Contents of this Note :

Key Investment Arguments In Favour & Against Relaxo Footwear Ltd.

( Relaxo Footwear Ltd. - Mcap Rs. 580 cr. with FY13e Revenues of Rs. 1036 cr. ) Page 2-3

Why it Deserves to be a Part of One's Core Portfolio Management Overview ( Core Professional Management ) 3, 5, 10 & 15 Years' CAGR ( Revenue, EBITDA, PAT, Fixed Assets, Debt, Equity, Share Price ) Evolution of the Company ( From Trading to Marketing to Manufacturing to Branding to Retailing ) Last 5 Fiscals Performance post Launch of 'Sparx' and 'Flite' Brands ( Core Revenue, EBITDA & PAT alongwith each Fiscal's YoY Growth ) Brand-Specific Revenue Growth ( Hawaii, Flite & Sparx ) Brand-Specific Volume Growth ( Hawaii, Flite & Sparx ) Retail Stores Under Operation ( with Revenue Per Store Trend ) Exports' Revenue Growth Assessment of Brand Marketing Effectiveness by Appeal of Celebrity Roped-In for Specific Brand ( Salman Khan for Hawaii & Akshay Kumar for Sparx ) Assessment of Quarterly Raw Material Price Fluctuations and its Effect on Company's Margins ( Actual From Q1FY10 till Q1FY13 and then Estimate for rest of FY13 ) Peer Comparison ( Bata India Ltd. & Liberty Shoes Ltd. ) Conclusion ( A Domestic Consumption Oriented Company on Verge of Significant Rerating )
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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' 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 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).

Page Intentionally Left Blank

Why Relaxo Footwear Ltd. [ NSE RELAXO ; BSE 530517 ] deserves to be a part of one's core portfolio : (1) 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. (2) Promoted by Dua family who directly hold 75 % equity of the company. Inspite of a family-run company, Relaxo is an apt example of a company with thorough professional management because of the highly qualified promoter family as also the three decades' experience promoters possess in the footwear industry. MD Mr. Ramesh Dua himself is a Rubber Technologist possessing deep knowledge of the footwear industry right from the production processes to selection of best raw materials for the products. Given below is a brief professional background of the key management personnel of the company :

Name

Designation

Qualification

Ramesh Dua

Managing Director

'Rubber Technologist' and a Licentiate of the Plastic and Rubber Institute of London (L.P.R.I.)

Ritesh Dua

Executive Vice President (Finance) Executive Vice President (Marketing) Executive Vice President (Retail)

MBA (Finance) from Fore School of Management, New Delhi

Gaurav Dua

MBA (Marketing) from University of Wales, Cardiff (U.K.)

Nitin Dua

MBA (Marketing) from Apeejay School of Management

(3) Apart from the core professional management, company's clean and genuine corporate governance can be gauged by the profile of independent directors on board. Given below is a brief profile of independent directors on board of Relaxo :

Name

Designation

Qualification

Currently Serving As Senior Professor at FORE School of Management.

Previously Associated with Department of Electronics, Uttranchal Government, Jindal Group, Surya Roshni Group, Flex Industries, Shrirams Group.

Vivek Kumar

Independent Director

Electrical Engineer from the University of Roorkee (now IIT Roorkee) and MBA from faculty of Management Studies, Delhi University

Tata Group, Polar Group JCB, Maruti Udyog Ltd.

Pankaj Shrimali

Independent Director

Fellow Member of ICAI, ICSI and ICWAI.

Director in : Network Limited,

Apollo Hospital Group, Birla Group,

Kritikal Solutions (Nucleus group) Ventura Strategic Management Solutions Pvt. Ltd.

Onida Group, VLS Finance, Liberty Shoes, Lakhani Footwear, Mirza International, Nucleus Software.

(4) Since the year 1995, when company came out with its IPO to raise an amount worth INR 4.5 cr. to set-up its first footwear manufacturing plant in Haryana, Relaxo has come a long way with current seven own manufacturing plants and the status of being the 2nd largest footwear company of India by volume. Bata India Ltd., which was then, in the year 1995, the largest footwear manufacturing company of India with a turnover of INR 548 cr. (as compared to FY95 turnover of INR 38 cr. of Relaxo), was handsomely outpaced in terms of growth rates year after year by Relaxo to attain its current FY12 scale of INR 864 cr. (as compared to current INR 1550 cr. scale of Bata). (5) It is worthwhile to look here at 3 Years', 5 Years', 10 Years' as well as 15 Years' CAGR of Revenue, EBITDA, PAT, Fixed Assets, Debt as well as Equity Capital for Relaxo to assess the exceptional growth that company has achieved over last many years as also how well such growth was managed. We have also included in the comparison, the CAGR in Share Price of Relaxo over the same period to check how well the markets have rewarded its growth :

3 Years' CAGR

5 Years' CAGR

10 Years' CAGR

15 Years' CAGR

Revenue

28.5 %

29.63 %

19.02 %

17.41 %

EBITDA

29.65 %

32.05 %

22.41 %

17.01 %

PAT

41.01 %

45.54 %

25.67 %

14.13 %

Fixed Assets

27.71 %

30.83 %

21.48 %

27.45 %

Debt

19.73 %

25.35 %

36.99 %

42.99 %

Equity Share Capital

0.00 %

0.00 %

0.00 %

4.73 %

(1:1 Bonus Issued in FY01)

117.31 % 63.81 % 23.70 % 25.45 %

Stock Price -- BSE (base : 1st June)

From above, four important things need to be noted : (a) (b) Revenue growth is backed by judicious capacity additions which is evident from CAGRs of Fixed Assets outpacing Revenue CAGRs. Margins are maintained while aggressively adding capacities which is evident from EBITDA as well as PAT CAGRs more or less higher than Revenue CAGRs. This is a very critical aspect, as, in a consumption-oriented business, once the brands are established in the market by maintaining margins and capacities are in place, cash generation is robust in the scale-up phase. Entire expansion so far is funded via internal accruals and manageable debt which is evident from 0 % equity dilution over last 15 years except for a bonus issue in FY01. This augurs very well for the future fund-raising of the company as the equity capital at the current scale of operation of 864 cr. is miniscule at just INR 6 cr. with 75 % promoters' shareholding which leaves ample scope of fund-raising via equity route in future. Stock Price CAGR, although looks decent over 3 Years' and 5 Years' period, is very low over 10 Years' and 15 Years' period when we compare this to PAT, Revenue and Fixed Assets CAGRs over the same periods. This leaves room for a rerating of commanded multiples for the company in its next phase of scale-up.

(c)

(d)

(6) Having looked at 3, 5, 10 & 15 Years' CAGRs of Relaxo above, its imperative to know the reason of such exceptional growth in financials over last many years (achieved by this company). For that, we will need to first look at the evolution of the company since inception :

From Inception till 1995

Company was mainly a marketing and trading company which focussed on marketing and selling footwear manufactured by its group companies as also other entities. Company started manufacturing footwears with focus on mass-market (rubber chappals/slippers) as a strategy to penetrate the market as there was dearth of organised players in low-value-high-volume massmarket. Company raised funds via its maiden IPO in 1995 and set-up its first own manufacturing plant in that year at Haryana which was subsequently followed by

From 1995 till 2004

another aggressive expansion at the same location in the year 2000 and a new plant in Rajasthan in the year 2001. Mass-Market product viz., Rubber Slippers/Chappals were branded 'Relaxo Hawaii'. The main consumers of 'Relaxo Hawaii' were from lower- and mid- segment of the society with majority being labour-class and rural-people. Company focussed on moving-up the value chain and building strong brands by launching specialised light footwears as also shoes under the brands 'Flite' and 'Sparx'. As a strategy to create brand visibility across the society, company started rolling out own Retail Stores named 'Relaxo Retail Shoppe' from the year 2006 onwards as also roped in Bollywood Celebrities for brand endorsements. The target consumers for 'Flite' and 'Sparx' were Midand Upper- segments of the society which demand quality branded products at affordable rates. Company has shifted its complete focus towards creating strong brand visibility of not only its highvalue brands viz., 'Sparx' and 'Flite' but also its massmarket brand viz., 'Hawaii' in order to scale-up the next phase of growth. Top-notch celebrities are recently roped-in to endorse the respective brands like Salman Khan for mass-brand 'Hawaii' and Akshay Kumar for specialised brand 'Sparx'. Aggressive ground presence is also planned with another 50 exclusive company owned retail stores (in addition to current 149) planned to be opened in FY13 as also improving availability and reach of its products across India from the current North-Indiaheavy focus.

From 2005 till 2012

2012

onwards

(7) It was post launch of 'Flite' & 'Sparx' brands in 2006 that company's real growth came about. It is worthwhile to look here at company's financials from FY08 onwards to assess how the company's brandbuilding exercise translated into numbers :

(fig. in ` cr.)
Revenue

FY12

FY11

FY10

FY09

FY08

864.67

691.6

557.75

409.92

307.08

EBITDA

95.26

72.39

80.29

44.11

32.99

PAT

39.9

26.71

37.69

14.23

10.52

In YoY growth terms, the picture looks like below :

FY12
Revenue Growth YoY
25.02 %

FY11
23.99 %

FY10
36.06 %

FY09
33.48 %

FY08
29.64 %

EBITDA Growth YoY

31.59 %

(-) 9.83 %

82.02 %

33.71 %

39.12 %

PAT Growth YoY

49.38 %

(-) 29.13 %

164.86 %

35.26 %

72.18 %

From above, three important things need to be noted : (a) Average YoY Revenue growth of 29.6 % was achieved in 5 years' period post launch and market-establishment of 'Flite' and 'Sparx' brands. This growth gets even more respectable when we consider the fact that it was achieved each year on the higher base of last year (500+ cr. since last 3 years). Growth in EBITDA and PAT outperformed the Revenue growth for all years post launch of said brands, except in FY11, when the raw material prices suddenly escalated by more than ~40 % while the passing-on of such higher input prices was gradual so asto keep the demand intact. The wide-gap in outperformance of growth rate of EBITDA relative to Revenue growth rate signifies that there is a great brand-pull in the market for Relaxo's products which is resulting in improving realisations for the company.

(b)

(c)

(8) Having looked at company-level consolidated Revenue growth since FY08, lets' now turn our attention to brand-specific revenue growth since FY08 to assess how each brand has performed in the marketplace. Brand-specific FY12 figures are not available and so revenue figures from FY08 till FY11 are given for each brand below :

(fig. in ` cr.)
Hawaii Flite

FY12

FY11

FY10

FY09

FY08

245

227

183

151

178

161

120

98

Sparx

168

85

31

13

Other Brands, Outsourced &

100.6

84.75

78.92

45.08

Traded Footwears' Sales

Total Sales

864.67

691.6

557.75

409.92

307.08

In addition, it will be interesting to go further deep into each brand sales and check the YoY growth rate in volume of each brand in addition to YoY growth rate in value so asto assess whether the sales were driven by only improving realisations per product (because of price increases and such other factors) or there was a growth in real sense in terms of improving volume of footwears sold :

FY12

FY11

FY10

FY09

Hawaii (YoY Growth) Volume Value

(-) 4.94 % + 7.92 % + 19.61 % + 24.04 % + 6.03 % + 21.19 %

Flite (YoY Growth) Volume Value

+ 1.46 % + 10.55 % + 26.65 % + 34.16 % + 11.91 % + 22.44 %

Sparx (YoY Growth) Volume Value

+ 104.97 % + 97.64 % + 203.65 % + 174.19 % + 159.83 % + 138.46 %

Four important things need to be noted from above : (a) The company, which was predominantly a low-value mass-product 'Hawaii' company till 2006, cornered a respectable marketshare in specialised high-value products too by successfully establishing 'Flite' and 'Sparx' brands in the marketplace. Share of 'Flite' and 'Sparx' brands to total sales of the company improved considerably over last 5 years from 0 % till FY06 to ~50 % (25% of each brand) in FY11. Similarly, share of low-value 'Hawaii' brand to total sales of the company decreased considerably from ~70 % till FY06 to 35 % in FY11. Growth in value terms of each of the three brands was backed by a corresponding increase in volumes of products sold under each brand which signifies improving brand visibility and wide

(b)

(c)

acceptance of company's products amongst consumers. (d) Company's low-value mass-product 'Hawaii' suffered a first-time volume-degrowth in FY11 because of three reasons -first,since its a low-value mass-product, its demand is very elastic to price variations ; company had to increase price of the products because of steep increase in raw material costs in FY11 because of which demand suffered, second, third, there was increased competition in the respective category of product from organised as well as unorganised segment, there was a gradual shift to slightly high-value but of similar category alternative product 'Sparx Hawaii' slippers of the company which were launched in FY11.

(9) In addition to having knowledge of brand-specific sales-trend, its necessary to have know-how of ground factors that assist in establishing brand-image amongst end-consumers. With that regards, company's exclusive retail stores branded 'Relaxo Retail Shoppe' play a crucial role. Lets' have a look at company's ground-presence expansion over last 5 years to assess whether company has invested judiciously to improve its brands' visibility amongst consumers :

FY12
Stores Under Operation Revenue Per Store
0.40 cr. 149

FY11
127

FY10
100

FY09
79

FY08
60

0.26 cr.

Two important things need to be noted from above : (a) Company has aggressively expanded its ground presence by setting-up its exclusive retail stores which number 149 as at 31st March 2012 with a plan to open another 50 stores in FY13 ( 3 Stores already opened till 15th June 2012 to take the total tally to 152 ). Revenue per store has shown a gradual increase from ~0.26 cr. in FY08 to ~0.40 cr. in FY12. These stores are used only as a tool to create brand visibility and improve brand acceptability amongst consumers as otherwise 90 % of the sales of the company are done via the strong distributor network that it has established over last many years which enables company to reach more than 46,000 retailers on a pan-India basis.

(b)

(10)The last important historical aspect that needs attention before evaluating the prospects of the company is its performance on exports front over last 5 years. It is worthwhile to note here that company started exporting its products only from FY08 onwards as till then, and even now, domestic market has remained its major focus :

(fig. in ` cr.)
Exports' Revenue

FY12
30

FY11
22

FY10
11

FY09
7

FY08
1.5

Company has shown a significant growth in exports' over last 5 years albeit on a lower base. Company's exports are primarily done to Asian and Middle East nations. Company has plans to spend ~6 % of its exports' sales on branding and advertisements of its brands in the respective nations which is expected to significantly boost its exports' sales in coming years. (11) Having looked above at the historical perspective to check the reasons for company's exceptional growth since last many years, its critical to evaluate whether such exceptional growth is imitable in forthcoming years or not. Towards this, first and foremost is the seriousness of the management to see its company scale the next level of growth with the same momentum as it has done in the past. Such seriousness can be judged by recent appointment (in 2HFY12) of world-renowned management consulting firm Accenture to advise the management on business strategies and systems by which they can enhance the marketability and reach of company's products to the consumers. (12) Second and most important aspect which is likely to keep company's topline growth intact is a complete, sea change in the marketing strategy which was so far focussed on only creating brand awareness by employing low-key bollywood celebrities. Now, from FY13 onwards, company has charted out an aggressive marketing plan that focuses on deep penetration in the marketplace for all of its brands including, mass-product 'Hawaii' and specialised brands 'Sparx' and 'Flite'. Towards this, company has recently roped-in top-notch celebrities like Salman Khan and Akshay Kumar to endorse its brands 'Hawaii' and 'Sparx' respectively, print and media ads of which are likely to be aired from July'2012 onwards. It is worthwhile to note here that 'Hawaii' will be India's first low-value-highvolume mass footwear brand which will be endorsed at such high level and this move is expected to arrest the otherwise stagnating growth of this brand (because of its elasticity to price-increases) and improve its realisations considerably. It will be interesting here to have a look at each of the newly roped-in celebrity's appeal, the respective product (brand)'s target consumers as well as the benefits that can be derived from roping-in such celebrity for the respective brand :

Celebrity Name

Celebrity's Appeal

Signed in for Brand

Target MarketSegment for Brand

Benefits that can be Derived because of Celebrity's Appeal Since Salman Khan has huge fan-following in Lower- & Midsegments of the society, signing him could drive the robust sales growth of otherwise stagnating sales of Hawaii with unorganised & peer consumers shifting to Hawaii.

Salman Khan

Mass-Puller with fanLower- & MidRelaxo Hawaii following across all segments of the society segments of society, with major consumers especially Mid- & being Labour Class & Lower- segments which Rural People are blind followers of the celebrity

Akshay Kumar

Young-crowd puller with a specialised image of proficiency in Action

Sparx

Young, Sporty as well as Fitness-conscious Middle agers with

Since Akshay Kumar has a fan-following across all segments, including upper-class,

& Comedy. Because of his good-boy society conduct, enjoys wide fan-following across all segments of society, especially Young Mid-, Low- & Uppersegments.

major consumers being from Mid- segment of the society which demand value-formoney products.

of young & middle agers, signing him could enable exponential growth of Sparx products as also will enable the company to launch high margin products in the category to cater to upper-class of the society.

(13) 20 % + Topline growth for atleast next 3 fiscals should not be a problem for the company because of varied factors like : (a) The benefits of the aggressive marketing campaigns with top-notch bollywood celebrities (that will be kicked-off from Q2FY13 onwards) will result in healthy marketpenetration with existing consumers sticking on to Relaxo while peer consumers and other new consumers turning towards using Relaxo's products. Each of the three brands, viz., 'Hawaii', 'Sparx' and 'Flite' still have a low base of INR 250-300 cr. annual revenue individually and so has a lot of space for aggressive YoY growth atleast till next 3 years by when they will attain a respectable higher base. Company is aggressive in launching new innovative products (like the latest one 'FlitePU Fashion' launched in FY12 based on latest PU technology) which will ensure that sales remain robust in the years to come.

(b)

(c)

(14) We have covered above the surety of topline growth for atleast next 3 fiscals for the company but, what about margins which we have seen fluctuating wildly in just the recent fiscal FY11 when EBITDA margins dropped sharply to 10.46 % from FY10's 14.39 % before recovering to 11.01 % in FY12. The main culprit for this is wild fluctuations in raw material prices which suddenly rose by more than 40 % in FY11 while the soothing of the impact of such rise by judicious price-increases in end-products took an obvious lag-period so as to keep the demand intact. If we look in deep towards the quarterly as well as yearly EBITDA margin performace of the company for the last three fiscals, starting from FY10 till latest FY12 and pitch it against the wild fluctuations that we have witnessed in the raw material prices, then, we find that company has managed the margins quite well inspite of all adversities. The main raw materials for the company constitute Ethyl Vinyl Acetate (EVA), Natural Rubber & Synthetic Rubber. Given below is the quarterly YoY rise/fall in each of the raw material prices starting from Q1FY10 as also the EBITDA margins reported by the company for each of the quarter. Here, we have taken the average price (of concerned raw material) for the quarter and evaluated it w.r.t. its average quarterly price the year before (for ex., Q1FY10 v/s Q1FY09 and so on). Also, rather than determining the YoY increase/decrease in raw material prices only at the end of each fiscal i.e. 31 st March, we have determined the average fluctuation in raw material prices on YoY basis by taking into consideration quarterly fluctuations, as only a plain YoY increase/decrease at a particular date doesn't allow to properly evaluate the performace of the company vis-a-vis raw material price fluctuations as raw materials are procured by the company on a running basis each quarter or half year (if not monthly) and so its the fluctuations on a quarterly basis that matter more rather than pure yearly basis fluctuations :

EVA Ethyl Vinyl Acetate

Rubber & Synthetic Rubber

(average quarterly price)

Q1FY13 (till 31st May 2012) YoY Growth
(- 33.3 %)

(average quarterly price)

(-13.3 %)

EBITDA Margin of the Company for respective Quarter

FY12 Avg. YoY Fluctuation in : EVA = + 9.88 % ; Rubber = + 7.45 %

FY12 Overall YoY Increase in EBITDA Margins : + 55 Basis Points [11.01 % v/s 10.46 %]

Q4FY12 YoY Growth

(- 20.37 %)

(-15.55 %)

14.1 %

(YoY = + 570 basis points)

(- 10 %) +2.5 % 9.1 %

Q3FY12 YoY Growth

(YoY = - 1 basis points)

+ 27.8 % + 20 % 8.4 %

Q2FY12 YoY Growth

(YoY = - 258 basis points)

+ 42.1 % + 22.85 % 11.3 %

Q1FY12 YoY Growth

(YoY = - 220 basis points)

FY11 Overall YoY Decrease in EBITDA Margins : -393 Basis Points [10.46 % v/s 14.39 %]

FY11 Avg. YoY Fluctuation in : EVA = + 41.92 % ; Rubber = + 56.15 %

Q4FY11 YoY Growth

+45.94 %

+ 57.1 %

8.4 %

(YoY = - 450 basis points)

+ 37.9 % + 62.5 % 9.1 %

Q3FY11 YoY Growth

(YoY = - 520 basis points)

+ 28.57 % + 47.8 % 10.9 %

Q2FY11 YoY Growth

(YoY = - 402 basis points)

+ 55.3 % +57.2 % 13.5 %

Q1FY11 YoY Growth

(YoY = - 218 basis points)

FY10 Overall YoY Increase in EBITDA Margins : + 363 Basis Points [14.39 % v/s 10.76 %]

FY10 Avg. YoY Fluctuation in : EVA = - 9.92 % ; Rubber = + 30 %

Q4FY10 YoY Growth

+ 15 %

+ 98.5 %

12.9 %

(YoY = - 229 basis points)

Q3FY10 YoY Growth

+ 19.23 %

+ 57.6 %

14.2 %

(YoY = + 663 basis points)

(- 34.78 %) (-17.8 %) 14.9 %

Q2FY10 YoY Growth

(YoY = + 670 basis points)

(- 39.13 %) (-18.1 %) 15.6 %

Q1FY10 YoY Growth

(YoY = + 539 basis points)

Six important things need to be noted from above : (a) All the three key raw materials witnessed a sharp escalating trend in prices each quarter starting from Q3FY10. The escalating trend got reversed in Q3FY12 for EVA and in Q4FY12 for Rubber. EVA is almost 100 % imported and so EVA's international pricing is taken into consideration rather than domestic landed cost as landed cost is subject to currency fluctuations. It is worthwhile to note here that despite steep INR depreciation, landed cost of EVA is still lower on a YoY basis (as at 31st May 2012). Raw Material price fluctuation and increase was more pronounced in FY11 when, on a yearly basis, EVA price fluctuated with an increasing bias by + 41.92 % while Rubber prices fluctuated with an increasing bias by + 56.15 %. Company's EBITDA margins saw a sharp 393 basis points decline in FY11 on the back of sharp increase in key raw material prices. Decline in EBITDA margins on a YoY basis for each quarter was also more pronounced in FY11. In FY12, raw material prices saw a stable trend with a downward bias in 2HFY12. Overall, EVA prices fluctuated with a decreasing bias by + 9.88 % while Rubber prices fluctuated with a decreasing bias by + 7.45 %. Company's EBITDA margins rebounded sharply by 570 basis points in Q4FY12 to regain FY10 levels on the back of decreasing raw material prices and increasing realisations. Sharp rebound in EBITDA margins in Q4FY12 helped the company to report a 55 basis points increase in yearly EBITDA margins for FY12.

(b)

(c)

(d)

(e)

(f)

(15) Key raw material prices have shown a further decline in first two months of Q1FY13 wherein EVA prices have declined by 33.3 % while Rubber prices have declined by 13.3 %. For the rest of the fiscal, key raw materials, especially Rubber, are projected to remain stable with a descending bias. To assess the margin scenario of the company in a more better way, we have taken the base price for Rubber to remain at current levels (31st May 2012 levels) for the rest of FY13 and we have taken the base price for EVA at +10 % above current price (31st May 2012 levels) to prevail for rest of FY13 and assessed the YoY fluctuation for each of the raw material on a quarterly basis as below :

EVA Ethyl Vinyl Acetate

Rubber & Synthetic Rubber

(average quarterly price)

(average quarterly price)

FY13 Avg. Expected YoY Fluctuation in : EVA = - 5.37 % ; Rubber = - 4.39 %

FY13e Overall YoY Increase in EBITDA Margins : + 264 Basis Points [13.65 % v/s 11.01 %]
+1.95 % + 2.89 %

Q4FY13 YoY Growth Q3FY13 YoY Growth Q2FY13 YoY Growth Q1FY13 YoY Growth

+16.11 %

(-2.7 %)

(- 12.91 %)

(-6.9 %)

(- 26.66 %)

(-10.88 %)

Four important things need to be noted from above : (a) (b) Rubber prices have further declined (till 22nd June 2012) by 4.6 % than our assumed base price and are projected to decline further till September'2012. EVA prices have shown a stable trend by declining further by 9.52 % (till 15th June 2012) over 31st May 2012 levels and are well ~18 % below our assumed base price (of + 10 % 31st May levels). EVA prices are likely to remain stable for rest of the year with cues to be taken from Chinese market which is subdued at present. If our base price assumption holds true for rest of FY13 then it will mean a further YoY degrowth in prices of key raw materials for Q1, Q2 and Q3FY13 which will improve company's EBITDA margins considerably over a larger base which could translate to a robust cash generation for the company in FY13. In our company-level EBITDA margin estimation for FY13, we have not considered any benefits that could arise from aggressive marketing campaigns (involving top-notch celebrities) like improved realisations on a consolidated basis because of higher contribution from high-value brands as also improved realisations from low-value mass product 'Hawaii'. Its only benefits because of raw material price softening that we have taken into consideration.

(c)

(d)

(16) Now, without going any further, its time to look at the valuation multiples commanded by Relaxo's listed peers. Although each of the listed peer has its own unique business model in the footwear industry as also a clear-cut defined focus on particular sub-segment(s) of the footwear industry, still, there are certain peers which overlap each other and therefore compete each other in particular sub-segments. With that regards, only Bata India Ltd. and Liberty Shoes Ltd. deserve to be compared to Relaxo and the comparison is done below :

Relaxo Footwear Ltd.

FY12 Revenue
864.67 cr.

Liberty Shoes Ltd.

369.50 cr.

Bata India Ltd.

1550.79 cr.

(CY11 Revenue for Bata)

EBITDA Margins

11.01 %

8.37 %

15.39 %

( FY12 )

Fixed Assets

292 cr.

~90 cr.

227.06 cr.

( FY12 )
EBITDA/Equity Multiple
6.08 5.97 22.45

( FY12 EBITDA )
Mcap/Sales

0.67

0.46

3.45

(FY12 Sales)
EV/EBITDA
7.6 11.67 13.21

EV/Sales

0.8

0.91

3.45

Price-to-Book Value

3.35

1.35

9.95

Few important things need to be noted from above : (a) Bata India Ltd. enjoys the highest scale as also the highest EBITDA margins amongst the peers because of its presence in the industry over last many decades in addition to its well established ground retail presence with own 1200 + stores on a pan-India basis. Relaxo is the second largest player in terms of Revenue next to Bata and also enjoys the second highest EBITDA Margins amongst all peers. Fixed Asset base for Relaxo has swelled over last 5 years and today stands higher than even Bata an indication of how aggressively it has grown over last 5 years. Another reason for higher asset base is Relaxo's presence in low-value-mass-product 'Hawaii'. For accurate comparison purpose, we have considered above the EBITDA multiple (which is based on EBITDA/Equity) rather than P/E multiple (which is based on PAT/Equity) as BATA's presence in real estate activity gives an inaccurate PAT figure which is not purely from Footwear business. Inspite of being the second largest company next to BATA, Relaxo quotes at significant discount to BATA and at par to Liberty Shoes. Liberty, even with its FY12 revenues being half as compared to Relaxo and relatively poor EBITDA margins, quotes at premium in terms of EV/Sales, EV/EBITDA as also EBITDA multiple (and also P/E multiple) as compared to Relaxo which is an anomaly that needs to get corrected sooner rather than later.

(b) (c)

(d)

(e)

Conclusion : A Company benefiting out of Indian Domestic-Consumption Strength and still quoting at just : 0.67 x FY12 Sales 0.8 EV/Sales 14.55 x FY12 EPS

Despite : FY12 Scale of Operations at INR 864 cr. with FY13e Scale at INR 1036 cr. Track-record of exceptional growth in financials with a 29.63 % 5 Years' CAGR in Sales and 45.54 % 5 Years' CAGR in PAT, Visibility of 20 % + CAGR in Sales till FY15, Strong Brands in its portfolio which are endorsed by top-notch celebrities like Salman Khan & Akshay Kumar, Strong Ground Presence with 150 + company-owned Retail Stores and reach to 46,000 + PanIndia Retailers, Consistently operating at healthy EBITDA margins which are 2nd best in the entire Footwear Industry next to Bata,

Consistent 20 %+ RoE achieved each year since last 5 Years,

calls for a significant rerating of this company sooner rather than later.

A company which should otherwise command a scarcity premium because of consistent outperformance in financials since last 15 years as also consistently high 20 % + RoE each year since last 5 Years' coupled with nil equity dilution since last 15 years and high 75 % promoters' shareholding in a tiny equity capital of INR 6 cr. (5 FV), is actually quoting at a discount to its smaller peer like Liberty Shoes. This signifies a gross relative undervaluation of Relaxo Footwear Ltd. on the bourses and therefore views are invited from fellow members on this promising consumption story.

Disclaimer :
This Research Note should only be taken as a direction for further research and should, in no way, be construed as an advice to Buy/Sell concerned Company. While preparing this note, we have used all publicly available information as also information from other sources which are thought of as most reliable. However, although we have tried to be as genuine and as accurate as possible in publishing the data(s), still, reader of this note is advised to cross-check the information and we should not in any way be held liable for any incorrect information. Its safe to assume that we have the concerned company as part of our portfolio and so the views expressed in this note should be seen in that backdrop. The reader assumes the entire risk of any use made of this note and we should, in no way, be held liable for any loss arising out of the contents or action taken by the reader because of this note. This Research Note should not be interpreted as a recommendation of any kind but is only for the information purpose.