scorecardresearch4 reasons why Relaxo Footwears is Axis Securities' pick of the week

4 reasons why Relaxo Footwears is Axis Securities' pick of the week

Updated: 14 Jun 2022, 01:59 PM IST
TL;DR.
Recovery in footwear demand, normal monsoon, and a good financial matrix of the firm make it a preferred investment choice for investors, noted Axis.
Recovery in footwear demand, normal monsoon, and a good financial matrix of the firm make it a preferred investment choice for investors, noted Axis.

Recovery in footwear demand, normal monsoon, and a good financial matrix of the firm make it a preferred investment choice for investors, noted Axis.

Despite a 26 percent fall in 2022 year-to-date (YTD) and 8 percent just in May, Axis Securities is bullish on Relaxo Footwears and has chosen the stock as its 'stock pick of the week'. The brokerage has a 'buy' call on the stock with a target at 1,100 per share.

Recovery in footwear demand, normal monsoon, and a good financial matrix of the firm make it a preferred investment choice for investors, noted Axis.

Relaxo is the largest footwear manufacturer in India. It manufactures quality and affordable footwear comprising slippers, sandals, sports, and casual shoes. The company boasts of several popular brands including Relaxo, Sparx, Flite, and the Bahamas which stand as leaders in their respective domains.

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Relaxo stock price trend

Let's take a look at the brokerage's investment rationale for the stock

1) Open footwear on a recovery track – As per the brokerage, the company’s March quarter (Q4FY22) performance stood tepid, especially for the open footwear category, which is 75-80 percent of Relaxo’s sales. However, it added that on a positive note, its closed footwear reported robust recovery on account of the opening of schools, colleges, and work offices. Axis believes a significant pent-up demand will be released as the rural economy revives, thereby benefiting the company’s operating performance moving forward.

2) Low pressure on profitability – Axis stated that hyper-inflation in key raw material prices, coupled with subdued volume growth, has been posing pressure on profits. However, it sees the company’s margins inching up going forward as the pick-up in the volumes and market share gains from the unorganized/smaller players trigger operating leverage.

3) Superior financial matrix – Relaxo has maintained healthy operating cash flow and asset turns, said Axis, adding that its robust EBITDA margins over the years have made it one of the most capital-efficient businesses in the industry. A strong balance sheet with zero net debt and efficient working capital should help Relaxo prosper in the long run, it pointed out.

4) Key catalysts: Normal monsoon forecast, the recent announcement of a hike in minimum support price (MSP), and higher remittances will be key catalysts aiding in the revival of the rural economy, which in turn, will kick-start the overall consumption cycle, noted the brokerage.

In Q4FY22, the footwear maker posted a 38.4 percent decline in net profit to 62.93 crore in Q4 FY22 from 102.17 crore recorded in Q4FY21. Revenue from operations also fell nearly 7 percent YoY to 698 crore in Q4 FY22 from 748 crore reported in the same period last year.

The company said revenue during the quarter was affected due to disruptions caused by the Omicron variant of COVID, GST rate hike from 5 percent to 12 percent with effect from 1 January 2022 on footwear priced below 1,000 and subdued demand due to high inflation.

Meanwhile, Relaxo's EBITDA margin slumped by 586 basis points to 15.9 percent in Q4FY22 from 21.8 percent in Q4FY21. The firm noted that the margin declined mainly due to a steep increase in raw material prices and extra support to trade towards the GST rate differential on inventory.

On a full-year basis, the footwear maker reported a 20.2 percent YoY decline in net profit to 232.68 crore in FY22. However, its net sales rose 12.5 percent YoY to 2,653.27 crore in FY22.

Going forward, the firm said that in view of no immediate relief from continual extraordinary inflation, it remains cautiously optimistic on the basis of strong recovery across categories, especially in the high-value closed footwear category after the opening up of offices, schools and colleges.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

 

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First Published: 14 Jun 2022, 01:59 PM IST