Shares of Relaxo Footwear have witnessed a sharp decline over the last one year. The company shares, which were trading at ₹1,216 apiece a year ago, have dropped by 36% to close at ₹778 in today's session.
Between July 2019 and November 2021, the stock delivered an outstanding return of 245%, with its value rising from ₹419 to an all-time high of ₹1,448. But, since then, the stock's trajectory suddenly took a sharp turn downward, and it has remained at a similar level to date, with its value plunging by 46% since its peak in November 2021.
In the last four months, the stock dropped by around 20% following the company's weak performance in the September and December quarters on the back of weak volumes.
In Q2 FY23, the company's net profit declined by 67% YoY to ₹22 crore, and this downward trend persisted in the subsequent quarter, with a 57% drop in net profit to ₹30 crore.
The revenue from operations in Q3FY23 came in at ₹681 crore, a fall of 8.46% from ₹744 crore in the corresponding quarter of the last fiscal.
The company's weak numbers in the December quarter were attributed to the low demand for mass open footwear, consumers opting for cheaper footwear, and high-cost inventory in the system.
The company implemented a 15-20% price reduction in the open footwear category beginning in September 2022, as the RM costs eased, and it expects the full impact of price reductions to be visible in the following quarters as high-priced inventory is cleared from distribution channels.
The company is confident of full volume recovery from Q4FY23 onwards as price reductions taken will start getting into the system and inch up volume growth.
But brokerage firm Axis Securities believes that it will be a daunting task for the company to gain back its lost market share from smaller, unorganized players, as they have benefited significantly from falling EVA prices compared to Relaxo.
The brokerage stated that it liked the company's focus on premiumization by increasing share of a fast-growing sports and athleisure category, doubling the capacity of Sparx from the current 50,000 pairs per day to 100,000 pairs per day at Bhiwadi (Rajasthan).
However, this strategy will take time to reflect in numbers given the intensifying competition from value players such as Campus, and Asian, in the S&A segment. Axis Securities said it will maintain "wait-and-watch" approach and see if the business shows any signs of improvement.
The brokerage has retained its "hold" rating on the stock and trimmed its target price to ₹850 apiece from ₹950 earlier.
ICICI Direct Research maintained a positive outlook on the stock given its strong brand prominence in tier 2 and 3 towns and healthy balance sheet to weather the crisis, but premium valuations and near-term headwinds may limit upsides, it said.
Also, with high-cost inventory still existing in distribution channels, the margin recovery to normal levels is likely to be gradual and would be dependent on the clearing of existing high-cost inventory across channels, it added.
Furthermore, the brokerage said that the volume recovery following the ASP correction would be a key monitorable, as the volume trajectory had stagnated in the previous quarters at 4 crore pairs.
Although Relaxo has sold 18 crore pairs, its current market share is less than 10%. ICICI Direct believes that there is still enough room for the company to grow in the long term and gain market share, given its strong brand recognition and robust balance sheet.
The brokerage maintained its "hold" rating on the stock with a 12-month target price of ₹745 apiece. ICICI Direct forecast a 10% revenue CAGR in FY22–25E, with volumes rebounding to 21.7 crore pairs in FY25.
13 analysts polled by MintGenie on average have a 'hold' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
