Relaxo Footwears, an ambitious upstart footwear company, has posted disappointing results amidst tight economic climate and increased competition
We had written about Relaxo Footwears (Relaxo) in our Moneylife issue dated 4 October 2012 (http://www.moneylife.in/article/relaxo-footwears-chalta-rahe/28865.html). The company has announced its third quarter results for fiscal 2013 and it was disappointing. Net sales were up only 9% year-on-year (y-o-y) for the December 2012 quarter, at Rs224.19 crore when compared to the corresponding quarter last year.
Likewise, operating profit rose only 7% y-o-y to Rs19.94 crore for the quarter compared to Rs18.70 for the year ago period. However, net profit crept into negative territory, only barely, when it was down nearly 1% at Rs5.97 crore.
A deeper analysis into the numbers revealed interesting facts about Relaxo’s quarterly results. We examined the pattern of net sales and found out that it was the first time the company has reported single digit growth in net sales (9%) in more than three years. This is less than the three-quarter y-o-y average growth rate of 15%. Its operating profit numbers are worse still, growing far less than the three-quarter y-o-y average growth rate of 28%. Despite this, the scrip is quoting at somewhat premium rates after its price shot up substantially over the last one year. The market capitalisation is quoting at over 12 times its operating profit while return on equity is an impressive 29%.
Relaxo Footwear owns some of the well known brands such as Flite, Sparx, Hawaii, and competes with the bigger likes of Bata and Liberty. It has roped in two Bollywood stars—Katrina Kaif and Akshay Kumar—to endorse its brands, hoping that it would give much-needed visibility and boost to its brand names. One could call this company an upstart, with the way it is approaching the marketplace and also with its ambitious advertising. It has managed to take a commodity product—footwear—and make it not only appealing but also affordable to the aspiring middle-class. Unfortunately, as the economic climate is challenging, many middle-class customers are putting off discretionary spends and footwear is no exception.
We had recommended this stock a few times but we felt it was overvalued, and still is. We felt the stock was worth buying at Rs647. Right now it is Rs770, down nearly 5% at time of writing this piece.
Check here for our analysis on other company results.
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