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Relaxo Footwears 3QFY2014 performance highlights and results update

February 3, 2014, Monday, 12:02 GMT | 08:02 EST | 17:32 IST | 20:02 SGT
Contributed by Angel Broking

Relaxo Footwears (Relaxo) reported a strong set of numbers for 3QFY2014, broadly in line with our estimates on the top-line and bottom-line front. The top-line clocked a 16.2% yoy growth to Rs.259cr, against our estimate of Rs.248cr. The gross margin for the quarter was flat on a yoy basis at 55.0%. However, with optimization of costs, the overall expense for the company is consolidating, leading to margin expansion. For the quarter, the operating margin expanded by 236bp yoy and came in at 10.8%. As a result, the net profit for the quarter came in at Rs.11cr, 74.5% higher yoy and in line with our estimate.
Profit to grow at a higher rate over FY2013-16E
On account of improving brand visibility resulting in strong demand, we expect Relaxo to post a revenue CAGR of 14.3% over FY2013-16E to Rs.1,502cr. The company is now in a consolidation phase with 1) optimized employee costs, 2) less requirement of investment in advertising as post the endorsement by the three Bollywood stars - Salman Khan (Hawaii), Katrina Kaif (Flite) and Akshay Kumar (Sparx), the company has successfully improved its brand visibility, 3) expected breakeven of most Relaxo Shopee by FY2015, and 4) improving product mix. The aforementioned factors will aid in expanding the operating margin of the company by 209bp to 12.5% in FY2016E. Additionally, with decent cash flow coming in, we expect debt repayment to start leading to lower interest cost and also with sufficient capacity expansion already in place; depreciation cost is expected to be flat. Resultantly, we expect the company’s profit growth to be almost the double of revenue growth and come in at Rs.98cr in FY2016, ie a CAGR of 29.9% over FY2013-16E.
Outlook and valuation: At the current market price, the stock is trading at 14.1x FY2016E earnings. With the consolidating business and increasing brand value, we are valuing the company at a higher multiple of 16.0x FY2016E earnings and recommend an Accumulate rating on the stock with a revised target price of Rs.262.