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Relaxo Footwear 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Relaxo Footwear (Relaxo) reported lower-than-expected numbers for 3QFY2013. The revenue for the quarter stood at Rs.223cr, 9.2% higher yoy, but substantially lower than our expectation of Rs.250cr. This was due to the new initiative of product specific distribution not getting popular among dealers; hence the impact on sales. The EBITDA margin witnessed marginal contraction of 16bp yoy to 8.4% during the quarter which was lower than our expectation of 10.3%. Subsequently, the profit for the quarter stood flat yoy at Rs.6cr, declined by 41.0% on a sequential basis, and was 49.9% lower than our estimate of Rs.12cr.

Capacity expansion and brand revamp to drive volume: The company incurred a capex of Rs.60cr for the construction of a PU (Polyurethane) footwear plant which commenced in January, 2013. This development has increased the capacity by ~30,000 pairs per day totalling to 4.0 lakh pairs per day. In addition, the company plans to open 25-30 retail stores each year. Moreover, the company has successfully built a strong brand image with leading celebrities endorsing its brands; ie Salman Khan endorsing Hawaii, Katrina Kaif tied up for Flite and Akshay Kumar roped in to endorse the Sparx brand. We expect capacity expansion and aggressive marketing to complement each other and drive volume in the future.

Outlook and valuation: We expect Relaxo to post a revenue CAGR of 15.5% over FY2012-14E to Rs.1,148cr with an operating margin of 11.6% in FY2014E. The PAT is expected to grow at a CAGR of 29.8% to Rs.67cr for the same period. At the current market price, Relaxo is trading at 13.4x FY2014E earnings. We maintain our Buy recommendation on the stock with a revised target price of Rs.897, based on a target PE of 16x for FY2014E.