Fw: Stock Idea: Relaxo Footwears (Catch this Flite)

 

 

Stock Idea [September 10, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA Relaxo Footwears Cluster: Emerging Star Recommendation: Buy Price target: Rs885 Current market price: Rs672 Catch this Flite  Key points Enviable position in the lucrative footwear segment: Relaxo Footwears (Relaxo) is present in the Indian organised footwear market, which has been growing at a CAGR of 15-18% for the last five years and is expected to maintain the growth momentum for the next five years. The company caters to customers from across socio-economic and demographic strata with its four top-of-the-mind-recall brands, viz, Hawaii, Sparx, Flite and Schoolmate. Its flagship brand, Hawaii, is the leader in the rubber slipper market, particularly in the north, while its other brands also command a significant share of their respective markets. The same is visible from the fact that during FY2008-12 the company outperformed the industry by growing at a CAGR of 29.5%.  A well-heeled distribution set-up complemented by a growing network of exclusive outlets: Relaxo sells its products primarily through distributors, who, in turn, sell the company's products to retailers on a pan-India basis. Over the years the company has developed a strong distribution network of over 700 distributors, making its products and brands available in over 50,000 retail touch-points across India. At present, around 90% of its revenues comes from this mode of distribution. Apart from this two-fold distribution model, Relaxo also sells directly to the customers, through its own retail outlets called "Relaxo Retail Shoppe". At present, it owns 154 such outlets which together contribute around 7% of its total sales. The company plans to improve the revenue flow from this segment by setting up 25-30 stores each over the next three financial years. To improve its brand reach and drive its volume growth, Relaxo is aggressively promoting its brands-it has roped in leading Bollywood actors as brand ambassadors (viz Salman Khan for Hawaii, Akshay Kumar for Sparx and Katrina Kaiff for Flite).  Soft raw material price outlook to drive margins and earnings going forward: Three raw materials, viz raw rubber, EVA and synthetic rubber, together constitute 55-60% of the company's total raw material cost. In the last two years, the prices of raw rubber and EVA have increased considerably, affecting the gross profit margin (GPM) and consequently the operating and net earnings of Relaxo. Of late, the input prices have cooled off and are currently ruling at their 24-month lows. The outlook for these raw materials is expected to be soft which would benefit Relaxo by driving up its GPM and earnings. We expect a considerable improvement in the company's operating profit margin (OPM) in FY2013 and FY2014. With new strategies in place and raw material prices softening, the company's top line and earnings are expected to grow at a CAGR of over 22% and 34% over FY2012-14 respectively. Consistent robust financial performance leading to re-rating of multiples; recommend Buy: Relaxo has emerged as an attractive investment opportunity in the domestic consumption space due to its growing scale of operations, strong brand positioning and consistent healthy financial performance. In addition to the steady volume growth and higher blended realisation due to a favourable product mix, the company is likely to benefit from the softening of the price of the key raw material (read rubber) and is a potential re-rating candidate. Thus, we recommend a Buy on the stock with a price target of Rs885. Click here to read report: Stock Idea   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.