Reproducing in this and next posts key elements of research note for quick reference of members…
Key Investment Arguments In Favour of Relaxo Footwear Ltd. :
-
India’s 2nd** Largest Footwear company** by Volume next to Paragon Footwear (unlisted) and 2nd Largest Footwear company by Value, next to only Bata India Ltd.
-
Generating 20 % + RoE every year since last 5 Years,
-
Exceptional Growth Track-Record wherein company has increased its Sales at 5 Years’ CAGR of 29.63 % while PAT has increased at a 5 Years’ CAGR of 45.54 %
-
Strong Brands in company’s portfolio like ‘Hawaii’, ‘Sparx’ and ‘Flite’ which have tremendous potential of growth in coming years,
-
Great brand-pull for company’s products which is evident from Debtor Days at ~10 days,
-
Aggressive Marketing initiatives started from Q1FY13 by roping-in top-notch Bollywood Celebrities like Salman Khan & Akshay Kumar for company’s ‘Hawaii’ and ‘Sparx’ brands respectively (print and media ads to be aired from Q2FY13)
-
Appointment of world-renowned management consulting firm Accenture in 2HFY12 to aid in improving processes and maintaining growth momentum,
-
20 % + p.a. Sales growth visibility till FY15,
-
Key Raw Material prices (EVA & Rubber) starting to decline from Q3FY12 onwards and have further declined by 33 % & 13 % respectively in Q1FY13 (till 31st May 2012) which is expected to provide significant boost to EBITDA margins of the company in FY13,
-
Company is increasing its ground Retail presence aggressively with 150 + own stores as on date with a strong distribution network with which company has a reach to 46,000 + pan-India Retailers.
Key Investment Arguments Against Relaxo Footwear Ltd. :
-
Low Liquidity in company’s stock because of 75 % promoters shareholding and another 14.5 % held by VLS Finance (holding since last 15 years’ â acquired in IPO) and 1.7 % held by FII Indea Capital (run by Raj Mishra). Hence, effective free public float is just 8.8 %,
-
Raw Material Price susceptibility. EBITDA margins are highly dependent on key raw materials â EVA & Rubber prices although company has managed gradual fluctuations quite well over last many years (Refer Page 12-15 of this Research Note) but in case of wild fluctuations, as experienced in FY11, when EVA prices went up by 40 % + while Rubber prices went up by 56 % +, EBITDA margins could suffer,
-
Related Party Transactions wherein two key heads ‘Purchase of Goods’ from associates and ‘Guarantees & Collaterals Taken’ from key management personnel is quite big. However, this is to be seen in the backdrop of evolution of Relaxo (Refer Page 6-7 of this Research Note) wherein it essentially started as a marketing and selling company selling footwears of group companies and other entities and then gradually transformed itself into a full-fledged manufacturing and marketing Footwear company. Also, till the major manufacturing plants for brands are established, company sources the products from its small group companies. W.r.t. ‘Guarantees & Collaterals Taken’ its essentially because of aggressive debt-funded expansion since last 5 years which has resulted in promoters of the company giving personal guarantees for loans taken.
-
High Debt. Because of aggressive expansion since last 5 years, company has a debt of around INR 190 cr. on books. However, this has to be looked in the backdrop of significant increase in Fixed Assets of the company which has swelled from INR 94 cr. 5 years before to current INR 292 cr… Similarly, the Scale of Operations of the company has swelled from INR 305 cr. 5 years before to current INR 864 cr… In contrast, Equity Capital has remained constant at miniscule INR 6 cr. over last 10 years which effectively means company has managed the entire expansion and growth with nil equity dilution.
-
Relaxo brand is not wholly owned by the company and is jointly owned with a group company. However, no royalty is currently being paid by the company as also recent management interaction suggests the willingness of bringing the brand under company’s fold by paying a negligible amount (in lakhs).