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    43,431% returns in 15 years! This stock taking long strides through Covid crisis

    Synopsis

    The footwear stock has been a consistent performer and a multibagger.

    Multibagger-getty-1200Getty Images
    Shares of the company have rallied 30 per cent from the lows of March 24 against a 39 jump in the benchmark Sensex.
    A footwear stock has been taking long strides on Dalal Street these days, walking ahead of peers despite the Covid-19 disruption in the consumer space.

    Shares of the company have rallied 30 per cent from the lows of March 24 against a 39 per cent jump in the benchmark Sensex.

    This stock has been a consistent performer and a multibagger: up 53 per cent for last one year and 187 per cent in last five, 3,586 per cent for last 10 and 43,431 per cent for 15.

    Analysts say the stock should continue the ongoing momentum on hopes of faster recovery on the back of its strong product portfolio and improved distribution reach.

    This is Relaxo Footwears. SBI Mutual Fund, the country’s biggest fund manager by assets, held 3.98 per cent stake in the company as of March 31, 2020.

    The company posted 4.8 per cent YoY dip in March quarter net profit at Rs 51.80 crore as disruptions owing to store closures from mid-March due to the nationwide lockdown led to a substantial contraction in top line. Revenues declined 15 per cent YoY to Rs 540.58 crore.

    Brokerage firm Sharekhan has a ‘buy’ rating on Relaxo Footwears with a price target of Rs 825.

    Key drivers
    Sharekhan says demand for Relaxo hawaii chappals (around 40 per cent of Relaxo’s sales volumes) has started picking up. The company expects other segments to recover gradually after gradual opening of key markets. “Though FY2021 is expected to be subdued, we expect a strong recovery in FY2022,” the brokerage said.

    Footwear bar graphETMarkets.com


    The brokerage said the company’s low penetration in the southern market, lower per-capita consumption in India at 1.66 pairs per annum compared with 6-7 pairs for other developing markets and lower global export contribution at around 4 per cent can be some of the medium to long-term growth drivers.

    Other analysts say any slowdown in sales recovery or a spike in key input prices remain key near-term risks for the stock.

    In its latest conference call, the footwear major said raw material costs are likely to remain benign in Q1FY21 and gross margins may sustain at the FY20 levels of 57-58 per cent. Major raw materials for the company include ethylene-vinyl acetate (EVA) and polyurethane (PU), which are imported from seven to eight countries.

    Relaxo Footwear over the years has maintained balance sheet prudence with a controlled working capital cycle, healthy asset turns of 2.5 times and return on capital employed (RoCE) at over 20 per cent.

    “While earnings may get impacted negatively in the near term (particularly in the first half of FY21), Relaxo through its strong balance sheet and brand patronage is expected to tide over the current situation,” said ICICIdirect.com.

    The brokerage has a ‘hold’ rating on the stock with a revised price target of Rs 715 (Rs 775 earlier). Shares of the company traded at Rs 659 on June 24.

    Relaxo is planning cost cutting, mainly by trimming advertisement expenditure. It also plans to link contractual labour costs to production, and thereby, save on this front. At present, Relaxo’s fixed cost per month stands at Rs 35-40 crore, says Motilal.

    Size of the Opportunity
    The size of the footwear market in India is estimated at Rs 70,000 crore: leather footwear contributes Rs 30,000 crore and the balance comes from non-leather footwear. The market size of PU footwear is around Rs10,000 crore.

    With a market capitalisation of nearly Rs 16,000 crore, the stock traded at a price-to-earnings (P/E) multiple of 70.21 times against a 10-year average of 37.76 times. This suggests the stock may be hovering in the overvalued zone against its long-term averages.

    “We bake in revenue CAGR of 10 per cent and Ebitda growth of 15 per cent, respectively, for FY20-22E. The stock currently trades at rich valuations. But we remain structurally positive on it. We would prefer to await better entry points at lower levels from a long-term holding perspective,” ICICIdirect said.

    In a June 22 report, Motilal Oswal Financial Services said e-commerce contributes 8-10 per cent of the company’s revenue, which is expected to rise to 10-15 per cent in five years. The Sparx category is growing fast pace online.

    The brokerage said there is no difference in Ebitda margins between distributor channel and online channel.

    The stock had one ‘Outperform’, two ‘Hold’, two ‘Underperform’ and one ‘Sell’ ratings on the publicly available Reuters Eikon platform on June 23.

    Other footwear majors have underperformed Relaxo in last one year. Bata India shares are down 4.42 per cent since June 2019, while Liberty Shoes is up 12 per cent. Equity benchmark Sensex is down 11 per cent for the comparable period.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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