Metro Brands vs Relaxo Footwears: Which is a better footwear stock for long-term investing?

Footwear stocks Metro Brands and Relaxo Footwears have been in focus on the back of a recovery in demand and a strong growth outlook. Brokerage firm B&K Securities believes the Indian footwear industry is poised for a strong performance in the coming years.

Recently, Union Minister Piyush Goyal also said that India’s footwear sector has immense potential, and it can increase production and exports 10 times in the near future.

Let's take a look at which one of them is a better footwear stock, hence a better investment.

Stock price trend

In October so far, shares of Metro Brands lost nearly 10 percent whereas Relaxo lost 4 percent. Overall in 2022 YTD, Metro rose 80 percent while Relaxo lost 26 percent.

In the 10 months of 2022, Metro gained in 6 of those while falling in the remaining 4 months. It rose the most in January, up 32.5 percent followed by in August, up 24 percent. Meanwhile, it shed the most in February, down 10.5 percent followed by in October.

Now for Relaxo, the stock gained in 4 months out of the 10 months of the calendar year 2022 while falling in the remaining 6. It rose the most in July and August, up 2 percent each, and fell the most in March, down 12 percent followed by in May, down 8 percent.

About the firms

Metro Brands Limited operates as a footwear specialty retailer in India. The company offers footwear for men, women, unisex, and kids under its own brands, including the Metro, Mochi, Walkway, Da Vinchi, and J. Fontini, as well as third-party brands, such as Crocs, Skechers, Clarks, Florsheim, and Fitflop. It also offers accessories, such as belts, bags, socks, masks, and wallets; and footcare and shoe-care products. The company offers its products through stores and distributors, as well as through online channels. As of March 31, 2021, it operated 586 Stores across 134 cities across 29 states and union territories in India.

Relaxo Footwears Limited is engaged in the manufacturing and trading of footwear and related products. It manufactures a range of slippers, sandals, casuals, and sports and casual shoes for men, women and kids. Its brands include Relaxo, Sparx, Flite, Bahamas, Maryjane and Kids Fun. The Company’s manufacturing facilities at Bahadurgarh (Haryana), Bhiwadi (Rajasthan) and Haridwar (Uttarakhand).

Earnings

Metro Brands reported a 50 percent year-on-year growth in its net profit for the September quarter. The company's bottom line grew to ₹102.7 crore in the September quarter from ₹68.3 crore during the same period last year.

Consolidated revenue grew 47 percent year-on-year to ₹476 crore during the quarter under review. On the operational front, the company's EBITDA grew over 50 percent from last year, rising 51.9 percent to ₹147.1 crore from ₹96.8 crore. Margin saw an expansion of 110 basis points to 30.9 percent from 29.8 percent last year.

Relaxo, meanwhile, has not yet declared their September quarter results. In the June quarter, the firm posted a 24.90 percent rise in net profit to ₹38.67 crore for the quarter ended June 30, 2022, against a net profit of ₹30.96 crore for the period ended June 30, 2021.

Sales rose 34.20 percent to ₹667.15 crore in Q1 against ₹497.13 crore in the corresponding quarter of the previous fiscal. Operating profit excluding other income too climbed 30.15 percent to ₹86.12 crore against ₹66.17 crore in Q1 for the quarter ended June 2021.

So which is a better footwear stock? 

As per Preeyam Tolia, Senior Research Analyst, Axis Securities, Metro is a better choice than Relaxo for investors in the current environment.

"In the current volatile environment, premium and urban footwear brands such as Metro Brands and Bata are likely to fare well compared to Relaxo which mainly caters to value-conscious customers. As consumers in smaller and rural areas are more value-conscious, they are cutting down their discretionary spending on account of high inflation, impacting their wallet share," said Tolia.

However, from a long-term perspective, Tolia remains positive on Relaxo as they have a strong moat in terms of in-house manufacturing capabilities and a strong distribution network in rural and smaller towns.

Vinit Bolinjkar, Head of Research of Ventura Securities has also picked Metro Brands between the two. Bolinjkar said he likes Metro given that its store reach is at 624 as against 344 for Relaxo.

"Metro has 11 brands as compared to 9 for Relaxo. It also houses third-party brands like Crocs, Clarks, Reebok, Adidas, etc. The company relies mostly on outsourced manufacturing and is retail focused as compared to Relaxo which has 9 manufacturing units and is more distribution-focused. Metro is also present in other accessories like Bags, Clutches, Watches, Belts, and Foot care where Relaxo is not present," explained Bolinjkar.

Footwear industry outlook

B&K Securities stated that factors like a younger population, rise in income levels and standard of living, shift from unbranded to branded footwear, increasing women workforce participation, the tendency of owning multiple pairs of footwear, increasing penetration in smaller towns and rising salience of online channels are expected to be the key drivers of the footwear industry going forward.

According to Tolia, the entire footwear industry is witnessing a strong structural change in terms of formalization trends, where larger and branded players are gaining market share from the smaller and unorganized players.

"As they expand into smaller towns, more consumers are opting for branded footwear, coupled with the opening up of the economy and strong festive & wedding outlook post two years of tepid festive and wedding season impacted due to COVID-19 vagaries, driving the overall footwear demand in H2FY23. Moreover, hyperinflation in key raw material prices over the last year has weakened the smaller and unorganized players giving further fillip for larger and branded players to increase their market share," Tolia added.

Meanwhile, Bolinjkar also pointed out that the young population, rise in income and standard of living, shift from unbranded to branded, increasing women workforce participation, and the tendency of owning multiple pairs of footwear are expected to be key drivers of the footwear industry.

The Indian footwear consumption has grown at a CAGR of 4.5 percent from 205 crore pairs in FY15 to 256 crore pairs in FY20, he noted. Post a decline of 35 percent in FY21 due to COVID, the consumption is expected to grow at a CAGR of 8-10 percent in volume terms from FY22-25E to a total of 290 crore pairs, predicted Bolinjkar. In value terms, the industry is expected to grow at a CAGR of 15-17 percent over FY22-25, he said.