Relaxo Footwear :Buy , 26 % Upside
Call & Research Report by Anand Rathi Research
Report Date: 4 April 2021
CMP Rs. 945 Target price Rs. 1193
Rationale:
Relaxo Footwear Ltd. was incorporated in September 1984 and its promoters have been involved in the footwear business for over three decades. Over this period, the company has successfully expanded in new product categories, geographies and customer segments. The company’s products include rubber/EVA slippers, canvas shoes, sports shoes, sandals, and school shoes with the negligible presence of leather footwear.
Company has established one of the largest distribution network in the
footwear Industry. Its distribution network comprises 50,000+ retailers, ~700 distributors & ~400 EBOs. The largest portion of sales of the company comes from North India which accounts for more than 50% of the revenues.
As most people are working from home, sales of sandals, flip flops saw a
significant surge in demand. Relaxo being a dominant player in the aforesaid categories, through its strong portfolio of brands (‘Flite’, ‘Bahamas’, ‘Hawaii’) saw a swift recovery in volumes and captured market share from un-organized players.
Despite the pandemic, margins surprised positively yet again during the
quarter ended in December. Revenue grew by 12%, while EBITDA growth
stood at 46.4% which is due to excellent volume growth particularly from rural India. Relaxo’s product portfolio is highly skewed towards rural India with lower value products garnering nearly 75% revenues for the company.
RFL has a strong financial risk profile, characterized by robust internal accruals, limited debt, and healthy debt protection indicators. The company’s liquidity position remains comfortable with cash and equivalents of ₹495million as of December 31, 2020.
RFL is expected to benefit from the healthy demand from its diversified
product portfolio catering to different casual footwear requirements. The
company is also likely to benefit from the gradual shift in the industry towards organized players due to the impact of Goods and Services Tax (GST) and Covid-19. Moreover, Company has maintained healthy operating cash flows, asset turns (~3x) and consistency in EBITDA Margins over the years making it a capital-efficient business
We initiate our coverage on the company with a BUY rating and a target price of ₹1,193 per share.
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