relaxo equity research

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1QFY2013 Result Update | Relaxo Footwear

November 6, 2012 2

Exhibit 1:2QFY2012 performanceY/E March (` cr) 2QFY2013 2QFY2012 % chg (yoy) 1QFY2013 % chg (qoq) HY2013 HY2012 % chgNet Sales 242 199 21.6 248 (2.5) 491 414 18.5Net raw material 115 108 6.3 120 (4.3) 234 225 4.2(% of Sales) 47.3 54.1 48.3 47.8 45.9

Staff Costs 37 26 45.1 37 (0.1) 75 51 45.2

(% of Sales) 15.4 12.9 15.0 15.2 10.5

Other Expenses 66 50 32.6 61 8.6 128 99 28.8

(% of Sales) 27.4 25.1 24.6 26.0 20.2

Total Expenditure 218 184 18.9 218 0.0 437 375 16.3Operating Profit 24 16 53.1 30 (20.3) 54 39 39.7OPM 9.9 7.9 204 bp 12.1 (221)bp 11.0 9.3 167bp

Interest 4 5 (19.0) 4 0.4 8 10 (17.8)

Depreciation 6 6 6.6 6 6.1 12 12 5.1

Other Income 1 1 3.5 2 (31.2) 3 3 12.9

PBT 15 6 145.2 22 (31.9) 37 20 82.9(% of Sales) 6.2 3.1 8.9 7.6 4.1

Tax 5 2 158.6 7 (32.5) 12 5 125.8

(% of PBT) 31.5 29.8 31.8 31.6 25.6

Reported PAT 10 4 139.4 15 (31.7) 25 15 68.1PATM 4.3 2.2 6.1 5.2 3.1

Equity capital (`cr) 6 6 6 6 6

EPS (`) 17.2 7.2 139.4 25.1 (31.7) 42.3 25.2 68.1Source: Company, Angel Research

Revenue marginally lower, however operating performance

disappointed

Relaxo reported revenue of`242cr, 21.6% higher yoy, marginally lower than our

expectation of`248cr. The EBITDA margin witnessed an expansion of 204bp yoy

to 9.9% during the quarter; however, it was lower than our expectation of 12.5%.

On sequential basis, the operating margin contracted by 221bp from 12.1% in

1QFY2013 on account of higher other expenses as a percentage of net sales

(mainly advertisement expense). Subsequently, the profit for the quarter grew by

139.4% yoy (on a lower base of `4cr for 2QFY2012) at `10cr and declined by

31.7% on sequential basis; against our estimate of`15cr.

Exhibit 2:Actual vs. EstimateY/E March (` cr) 1QFY13 Angel est. % diffNet sales 242 248 (2.2)EBITDA 24 31 (22.4)

EBITDA margin (%) 9.9 12.5 (258)bp

Reported PAT 10 15 (32.9)

Source: Company, Angel Research


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November 6, 2012 4

Exhibit 5:Brand show all the wayBrand CelebrityHawaii Salman Khan

Flite Katrina Kaif

Sparx Akshay Kumar


Changing revenue mix to drive profit

With the changing revenue mix, the profitability is expected to improve in the

coming years.Sparx has increased its contribution from a mere 4.2% in FY2008 to

24.3% in FY2011; on the other hand, Flite has maintained its contribution at ~25-

30%. Hawaii, being a mass brand, adds to the volume, however, Sparx and Flite

help in improving the companys profitability. Going forward we expect the mix to

further improve with the new ads and celebrity endorsements, which will help in

increasing brand visibility. The company is also planning to launch new products in

the high margin segment.

Exhibit 6:Sales break up Brand-wise

Source: Company, Note: * Others includes - Other brands, outsourced, & traded goods

49.2 44.4 40.8 35.5

31.929.1

28.9 25.8

4.27.5 15.3

24.3

14.7 18.9 15.1 14.5

0.0

20.0

40.0

60.0

80.0

100.0

FY2008 FY2009 FY2010 FY2011

(%

)

Hawaii Flite Sparx Others*


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November 6, 2012 5

Financial performance

Assumptions

Exhibit 7:Key assumptionsFY2013E FY2014E

Volume Growth (%) 15.2 15.2

Realisation Growth (%) 3.0 3.0

Change in raw material prices (%)

Ethyl Vinyl Acetate (EVA) (6.0) 2.0

Rubber (6.0) 2.0

Source: Angel Research

Exhibit 8:Change in estimatesY/E March Earlier estimates Revised estimates % chg(` cr) FY2013E FY2014E FY2013E FY2014E FY2013E FY2014ENet sales 1,019 1,208 1,019 1,208 0.0 0.0OPM (%) 12.3 13.0 11.0 12.5 (131)bp (47)bp

Adj. PAT 61 82 56 80 (7.9) (2.5)Source: Angel Research

We expect the companys revenue to grow at a CAGR of 18.5% over FY2012-14E,

from `860cr in FY2012 to `1,208cr in FY2014E, mainly on the back of growth

triggers, which includes 1) capacity expansion plan, 2) store expansion, 3)

improved sales mix and 4) brand revamping. With the cooling off of raw materialprices, we expect the raw material cost as a percentage of sales to decline from

54.4% in FY2012 to 47.6% in FY2014E. Simultaneously, we expect employee cost

and other expenses to increase on account of expansion and advertisement

spending respectively. We expect a 208bp expansion in the operating margin to

12.5% in FY2014E mainly on account of fall in raw material prices and

improvement in value mix (Sparx and Flite contributing to ~60% of sales). The

companys profit is expected to grow at a CAGR of 41.6% over FY2012-14E, from

`40cr in FY2012 to`80cr in FY2014E.


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November 6, 2012 6

Exhibit 9:Revenue to be driven by volume growth


Exhibit 10:Margin to rebound with decreasing RM price


Outlook and valuation

Relaxo is poised for growth with triggers like 1) capacity expansion plan, 2) store

expansion, 3) improved sales mix and 4) brand revamping. On the back of these,

we expect Relaxo to post a revenue CAGR of 18.5% over FY2012-14 to `1,208cr

with an operating margin of 12.5% in FY2014. The PAT is expected to grow at a

CAGR of 41.6% to`80cr for the same period. At the current market price, Relaxo

is trading at 12.0x FY2014E earnings. We maintain our Buy recommendation onthe stock with a revised target price of `933, based on a target PE of 14x forFY2014E.Exhibit 11:One-year forward PE


306

407

554

686

860

1,

019

1,

208

29.6

33.335.9

23.925.4

18.5 18.5

0

10

20

30

40

0

200

400

600

800

1,000

1,200

1,400

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013E

FY2014E

(%)

(`cr)

Revenue (LHS) Revenue growth (RHS)

31

41

76

66

90

112

151

10.3 10.1

13.8

9.6

10.5 11.0

12.5

0

2

4

6

8

10

12

14

16

0

20

40

60

80

100

120

140

160

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013E

FY2014E

(%)

(`c

r)

EBITDA (LHS) EBITDA margin (RHS)

0

200

400

600

800

1000

Apr-

08

Sep-0

8

Fe

b-0

9

Jul-09

Dec-0

9

May-1

0

Oc

t-10

Mar-

11

Aug-1

1

Jan-1

2

Jun-1

2

Nov-1

2

(`)

Price (`) 4x 8x 12x 16x


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November 6, 2012 7

Exhibit 12:Comparative analysisCompany Year end Mcap(` cr) Sales(` cr) OPM(%) PAT(` cr) EPS(`) RoE(%) P/E(x) P/BV(x) EV/EBITDA(x) EV/Sales(x)Relaxo footwear FY2013E 963 1,019 11.0 56 47.0 28.2 17.1 4.2 9.9 1.1

FY2014E 963 1,208 12.5 80 66.7 30.1 12.0 3.2 7.3 0.9

Bata India* CY2012E 5,557 1,858 15.1 173 26.8 27.2 32.2 8.0 18.7 2.9

CY2013E 5,557 2,206 16.2 226 35.2 29.0 24.6 6.4 14.1 2.5

Source: Company, Angel Research, *Bloomberg


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November 6, 2012 8

Risks

Rise in raw material prices and depreciating rupee

The prices of key raw materials EVA and rubber had reached their peak in thelast financial year to ~`149/kg and ~`243/kg respectively, which impacted the

operating margin. However, the prices of both the raw materials have started

declining, with the current price for rubber at ~177/kg and EVA at ~`110/kg. Any

rise in the prices can put margins under pressure. Also, Relaxo imports its entire

EVA requirement, so any further depreciation in the rupee can pose a risk to the

operating margin and thereby impact the profitability of the company.

Exhibit 13:Depreciating rupee a concern for EVA cost

Source: Angel Research, Bloomberg

Competition from both branded and unorganised sector

Relaxo competes with both branded as well as the unorgansied market. Hawaii,

the mass product faces stiff competition from the unorganised market. On the

other hand,Sparx faces competition from branded shoes. The company has priced

its products considering competition. Any price cut by competitors can put pressure

on Relaxos sales and margin.

The company

Relaxo is a key player in the retail footwear industry, with a strong foothold in the

slippers market and a strong distribution channel of 700 distributors and more

than 46,000 retailers. The company presently has 158 company-owned outlets

across India, with a concentrated presence in Delhi, Rajasthan, Gujarat, Haryana,

Punjab, Uttar Pradesh and Uttarakhand. It has nine manufacturing plants, seven in

Bahadurgarh (Haryana) and one each in Bhiwadi (Rajasthan) and Haridwar

(Uttaranchal). Currently, the company sells its products under three major brands

Hawaii, Flite andSparx.

52.26

54.5

42

44

46

48

50

52

54

56

58

Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12

USD/NR


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November 6, 2012 9

Profit & Loss Statement (Standalone)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014ETotal operating income 554 686 860 1,019 1,208% chg 35.9 23.9 25.4 18.5 18.5Net Raw Materials 290 375 459 495 558

% chg 33.0 29.4 22.3 7.9 12.5

Other Mfg costs 33 43 55 65 82

% chg (34.3) 31.8 26.8 19.1 25.9

Personnel 55 74 106 153 184

% chg 65.7 34.5 42.6 44.0 20.1

Other 99 127 150 194 233

% chg 52.8 27.6 18.6 28.9 20.4

Total Expenditure 477 620 770 907 1056

EBITDA 76 66 90 112 151% chg 85.2 (13.2) 35.9 24.6 35.1

(% of Net Sales) 13.8 9.6 10.5 11.0 12.5

Depreciation 15 21 23 23 28

EBIT 61 45 67 89 124% chg 98.0 (25.5) 47.7 32.7 39.3

(% of Net Sales) 11.0 6.6 7.8 8.7 10.2

Interest & other Charges 11 16 19 17 17Other Income 4 6 5 6 7

(% of sales) 0.7 0.9 0.6 0.6 0.6

Recurring PBT 50 30 48 72 106% chg 132.0 (40.5) 62.8 48.6 48.7

Extraordinary Expense/(Inc.) (0.0) 0.0 0.0 0.0 0.0

PBT (reported) 54 36 53 78 113Tax 16 9 14 21 33

(% of PBT) 30.0 24.7 25.4 27.5 29.2

PAT (reported) 38 27 40 56 80ADJ. PAT 38 27 40 56 80% chg 160.2 (28.8) 48.5 41.2 42.0

(% of Net Sales) 6.8 3.9 4.6 5.5 6.6

Basic EPS (`) 31.4 22.4 33.3 47.0 66.7Fully Diluted EPS ( ) 31.4 22.4 33.3 47.0 66.7% chg 160.2 (28.8) 48.5 41.2 42.0

Dividend 2 2 2 2 2

Retained Earning 36 25 38 55 78


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November 6, 2012 10

Balance Sheet (Standalone)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014ESOURCES OF FUNDSEquity Share Capital 6 6 6 6 6Reserves& Surplus 104 129 166 221 299

Shareholders Funds 110 135 172 227 305Total Loans 147 156 146 156 156

Other Long Term Liabilities 0 0 0 0 0

Long Term Provisions 0 2 3 4 4

Deferred Tax (Net) 18 22 22 22 22

Total Liabilities 275 316 344 409 487APPLICATION OF FUNDSGross Block 286 353 379 455 532

Less: Acc. Depreciation 64 84 108 131 159

Net Block 222 268 272 324 374Capital Work-in-Progress 7 1 21 20 20

Lease adjustment - - - - -

Goodwill - - - - -

Investments 0 0 0 0 0

Long Term Loans and adv. 0 11 12 12 12

Other Non-current asset 0 0 1 1 1

Current Assets 116 158 169 221 263

Cash 1 2 1 4 10

Loans & Advances 27 16 15 17 20

Inventory 67 117 128 169 196

Debtors 21 23 23 28 33

Other current assets 0 1 2 3 4

Current liabilities 69 123 131 169 182

Net Current Assets 47 35 38 52 81Misc. Exp. not written off 0 0 0 0 0

Total Assets 275 316 344 409 487


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November 6, 2012 11

Cash Flow (Standalone)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014EProfit before tax 54 36 53 78 113

Depreciation 15 21 23 23 28Change in Working Capital (16) 13 (4) (11) (23)

Direct taxes paid (16) (9) (14) (21) (33)

Others 34 36 (5) (6) (7)

Cash Flow from Operations 72 97 54 63 79(Inc.)/Dec. in Fixed Assets (80) (62) (46) (75) (77)

(Inc.)/Dec. in Investments 0 0 0 0 0

(Inc.)/Dec. in LT loans & adv. 0 11 1 0 0

Others (5) (12) 3 7 7

Cash Flow from Investing (85) (63) (42) (68) (70)Issue of Equity 0 0 0 0 0

Inc./(Dec.) in loans 39 10 (11) 10 0

Dividend Paid (Incl. Tax) (2) (2) (2) (2) (2)

Others (25) (41) 0 0 0

Cash Flow from Financing 11 (33) (13) 8 (2)Inc./(Dec.) in Cash (2) 1 (1) 3 6

Opening Cash balances 3 1 2 1 4Closing Cash balances 1 2 1 4 10


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November 6, 2012 12

Standalone Key RatiosY/E March FY2010 FY2011 FY2012 FY2013E FY2014EValuation Ratio (x)P/E (on FDEPS) 25.5 35.8 24.1 17.1 12.0P/CEPS 18.1 20.1 15.3 12.1 8.9

P/BV 8.8 7.2 5.6 4.2 3.2

Dividend yield (%) 0.2 0.2 0.2 0.2 0.2

EV/Sales 2.0 1.6 1.3 1.1 0.9

EV/EBITDA 14.5 16.9 12.3 9.9 7.3

EV / Total Assets 4.0 3.5 3.2 2.7 2.3

Per Share Data (`)EPS (Basic) 31.4 22.4 33.3 47.0 66.7

EPS (fully diluted) 31.4 22.4 33.3 47.0 66.7

Cash EPS 44.3 39.9 52.5 66.4 89.9

DPS 1.5 1.5 1.5 1.5 1.5

Book Value 91.6 112.2 143.7 189.1 254.3

Dupont AnalysisEBIT margin 11.0 6.6 7.8 8.7 10.2

Tax retention ratio 0.7 0.8 0.7 0.7 0.7

Asset turnover (x) 2.0 2.2 2.7 2.6 2.6

ROIC (Post-tax) 15.7 10.9 15.5 16.7 19.1

Cost of Debt (Post Tax) 5.3 7.5 9.6 8.0 7.8

Leverage (x) 1.4 1.2 1.0 0.8 0.6

Operating ROE 29.6 15.0 21.4 23.3 25.6

Returns (%)ROCE (Pre-tax) 21.8 14.3 19.5 21.7 25.4

Angel ROIC (Pre-tax) 22.4 14.5 20.8 23.1 27.0

ROE 41.0 22.0 26.0 28.2 30.1

Turnover ratios (x)Asset Turnover 2.3 2.1 2.4 2.4 2.4

Inventory / Sales (days) 35 49 52 53 55

Receivables (days) 13 12 10 10 10

Payables (days) 44 57 60 68 63

WC (ex-cash) (days) 25 21 14 14 17

Solvency ratios (x)Net debt to equity 1.3 1.1 0.8 0.7 0.5

Net debt to EBITDA 1.9 2.3 1.6 1.4 1.0

Interest Coverage 5.5 2.9 3.6 5.2 7.2


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N b 6 2012 13

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to thelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may haveinvestment positions in the stocks recommended in this report.

Disclosure of Interest Statement Relaxo Footwear

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

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