]

India’s trusted leading Fashion and lifestyle brand with over 390+ opulent stores across PAN India. RedTape is known for emerging as one of the Finest Brands of Footwear and Clothing for Men, Women, and Kids. It has become a complete Family Fashion Destination by providing the Best International Styles and World-Class Quality through Shoes, Apparel, and Accessories for all age groups.

The company sells in over 37 Countries and 6 Continents. It is listed among the top Footwear Brands striding ahead of the market. The brand has gained a strong foothold in the niche markets of India, the UK, the US, Australia, Turkey, UAE, France, Germany, West Asia South Africa, and others.

It was demerged from Mirza International in 2023.

Narration	Jan-00	Jan-00	Jan-00	Jan-00	Jan-00	Jan-00	Jan-00	Jan-00	Mar-22	Mar-23	Trailing	Best Case	Worst Case
Sales	-	-	-	-	-	-	-	-	303.22	1,468.31	1,078.16	7,110.13	5,611.02
Expenses	-	-	-	-	-	-	-	-	255.75	1,223.96	884.63	5,833.86	4,686.73
Operating Profit	-	-	-	-	-	-	-	-	47.47	244.35	193.53	1,276.27	924.29
Other Income	-	-	-	-	-	-	-	-	-0.25	6.65	4.75	-	-
Depreciation	-	-	-	-	-	-	-	-	2.43	44.44	36.56	36.56	36.56
Interest	-	-	-	-	-	-	-	-	3.99	17.46	15.01	15.01	15.01
Profit before tax	-	-	-	-	-	-	-	-	40.80	189.10	146.71	1,224.70	872.72
Tax	-	-	-	-	-	-	-	-	11.76	46.95	37.36	25%	25%
Net profit	-	-	-	-	-	-	-	-	29.04	142.15	109.36	912.83	650.48
EPS	-	-	-	-	-	-	-	-	5,808.00	10.29	7.91	66.05	47.07
Price to earning											52.95	52.95	52.95
Price	-	-	-	-	-	-	-	-	-	-	419.00	3,497.39	2,492.24
RATIOS:
Dividend Payout	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
OPM	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	15.66%	16.64%	17.95%
						TRENDS:	10 YEARS	7 YEARS	5 YEARS	3 YEARS	RECENT	BEST	WORST
						Sales Growth					384.24%	384.24%	384.24%
						OPM	16.47%	16.47%	16.47%	16.47%	17.95%	17.95%	16.47%
						Price to Earning	52.95	52.95	52.95	52.95	52.95	52.95	52.95
Source - Screener

Risks/threats -

Economic and political factors, both national and global, that are beyond control, and factors of force majeure, may directly affect the performance of the Company as well as the Footwear industry. These factors include interest rates and their impact on the availability of retail space, rate of economic growth, fiscal and monetary policies of governments, inflation, deflation, consumer credit availability, consumer debt levels, tax rates and policies, unemployment trends, terrorist threats and activities, worldwide military and domestic disturbances and conflicts, pandemics, and other
matters that influence consumer confidence and spending.

Disclosure - Invested

[Mohit_baid]

First ever credit rating of Redtape as an individual entity.

[Surender]

Few Observations on this business:

1- Statement of Cash Flow FY23:
To arrive at ‘Net Cash generated from Operating Activity’, ‘Direct Taxes Paid: 46 Cr.’ shall be subtracted from ‘Cash Generated from Operations: 78 Cr.’. Hence, this amount shall be 32 Cr. instead of the reported amount of 124Cr [Am I misreading it due to lack of accounting skill…???].

2- Income Statement of FY22: Provided amounts seem to be of only Q4. The same is inferred from the note: “Figures of the previous financial year ended March 31,2022, have been restated to give effect to the Scheme with effect from January 1, 2022.” This provides a bad base to compare the FY23 numbers. However, management used these numbers to show the improvement under heading “Profit and loss indicators”. Is the financial control so weak that it’s not possible to provide numbers of the whole year[FY22]? If they skipped reporting using an accounting note, why did they use FY22 numbers to compare and highlight FY23 numbers as a good performance?

3- Compulsorily Redeemable Preference Shares: What’s the purpose of these? What is the price at which these will be bought back by the company?

3- Lack of information in the AR to answer important questions such as:

• How many stores were added in the last 1 year or over the years?
• What’s the future plan of action (Strategy), no word in the MDA section?
• What for the Capex of 163 Cr. was used in FY23?
• Why no explicit provision or write-off for the slow moving inventory although accounting notes talk about this aspect? Note: Inventory amounts to half of the balance sheet assets.

[Khanemc2]

Sharing snip from credit rating Crisil.

[manojmph]

The valuations seem to be attractive (ROCE44.8 % and ROE 35.0 %) as compared to the listed peers such as Relaxo, Campus, Metro and Bata. The OPM was 20% in the recent quarter and the EPS was 3.38 (~13.5 Annualized, that translates to PE ~33)

[sujay85]

@manojmph

listed peers such as Relaxo, Campus, Metro and Bata

I believe, especially for Redtape, its another peer is Kewal Kiran. Redtape is gradually becoming a fashion giant just like Kewal Kiran already is, and the latter has already entered footwear category through Killer brand. Kewal Kiran is more of a fashion player now, and Redtape is more of a footwear player now, but they are converging. Redtape is a powerful brand, but Kewal Kiran has multiple decent brands in its kitty like Killer, Integriti, Lawman etc. Going forward, they will be the most appropriate listed peers.

[Abhishek_Kohli]

Higher ROCE and ROE are because 75% of manufacturing is outsourced .

[Gauti]

Icici flexicap added close to 26 lakh redtape shares last month

[value_learner]

Thanks for very useful information. Could you please share the app where we can monitor this month wise?

[sameernics]

Stocks held by Mutual Funds | Redtape Ltd | RupeeVest

[RajeevJ]

ICICI Pru Flexicap Fund has picked up about 27 lakh shares of Redtape, almost 2% stake, during the month of August investing about 118 crs. It is the second mutual fund after HDFC MF to invest in the Co. HDFC Small Cap fund continues to hold about 4%, which it has for the last few quarters (Pre demerger).

Fund houses like HDFC & ICICI getting interested in the Co. is a very positive sign. If accompanied by good numbers in the coming quarters, which seems likely if the June qtr numbers are anything to go by, then it could well mean a good ride ahead for the existing shareholders, if only they can hold their horses!

[RajeevJ]

Attaching the transcript of the proceedings of the AGM. The MD Mr. Shuja Mirza has shed some meaningful insights on the working of the Co.

For starters, not only is the market for sports shoes as a whole growing rapidly organically, the even bigger growth is coming in the shift from the unorganized to the organized sector. Further, the Co. currently is concentrated in the northern part of the country & the scope for geographic growth to newer markets in different states is immense. The Co. is gradually increasing its reach. The coming 3-4 years could be years of high growth. The Co. is also looking to add to its ever increasing range of products by looking to enter the luggage industry once the turbulence in the retail industry settles down in the next year or so.

As regards the perception of Redtape being a discount brand, the MD clarified that the Co. is working on very decent & industry leading operating margins & giving discounts on MRP is only a strategy as it appeals to the Indian consumer’s psyche who enjoys the whole shopping experience more because of the discount, thereby making it a win-win for both the Co. as well as the consumer!!

There has been a lot of debate as to how Redtape should be valued. Investors are not clear as to whether it should be valued as a footwear or a garment manufacturer. The fact is that Redtape is neither, but a fashion company & needs to be valued as such, given both, the potential as well as the visibility for growth.

No stock goes in one direction & there will be corrections periodically, but investors need to track both the growth as well as the margins & take a call based on this reality. We are already into the second half of the year & soon we will start extrapolating numbers in 24-25. As of now the stock is under owned with only a couple of mutual funds invested in the Co. Fund managers typically have a longer time horizon & if a few more take a fancy to the story, then the journey could become interesting!

REDTAPE Transcript-of-AGM-September-30-2023.pdf (128.3 KB)

[mahes0111]

Red Tape AGM Short Notes:

Question about Geographical Expansion Plans:

Management Reply:

At present, majority of revenue comes from Jammu Kashmir, Punjab, Haryana, Himachal, Uttar Pradesh and Rajasthan.

We are now expanding in cities like Hyderabad. We’re looking to open more stores in coastal Andhra Pradesh cities like Guntur, Vijayawada, Vishakhapatnam. We are also expanding in Gujarat in a big way. And the Northeast is also something that we are toying with right now.

In the West India, In South India states like Tamil Nadu, Central India we don’t have a single shop So there is a lot of place lot of room to grow within India.

We have expanded our online warehouse, multi-fold this year, and the results should start coming out from the third quarter of this financial year. We are extremely optimistic about the future of footwear industry in India and believe that we have just started.

Question about Product Expansion Plans:

Management Reply:

We are not experimenting with any new categories as of now but next year when hopefully things get more settled down, we are planning to get into the luggage industry and backpacks and cabin sized suitcases.

Question about Competitors:

Management Reply:

In Footwear Space:

In the footwear industry, we compete with some of the lower ranges of brands like Reebok, Adidas and Puma. Lotto and Fila are our direct competitor and brands like Campus, they have certain premium ranges that also sell in the same price vicinity as ours.

In Apparel Space:

We would be competing with brands like Allen Solly and Peter England, John Players and even some of these primary label brands of Westside and Pantaloons.

we’re facing this competition is by improving the product quality, making a better product for consumers and overall giving consumers a better experience for shopping.

Question about Spors shoe market size:

Management Reply:

As per surveys done by some independent agencies, they say that the Indian sports shoe in the Indian footwear industry is around INR93,000 crores and is set to increase to INR1,41,000 crores by 2025.

The exact numbers, nobody knows, because still a very big part of our industry is unorganized. It’s slowly and slowly becoming more and more organized. So, as it gets organized, the numbers go up. So, there’s tremendous scope for growth in the future.

Question about perception of Discount Brand:

Management Reply:

Whenever they come shopping in REDTAPE, we want them to get the sweetest deal. We want them to get the best product, best value for the money. And each consumer should feel like he’s a winner. If this winning spirit is alive, that’s the DNA of our brand.

If you look at our margins, they are also highest. EBITDA is healthy. So, whether it’s 50% or 80%, this is a marketing strategy designed for making consumers buy a product. The Indian consumer mindset, unfortunately today, does not want to buy anything full price, from a car to a house, they want a discount. So this is the trend as of today. If tomorrow the trend changes, we will be flexible enough to change with the trend.

[AVB]

@RajeevJ

For starters, not only is the market for sports shoes as a whole growing rapidly organically, the even bigger growth is coming in the shift from the unorganized to the organized sector. Further, the Co. currently is concentrated in the northern part of the country & the scope for geographic growth to newer markets in different states is immense. The Co. is gradually increasing its reach. The coming 3-4 years could be years of high growth. The Co. is also looking to add to its ever increasing range of products by looking to enter the luggage industry once the turbulence in the retail industry settles down in the next year or so.

From a purely consumer point of view, I can affirm from first-hand experience that Redtape shoes are one of the best available in the market at prices that are affordable to the Indian middle class.

However, from an investment perspective, I see a few main issues with the organized footwear business as a whole.

1. First is the lack of customer stickiness and our general obsession with price and discounts over quality. So there is very little pricing power in the hands of manufacturers if any at all.

2. Second is the pervasive presence of unorganized players. The FY23 Annual Report of Redtape states that about 85% of the Indian footwear market resides in the hands of these unorganized players and perhaps more importantly the entry barrier is low for new players to enter.

However, this is completely my personal opinion and doesn’t make Redtape a bad investment whatsoever, especially with India slowly migrating towards becoming a middle-income economy. It is only that I feel there are better businesses available and I am open to contrarian views on this point.

Disclosure - Not invested

[Ghonarbochon]

In your opinion ,which is a better business in the same sector available at cheaper price point ?

[imsushant]

I think other than luggage industry, REDTAPE can also expand into sunglasses, watches and some other fashion accessories segments. Their small innerwear portfolio also needs a revamp and it might do wonders.

[bijut]

The range of products on offer in the company’s website is quite good( haven’t seen a store yet). Apparels and Footwear for Men, Women and Kids which many of the other players may not be offering combinedly. Offering discounts as mentioned in AGM is a good strategy but achieving a brand name of it’s own will be the challenge. Only the brand can take it forward to longevity and better margins. I see lot of scope for it to expand to other categories of products. I think the management’s key focus will be on expansion of its network and retaining the margin.

[PrashantModgill]

Hi VP,

This is my first post. I am a long term investor in REDTAPE, i bought heavy bags at 440 bucks. I have visited REDTAPE mega store in Ludhiana, multiple times. And the more i say about it, more amazing the products are.

personally used multiple products, they have streamlined their Size Sets across different SKUs, fantastic products, great quality.

The store in ludhiana does around 6 lakh rupees worth sales everyday according to the manager.

Disc- Invested & Biased.

[praveen_potnuru]

Hi Prasanth

Thanks for sharing your findings. I have a question for you
They generally have high MRP for their shares and sells at huge discount of 60-80% (as a marketing strategy) in online channels. Is it the same is Physical stores ? Do they sell at discount to MRP ? or do they sell/list the products at MRP ?

Thanks in advance for your response.
Other members of VP, please share any info/observations you have on this point (Thanks )

Praveen

[Mohit_baid]

Stores have discounts too!

We Indians love discounts and I believe the segment of the society that red tape is targeting has a thing for discounts and negotiations don’t know why but there is always a sense of satisfaction after there is a price reduction but there is one drawback to this, overtime building an image of a discount brand which people will start mocking saying MRP toh naam ka hai asli daam toh ye hai.