Footwear firm Relaxo Footwears has lost over 32 percent of its investor wealth from its 52-week high of ₹1,448, hit in November 2021. Currently trading around ₹982 per share, the firm has given negative returns in 6 out of 7 months of 2022.
The share is currently trading at ₹1009, up 2.57% on the BSE as on 1.35 pm on August 1, 2022.
It is down 25 percent in 2022 YTD and 14 percent in the last 1 year. In 2022, the stock shed the most in the month of March, over 12 percent followed by in May, when it lost over 8 percent.
Relaxo Footwears Limited manufactures and sells footwear for men, women, and kids in India and internationally. It offers casual, running, athleisure, walking, formal, sports, school, and training and gym shoes. The company offers its products under the Relaxo, Bahamas, Flite, Sparx, BOSTON, and Mary Jane brands. It sells its products through 394 exclusive brand outlets; and e-commerce portals.
In the June quarter (Q1FY23), Relaxo's net profit rose 24.90 percent to ₹38.67 crore against a net profit of ₹30.96 crore in the same period last year. The company has reported a total income of ₹671.32 crores, up 33.6 percent during the period ended June 30, 2022, as compared to ₹502.40 crores during the period ended June 30, 2021.
Total expenses also rose 33.7 percent YoY to ₹617.74 crore while the cost of raw materials consumed rose 30 percent to ₹306.94 crore in Q1 FY23 over Q1FY22. The company said that there was a fire at one of its rented warehouses in Haryana on 28 May 2022 where finished goods were stored and goods worth ₹31.87 crore were destroyed. The company has accounted for a loss of ₹1.59 crore as per the excess clause of the insurance policy. It has filed the insurance claim which will take time in the final settlement. Overall, this incident has not impacted the business operations, it added.
Post the massive correction from its 52-week high, brokerages now see some recovery in the stock. Both Axis Securities and Centrum Broking are bullish on the stock. While Axis has a target of ₹1,100 for the footwear firm, Centrum sees the stock rising to ₹1,057.
Centrum Broking believes the footwear industry is a long-term structural story and remains confident on Relaxo’s long-term growth trajectory despite short-term hiccups. The company currently boasts a manufacturing capacity of 1 million pairs per day. Current capacity utilization is at 65 percent and expected to pick up over the next two years, it said.
"Despite the relentless raw material pressure, the company continued to maintain its market share and maintains its premium pricing of 5-10 percent over its peers. Retail footprint expansion of 10k outlets during FY22 followed by cutting down on weaker distributors should help the company strengthen its foundation and support long-term growth trajectory," noted Centrum.
It expects margin pressure to sustain for one more quarter before improving back. With polymer prices cooling off sharply over the last three months it sees gross margin improvement on a sequential basis, added the brokerage.
"The impact of inflation on the consumer base of Relaxo is far higher than the footwear companies targeting the mid-premium to premium segments. We also, observed downtrading by some segments of Relaxo’s consumers hurting the company’s sales. We expect demand trend to improve meaningfully starting 3QFY23 as the festive season approach and price hikes get fully absorbed into the markets," Centrum stated. It also pointed out that Relaxo had taken cumulative price hikes of 20-25 percent in 3Q/4QFY22 to mitigate the impact of raw material inflation and GST rate hikes.
The impact on EBITDA margins this quarter was on account of higher other expenses which largely include – Advertisement & Sales Promotions, Freight cost and Power & Fuel cost, it said, adding that it expects these cost items to normalize on a sequential basis and helping improve margins.
Meanwhile, Axis Securities believes a significant pent-up demand will be released as the rural economy revives, thereby benefiting the company’s operating performance moving forward. It added that a normal monsoon, the recent announcement of a hike in 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.
"Hyper-inflation in key raw material prices, coupled with subdued volume growth, has been posing pressure on profits. However, we believe the company’s margins are likely to inch up going forward as the pick-up in the volumes and market share gains from the unorganized/smaller players trigger operating leverage," Axis further highlighted.
It also noted that Relaxo has maintained healthy operating cash flow and asset turns. Moreover, its robust EBITDA Margins over the years have made it one of the most capital-efficient businesses in the industry. It believes a strong balance sheet with zero net debt and efficient working capital should help Relaxo prosper in the long run.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
