Institutional Equities

Relaxo Footwears
20 June 2012 Reuters: RLXO.BO; Bloomberg: RLXF IN
We had a meeting with Mr. Sushil Batra, chief financial officer of Relaxo Footwears (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 firstgeneration promoters and their sons and the involvement of professional talent is limited currently. RFL is in process of transforming itself from a promoter-operated entity to a professionally-run company. In order to frame strategies for sustainable growth, RFL appointed Accenture as its consultant. Key tasks assigned to Accenture are as follows: 1) Improve logistics and supply chain, 2) Provide inputs for new product launch, 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 frame right strategies on the issues stated above. Accepting key inputs with an open mind followed by successful implementation would be key things to watch out for as it can transform RFL from a manufacturing company to a branded retail company with strong financials, 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 net sales at a healthy 29.7% CAGR over FY07-12, at Rs8,648mn. As per the management, RFL would continue to grow 20-25% for the next couple of years following strong volumes and improving product mix. RFL appointed film stars Mr. Salman Khan in 4QFY12 and Mr. Askhay Kumar in 1QFY12 as brand ambassadors to promote its Relaxo brand (Hawaii slipper) and Sparx brand (sandal), respectively. The company 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, to increase its capacity and set up warehouse. Continues to operate with lean working capital: RFL operated with lean working capital, 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 in FY12. Following lower working capital requirement, RFL generated strong operating cash flow of Rs1,443mn over FY10-12, which supported capex of Rs1,930mn over the same period. (see Exhibit 5/6). As a result, debt remained stagnant at the same level since the past three years and the D/E ratio reduced to 0.8x in FY12 from 1.3x in FY10. As per the management, RFL would continue to operate with lean working capital in FY13/FY14 also. Strong revenue growth supported by a better product mix would improve operating cash flow, which would be sufficient for capex planned in FY13/FY14.
Y/E March (Rsmn) Net sales YoY (%) EBITDA EBITDA margin (%) Adjusted net profit EPS (Rs) EPS growth (%) PE ratio (x) Price/sales (x) EV/EBITDA (x) RoIC (%) RoCE (%) RoE (%) FY08 3,057 29.6 382 12.5 109 9.1 76.7 52.2 1.9 16.6 13.9 15.8 19.4 FY09 4,075 33.3 510 12.5 145 12.1 33.2 39.2 1.4 13.2 14.4 16.2 21.5 FY10 5,537 35.9 907 16.4 377 31.4 160.4 15.1 1.0 7.9 22.3 25.3 41.0 FY11 6,860 23.9 824 12.0 270 22.5 (28.4) 21.0 0.8 8.8 15.3 18.5 22.1 FY12 8,648 26.1 943 10.9 399 33.2 47.8 14.2 0.7 7.6 15.6 17.7 26.0

Not Rated
Sector: Footwear CMP: Rs473
Jignesh Kamani, CFA jignesh.kamani@nirmalbang.com +91-22-3926 8239 Saiprasad Prabhu saiprasad.prabhu@nirmalbang.com +91-22-3926 8172

Management Meet Update

Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities
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 the prices 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 landed price of EVA started rising and margins would be under pressure in 2Q/3QFY13. With a better product mix in favour of high value Sparx and other brands like Flite and also commissioning of warehouses, the margins are set to improve in FY14. Exhibit 1: Rising raw material costs lead to lower margins
(%) 18 16 14 11.7 9.1 12.5 16.4

Exhibit 2: Sharp improvement in margins in 4QFY12

(%) 16 14 15.7 14.6 14.9

14.3
12.9

13.6

14.1

12.5

12.0

12

10.2 8.2 7.7

11.0
9.1 8.4

11.4 8.4 9.1

12
10 8 6 4

10.9

10
8 6

8.1

7.9 6.2
4.2 2.2 0.8

7.0 5.6

7.7 6.6

6.8 3.6 3.6 3.9 4.6

5.6

5.0 2.2 2.8

5.0 2.1 2.9

2
0

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12
78

1.7

FY05

1.6 FY06

FY07 FY08 EBIDTA (%)

FY09

FY10 PAT (%)

FY11

FY12

EBIDTA (%)

PAT (%)

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 in FY12. Till now, the purpose of retail outlets was to create brand awareness which helped its dealer/retail network. However, the company is exploring opportunities to make retail outlets as a viable business model and grow it aggressively. The company had a sales/marketing team comprising 150 people in FY11 and in FY12 alone it added 700 people to boost retail sales. RFL competes with firms like Paragon, Liberty, Mirza International (owner of Red Tape shoe brand), Bata India etc. As per the management, Paragon is the market leader in South India, while RFL is the market leader in North India in slippers. The company is highly dependent on the northern region (including the northeast region up to Assam), which accounted for ~60% of its sales. With the commencement of new facilities and setting up of warehouses, the company is expected to improve its sales into other regions also in FY13/FY14. Exhibit 3: Sales volume growth
(mn pair) 90 80 70 60 59 64 68 22.9 84 23.2 87 (%) 25

Exhibit 4: Improving average realisation

(Rs/pair) 90 80 70 60 50 40 30 10.2 14.0 10.9 7.5 23.6 19.5 (%) 24 22 20 18 16 14 12

20
15 10

51

52 7.1

50
40 30 20 10 0 FY05 FY06 FY07 Sales volume FY08 FY09 FY10 FY11 Volume growth (2.6) (14.9)

5 2.7 0 (5)

2.8

7.1

20
10 36 FY05 39 FY06 44 FY07 Average realizaton 48 FY08 59 FY09 65 FY10

(10)
(15)

FY11

Realization growth

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

Relaxo Footwears

4QFY12
10
8 6 4 2 0

2.6

Institutional Equities
Exhibit 5: Improving operating cash flow
(Rsmn) 600

Exhibit 6: Gradual improvement in free cash flow

(Rsmn) 200
100 98 27

450
300 150 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E

FY05
(100) (200) (300) (313) (400) (412)
CFO CFI CFF

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

(150)
(300) (450) (600) (750)

(160)

(131)

(141)

(900)

(500)

(444)

Free cash flow

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 7: Better inventory turnover to improve working capital Exhibit 8: Lean working capital to support cash flow
(Days) 70 60 50 50 40 30 20 10 0 FY05 FY06 FY07 FY08 Inventories FY09 Debtors FY10 FY11 Creditors 35 25 32 28 23 21 24 18 25 17 27 20 41 39 40 52 70 60
(Days) 500 450 400 350 300 250 9.3 250 186 231 11.6

457
416

463

(%) 12 11 10

9.8
300

30 32

8.4
256

8.3

9 8 7 6.1 5.3 6 5

200 150 100 50 0 FY05

7.4

14

12

10
FY12

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Ex-cash working capital

As % of sales (RHS)

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 9: Comparative valuation

Mkt CMP Cap Comparison Relaxo Footwears Bata India 5.7 473 5.5 Net sales (Rsbn) 6.7 12.6 8.6 16.4 15.4 11.9 EBITDA (%) 12.0 13.3 CAGR (%) FY09-12 10.9 28.5 15.5 16.0 22.8 40.2 31.4 38.0 32.7 10.5 EPS (Rs) 22.5 14.8 33.2 15.1 22.1 76.7 P/E (x) 21.0 54.1 14.2 EV/EBITDA (x) 7.9 8.8 29.9 7.6 41.0 21.2 21.5 RoE (%) 22.1 26.0 26.0 29.2 (Rsbn) (Rs) FY10 FY11 FY12 FY10 FY11 FY12 Sales EBITDA PAT FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 51.6 803 10.9 36.3 39.5

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 background
RFL, incorporated in 1984, is the largest maker of slippers in India under the Hawaii brand with a capacity of 128mn 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 their sons. Mr. M.L. Dua has two sons, while Mr. Ramesh Dua has three sons. These seven persons from the promoter family look after various functions of RFL currently, with limited involvement of professionals. The company 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 which contributed 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 EVA slippers available in multiple colours and designs sold under the Flite brand, and 3) Premium sandal sold under 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.

Relaxo Footwears

Institutional Equities
Financials
Exhibit 10: Income statement
Y/E March (Rsmn) Net sales Growth (%) Raw material costs Staff costs Power and fuel cost Other manufacturing exp Selling and admin exp Miscellaneous exp Total expenditure EBITDA Growth (%) EBITDA margin (%) Other income Interest costs Gross profit Growth (%) Depreciation Profit before tax Growth (%) Tax Effective tax rate (%) Net profit Growth (%) Extraordinary items Reported net profit Growth (%) FY08 3,057 29.6 1,639 241 162 255 339 38 2,675 382 38.4 12.5 17 138 261 37.1 93 167 56.1 62 37.1 105 71.9 (4) 109 76.7 FY09 4,075 33.3 2,181 334 189 309 506 45 3,565 510 33.5 12.5 26 191 345 32.2 105 240 43.5 98 40.7 142 35.3 (3) 145 33.2 FY10 5,537 35.9 2,901 554 228 99 799 49 4,630 907 77.9 16.4 41 256 693 101.0 155 538 124.2 161 30.0 377 164.9 (0) 377 160.4 FY11 6,860 23.9 3,756 745 279 153 1,060 44 6,037 824 (9.2) 12.0 61 320 565 (18.4) 210 355 (34.0) 88 24.8 267 (29.1) (3) 270 (28.4) FY12 8,648 26.1 4,592 1,062 372 204 1,415 59 7,705 943 14.5 10.9 9 187 766 35.6 231 535 50.5 136 25.4 399 49.4 399 47.8

Exhibit 11:Cash flow

Y/E March (Rsmn) EBIT Inc./(dec.) in working capital Cash flow from operations Other income Depreciation Deferred liabilities Interest paid (-) Tax paid (-) Dividend paid (-) Extraordinary items Net cash from operations Capital expenditure (-) Net cash after capex Inc./(dec.) in short-term borrowing Inc./(dec.) in long-term borrowing Inc./(dec..) in preference capital Inc./(dec.) in borrowings Equity issue/(Buyback) Cash from financial activities Others Opening cash Closing cash Change in cash FY08 289 (25) 264 17 93 (11) (138) (62) (36) 4 130 (261) (131) (45) 159 114 114 23 36 42 6 FY09 405 (44) 361 26 105 17 (191) (98) (42) 3 181 (593) (412) 199 170 369 369 28 42 27 (14) FY10 752 (157) 595 41 155 89 (256) (161) (60) 0 403 (848) (444) 196 189 385 385 43 27 10 (17) FY11 614 42 656 61 210 39 (320) (85) (80) 480 (622) (141) (25) 121 96 96 56 10 21 11 FY12E 712 (47) 665 9 231 (3) (187) (136) (21) 559 (461) 98 (71) (38) (110) (110) 0 21 10 (11)

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 13: Key ratios

Y/E March Per share (Rs) EPS Book value Valuation (x) P/E P/sales P/BV EV/EBITDA EV/sales Return ratios (%) RoIC RoCE RoE Margins (%) EBITDA margin PBIT margin PBT margin PAT margin Turnover ratio Asset turnover ratio (x) Avg. inventory period (days) Avg. collection period (days) Avg. payment period (days) Solvency ratios (x) Debt-equity Interest coverage Growth (%) Sales EBITDA PAT FY08 9.1 50.7 52.2 1.9 9.3 16.6 2.1 13.9 15.8 19.4 12.5 9.4 5.5 3.6 2.2 50 18 24 1.2 2.1 29.6 38.4 76.7 FY09 12.1 61.6 39.2 1.4 7.7 13.2 1.7 14.4 16.2 21.5 12.5 9.9 5.9 3.6 2.1 40 17 25 1.5 2.1 33.3 33.5 33.2 FY10 31.4 91.6 15.1 1.0 5.2 7.9 1.3 22.3 25.3 41.0 16.4 13.6 9.7 6.8 2.0 52 14 27 1.3 2.9 35.9 77.9 160.4 FY11 22.5 112.2 21.0 0.8 4.2 8.8 1.1 15.3 18.5 22.1 12.0 9.0 5.2 3.9 2.2 70 12 32 1.2 1.9 23.9 (9.2) (28.4) FY12 33.2 143.7 14.2 0.7 3.3 7.6 0.8 15.6 17.7 26.0 10.9 8.2 6.2 4.6 2.5 60 10 20 0.8 3.8 26.1 14.5 47.8

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 12: Balance Sheet

Y/E March (Rsmn) Equity Reserves Net worth Short-term loans Long-term loans Total loans Deferred tax liability Liabilities Gross block Depreciation Net block Capital work-in-progress Long-term Investments Inventories Debtors Cash Other current assets Total current assets Creditors Other current liabilities Total current liabilities Net current assets Total assets FY08 60 548 608 231 484 715 78 1,401 1,334 434 900 203 1 368 156 42 69 635 179 159 337 298 1,401 FY09 60 680 740 430 654 1,084 95 1,919 1,941 536 1,405 186 1 398 197 27 153 776 247 201 449 327 1,919 FY10 60 1,039 1,099 626 843 1,469 184 2,752 2,855 638 2,217 67 1 672 209 10 272 1,162 350 345 694 468 2,752 FY11 60 1,286 1,346 601 964 1,565 223 3,134 3,529 845 2,684 12 1 1,166 232 21 277 1,697 532 728 1,260 437 3,134 FY12 60 1,664 1,724 530 925 1,455 220 3,400 3,991 1,076 2,915 11 1 1,285 230 10 300 1,825 421 931 1,352 473 3,400

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

Relaxo Footwears

Institutional Equities
Disclaimer
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Relaxo Footwears