anandrathi_relaxo_05oct2012

Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix.

Anand Rathi Research India Equities

Suman Memani+9122 66266707

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Key financials (YE Mar) FY11 FY12 FY13e FY14e FY15e

Sales (`m) 6,897 8,647 10,923 13,731 15,953

Net profit (`m) 268 399 576 882 1,069

EPS (`) 22 33 48 74 89

Growth (%) (28.7) 48.2 44.8 52.9 21.3

PE (x) 32.4 21.8 15.1 9.9 8.1

PBV (x) 6.2 4.9 3.7 2.7 2.0

RoE (%) 22.0 26.0 28.8 32.5 29.2

RoCE (%) 15.6 19.2 21.7 24.7 24.0

Dividend yield (%) 0.1 0.2 0.3 0.3 0.3

Net gearing (%) 3.2 3.8 5.3 7.8 10.0

Source: Company, Anand Rathi Research

Footwear

Initiating Coverage

India I Equities

5 October 2012

Relaxo Footwear

Building pricing muscle; initiating with Buy

Relaxo Footwear (Relaxo) is second largest in the organised segment of Indian footwear, accounting for 7-8% share. It is currently focused on building pricing power by revamping key brands, Sparx and Flite. Over FY12-15, we expect revenue and EPS to post CAGR of 23% and 39%, respectively, and margins to expand 250bps. We initiate coverage with Buy, at a price target of `960.

Rising volumes, improving value mix. Relaxo is currently focused on growing revenues from its premium brands - Flite and Sparx. Towards this, the company has already set up a manufacturing unit for polyurethane – a key chemical used in making its shoes – which will commence production from Q3FY13. This, together with rapid network expansion, will aid revenues to post 23% CAGR over FY12-15.

Embarking on major brand revamp. The company has roped in three leading Bollywood stars for its brand endorsements. This marketing strategy is applicable across segments, from low-cost Hawaii to premium Sparx. It would build pricing power, raise market share (especially in East, West) and increase direct reach to customers through stores across India.

Margin expansion on the cards: Margins are likely to expand 250bps owing to: (a) falling raw material prices, especially of EVA and rubber (more than 50% of RMC); (b) freight costs stabilising at 3% of sales with new warehouses; and c) reducing third-party purchases.

Valuation. We assign a one-year-forward PE of 13x and derive target price target of `960. It has historically traded at 6-17 PE.At the CMP of `725, the stock trades at PE of 15.1x FY13e and 9.9x FY14e EPS of `48.1and `73.6 respectively. Risk: Rise in input costs.

Rating: Buy

Target Price: `960

Share Price: `725

Relative price performance

RLXF

Sensex

200

300

400

500

600

700

800

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Source: Bloomberg

Key data RLXF IN / RLXO.BO

52-week high / low `815 / `230

Sensex / Nifty 18909 / 5737

3-m average volume US$0.2

Market cap `9bn / US$173?bn

Shares outstanding 12m

Shareholding pattern (%) Jun ’12 Mar ’12 Dec ’11

Promoters 75 75 75

- of which, Pledged 0 0 0

Free Float 25 25 25

- Foreign Institutions 1.53 1.67 1.67

- Domestic Institutions 0 0 0

- Public 23.47 23.33 23.33

5 October 2012 Relaxo Footwear – Building pricing muscle; initiate with Buy

Anand Rathi Research 21

Quick Glance – Financials and Valuations

Fig 1 – Income statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Net revenues 6,897 8,647 10,923 13,731 15,953

Revenue growth (%) 24.6 25.4 26.3 25.7 16.2

- Op. expenses 6,177 7,704 9,588 11,883 13,812

EBIDTA 719.9 942.6 1,334.9 1,847.9 2,141.2

EBITDA margins (%) 10.4 10.9 12.2 13.5 13.4

- Interest 159.1 186.7 198.4 191.6 175.8

- Depreciation 209.5 231.0 288.2 353.0 378.5

+ Other income 5.2 10.6 15.0 15.0 15.0

- Tax 88.3 135.8 286.0 435.7 531.6

Effective tax rate (%) 24.8 0.3 0.3 0.3 0.3

Reported PAT 268 399 576 882 1,069

Extraordinary items

Adjusted PAT 269.0 398.8 576.3 881.7 1,069.3

PAT growth (%) (28.7) 48.2 44.5 53.0 21.3

Adj. FDEPS (`/share) 22.4 33.2 48.1 73.6 89.2

Adj. FDEPS growth (%) (29) 48 45 53 21


Fig 3 – Cash-flow statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

PBT 357 535 863 1,318 1,602

+ Non-cash items 210 231 288 353 378

Cash profit 566 766 1,152 1,671 1,980

- Incr./(decr.) in WC 147 (35) (238) (440) (671)

Operating cash-flow 713 732 914 1,232 1,310

- Capex (562) (455) (847) (411) (339)

Free cash-flow 151 276 67 820 971

- Dividend (21) (14) (21) (21) (21)

+ Equity raised 0 0 0 0 0

+ Debt raised 96 (110) 229 (78) (158)

- Investments - 1 - - (500)

- Misc. items (216) (174) (183) (176) (159)

Net cash-flow (141) (297) 25 (275) (838)

+ Op. cash & bank bal. 10 21 10 102 646

Cl. Cash & bank bal. 21 10 102 646 778Source: Company, Anand Rathi Research

Fig 5 – PE band

3x

9x

6x

12x

15x

0

200

400

600

800

1,000

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

(`)

Source: Bloomberg, Anand Rathi Research

Fig 2 – Balance sheet (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Share capital 60 60 60 60 60

Reserves & surplus 1,287 1,665 2,221 3,083 4,132

Net worth 1,347 1,725 2,281 3,143 4,192

Total debt 1,861 1,752 1,984 1,916 1,758

Minority interest 2 4 - - -

Def. tax liab. (net) 181 218 223 226 229

Capital employed 3,390 3,700 4,488 5,285 6,179

Net fixed assets 2,692 2,926 3,485 3,553 3,563

Investments 1 - - - 500

- of which, Liquid

Working capital 677 764 902 1,086 1,338

Cash 21 10 102 646 778

Capital deployed 3,390 3,700 4,488 5,285 6,179

Net debt/equity (x) 1.4 1.0 0.8 0.4 0.2

W C turn (days) 36 32 30 29 31

Book value (`/sh) 112 144 190 262 349 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `725 Year-end: Mar FY11 FY12 FY13e FY14e FY15e

P/E (x) 32.4 21.8 15.1 9.9 8.1

Cash P/E (x) 18.2 13.8 10.1 7.1 6.0

EV/EBITDA (x) 14.1 10.8 7.6 5.5 4.7

EV/sales (x) 1.5 1.2 0.9 0.7 0.6

P/B (x) 6.2 4.9 3.7 2.7 2.0

RoE (%) 22.0 26.0 28.8 32.5 29.2

RoCE (%) 15.6 19.2 21.7 24.7 24.0

Dividend yield (%) 0.1 0.2 0.3 0.3 0.3

RoIC (%)

Debt to equity (x) 1.4 1.0 0.8 0.4 0.2

Debtor days 12.3 9.7 10.0 10.0 10.0

Inventory days 61.7 54.2 51.5 52.6 56.7

Payables days 77.2 61.9 60.0 60.0 60.0

Working capital days 35.8 32.2 30.2 28.9 30.6

Fixed asset T/O (x) 2.2 2.4 2.6 2.8 3.0Source: Company, Anand Rathi Research

Fig 6 – FY11 revenue breakdown (standalone)

Distributor

88%

Retail

7%

Export

4%Other

1%

Source: Company



Rising volumes and better value mix

Relaxo is focused on increasing revenue from high-margin products, especially Flite and Sparx. To expand volumes and enhance value mix, it is setting up a manufacturing unit for polyurethane (PU) - a key chemical used for making its shoes - likely to commence production from Q3FY13. Also, it is enhancing its distribution network by increasing the number of retail outlets in East and West India to capture volumes.

Value mix to enhance further

Sparx and Flite together accounted for 35% and 51% of volume and value, respectively, of distributor category in FY10. This has steadily risen to 42% and 60% in FY12. We believe concerted efforts towards growing revenues from the two brands, supported by massive distribution, will grow value mix even further in future.

Fig 7 – Volume and value mix FY10 FY11 FY12

Particulars Volume Value Volume Value Volume Value

Hawaii 65% 47% 61% 40% 58% 39%

Flite 28% 33% 28% 29% 31% 30%

Sparx 7% 18% 10% 30% 11% 30%

Source:Company,Anand Rathi Research

Fig 8 – Realisation of major categories

0

50

100

150

200

250

FY

10

FY

11

FY

12

Hawaii Sparx Flite

(`/pair)


Capacity expansion on track

In FY11 and FY12, volume growth in Flite and Sparx (shoes) was a steady 1% and 15% and 45% and 26% respectively, whereas Relaxo’s overall revenue growth in FY12 was 25.4%. Management took the right decision in expanding both Flite and Sparx capacities in FY11, by 44% and 23%. Considering the steady growth in sales volumes, we believe the company would again have to increase capacity in FY14. After declining volume growth in FY11, rising exports in FY12 led to Hawaii volumes growing marginally. Also, we believe that the expanded capacities would help curtailing imports of Sparx (shoes) from China. Overall, we see 24% and 26% revenue growth in Flite and Sparx, respectively, over FY12-14e (see Fig 9).

Sparx and Flite key drivers for value mix.In FY12, both brands

together increased to 42% and 60% in volume and value respectively

User demand leading to capacity expansion



Fig 9 – Capacity category-wise

Capacity (m pairs) FY09 FY10 FY11 FY12e

Hawaii 60 60 60 60

Sparx 3 9 11.1 11.1

Flite 22.5 24 34.5 34.5


PU capacity enhanced

At Bahadurgarh, Haryana, Relaxo is setting up a manufacturing unit for PU footwear, the fastest-growing segment. It is already selling, on a small scale, PU-Flite (formal and fashionable footwear with additional features: light weight, longevity and skid resistance). Expansion in this category would increase overall volumes and improve market share. It is incurring capex of `700m and commercial production is likely to start in Q3FY13. We believe this segment is likely to lead to an asset-turnover ratio of 3-4x and help the company improve both value mix and revenue.

Expanding distribution to match increasing demand

In the past, Relaxo’s operations were concentrated in North and North-East India, with a distribution network primarily in the North. Rising footwear consumption has, however, led the company broaden its distribution network to eastern and western India. Today, the company has a strong network of more than 46,000 distributors all over India and 154 retail outlets. These retail outlets go a long way in enhancing Relaxo’s brand image, the effect of which will trickle down to margins.

Fig 11 – Distribution network

FY10 FY11 FY12

Multi Brand Outlets 20,000 40,000 46,000

Retail Outlets 100 127 149*

Sales 541.5 459.236 612

Store revenue per store 5.4 3.6 4.1


Company is incurring a capex of `70m on PU capacity, which will

deliver to 3-4x assets turnover,improving overall revenues

Expanding network in East and West India

Fig 10 – Revenue break-up region-wise

Region (`m) FY10 % Share FY11 % Share FY12 % Share Stronger Presence Industry player presence

North 3,270 64.5 3,410 56.2 4,000 52.7 UP, Delhi, Haryana Relaxo, Lakhani

East 1,150 22.7 1,520 25.0 2,180 28.7 Kolkata Khadims, Relaxo

West 340 6.7 700 11.5 880 11.6 Gujarat, Maharashtra Relaxo, Lakhani

South 310 6.1 440 7.2 530 7.0 Paragon, Relaxo

Total 5,070 6,070 7,590




Brands undergoing major revamp

The company has roped in three leading Bollywood stars for its brand endorsements. This marketing strategy is applicable across segments, from low-cost Relaxo Hawaii to premium Sparx. It would build pricing power, raise market share (especially in East, West) and increase direct reach to customers through stores across India. As large as 4-5% of sales has been allotted to advertisement.

New marketing strategy across categories

Relaxo has ramped up its marketing strategy for all categories (Relaxo Hawaii – low cost, and Flite and Sparx – premium), targeting all age groups. It has recently roped in Bollywood stars (Salman Khan, Akshay Kumar and Katrina Kaif) to endorse Relaxo Hawaii, Sparx and Flite .This is likely to broaden recognition of its brands all over India against earlier perceptions of the company being largely a northern and north-eastern player. This would push its volumes and enhance its value mix. We believe this measure is likely to increase its market share (7-8%of organised segment) in all segments as well as in the overall footwear market.

Fig 13 – Brand ambassadors Celebrity Brand Position Target Segment Impact

Salman Khan

Hawaii Low-cost mass market

Unorganised sector Will help gain market share from the unorganised segment and compete with the economy footwear range

Akshay Kumar

Sparx Middle class; young and sporty for middle-agers

MNC brands, youth and middle-agers

Will help target middle-agers and compete with MNCs as well as domestic brands such as Lotto and Sketchers

Katrina Kaif Flite Fashionable, stylish

Unorganised domestic as well as MNCs in the youth category

Will help target the youth category and increase market share in the fashionable and style category

Source: Company,Anand Rathi Research

Focused on retail store expansion

Relaxo is increasing the number of its retail stores ‘Relaxo Shoppe’, dealing directly with end-customers, to enhance its brand image and increase sales. It has 154 stores (FY12, 149 stores) currently and is in the process of adding 25 more this year . We believe greater volumes and value would be added if more stores are opened in East and West India, where its revenue is fast increasing every year.

Advertising costs to be held in check

Despite signing up three huge Bollywood stars at `120m, we believe that advertising expenditure would not cross 4-5% of sales. The benefits would be substantial in comparison with the costs.

Fig 15 – Advertisement cost vs EBIDTA margin

Particulars FY10 FY11 FY12 FY13e FY14e FY15e

Advertisement cost (% of sales) 3.76 3.62 3.42 4.57 4.00 3.76

EBIDTA margins (%) 16.4 10.4 10.9 12.2 13.5 13.4

Source: Anand Rathi Research

Fig 12 – Brand wise realisation and EBIDTA margin

0

50

100

150

200

250

FY

10

FY

11

FY

12

9

11

13

15

17

19

Hawaii Sparx Flite EBIDTA margins (RHS)

(`/pair) (%)


Fig 14 – Region-wise sales percentage

0102030405060

70

FY

10

FY

11

FY

12

North East West South

(`m)




Margin Expansion on Cards

Relaxo is taking steps to rationalise costs and improve margins. Margin expansion is likely to come through: (a) falling raw material prices, especially of EVA and rubber (more than 50% of RMC); (b) stabilising freight at 3% of sales by opening warehouses in West and East India (since sales and revenue are increasing there); and (c) reducing third-party purchases by expanding capacity. All these would yield margin expansion of 250bps over FY12-15e.

Two-year low input costs to boost margins

Raw material costs formed ~54-55% of sales, except in FY11 and Q1/Q2FY12 when they were 60-61%. Rubber (15-16% of RMC), the major component of Relaxo Hawaii, peaked in Q2FY12 and has come off 22-23%. This, we believe, would add to margins .EVA (100% imported item, 27-30% of RMC), largely used in Flite, peaked in Q4FY12 and has now dropped 22-23% from. The rise in raw material prices is passed on to end consumers but with a lag of 3-4 months. Ahead, we do not see prices of the above raw materials rising more then 5% annually. With its increasing pricing power, Relaxo’s margins are likely to further improve. We expect the FY14 EBIDTA margin to improve 150bps over FY12.

Fig 18 – Key raw material realisation vs. EBIDTA margin

Raw Materials FY10 FY11 FY12 FY13e FY14e FY15e

Rubber 112.0 192.4 193.7 186.1 195.4 205.1

EVA 90.0 116.8 145.5 121.1 127.1 133.5

Synthetic rubber 77.2 94.1 114.4 114.4 114.4 114.4

EBIDTA margins 16% 10% 11% 12% 13% 13%


Freight costs to stabilise despite wider operations in East, West

Relaxo has nine manufacturing plants, seven in Bahadurgarh (Haryana) and one each in Bhiwadi (Rajasthan) and Haridwar (Uttaranchal). At present, 53-55% of sales arise in North India and most of its distribution network is located here, restricting freight costs to 3.5% of sales. Ahead, freight costs are likely to stabilise at 3% despite its all-India operations as it is putting up four warehouses .Capital expenditure for the warehouses, to be opened one at a time, is likely to be `200m in the next two years.

Fig 16 – EVA price movement

115

120

125

130

135

140

FY

12

1QF

Y13

2QF

Y13

2HF

Y13

e

FY

14e

FY

15e

(`/kg)


Fig 17 – Rubber price movement

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

FY

10

FY

11

1QF

Y12

2QF

Y12

3QF

Y12

4QF

Y12

1QF

Y13

2QF

Y13

2HF

Y13

e

FY

14e

FY

15e

(`/ton)




Fig 19 – Plant location

Plant Location Production

RFL I Bahadurgarh (Haryana) Hawaii

RFL II Bahadurgarh (Haryana) Hawaii

RFL III Bhiwadi (Rajasthan) Hawaii

RFL IV Bahadurgarh (Haryana) Flite

RFL V Haridwar (Uttaranchal) Sparx shoes and sandals

RFL VI A Bahadurgarh (Haryana) Flite, Schoolmate, Casualz, Sparx

RFL VI B Bahadurgarh (Haryana) Flite, Schoolmate, Casualz, Sparx

RFL VIIA Bahadurgarh (Haryana) Canvas, Sparx, shoes, sandals

RFL VIIB Bahadurgarh (Haryana) Canvas, Sparx, shoes, sandals


Fig 20 – Warehouse setup

Existing Warehouses New warehouse location Sales Revenue (%)

North India

Delhi

Bahadurgarh 53.0

East India East India

West Bengal Patna, Bihar

Ranchi, Jharkhand

Guwahati, Assam

28.5

West India West India

Bhiwadi, Rajasthan Bhiwadi, Rajasthan

11.5

South India

Karnataka 7.0


Third-party-purchase costs likely to come down

Third-party purchases are largely of the high-value Sparx, imported from China. With minor expansion in Sparx (4,000 pairs a day) and surplus capacity in Relaxo Hawaii, we expect outsourcing (as percent of sales) to come down and settle between 4% and 5% in the next two years, against 10-11% in the past few years (table). Margins in the high-value Sparx produced by the company are higher than in those outsourced.

Fig 21 – Outsource vs. EBIDTA margin

4

7

10

13

16

FY

10

FY

11

FY

12

FY

13e

FY

14e

FY

15e

Outsourced purchases % of sales EBIDTA margin (RHS)

(%)


In-house production is likely to improve margin further. Expect

third-party purchase to come down to 4-5% against 10-11% in the

past few years



Financials

We expect Relaxo to report 23% revenue growth over FY12-15, led by growth in volumes and value. EBIDTA margin is likely to improve 250bps to 13.5% in FY15e. With free-cash generation, we believe gross debt is likely to come down from 1.0x in FY12 to 0.4x. Ahead, return ratios are likely to further improve with working-capital efficiency and a better margin.

Revenue to register 23% CAGR over FY12-15e

On the launch of the Sparx and Flite brands in FY06, sales grew 24% over FY07-12. Ahead, we expect 23% revenue CAGR during FY12-15, led by 20% and 23% CAGR in Flite and Sparx respectively. Moreover, we expect enhanced revenue growth from retail outlets and exports. We believe the company’s focus on brand building is likely to improve its value mix, helping revenue growth.

Margin expansion to help robust net profit growth

The margin is likely to expand 150bps to 13.5% over FY12-15e due to a) better pricing power through brand-building, b) increasing value mix especially of Sparx and Flite from 60%in FY12, c) freight-cost rationalisation on opening four warehouses in west and east India and d) low prices of raw material, especially of rubber and EVA, which are at one-year lows. We do not expect any rise in raw material prices in the next 1-2 years due to rising capacities (of the raw materials) and a drop in demand from other industries such as autos. The margin expansion is likely to help net profit grow 39% over FY12-15e.

Return ratios to improve further

We expect the RoE to improve further, from 26% in FY12 to 29.2% in FY15 on the better asset-turnover ratio and value mix, resulting in robust net profit growth. We expect the RoCE also to improve, from 19.2% in FY12 to 24% in FY15.

Free cash-flow to improve further

On the expansion of its PU-Flite plant in Bahadurgarh at `700m, Relaxo is likely to generate more than `1bn in free cash. This free-cash generation would arise from better operational flows and efficient working capital. It would reduce the debt-equity ratio from 1x to 0.4x.

Fig 24 – Cash flow

0

350

700

1,050

1,400

FY

11

FY

12

FY

13e

FY

14e

FY

15e

15

18

21

24

27

30

33

Operating Cash Flow FCF RoE (RHS) RoCE (RHS)

(`m) (%)


Fig 23 – PAT growth vs. EBIDTA margin

-50

0

50

100

150

200

FY

10

FY

11

FY

12

FY

13e

FY

14e

FY

15e

9

11

13

15

17

19

PAT growth EBIDTA margins (RHS)

(%) (%)


Fig 22 – Revenue break-up (%) FY10 FY11 FY12

Distributor 87% 88% 88%

Retail 10% 7% 7%

Export 2% 3% 4%

Other 1% 2% 1%




Valuation

In the last few years, the stock has traded in the one-year-forward P/E range of 6x-17x. Brand recognition helps increase pricing power and improve revenue, as well as raises market share. We believe Relaxo’s focus is to increase the revenue value-mix, which would help to better margins. All this is likely to improve RoE from 26% to 32.5% over FY12-14e and help get higher multiples. The stock is at a discount over 50% to Bata India and we believe that, with Relaxo’s improving brand image, return ratios and growth ratios, the discount will narrow faster. At TP of `960, the stock trades at a P/E multiple of 13.0x and 10.8x FY14e and FY15e EPS of `73.6 and 89.2respectively.

Risks

Volatile raw material prices. Raw material cost was 54-55% of sales except in FY11 when it was over 60%. Key raw materials are rubber, EVA (ethyl vinyl acetate) and synthetic rubber. Inability to pass on the increase in raw material costs because of competition may lead to pressure on margins.Any rise in prices of rubber (15-18% of RMC), used in Relaxo Hawaii and shoes, would lead to pressure on margins in those categories. Any rise in prices of EVA (28-33% of RMC), used in Flite and shoes, would put pressure on margins in Flite.

Fig 25 – RMC and EBIDTA margin

50

90

130

170

210

FY

10

FY

11

FY

12

FY

13e

FY

14e

FY

15e

9

11

13

15

17

Rubber EVA Synthetic rubber EBIDTA margins (RHS)

(`/unit) (%)


Competition may lead to pricing pressure. Competition comes from all branded manufacturers, unorganised to high-end. The Hawaii brand primarily faces competition from the unorganised market in northern India; therefore, pricing has to be done considering this. Sparx shoes face competition from premium brands; any drop in prices by the competition would lead to a fall in the prices of Sparx, and would dent margins.

We initiate coverage with TP of `960



Fig 26 – Income statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Gross Sales 6,866 8,654 10,938 13,751 15,978

Income from other sources

Excise duty 6 7 15 20 25

Other operating revenue 19 - - - -

Net Revenue 6,879 8,647 10,923 13,731 15,953

Growth % 24.2 25.7 26.3 25.7 16.2

Expenditure

Cost of Revenue 4,190 5,140 6,270 7,935 9,395

Employeee Cost 745 1,062 1,480 1,800 2,020

Rent 145 175 200 230 250

Advertisement Expenses 248 296 500 550 600

Sales Promotion and Incentive 294 271 300 340 370

Cartage Outward 247 300 330 410 475

Other Expenses 326 461 508 618 701

EBIDTA 683 943 1,335 1,848 2,141

EBIDTA margin 0.1 0.1 0.1 0.1 0.1

Depreciation & Amortisation 210 231 288 353 378

EBIT 473 712 1,047 1,495 1,763

Interest Expenses & Bank charges 159 187 198 192 176

Other Income 5 11 15 15 15

PBT 319 535 863 1,318 1,602

Income taxes 88 136 286 436 532

effective Tax rates 0 0 0 0 0

Profit after Taxes 231 399 577 883 1,070

PAT margin (%) 0.0 0.0 0.1 0.1 0.1

PAT Growth (%) (38.8) 72.8 44.6 52.9 21.3

EPS 22 33 48 74 89

Dividend on Equity Share 18 18 18 18 18

Dividend per share 1 2 2 2 2


Fig 27 – Balance sheet (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Inventories 1,166 1,285 1,541 1,980 2,479

Sundry debtors 232 230 300 377 438

Loans & advances 270 262 390 490 508

Other current assets 9 34 36 26 36

Cash & cash equivalents 21 10 102 646 778

Current assets 1,698 1,820 2,368 3,520 4,239

Net fixed assets 2,652 2,890 3,456 3,553 3,548

Net intangible assets 40 36 28 -- 15

Investments 1 -- -- -- 500

Deferred tax asset, net (181) (218) (223) (226) (229)

Total assets 4,210 4,528 5,630 6,846 8,073

Current liabilities 1,182 1,169 1,331 1,614 1,854

Provisions 115 174 333 483 579

Long-term debt 964 925 1,184 1,056 848

Short-term debt 601 530 500 550 600

Other liabilities 2 4

Shareholder's equity 1,347 1,725 2,281 3,143 4,192

Total liabilities & equity 4,210 4,528 5,629 6,846 8,073




Fig 28 – Cash flow statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Profit before taxes 357 535 863 1,318 1,602

Depreciation -- -- -- -- --

Amortization 210 231 288 353 378

Interest expense 159 187 198 192 176

Interest income (5) (11) (15) (15) (15)

Dividend income -- (2) -- -- --

Profit on sale of investments -- -- -- -- --

Provisions for doubtful debts/adv -- -- -- -- --

Provisions written back -- -- -- -- --

Other non-cash adjustments

Change in sundry debtors (24) 3 (70) (77) (61)

Change in inventories (494) (119) (256) (440) (498)

Change in loans & advances 15 (1) (128) (100) (79)

Change in other current assets (9) (25) (3) -- --

Change in current liabilities 534 (13) 157 284 240

Change in provisions 4 9 8 -- --

Change in working capital 27 (147) (291) (333) (399)

Direct taxes paid (34) (62) (130) (283) (433)

Other operating cashflow

Cashflow from operations 713 732 914 1,232 1,310

Purchase of fixed assets (562) (455) (847) (411) (339)

Proceeds from sale of fixed assets

Purchase of investments -- 1 -- -- (500)

Proceeds from sale of investments

Purchase of business

Investment in subsidiary/JV -- -- -- -- --

Sale of business/subsidiary/JV

Interest income 5 11 15 15 15

Dividends income -- 2 -- -- --

Other investing cashflow

Cashflow from investing (557) (442) (832) (396) (824)

Issue of equity 0 0 0 0 0

Issue of preference capital -- -- -- -- --

Proceeds from borrowings 96 (110) 229 (78) (158)

Repayment of borrowings

Interest paid (159) (187) (198) (192) (176)

Dividend paid, including taxes (21) (14) (21) (21) (21)

Any other financing cashflow -- -- --

Cashflow from financing (84) (310) 10 (291) (355)

Net cash generated during year 72 (21) 92 545 131

Forex gain/(loss) impact

Cash at beginning of year 10 21 10 102 646

Cash at end of year 21 10 102 646 778




Fig 29 – Ratio analysis @ `725 Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Profit Margins (%)

Gross profit 40 41 43 42 41

EBITDA 10 11 12 13 13

EBIT 7 8 10 11 11

PBT 5 6 8 10 10

Adjusted PAT 4 5 5 6 7

Return Ratios (%)

Return on assets 11 13 14 16 16

Return on capital employed 14 18 20 23 23

Return on equity 22 26 29 33 29

On adjusted net profit (%)

Return on assets 11 13 15 17 17

Return on capital employed 16 19 22 25 24

Return on equity 22 26 29 33 29

NOPAT [EBIT*(1-T)] 384 531 700 1001 1178

Invested capital 3007 3349 4197 4585 5441

Return on invested capital 14% 17% 19% 23% 23%

Turnover Ratios

Fixed asset turnover, gross 2.2 2.4 2.6 2.8 3.0

Fixed asset turnover, net 2.8 3.1 3.4 3.9 4.5

Total asset turnover 1.8 2.0 2.2 2.2 2.1

Sales/ROIC 2.5 2.7 2.9 3.1 3.2

Days of inventory on hand 80.0 87.0 82.2 81.0 86.6

Days of sales outstanding 11.7 9.8 8.8 9.0 9.3

Number of days payable 38.4 33.8 27.2 26.9 27.7

Cash credit cycle 53.3 62.9 63.8 63.1 68.3




Company Background & Management

Begun in 1977 as a marketing and trading company, after its IPO in 1995 Relaxo Footwear began manufacturing Relaxo Hawaii for the mass market. Today, it is the second-largest—in volumes, after Paragon, and by value, after Bata—with 7-8% of the organised market by value. First-generation promoters, the Delhi-based Dua family, hold a 75% stake.

Company Background

Founded by the late Shri Moolchand Dua, Relaxo Footwear was incorporated in Sep’84 and went public in 1993. Primarily known as a Hawaii company in the early 2000s after manufacturing only Relaxo Hawaii, at present, it has diversified into sandals, slippers, Relaxo Hawaii, canvas shoes and casuals, and caters to men, women and children. With nearly 46,000 multi-brand outlets (MBO) and 154 retail outlets across the country (especially in north India), today Relaxo has one of the widest points-of-sale. This helps it enhance its brand. It has nine production facilities and four warehouses, and markets more than 300,000 pairs daily.

Fig 30 – Revenue break-up in pairs and value FY10 FY11 FY12

Particulars m pairs Value (`m) m pairs Value (`m) m pairs Value (`m)

Hawaii 53 2,274 50 2,458 51 3,000

Flite 23 1,610 23 1,785 27 2,280

Sparx 5 854 7 1,679 9 2,190

Others 1 98 1 159 1 110


Management

CEO and MD Ramesh Dua looks after strategic and overall operations. CFO Sushil Batra looks after finance. Executive vice-president Gaurav Dua looks after marketing. Younger son Rahul Dua looks after the new business of polyurathane-Flite. (Flite also comes in EVA.) Whole-time director Nikhil Dua has more then 15 years’ experience and looks after projects.

Fig 31 – Key management

Management Person Designation Role

Ramesh Dua CEO, MD Strategic and overall operations

Sushil Batra CFO Finance

Nikhil Dua WTD Looks after projects

Gaurav Dua Executive vice-president Marketing

Rahul Dua New business of PU

Source: Company Anand Rathi Research

anandrathi_relaxo_05oct2012

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