Prof Sanjay Bakshi, the authority on value investing, is very reticent when it comes to talking about stocks. If you ask him any stock specific question, he will mumble incoherently and fob you off.
However, there are a few stocks that the Prof loves talking endlessly about. These stocks form the bedrock of “case studies” or “lectures” that the Prof prepares for his beloved students.
The Prof’s lecture note dated 20th September 2013 on Relaxo Footwears is a textbook example of how one should write a research report. The Prof has gone into extreme detail about the business model of the company and conducted an in-depth analysis of its strengths and weakness. The Prof has also anticipated the numerous queries that may arise in the mind of an alert reader and answered them with aplomb.
Interestingly, this is probably the first time that the concept of wafer-thin margins, which a layman would regard as a bane, was treated by the Prof as a “moat” for Relaxo Footwears. The Prof explained that the wafer-thin margins that Relaxo makes (Rs. 4.48 per pair) discourages competitors from barging into the field and enables Relaxo to enjoy a virtual monopoly. He also pointed out that the business is a “difficult” one and that this providers an “entry barrier” against pesky intruders.
The other interesting aspect is that the Prof was uncharacteristically ebullient about the prospects of Relaxo. “What I love about Relaxo is its growth potential”, the Prof exclaimed. He added with emphasis “I am confident that Relaxo will continue to grow faster than the market by taking market share from the unorganised players – just as it has been doing over the last several years”.
Well, it is not every day that one sees such unbridled confidence from a stock researcher. Coming as it did from one with a proven track record for finding winning stocks, it was a rare opportunity and we ought to have grabbed massive truckloads of the stock without a second’s hesitation.
Prof Sanjay Bakshi’s confidence in Relaxo Footwears was totally justified. On that day (20th September 2013), the stock was quoting at Rs. 75 (adjusted for split). Today, it is at Rs. 519. This means that incredible gains of nearly 600% are on the table in the short period of about 22 months.
Now, the important part is about the future. It has to be noted that on the day that the Prof sent out the lecture note, Relaxo was already a super-duper multibagger with an incredible 41x return over the past ten years. However, this did not deter the Prof from making the recommendation. At that stage, I had asked the pertinent query “What is to prevent the stock from showing the same performance all over again over the next ten years?”
Today, 22 months after that date, the same question is still relevant. It is true that 6x returns are on the table. However, Relaxo is still a mid-cap with a market cap of (only) Rs. 6200 crore and annual sales of (only) Rs. 1206 crore as of 31st March 2014. According to the Prof’s note, the size of the Indian footwear market is growing at 15% CAGR and expected to be Rs. 38,700 crore by 2015. The Prof also pointed out that the number of pairs sold by Relaxo (100m at that time) was “peanuts” compared to India’s population of 1.2 billion. He also explained that if Relaxo decides to go the ‘Havaianas’ route, the “sky is the limit” for realizations.
In fact, the Prof anticipated the question about Relaxo’s future prospects and also answered it:
“How big can Relaxo become? That’s a speculative question. It would be over-optimistic to take recent high growth rates and project them into eternity but I believe that the company’s ability to sell 250 million pairs of footwear a decade from now (at higher realisations and higher margins) is well within its reach.”
As of 31st March 2014, Relaxo Footwears sold 107.784 million pairs. If the Prof’s projection of 250 million pairs (with higher realizations and margins) of sales comes true, we may be talking of another 6-bagger over the next few years!