While Sensex has grown 133% over the last 10 years, Relaxo Footwears Ltd (RFL) has surged a whopping 11,800% over the same period. It has been one of the biggest multibagger of the decade. So why have the investors shown such confidence in this stock? Let’s take a closer look to understand.

About the Company:

Relaxo Footwears is the leading footwear manufacturer in India and has brands like Flite, Sparx, Bahamas, Mary Jane, Boston, Relaxo under its belt.

Footwear industry in India is extremely under-penetrated with per capita consumption of 1.66 pairs/annum vs. global average of 3/annum and 6-7/annum in developed countries. India covers just 2% market share of total global footwear exports compared to ~40% by China.

RFL has managed to grow its revenue at 18% CAGR over the last 10 years whereas PAT grew at 28% CAGR over the same period. It has continuously improved volumes over the years as volumes grew from 8.4 crores in FY10 to 18.4 crores in FY19. In the same period, realizations have almost doubled from Rs.65/pair to Rs.125/pair in FY19.

RFL has 8 plants spread across India and produces most of its products in-house. It has the capacity to produce 7.5 lakh pairs/day and is planning to add capacity of 1 lakh pairs/day over the next 3 years. RFL has clocked capacity utilization of ~75% with utilization reaching 90% during peak production. RFL has established a strong distribution network throughout the country with 385 exclusive outlets and 50000+ retail outlets. It plans to add 30-40 exclusive outlets every year. Only 7% of the sales come from exclusive RFL stores.

North India is Relaxo’s biggest market and forms 50% of its revenue and East India forms 20% while the rest is from South and West India. Company is now expanding in South and North and these regions have become the fastest-growing regions for RFL. The company also exports its products to 30 countries. It has recently established an office in Dubai to boost revenue from exports.

RFL commands a 5% market share in India. 55% of the market is controlled by unorganized players and RFL has huge room for growth as consumers in Tier 2, Tier 3 cities and rural areas in India are increasingly becoming brand-centric. RFL restyles 20% of its portfolio every year to keep up with the trend. It spends Rs.9/pair on branding compared to just Rs.4/pair by its biggest competitor, Bata.

RFL derives 70% of its revenue from products ‘under Rs.500’ category. Gradually the company is moving towards premiumization. Premium products brand Sparx is the fastest growing brand for RFL and it now forms 35% of the total revenue while contributing just 15% of the total volumes.

Buying behaviour is continuously changing in India due to urbanization and increasing internet penetration. E-commerce is now the fastest-growing channel as it grew 37% YoY in H1FY20.

But the company has seen slow growth in volume as volumes grew just 1% in Q3FY20. It sold 4x the number of pairs that Bata sold in FY19 but Bata made a profit 7x that of Relaxo in FY19. This shows that Relaxo still has far lower realizations than its competitors.

Risks:

Significant import dependence for raw material: Currently, ~ 40% of raw materials used by the company are imported (EVA ~ 18%, PU ~ 15% and rubber ~ 7%). Fluctuation in prices of these crude-linked products and volatility in currency exchange rates can impact the margins of the company.

High level of competition may impact margins: Increased level of competition from new entrants as well as unorganised players can impact the profitability metric for the footwear industry.

Final Thoughts:

Company has huge market potential and government initiatives like “Make in India”, Tax cuts on footwears and increase in Import duty on footwears certainly works in the favour of Relaxo. RFL has a PE of 67 which hinges on investors’ expectation of huge growth, but COVID issues and the consequent slowdown will certainly affect the growth prospects (as witnessed in Q3) of the company and it will find it hard to justify such high valuations in a difficult environment.

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