If you wake up Prof Sanjay Bakshi, the authority on value investing, in the middle of the night and ask him for his all-time favourite stock, he is likely to blurt out the name of Relaxo Footwears.
Why? Because Relaxo is a glittering testament to the Prof’s mastery in turning abstract academic theories into real life stock picks. Since September 2013, when the Prof waxed eloquent about Relaxo’s virtues in the form of high RoE’s, strong brand, low debt etc, the stock is up an eye-popping 571%. This translates to a staggering CAGR of 114%.
The Prof is so fond of Relaxo Footwears that he uses it as a prop to illustrate various esoteric concepts of investment theory. For instance, the Prof formulated the hitherto unheard of theory, using Relaxo as an example, that wafer-thin profit margins are actually a “deep and impenetrable moat” because competitors are discouraged from barging in and taking away the loot.
The Prof also explained that stocks like Relaxo are a good investment because their businesses have “fewer moving parts” and the chances of something going wrong are lesser.
Sumir Chadha, the whiz-kid founder of Westbridge Capital a.k.a Jwalamukhi Holdings, is, like the Prof, a stickler for quality. He is a staunch believer in the principle that one must never compromise on the quality of a stock in terms of its management and business outlook even if one has to pay a pretty penny for the same.
In an exclusive and rare interview, Sumir Chadha explained the investment philosophy of Westbridge/ Jwalamukhi in pithy terms: “We look for high quality franchisee businesses that can generate superior return on capital over the long term. For us, that means companies with unfair advantages. Typically, we look for a very strong brand with a great reputation, a very strong distribution network, the type of things that make it very hard for a competitor to come in and eat their lunch.”
Sumir Chadha also revealed that his Fund has a preference for stocks with high promoter holding and low liquidity. This leads to a “scarcity premium” and results in a “mis-pricing” of the stock, he emphasized.
Westbridge/ Jwalamukhi’s portfolio already consists of several top-quality mid-cap stocks like Kajaria Ceramics, Greenply Industries, Astral Poly Technik, Cera Sanitaryware, La Opala RG, DFM Foods, Mayur Uniquoters etc.
Relaxo Footwears fits in perfectly with Westbridge/ Jwalamukhi’s investment criteria. Apart from the all the usual aspects of high RoE, strong brand, low debt etc, the Company has the highest possible promoter shareholding of 75%. In addition, a few big-ticket investors hold a big chunk of the shares. This means that there is only a trickle left for the public to fight for.
So, it is no surprise that Jwalamukhi did not hesitate for even a second when the opportunity to buy a truckload of Relaxo came through. On Monday, 4th April, they bought 18,66,277 shares at Rs. 424.89 each and paid Rs. 79.29 crore without even batting an eyelid.
Relaxo’s business prospects have been thoroughly examined by Sharekhan. Sharekhan explains that Relaxo’s “double digit growth is commendable and signifies the strong on-ground execution and brand salience efforts”. It also emphasizes that “Relaxo’s strong presence in the lucrative mid-priced footwear segment (through its top-of-the-mind recall brands like Hawaii, Flite and Sparx) along with its integrated manufacturing set-up, lean working capital requirement and vigilant management puts it in a sweet spot to cash in on the strong growth opportunity unfolding in the footwear category due to a shift from unbranded to branded products.”
In the light of this expert analysis, one can confidently say that the lucky shareholders of Relaxo Footwears can rest assured that more mega gains will effortlessly flow into their coffers in the years to come!