“An idea without implementation is just good thinking.” Relaxo is a beautifully executed idea. Lets look at their story.
In 1976, Mukund Lal Dua and Ramesh Kumar Dua, aspired to grow their father’s footwear business to what Relaxo Footwears (Relaxo) is today - one of the largest and most popular footwear manufacturers in India.
Headquartered in New Delhi and running 8 manufacturing units, Relaxo has the capacity to produce over 7.25 lakh pairs of footwear every day. Relaxo’s range of footwear boasts a fine combination of comfort, style, and quality workmanship. The company offers a wide collection of fashionable, colourful, comfortable and durable footwear for men, women and children. The company offers products for every age group with more than 6,000 Stock Keeping Units or SKUs.
The company dominates the footwear value segment, only 30% of which is organized. It is a classic example of being a mass player converting its business into a brand.
Ramesh Kumar Dua, Founder & Managing Director of the company, has been responsible for bringing scale to the company. The company continues to be promoter-run with the management team headed by the promoters. Going forward, the promoters plan to professionalize the company. In order to incentivize its employees, the company rolled out its first Employee Stock Option or ESOP plan in 2014; 1.5% (1.8 mn shares post bonus issue) was offered to eligible employees. Up until FY17, 0.18 mn shares were issued to employees.
c. Growth timeline:
1. Focus on premiumization:
The company has been very active in launching different brands to move up the customer value chain. This has resulted in the profit per pair rising from Rs 4.47 in FY13 to Rs 10.23 in FY18. With the company focusing on premiumizing its brands, profit per pair is expected to further rise.
While 40% of the company’s revenues are garnered from its mass market brand Hawai slippers, its sport shoe brand, Sparx (contributes 25% to the revenue), which is targeted towards fashion conscious youth, has been growing further to add to Relaxo's profitability.
Relaxo has a strong foothold in the slippers market with an extensive distribution network of 800 distributors and more than 50,000 retailers. The company presently has 302 company-owned outlets across India with a concentrated presence in Delhi, Rajasthan, Gujarat, Haryana, Punjab, Uttar Pradesh and Uttarakhand. It has 8 manufacturing plants, six in Bahadurgarh (Haryana) and one each in Bhiwadi (Rajasthan) and Haridwar (Uttaranchal). Currently, the company sells its products under three major brands – Hawaii, Flite and Sparx. It has launched newer categories like Boston (Formal Footwear), Bahamas (Beach Wear), Schoolmate (Children’s school footwear) etc. The brands are endorsed by celebrities like Salman Khan, Akshay Kumar, Shahid Kapoor and Shruti Hassan.
3. Promoter Holding
The promoters currently hold 74.25% of the equity. None of the promoters have reduced their stake since 1998, which indicates their commitment to the company.
|CFO / PAT||2.91||2.89||1.91||1.63||1.82||1.21||1.90||1.04||1.33||1.47||1.09|
Revenue over the decade has grown by 20.45% CAGR to Rs 1964.44 crores. During the same period, PAT grew by 31.37% to Rs 160.67 crores. However, the company’s business strength is judged by the cash flows generated from operations. In case of Relaxo, the company generated greater cash flows than PAT in its 10-year history, which indicates efficient operations of management with minimum working capital.
ROE and ROCE
The company has recorded robust ROE (return on equity) and ROCE (return on capital employed) over the last 10 years.
f. Stock Returns
The company’s stock has rewarded investors since the last 15 years with consistent dividend. Over the last 15 years, company has paid Rs 49 crores as dividend. Assuming you bought Relaxo in FY04 when the market cap was Rs 27 crores you would have got 180% of your investment only in terms of dividend.
|Equity CAGR returns over different periods|
|3 Years||5 years||10 years||15 years|
The domestic footwear market is projected to grow at a CAGR of 15% to reach US$ 12.6 billion by FY 2020 from US$ 7.2 billion in FY 2016. The key drivers for the footwear segment will be: a) increased adoption owing to versatility in usage, and b) shift from unbranded to branded.
India’s per capita footwear consumption is 1.4 - 1.6 pairs per person. In comparison, China has per capita footwear consumption of 2.8 pairs, double that of India. Other developed markets like US, Europe, Japan, etc. have consumption upwards of 4 pairs per person. There is a strong potential for increase in footwear consumption in India, going forward.
Men’s footwear currently dominates this market with ~54% share; the women’s segment contributes 37% and the rest is contributed by the children’s segment. However, the women’s segment is growing at a much faster pace than the other segments.
Branded footwear segment
The branded footwear market is expected to grow at a CAGR of 20% to account for ~50% of the overall market by FY 2020 from the current ~42% of total market. The branded footwear segment has a strong potential for growth due to retail becoming organized and consumers preferring brands. Additionally, the footwear segment is the most well-received segment in modern retail (or organized retail) with 26% share of channel sales attributed by modern retail as against ~22% for other key lifestyle categories viz. apparel, jewellery and watches.
Mass footwear segment
The mass footwear segment driven by chappals and sandals is also witnessing consumers increasingly preferring branded products owing to strong distribution network of brands: Khadim, VKC, Paragon, Relaxo, etc.
The industry network of dealers for footwear is as follows
Urban India accounts for 2/3rd of the footwear market by value. The top 8 cities (Metro and Mini-Metro Cities) contribute 40% of the urban footwear market and are dominated by the presence of leading national and international brands. Tier II and below cities contribute ~35% of the overall urban footwear market and are expected to grow further with increasing penetration of Exclusive Branded Outlets (EBOs) in these cities. Also, with the advent of online retail, people in Tier II cities and below have access to branded footwear which will further drive the growth in these markets.
The premium segment has international brands such as Aldo, Charles & Keith, Kenneth Cole, Clarks etc. that are currently focussing on Indian metro-centric centres. The segment is marked primarily by the EBO format. Mass footwear brand retailers such as Relaxo Footwears, Action Shoes, VKC, Lakhani Shoes, Ajanta Footwear, Lancer etc. cover 54% of the market and are characterized by a predominant distribution channel. Most players have distinct positioning allowing them to capitalize on either retail or distribution business.
1. Premiumization to be a key play for Relaxo growth story:
The company’s realizations have grown at 10.09% CAGR over FY08-18 driven by premiumization and price hikes from cost inflation. However, with about 50% of volumes (and 33% of revenue) coming from sales of its mass market brand Hawai, its current average realisation is a modest Rs 125 per pair. As against this, the average realization for footwear in the domestic market is Rs 250 (Rs 50,000 crores market – 2 billion pairs manufactured).
With the market remaining unorganized at the low end and GST kicking in, the price differential between organized and unorganized is expected to narrow. This would help in gaining market share. Moreover, with product mix still skewed towards the entry-level Hawai, there is scope to premiumize within the segment towards offerings such as Bahamas (price range of Rs 139-225 vs Rs 77-125 of Hawai).
The company’s premiumization initiative has resulted in creating strong brands in new categories (e.g. Sparx, Bahamas etc) where there were no credible brands. Since these categories are new, Relaxo is using the distribution network to increase their reach. This will drive average realisations going forward. Sparx contributes 30% to revenue in terms of revenue, however volume would be lesser as it’s a high ticket price offering.
2. Ability to create and launch new categories with strong brand identities:
Relaxo has the ability to create new brands to cater to different segments of customers. In the past, the company launched upgraded brands for customers to move up the value chain thereby creating opportunity for premiumization. The new categories of affordable sports footwear (Sparx) and trendy beachwear (Flip-flops – Bahamas) not only offer uptrading avenues to customers, but also open doors to newer markets. These categories have been instrumental in Relaxo making inroads into the more developed yet competitive market of Tier II – Tier III cities.
|Brands||Price Point (Rs)|
|Boston (Formal Leather)||699-2,799|
3. Amalgamation with Relaxo Rubbers Pvt Ltd & Marvel Polymers Pvt Ltd will save
Merger with promoter firms Relaxo Rubber & Marvel Polymers not only does away with related-party transactions, but will also reduce the rent liability on the company’s books. In FY17, the company paid Rs 11.66 crores as rent to these two companies, which is 0.6% of revenue. Amalgamation with the subsidiaries is expected to be completed in FY19 and benefits would start flowing post H2FY19. Post merger, Promoters shareholding would increase from 74.25% to 75%.
4. High Ad & sales promotions spends to create strong brand and gain customers’
The company caters to the mass market segment, which is utilitarian; branding is a significant differentiator. The company uses Bollywood superstars such as Salman Khan, Akshay Kumar, Shahid Kapoor and Shruti Hassan to endorse its brands. It has always used different brand ambassadors for each brand to distinguish its portfolio offerings in the mind of the consumer. Average spends on advertisements & sales promotion are 8% of revenues. Ad spends using celebrities has helped the company gain a share in the premium market segment too. This has also helped in building a distribution web spanning 50,000 touch points across India.
5. GST - game changer for the footwear market:
The Goods and Services Tax (GST), which became applicable from 1st July 2017, is a game changer for the Indian footwear market since it is expected to move the business from the unorganized segment (currently 60% of the footwear market) to the organized segment. GST has brought about tax uniformity across states, which has narrowed the pricing difference between unorganized and organized players. Relaxo being a major organized player is one of the prime beneficiaries of implementation of GST.
6. Premiumization and operating leverage to aid margin expansion:
The company’s average realisation per pair is Rs 125, which is lower than the Indian average Rs 250 per pair. With the launch of premium brands including Bahamas, Boston, etc. the company would be able to push its realisations upward and gradually close the gap in realisations with the industry average. Since The company’s average realisation per pair is Rs 125, which is lower than the Indian average Rs 250 per pair. With the launch of premium brands including Bahamas, Boston, etc. the company would be able to push its realisations upward and gradually close the gap in realisations with the industry average. Since 2013, realisations have grown from Rs 99 to Rs 125 in 2018 (CAGR of 4.7%) which is primarily inflation-led, but the future would be premium-led growth in EBITDA margins.
7. Distribution Reach Expansion:
Relaxo sells its products through more than 302 exclusive brand stores across 143 cities in 9 states apart from large format retail stores and e-commerce. Company has plans to add 50 new stores in FY19. Company currently earns Rs 170 crores from their stores and is expected to clock Rs 200 crores post expansion of 50 stores. However, majority of the company’s business comes from general trade, driven by more than 800 distributors across the country, with more than 50,000 outlets. In FY18, the company introduced the franchise model; 10 franchisee outlets have been opened till date. Going ahead, it will focus on franchisees as a new model of sales. This would put less burden of cost on its books and would, in turn, help grow its business.
|State||Number Of Store|
|Jammu & Kashmir||10|
|Stores||Distributors||Brand Investment (% Of Sales)||Revenue CAGR 10 yrs||Inventory Days||WC % of sales||Mcap||Revenue||PAT|
Relaxo has used the distribution model more than the EBO format to grow. This has helped the company expand its distributors across the India and the company has become the 2nd largest company in terms of revenue and the largest in India in terms of volumes.
|Peers||Brands||Strong Presence||Revenue In Cr||Distribution||Retail Touchpoints||EBO's|
|DEIEM India Pvt Ltd||Rex||North||NA||NA|
|Action Shoes||Campus, Floater, School Time, Roaming, Fly Float||North||186.8||1000||50000||250|
|Aqualite||Ultra, Real-PU, Gurukul, Aquasoft||North||700||1000||-||100|
|Ajanta||Warmez, Imperio, Ajanta, Hawai, Fit & Style||East||NA||-||-||57|
|Lawreshwar polymers||Lehar||North West||79||NA|
|Venus||Venus||North West||123||Exports only|
|Rika Lifestyle||Flipside||PAN-India||NA||Online only|
a. Erosion in price value proposition:
Sustained price hikes or reduction in prices from regional peers can widen the differential between Relaxo’s entry-level brands and peers, including unorganized players. This can result in slower-than-estimated growth as well inventory pile-up, impacting RoCE.
b. Increase in input costs:
Ethylene-vinyl acetate (EVA) and Polyurethane (PU), key raw materials for the company, are largely imported. Fluctuation in prices of these crude-linked products can impact the margins of the company. 37% of raw materials (in value) are imported.
c. Succession Plan:
While the likes of Page, DMart and Trent have devolved management to professionals, Relaxo continues to be promoter-driven and the next generation is still being groomed. Therefore, without clarity on succession planning (who and by when), there is a higher degree of key man risk in Relaxo than its peers.
|Less: Excise Duty||13.56||19.17||21.42||20.82||7.52||0||0||0|
|Raw Material Expenditure||484.05||557.25||614.41||630.57||883.01||860.87||1033.29||4471.16|
|Power & Fuel||43.26||49.27||50.5||47.63||0||59.80||72.28||331.29|
|Other Manufacturing Expenses||167.05||227.9||243.58||249.69||557.74||334.88||400.42||1676.35|
|General & Admin||76.35||86.69||105.91||114.48||0||155.48||185.03||742.10|
|Selling & Distribution||174.95||218.3||284.7||271.25||0||358.80||427.89||1749.23|
|Add: Other Income||2.34||0.39||3.46||3.73||4.46||0.04||0.04||7.04|
|Less: Exceptional Item||4.26|
|Sources Of Funds|
|Total Reserves & Surplus||270.56||361.82||467.98||592.78||749.18||931.26||1163.60||7686.48|
|Application Of Funds|
|Less: Dep & impairment||154.45||188.77||227.28||266.94||321.28||381.91||454.58||1879.67|
|Cash & Cash Equivalents||5.66||4.49||2.37||3.65||4||25.90||9.16||1869.46|
|Other Current Assets||3.27||5.79||2.95||3.35||69.47||83.72||101.19||463.81|
|Loans & Advances||25.56||26.25||38.28||41.80||0.39||0||0||7|
|Net Current Assets||111.18||158.18||184.14||202.59||232.75||428.16||507.96||4507.19|
|Cash Flow From Operation|
|Profit/Loss on sale of fixed Assets||0.81||0.18||0.32||0.45||0||0.00||0.00||0.00|
|Profit/loss on sale of Investments||-0.03||-0.16||-4.35||-0.01||0||0.00||0.00||0.00|
|Changes In WC||3.12||-56.59||-30.24||-8.29||-147.19||-29.02||-87.80||-450.82|
|Cash flow after working capital Changes||152.45||145.08||213.69||239.71||272.28||193.06||367.70||2533.29|
|Cash Flow From Operation||124.86||107.49||159.43||181.08||189.73||93.00||239.17||1623.77|
|Cash Flow from Investing||-69.7||-129.79||-130.26||-90.37||-174.28||-76.77||-200.75||-829.44|
|Purchase of Fixed Assets||-71.1||-131.29||-134.79||-91.19||-100.26||-163.21||-200.75||-820.66|
|Sale of Fixed Assets||0.53||1.11||0.36||0.29||0||0||0||0|
|Profit/Loss on sale of Investments||0.03||-7.78|
|Purchase of Investment||-0.5||-0.2||0||0||0||0|
|Sale of Investments||0.16||4.42||0.01||0||0||0||0|
|Cash Flow from Financing||-51.26||21.11||-31.31||-89.44||-101.27||91.98||-55.15||-145.92|
|Increase / (Decrease) in Loan Funds||-27.03||41.03||-3||-62.51||(40.06)||36.18||(20.00)||1.00|
|Proceeds from Issue of Equity Share Capital||0.55||1.84||0|
|Equity Dividend Paid||-2.39||-2.99||-5.99||-7.19||-12||-15.0375||-18.045||-108.27|
|Income tax on dividend paid||-0.41||-0.51||-1.22||-1.47||-2.4||-3.0075||-3.609||-21.654|
|Other Financial Activities||1.23||-0.03||-0.02||-0.01||-38.25||86.44||0.00||-1.00|
|Net Cash Inflow / Outflow||3.9||-1.19||-2.14||1.27||-85.82||108.21||-16.74||648.41|
|Opening Cash & Cash equivalents||1.66||5.58||4.38||2.24||3.51||-82.3||25.9||1221.1|
|Closing Cash & Cash equivalents||5.58||4.37||2.24||3.51||-82.31||25.9||9.2||1869.5|
|Financial & Operational|
|Earnings Per Share (Rs)||10.94||17.17||10.02||10.24||13.39||16.44||21.11||149.41|
|Adjusted EPS (Rs.)||5.47||8.59||10.02||10.24||13.43||16.48||21.17||149.78|
|Book Value (Rs)||46.09||61.30||40.00||50.36||63.28||78.41||97.72||639.94|
|Adjusted Book Value (Rs)||23.04||30.65||40.00||50.36||63.28||78.41||97.72||639.94|
|Dividend Pay Out Ratio(%)||4.57||5.82||5.99||9.77||9.10%||8.50%||8.80%||0.00%|
|Pre Tax Margin(%)||7.79||9.51||10.25||10.30||12.45%||12.45%||13.23%||20.43%|
|Fixed Asset Turnover (x)||2.49||2.51||2.41||2.20||2.31||2.37||2.39||2.59|
|Sales/Working Capital (x)||54.68||24.75||30.40||18.08||8.41||5.59||5.69||2.94|
|Financial Stability Ratios|
Based on the past growth in realisation and volume, we believe it would continue to grow at 10% due to premiumization and inflation. However, with growth triggers like – 1) capacity expansion plans, 2) store expansion, 3) improved sales mix 4) brand revamping and 5) continuous product development – intact, we remain positive on the company’s future. At the CMP Rs 763, Relaxo is trading at 56.9x FY18 earnings. At FY28 estimate of Rs 149.43 we assign multiple of 51.06x giving us a target price Rs 7630. We recommend to Buy on the stock with a target price of Rs 7630.