July 27, 2012

RELAXO FOOTWEARS LTD BUY Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs

Strong Buy
Relaxo Footwears Ltd (Relaxo) is India's second largest footwear company with presence across Buy
almost all segments of the industry. It has extensive manufacturing set-up with nine Hold
Reduce
manufacturing facilities having capacity to produce more than 370,000 pairs of footwear per day.
Sell
• Over the years the company has developed strong distribution network for its products. In Strong Buy – Expected Returns > 20% p.a.
Buy – Expected Returns from 10 to 20% p.a.
addition to 46,000 retailers and 700 distributors pan India, Relaxo also owns 154 outlets (Relaxo Hold – Expected Returns from 0 % to 10% p.a.
Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk
Retail Shoppe) exclusively for its branded footwares across Delhi, Rajasthan, Gujarat, Haryana,
Sell – Returns < 0 %
Punjab, Uttar Pradesh and Uttarakhand. It plans to add 25-30 stores each in FY13 and FY14
taking the number of outlets to more than 200.
• Post 2006, when the company launched its two flagship brands, Flite and Sparx, most of the
revenue growth happened on the back of robust performance shown by these brands. We
believe that these brands have tremendous potential to grow due to multiple factors such as STOCK DATA
BSE / NSE Code 530517 / RELAXO
celebrity endorsements, visibility through company owned stores, wide distribution network Bloomberg Code RLXF IN Equity
and competitive pricing. No. of Shares (Mn) 12
Sensex / Nifty 16640/ 5043
• Per capita consumption of footwares in India is lowest among BRIC countries at USD 7.2 (China PRICE DATA
USD 25.7, Russia USD 81.5 and Brazil USD 107.3). We believe that there is humongous growth CMP Rs (26th July 12) 515
Beta 0.6
opportunity for player like Relaxo as domestic footwear market is driven by growing fashion
Market Cap (Rs mn) 6,180
consciousness together with increased disposable income among India’s urban middle class, 52 Week High-low 576/ 230
which constitutes 45% of the market. Average Daily Volume 2,240
STOCK RETURN (%)
• In the last five years, bottom line CAGR has outpaced the topline. This implies that there is 30D 3M 6M 1Y
continuous improvement in realization due to great brand pull enjoyed by company’s brands. Relaxo 0.7 69.4 93.1 83.8
Sensex -1.6 -2.9 -2.6 -10.1
The company has consistently achieved ~20% RoE in the last 5 years with nil equity dilution. Nifty -1.5 -2.8 -2.2 -9.5
We believe that there are enough triggers for the company to command high valuation and its SHARE HOLDING PATTERN (%)
Promoter 75.0
value play on domestic consumption strength.
Institutional 1.5
Based on a standalone FY14 P/E multiple of 11.16, the fair value for the company works out Non Institutional 23.5
to Rs 616/share Total 100.0
Financial Snapshot 1 Year Price Performance (Rel. to Sensex)
Projections (Rs Mn) FY10A FY11A FY12E FY13E FY14E 190
Net Sales 5,537 6,860 8,647 10,216 11,941 Sensex Relaxo
Y-o-Y Growth % 36% 24% 26% 18% 17% 160
Operating Expenditure 4,630 6,037 7,704 9,015 10,527
EBIDTA 907 824 942 1,200 1,413
130
Y-o-Y Growth % 78% -9% 14% 27% 18%
Adjusted PAT 377 267 399 512 663
Y-o-Y Growth % 388% -29% 50% 28% 29% 100
EPS Rs 31.4 22.3 33.3 42.7 55.2
BVPS Rs 91.6 112.2 143.6 182.8 233.5 70
EBITDA % 16.4% 12.0% 10.9% 11.8% 11.8%
NPM % 6.8% 3.9% 4.6% 5.0% 5.5%
ROE % 34.3% 19.8% 23.2% 23.4% 23.6%
PER x 15.5 12.1 9.3
P/B Ratio 3.6 2.8 2.2
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 July 27, 2012

BUSINESS PROFILE
Relaxo Footwears Limited (Relaxo) is India's second largest footwear company with presence across almost all
Second largest footwear
segments of the industry. The company is promoted by Dua family who directly hold 75% equity of the company. It is the company with presence
second largest company by volume next to unlisted Paragon Footwear Ltd and also second largest by value next to Bata across almost all segments of
the industry
India Ltd.
Relaxo was mainly a marketing and trading company which focused on marketing and selling footwear
manufactured by its group companies like other entities till it came out with its IPO in 1995. With the help from funds raised
in IPO, the company started manufacturing footwears with focus on mass-market (rubber chappals/slippers) as a strategy to
penetrate the market as there was dearth of organized players in low-value-high volume mass-market.
Since 2005, the company focused on moving-up the value chain and building strong brands by launching
specialized light footwear’s such as shoes under the brands 'Flite' and 'Sparx'. As a strategy to create brand visibility across
the society, the company started rolling out its own Retail Stores named 'Relaxo Retail Shoppe' from the year 2006 onwards
and has also roped in Bollywood celebrities for brand endorsements.
It has extensive manufacturing set-up with nine manufacturing facilities having capacity to produce more than
370,000 pairs of footwear per day which adds up to more than 12cr pairs of footwear per year.

Unit Location Brand With the help from funds

raised in IPO, the company
RFL I Bahadurgarh (Haryana) Hawaii started manufacturing
RFL II Bahadurgarh (Haryana) Hawaii footwear’s with focus on
mass-market
RFL III Bhiwadi (Rajasthan) Hawaii
RFL IV Bahadurgarh (Haryana) Flite
RFL V Haridwar (Uttarakhand) Sparx Shoes & Sandals
RFL VI A Bahadurgarh (Haryana) Flite, Schoolmate, Casuals, Spark DIP
RFL VI B Bahadurgarh (Haryana) Flite, Schoolmate, Casuals, Spark DIP
RFL VII A Bahadurgarh (Haryana) Canvas, Sparx, Shoes, Sandals
RFL VII B Bahadurgarh (Haryana) Canvas, Sparx, Shoes, Sandals

Hawaii brand still contributes highest to the total revenue but over the last few years, this contribution has
declined as other brands like Flite and Sparx are performing very well after their launch in FY06. In terms of the source of
the revenue, sales via its vast distribution network, is still a major source with 90% contribution. The company is expanding
its own retail outlets and we believe that revenue via owned stores would be around 8% by FY14E. It has extensive
manufacturing set-up with
Brandwise Revenue - Revenue - FY11 nine manufacturing facilities
having capacity to produce
FY11 more than 370,000 pairs of
Direct Sales (via co
6.7% footwear per day
14% Hawaii 3.2% owned stores)
35% Exports (via
Flite
24% distributors)
Sparx
Domestic Sales (via
26% Other Brands 90.2% distributors)

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 July 27, 2012

INDUSTRY PROFILE
India produces nearly 3000mn pairs of footwear annually out of which 10% are exports. The country accounts for
nearly 15% of the total footwear output of the world which is over Rs 20,000mn pairs. The global footwear market which is The industry is highly
unorganized with 70% of the
growing at a CAGR of about 5 %, is currently estimated at about Rs 10.2tn is likely to reach Rs 12.34tn by 2015. market is with unorganized
The industry is highly unorganized with 70% of the market with unorganized sector and remaining 30% sector

organized. As per the ASSOCHAM report, Indian footwear industry is likely to reach about Rs 387bn by 2015 from the
current level of about Rs. 220bn growing at a CAGR of 15%.
The domestic footwear market is driven by growing fashion consciousness together with increased disposable
income among India’s urban middle class, which contributes about 45 per cent of overall footwear market, making India the
second largest global producer of footwear across varied segments after China.
The Indian footwear industry is divided into various segments – Mass (low-value footwear), Casuals, Sports/Active,
Premium Leather and Premium Non-Leather Footwears.

Industry Segment Volume Share The domestic footwear

market is driven by growing
7% 3% fashion consciousness
Casuals together with increased
7% 29%
Mass Men disposable income
Sports
22% 61% 58% Women
Premium Leather 13%
Premium Non-Leather Children/Kids

Driven by larger penetration into Tier II, III cities and growing rural market, various premium footwear brands are
foraying into India’s non-metro market which holds enormous growth potential and account for about 55% of the overall
footwear industry. Relaxo has been focusing on this market and increased its efforts by creating deep reaching distribution
network and brand awareness by celebrity endorsements and its own chain of retail stores.
In the non-leather footwear segment, there is huge demand for slippers as they are cheap, convenient and suit
the needs of the rural consumer and can be used as multi-purpose footwear. Rural India accounts for about 60 percent of
Per capita consumption of
slippers manufactured in Indian footwear market. Relaxo has a strong presence in this segment with its brand Hawaii. footwares in India is lowest
among BRIC countries at USD
Per Capita Consumption - USD 7.2
Per capita consumption of footwares in India is
120 107.3
lowest among BRIC countries at USD 7.2 (China USD 25.7,
100 81.5
80 Russia USD 81.5 and Brazil USD 107.3). In our opinion this is
60 a very huge opportunity which will drive the revenue
40 25.7
20 7.2 growth for the industry as a whole and Relaxo is better
0 placed to take advantage of this opportunity.
India China Russia Brazil

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 July 27, 2012

INVESTMENT RATIONALE
Strong brands driving revenue growth
Post 2006, when the company launched its two flagship brands, Flite and Sparx, most of the revenue growth
By successfully
happened on the back of robust performance displayed by these brands. Until 2006, the company was predominantly a low- establishing 'Flite' and
value mass-product 'Hawaii' company. By successfully establishing 'Flite' and 'Sparx' brands in the marketplace, Relaxo has 'Sparx' brands in the
marketplace, Relaxo has
cornered a respectable market share in specialized high-value products. cornered a respectable
Share of 'Flite' and 'Sparx' brands to total sales of the company improved considerably over the last 5 years from 0% market share in
specialized high-value
till FY06 to ~50% (24% Sparx and 26% Flite) in FY11. Similarly, share of low-value 'Hawaii' brand to total sales of the company products
decreased considerably from ~70 % in FY06 to 35 % in FY11.

Fig in mn FY08 FY09 FY10 FY11 We believe that these brands still have
Hawaii 151 183 227 245 tremendous potential to grow as they are still functioning
Y-o-Y growth 21% 24% 8%
at lower base. The company is increasing its focus on
Flite 98 120 161 178 creating brand awareness through marketing campaign
Y-o-Y growth 22% 34% 11% and rolling out its own retail stores. The strong inherent
fundamentals of the industry will also aid the growth of
Sparx 13 31 85 168
Y-o-Y growth 138% 174% 98% these brands as organized sector increases its share.

CAGR growth rate of

Growth in EBITDA and PAT outperforming the revenue growth EBITDA and PAT has
We have observed that CAGR growth rate of EBITDA and PAT has outpaced the revenue growth on consistent basis. outpaced the revenue
growth on a consistent
For the last 3, 5 and 10 years, CAGR growth of EBITDA and PAT has outpaced the revenue growth with wide margins. We basis
believe this has happened on the back of successful position of its two brands post 2006 which resulted in improved
realization and great brand pull enjoyed by Flite and Sparx.

Once the brands are established and the capacities CAGR Growth
are in place, it will be easier for the company to generate the 3 Years 5 Years 10 Years
cash in the growth phase of a brand. We believe that this out Revenue 28.5% 29.6% 19.0%
performance in the EBITDA and PAT front will continue due to EBITDA 29.7% 32.0% 22.4%
PAT 41.0% 45.5% 25.7%
small base of these brands and growth potential these brands
Relaxo continues to invest in the technology and has launched new product in FY12, Flite-PU Fashion, based on
latest PU technology, which will ensure that sales remain robust in the years to come. The prices of key raw
material, EVA (Ethylene
Falling raw material prices vinyl acetate) and rubber
have shown declining
The prices of key raw material, EVA (Ethylene vinyl acetate) and rubber (53% of the total revenue in FY12) have trend in the first two
shown declining trend in the first two months of Q1FY13, where EVA and rubber prices have declined by 33% and 13% months of Q1FY13

respectively. The prices of both these raw material are expected to be stable in the rest of the fiscal year which will help the
company to improve its margins in the near term.

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 July 27, 2012

INVESTMENT RATIONALE
Strong distribution network
Over the years, the company has developed strong distribution network for its products. In addition to 46,000
retailers and 700 distributors pan India, Relaxo also owns 154 outlets (Relaxo Retail Shoppe) exclusively for its branded
In addition to 46,000
footwares across Delhi, Rajasthan, Gujarat, Haryana, Punjab, Uttar Pradesh and Uttarakhand. It plans to add 25-30 stores each retailers and 700
in FY13 and FY14, taking the total number of outlets to more than 200. distributors pan India,
Relaxo also owns 154
We believe that this distribution network will play a crucial part in taking the company in the next phase of growth outlets (Relaxo Retail
where the company will establish itself as a major brand player and tries to move up the value chain. Shoppe) exclusively for
its branded footwares
FY08 FY09 FY10 FY11 FY12 In our opinion the
Direct Sales (via co owned stores) 160 240 330 460 600
strategy of expanding the owned
% of total sales 5.2% 5.9% 5.9% 6.7% 6.9%
outlet will give the company
Exports (via distributors) 15 70 110 220 300 brand visibility and also help in
% of total sales 0.5% 1.7% 2.0% 3.2% 3.5%
launching new products in future.
Domestic Sales (via distributors) 2895 3789 5137 6236 7746 We expect that the sales from the
% of total sales 94.3% 92.4% 92.1% 90.2% 89.6% company owned stores to reach

Total Revenue 3070 4099 5577 6916 8646 8% of the total sales by FY14
Consistent performer
The company has consistently achieved ~20% RoE in the last 5 years with nil equity dilution. The company has high
promoter holding of 75% and has consistently performed on revenue growth front. Relaxo has track record of exceptional The company has
consistently achieved
growth in terms of revenue and PAT which grew at 5 year CAGR of 29.63% and 45.54% respectively. ~20% RoE in the last 5
We believe that there is clear visibility of revenue growth of about ~20% per annum for the next 2 to 3 years and years with nil equity
dilution
there are enough triggers for the company to command high valuation and its value play on domestic consumption
strength.
Risk & Concerns
• Profit margins of the company are highly dependent on the key raw material prices such as EVA and rubber. Any sudden
spike in the prices of these raw materials will impact the profitability as it did in FY11 when EVA and rubber prices went up
by 40% and 56% respectively.
• In the last five years, the company has accumulated debt of around Rs 1,850mn in its books, but we take comfort from the
fact that its fixed asset base has increased considerably to ~Rs 2,900mn and the company has managed all the expansion
without any equity dilution.
• The company outsources some of the products from companies in which promoters have interest. This poses related party Profit margins of the
transaction risk, however as the company expands its manufacturing base, this dependence is reducing and the company company are highly
dependent on the key
also started outsourcing from some non related companies from China. raw material prices such
• The company employs more than 8,000 workers across its manufacturing facilities which might pose a wage hike threat or as EVA and rubber

labor related issues.

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 July 27, 2012

BUSINESS PERFORMANCE
In Q4FY12, revenue grew by 21% on Y-o-Y basis to Rs 2,417mn and PAT grew by 234% in the same period to Rs
188mn. This huge increase in PAT is on the back of normalization of raw material prices which unexpectedly rose in FY11, In Q4FY12, revenue grew
by 21% on Y-o-Y basis to Rs
drastically impacting the profitability of the company.
2,417mn and PAT grew by
The company plans to raise its production capacity by 30,000 units by Q4FY12 from current 370,000 units to 234% in the same period to
Rs 188mn
400,000 units. The company also plans to roll out 25-30 stores each in FY13 and FY14. Recently the company has appointed
consulting firm Accenture to improve its supply chain, new product launch, expansion of retail operations and
implementation of SAP. We expect all these measures will streamline the existing operations and help in revenue growth
going forward.

14,000
Yearly Performance 18% EPS & BVPS
250
12,000 15%
10,000 200
12%
Rs in mn

8,000 150
9%
Rs

6,000
4,000 6% 100
2,000 3% 50 The company plans to raise
0 0% its production capacity by
0 30,000 units by Q4FY12
FY10 FY11 FY12 FY13E FY14E
FY10 FY11 FY12 FY13E FY14E from current 370,000 units
Revenue EBITDA Margin PAT Margin EPS BVPS to 400,000 units

Peer Comparison

We compare Relaxo footwear with other major listed footwear companies such as Bata India and Liberty Shoes.
Bata India is the largest player in the industry with superior profit margins and return ratio owing to its vast ground
presence in the form of more than 1,200 retail outlets across India.
Even though Relaxo is second only to Bata in terms of volume, it is trading at significant discount to Bata India.
We believe that retail expansion and consistent performance from its flagship brands will reduce the valuation gap between
them.
We also believe that Relaxo deserves to trade at premium valuation compared to Liberty Shoes as it
comparatively has a bigger and efficient scale of operations with better EBITDA and PAT margins.
We believe retail expansion
Peer Group Comparison and consistent performance
from its flagship brands will
EBIDTA PAT
Revenue P/E P/B CMP FV reduce the valuation gap
Companies Margin Margin ROE % between Relaxo and Bata
(Rs. mn) (x) (x) (Rs.) (Rs.)
(%) (%) India
Relaxo 8,647 11% 4.6% 23.2% 15.5 3.6 515 5
Bata India 15,699 15% 9.5% 32.9% 37.7 10.6 896 10
Liberty Shoes 3,324 8% 3.1% 7.4% 15.0 1.1 96 10
FY12 figures / CY11 fig for Bata India

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 July 27, 2012

VALUATION
We expect Relaxo’s revenue to grow at a CAGR of 17.5% to Rs 11,941mn from FY12-FY14E and further estimate
that PAT would grow at a CAGR of 28.8% to Rs 663mn. PAT margins would show a significant improvement on the back of We expect Relaxo’s revenue
falling raw material prices, retail expansion and better performance from its brands which command higher profit margins. to grow at a CAGR of 20% to
Rs 11,941mn from FY12-
At current market price, the stock is trading at 9.3x based on estimated EPS of Rs 55.2 for FY14E. The stock was FY14E and PAT would grow
trading at 2 year forward P/E multiple of 1.7x in FY09 which expanded to 5.6x in FY12. The P/E multiple expanded on the at a CAGR of 34% to Rs
663mn
back robust performance from the company in the form of revenue growth and profitability. Applying the same growth in
the P/E multiple it comes to 12.4x in FY14E. However, looking at the company’s vulnerability due to high fluctuation in the
raw material prices we apply 10% discount to the multiple and reach a target multiple of 11.16x.
Based on a standalone FY14 P/E multiple of 11.16, the fair value for the company works out to Rs
616/share.

Profit & Loss Statement

Particulars (Rs Mn) FY10A FY11A FY12E FY13E FY14E
Net Sales 5,537 6,860 8,647 10,216 11,941
Operating Expenditure 4,630 6,037 7,704 9,015 10,527
Depreciation 155 210 231 371 395
EBIT 752 614 711 829 1,018
EBIT Margin (%) 14% 9% 8% 8% 9%
Interest Expenses 256 320 187 177 206
Other Income 41 61 11 31 72
Profit Before Tax 538 355 535 683 883
Less: Tax 161 88 136 171 221
Adjusted PAT 377 267 399 512 663
PAT Margin (%) 7% 4% 5% 5% 6%
ROE (%) 34% 20% 23% 23% 24%
EPS (Rs) 31.4 22.3 33.3 42.7 55.2
BVPS (Rs) 91.6 112.2 143.6 182.8 233.5

Valuation Ratios (x) FY12E FY13E FY14E

PER x 15.5 12.1 9.3
P/B Ratio 3.6 2.8 2.2

Ratio Analysis
Particulars (Rs Mn) FY10A FY11A FY12E FY13E FY14E

Current Ratio 1.7 1.8 1.8 2.2 2.4

Cash Ratio 0.0 0.0 0.0 0.2 0.6
Interest Coverage Ratio 0.3 0.5 0.3 0.2 0.2
Debt Equity Ratio 1.3 1.4 1.0 0.9 0.7
ROCE 21% 14% 15% 15% 16%

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 July 27, 2012

Balance Sheet
Particulars (Rs Mn) FY10A FY11A FY12E FY13E FY14E
Application of Funds
Fixed Asset (Net) 2,217 2,684 2,913 3,192 3,097
CWIP 67 12 12 12 12
Investments 1 1 1 1 1
Inventories 672 1,166 1,285 1,627 1,902
Sundry Debtors 209 232 230 309 361
Cash & Bank Balance 10 22 7 242 745
Loans & Advances 272 205 205 205 205
Total 3,447 4,322 4,653 5,588 6,322

Sources of Funds
Share Capital 60 60 60 60 60
Reserves & Surplus 1,039 1,286 1,664 2,134 2,742
Total Debt 1,469 1,855 1,768 2,064 1,952
Net Deferred Tax 184 223 223 223 223
Current Liabilities 648 848 855 1,015 1,244
Provisions 46 49 83 92 102
Total 3,447 4,322 4,653 5,588 6,322

Cash Flow Statement

Particulars (Rs Mn) FY10A FY11A FY12E FY13E FY14E
Profit Before Tax 538 356 535 683 883
Total Adjustments 414 534 418 548 602
Change in Working Capital (153) (215) (76) (253) (88)
Direct Taxes Paid (80) (84) (136) (171) (221)
Others 0 0 0 0 0
Cash Flow from Operations 719 592 741 808 1,176

Net Investment in GFA (925) (627) (460) (650) (300)

Sale of Fixed Assets 77 1 0 0 0
Cash Flow from Investment (848) (625) (460) (650) (300)

Proceed from LT Borrowings 385 386 460 650 300

Proceed from ST Borrowings 0 0 0 0 1
Repayment of the L T Borrowings 0 0 (547) (354) (413)
Repayment of the S T Borrowings 0 0 0 0 0
Dividend Paid (18) (21) (22) (42) (55)
Interest Paid (256) (320) (187) (177) (206)
Cash Flow from Financing 112 45 (296) 77 (373)
Net Cash Flows (17) 12 (15) 235 503
Op bal of cash 27 10 22 7 242
Transferred to B/S 10 22 7 242 745

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 July 27, 2012
Board Of Directors

Director Name Current Position Description

Chief Executive Officer, Managing Director, Mr Ramesh Dua is Chief Executive Officer, Managing Director, Executive Directorof the company. He is 'Rubber Technologist' and a
Ramesh Dua
Executive Director Licentiate of the Plastic and Rubber Institute of London (L.P.R.I.)

Sushil Batra Chief Financial Officer Mr Sushil Batra is CFO of the company.

Mr. Nikhil Dua is Whole Time Director of Relaxo Footwears Ltd. He is a graduate and has done course from International School of
Nikhil Dua Whole Time Director Modern Shoe- making (Czech Republic). He has an experience of 15 years in the shoe division of the Company. He has knowledge
with regard to product mix and market development in respect of footwear industry.

Mr. S. K. Sapra is Non-Executive Independent Director of Relaxo Footwears Ltd. He is a practicing Chartered Accountant. He is having
S. Sapra Non-Executive Independent Director
more than 50 years of experience in Finance, Accounts and Management.

Mr. Pankaj Shrimali is Non-Executive Independent Director of Relaxo Footwears Ltd. He is a fellow member of the Institute of
Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost and Works Accountants of India. He has
Pankaj Shrimali Non-Executive Independent Director over 25 years of experience in area of Finance, Accounts, Secretarial, Corporate Management, Legal & Corporate consultancy services,
Strategic Management, Investment Banking for reputed corporate houses etc. He is also Director in International Amusement
Limited, Network Limited and Kritikal Solutions Private Limited.

Gaurav Dua Executive – Vice President (Marketing) Mr Gaurav Dua is VP Marketing. He is MBA (Marketing) from University of Wales, Cardiff (U.K.)

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