nirmalbang_21june2012

7/31/2019 NirmalBang_21June2012

1/5

Institutional Equities

M

anagementMeet

Update

Reuters: RLXO.BO; Bloomberg: RLXF IN

Relaxo Footwears

We had a meeting with Mr. Sushil Batra, chief financial officer of RelaxoFootwears (RFL) to get the latest business update and understand its strategies.Following are the key highlights:

Company undergoing restructuring process: Mr. Batra said RFL is run by first-generation promoters and their sons and the involvement of professional talent islimited currently. RFL is in process of transforming itself from a promoter-operatedentity to a professionally-run company. In order to frame strategies for sustainablegrowth, RFL appointed Accenture as its consultant. Key tasks assigned to Accentureare as follows: 1) Improve logistics and supply chain, 2) Provide inputs for new productlaunch, 3) Successful implementation of SAP, and 4) Expansion of retail operations.

Mr. Batra said the team at Accenture is closely working with the management to frameright strategies on the issues stated above. Accepting key inputs with an open mindfollowed by successful implementation would be key things to watch out for as it cantransform RFL from a manufacturing company to a branded retail company with strongfinancials, just the way Bata India evolved in the past five years.

Revenue to grow at a healthy pace: In the past five years, RFL has grown its netsales at a healthy 29.7% CAGR over FY07-12, at Rs8,648mn. As per themanagement, RFL would continue to grow 20-25% for the next couple of yearsfollowing strong volumes and improving product mix. RFL appointed film stars Mr.Salman Khan in 4QFY12 and Mr. Askhay Kumar in 1QFY12 as brand ambassadors topromote its Relaxo brand (Hawaii slipper) and Sparx brand (sandal), respectively. Thecompany incurred a capex of Rs460mn to increase its manufacturing capacity in FY12

and is planning to incur capex of Rs700mn/Rs800mn in FY13E/FY14E, respectively, toincrease its capacity and set up warehouse.

Continues to operate with lean working capital: RFL operated with lean workingcapital, at a mere 5.3% of sales in FY12, down from 8.3%/6.1% in FY10/FY11,respectively (see Exhibit 7/8). It had inventory/receivable days of a mere 60/10 days inFY12. Following lower working capital requirement, RFL generated strong operatingcash flow of Rs1,443mn over FY10-12, which supported capex of Rs1,930mn over thesame period. (see Exhibit 5/6). As a result, debt remained stagnant at the same levelsince the past three years and the D/E ratio reduced to 0.8x in FY12 from 1.3x inFY10. As per the management, RFL would continue to operate with lean workingcapital in FY13/FY14 also. Strong revenue growth supported by a better product mixwould improve operating cash flow, which would be sufficient for capex planned in

FY13/FY14.

Not Rated

Sector: Footwear

CMP: Rs473

Jignesh Kamani, [email protected]+91-22-3926 8239

Saiprasad Prabhu

[email protected]+91-22-3926 8172

Y/E March (Rsmn) FY08 FY09 FY10 FY11 FY12

Net sales 3,057 4,075 5,537 6,860 8,648

YoY (%) 29.6 33.3 35.9 23.9 26.1

EBITDA 382 510 907 824 943

EBITDA margin (%) 12.5 12.5 16.4 12.0 10.9

Adjusted net profit 109 145 377 270 399

EPS (Rs) 9.1 12.1 31.4 22.5 33.2

EPS growth (%) 76.7 33.2 160.4 (28.4) 47.8

PE ratio (x) 52.2 39.2 15.1 21.0 14.2

Price/sales (x) 1.9 1.4 1.0 0.8 0.7

EV/EBITDA (x) 16.6 13.2 7.9 8.8 7.6RoIC (%) 13.9 14.4 22.3 15.3 15.6

RoCE (%) 15.8 16.2 25.3 18.5 17.7

RoE (%) 19.4 21.5 41.0 22.1 26.0

Source: Company, Nirmal Bang Institutional Equities Research

20 June 2012


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2 Relaxo Footwears

Margins under pressure in the near term, but would rise in the long run

Raw material costs accounted for 53.1% of sales in FY12. EVA and rubber are key raw materials for RFL.RFL imports its entire EVA requirement and following the rise in EVA prices coupled with rupee depreciation,the landed cost of EVA moved northwards, peaking out in December 2011, at ~Rs149/kg (current price~Rs130/kg). Similarly, rubber prices peaked out at ~Rs250/kg. RFL went for a price hike in 4QFY12, but theprices of EVA and rubber started declining during the quarter and as a result the operating margin increased

by a whopping 500bps QoQ (see Exhibit 2). Mr. Batra said that with further rupee depreciation, the landedprice of EVA started rising and margins would be under pressure in 2Q/3QFY13. With a better product mix infavour of high value Sparx and other brands like Flite and also commissioning of warehouses, the margins areset to improve in FY14.

Exhibit 1: Rising raw material costs lead to lower margins Exhibit 2: Sharp improvement in margins in 4QFY12

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Aggressive retail expansion

RFL sells its product through 700 distributors catering to 40,000 dealers/retailers. At present, the company has

149 stores (up from 127 in FY11) of ~900-1,000 sq ft operated by it, which accounted for Rs600mn of sales inFY12. Till now, the purpose of retail outlets was to create brand awareness which helped its dealer/retailnetwork. However, the company is exploring opportunities to make retail outlets as a viable business modeland grow it aggressively. The company had a sales/marketing team comprising 150 people in FY11 and inFY12 alone it added 700 people to boost retail sales.

RFL competes with firms like Paragon, Liberty, Mirza International (owner of Red Tape shoe brand), BataIndia etc. As per the management, Paragon is the market leader in South India, while RFL is the marketleader in North India in slippers. The company is highly dependent on the northern region (including thenortheast region up to Assam), which accounted for ~60% of its sales. With the commencement of newfacilities and setting up of warehouses, the company is expected to improve its sales into other regions also inFY13/FY14.

Exhibit 3: Sales volume growth Exhibit 4: Improving average realisation


8.1

9.1

11.712.5 12.5

16.4

12.010.9

1.7 1.6

2.63.6 3.6

6.8

3.94.6

0

2

4

6

8

10

12

14

16

18

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

EBIDTA (%) PAT (%)

(%)

10.28.2

7.7

14.615.7

14.914.3

12.913.6

11.0

9.18.4

11.4

8.49.1

14.1

4.2

2.2 0.8

6.2

7.97.0

5.66.6

5.65.0

2.22.8

5.0

2.12.9

7.7

0

2

4

6

8

10

12

14

16

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

EBIDTA (%) PAT (%)

(%)

59

51 52

6468

84 87

(2.6)

(14.9)

2.8

22.9

7.1

23.2

2.7

(15)

(10)

(5)

0

5

10

15

20

25

0

10

20

30

40

50

60

70

80

90

FY05 FY06 FY07 FY08 FY09 FY10 FY11

Sales volume Volume growth

(mn pair) (%)

36 39 44 48 59 65 78

10.2

7.1

14.0

7.5

23.6

10.9

19.5

0

2

4

6

8

10

12

14

16

18

20

22

24

-

10

20

30

40

50

60

70

80

90

FY05 FY06 FY07 FY08 FY09 FY10 FY11

Averag e realizaton Realization growt h

(Rs/pair) (%)


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3 Relaxo Footwears

Exhibit 5: Improving operating cash flow Exhibit 6: Gradual improvement in free cash flow


Exhibit 7: Better inventory turnover to improve working capital Exhibit 8: Lean working capital to support cash flow


Exhibit 9: Comparative valuation

MktCap

CMPNet sales

(Rsbn)EBITDA

(%)CAGR (%)FY09-12

EPS(Rs)

P/E(x)

EV/EBITDA(x)

RoE(%)

Comparison (Rsbn) (Rs) FY10 FY11 FY12 FY10 FY11 FY12 Sales EBITDA PAT FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12

Relaxo Footwears 5.7 473 5.5 6.7 8.6 16.4 12.0 10.9 28.5 22.8 40.2 31.4 22.5 33.2 15.1 21.0 14.2 7.9 8.8 7.6 41.0 22.1 26.0

Bata India 51.6 803 10.9 12.6 15.4 11.9 13.3 15.5 16.0 38.0 32.7 10.5 14.8 22.1 76.7 54.1 36.3 39.5 29.9 21.2 21.5 26.0 29.2

Note: Bata Indias financial year ends in December. Hence, we have taken CY09/10/11 for comparison purpose.

Source: Nirmal Bang Institutional Equities Research

Company backgroundRFL, incorporated in 1984, is the largest maker of slippers in India under the Hawaii brand with a capacity of128mn pairs per year. It caters to low-end mass products with selling prices in the range of Rs60-100 per pair.The company is run by first generation promoter Mr. Mukand Lal Dua and Mr. Ramesh Dua along with theirsons. Mr. M.L. Dua has two sons, while Mr. Ramesh Dua has three sons. These seven persons from thepromoter family look after various functions of RFL currently, with limited involvement of professionals. Thecompany was predominantly a Hawaii slipper manufacturer until 2004, with Hawaii slippers accounting for 95%of its sales in FY04. In the past five years, the company developed other brands like Flite and Sparx whichcontributed around 34% to sales in FY12. Flite is EVA-based slipper available in multiple colours and designs,while Sparx is a sandal catering to the premium segment in the price range of Rs600-1,700. Hawaii is sold at~Rs60 per pair, while Flite is sold at ~Rs75-80 per pair.

Currently, RFL has three products: 1) Blue colour slippers sold under the Hawaii brand, 2) Light weight EVAslippers available in multiple colours and designs sold under the Flite brand, and 3) Premium sandal soldunder the Sparx brand. As per Mr. Batra, Hawaii slippers account for ~38% of sales, EVA slippers account for~28% of sales and the balance ~34% is contributed by branded products like Sparx, Flite and other brands.

(900)

(750)

(600)

(450)

(300)

(150)

-

150

300

450

600

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E

CFO CFI CFF

(Rsmn)

(313)

27

(160)(131)

(412)(444)

(141)

98

(500)

(400)

(300)

(200)

(100)

-

100

200

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E

Free cash flow

(Rsmn)

41

30

39

50

40

52

70

60

35

32

23

18 1714 12

10

25 2821

24 2527

32

20

0

10

20

30

40

50

60

70


Inventories Debtors Creditors

(Days)

250

186

231

256

300

457

416

46311.6

9.3

9.8

8.4

7.4

8.3

6.1

5.3

5

6

7

8

9

10

11

12

0

50

100

150

200

250

300

350

400

450

500


Ex-cash work ing capital As % of sales (RHS)

(Days) (%)


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4 Relaxo Footwears

Financials

Exhibit 10: Income statement

Y/E March (Rsmn) FY08 FY09 FY10 FY11 FY12

Net sales 3,057 4,075 5,537 6,860 8,648

Growth (%) 29.6 33.3 35.9 23.9 26.1

Raw material costs 1,639 2,181 2,901 3,756 4,592

Staff costs 241 334 554 745 1,062

Power and fuel cost 162 189 228 279 372

Other manufacturing exp 255 309 99 153 204

Selling and admin exp 339 506 799 1,060 1,415

Miscellaneous exp 38 45 49 44 59

Total expenditure 2,675 3,565 4,630 6,037 7,705

EBITDA 382 510 907 824 943

Growth (%) 38.4 33.5 77.9 (9.2) 14.5

EBITDA margin (%) 12.5 12.5 16.4 12.0 10.9

Other income 17 26 41 61 9

Interest costs 138 191 256 320 187

Gross profit 261 345 693 565 766

Growth (%) 37.1 32.2 101.0 (18.4) 35.6Depreciation 93 105 155 210 231

Profit before tax 167 240 538 355 535

Growth (%) 56.1 43.5 124.2 (34.0) 50.5

Tax 62 98 161 88 136

Effective tax rate (%) 37.1 40.7 30.0 24.8 25.4

Net profit 105 142 377 267 399

Growth (%) 71.9 35.3 164.9 (29.1) 49.4

Extraordinary items (4) (3) (0) (3) -

Reported net profit 109 145 377 270 399

Growth (%) 76.7 33.2 160.4 (28.4) 47.8


Exhibit 12: Balance SheetY/E March (Rsmn) FY08 FY09 FY10 FY11 FY12

Equity 60 60 60 60 60

Reserves 548 680 1,039 1,286 1,664

Net worth 608 740 1,099 1,346 1,724

Short-term loans 231 430 626 601 530

Long-term loans 484 654 843 964 925

Total loans 715 1,084 1,469 1,565 1,455

Deferred tax liability 78 95 184 223 220

Liabilities 1,401 1,919 2,752 3,134 3,400

Gross block 1,334 1,941 2,855 3,529 3,991

Depreciation 434 536 638 845 1,076

Net block 900 1,405 2,217 2,684 2,915

Capital work-in-progress 203 186 67 12 11

Long-term Investments 1 1 1 1 1

Inventories 368 398 672 1,166 1,285

Debtors 156 197 209 232 230

Cash 42 27 10 21 10

Other current assets 69 153 272 277 300

Total current assets 635 776 1,162 1,697 1,825

Creditors 179 247 350 532 421

Other current liabilities 159 201 345 728 931

Total current liabilities 337 449 694 1,260 1,352

Net current assets 298 327 468 437 473

Total assets 1,401 1,919 2,752 3,134 3,400


Exhibit 11:Cash flow

Y/E March (Rsmn) FY08 FY09 FY10 FY11 FY12E

EBIT 289 405 752 614 712

Inc./(dec.) in working capital (25) (44) (157) 42 (47)

Cash flow from operations 264 361 595 656 665

Other income 17 26 41 61 9

Depreciation 93 105 155 210 231

Deferred liabilities (11) 17 89 39 (3)

Interest paid (-) (138) (191) (256) (320) (187)

Tax paid (-) (62) (98) (161) (85) (136)

Dividend paid (-) (36) (42) (60) (80) (21)

Extraordinary items 4 3 0 - -

Net cash from operations 130 181 403 480 559

Capital expenditure (-) (261) (593) (848) (622) (461)

Net cash after capex (131) (412) (444) (141) 98

Inc./(dec.) in short-term borrowing (45) 199 196 (25) (71)

Inc./(dec.) in long-term borrowing 159 170 189 121 (38)

Inc./(dec..) in preference capital - - - - -Inc./(dec.) in borrowings 114 369 385 96 (110)

Equity issue/(Buyback) - - - - -

Cash from financial activities 114 369 385 96 (110)

Others 23 28 43 56 0

Opening cash 36 42 27 10 21

Closing cash 42 27 10 21 10

Change in cash 6 (14) (17) 11 (11)


Exhibit 13: Key ratios

Y/E March FY08 FY09 FY10 FY11 FY12

Per share (Rs)

EPS 9.1 12.1 31.4 22.5 33.2Book value 50.7 61.6 91.6 112.2 143.7

Valuation (x)

P/E 52.2 39.2 15.1 21.0 14.2

P/sales 1.9 1.4 1.0 0.8 0.7

P/BV 9.3 7.7 5.2 4.2 3.3

EV/EBITDA 16.6 13.2 7.9 8.8 7.6

EV/sales 2.1 1.7 1.3 1.1 0.8

Return ratios (%)

RoIC 13.9 14.4 22.3 15.3 15.6

RoCE 15.8 16.2 25.3 18.5 17.7

RoE 19.4 21.5 41.0 22.1 26.0

Margins (%)

EBITDA margin 12.5 12.5 16.4 12.0 10.9PBIT margin 9.4 9.9 13.6 9.0 8.2

PBT margin 5.5 5.9 9.7 5.2 6.2

PAT margin 3.6 3.6 6.8 3.9 4.6

Turnover ratio

Asset turnover ratio (x) 2.2 2.1 2.0 2.2 2.5

Avg. inventory period (days) 50 40 52 70 60

Avg. collection period (days) 18 17 14 12 10

Avg. payment period (days) 24 25 27 32 20

Solvency ratios (x)

Debt-equity 1.2 1.5 1.3 1.2 0.8

Interest coverage 2.1 2.1 2.9 1.9 3.8

Growth (%)

Sales 29.6 33.3 35.9 23.9 26.1EBITDA 38.4 33.5 77.9 (9.2) 14.5

PAT 76.7 33.2 160.4 (28.4) 47.8



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5 Relaxo Footwears

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

HOLD 0-15%

SELL < 0%

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