Prof. Sanjay Bakshi is an authority on value investing. However, unlike other value investors who go scrounging in the bushes looking for “deep value” bargains and are allergic to high P/E stocks, Prof. Bakshi actively seeks high growth companies on the premise that they have a “moat” which will enable them to churn out stellar results in the future as well.
In fact, Prof. Bakshi wrote two illuminating pieces (1 & 2) in which he explained that even if we had bought high-quality high-P/E stocks like Nestle, Asian Paints and Pidilite at their peak valuations, we would have still made a fortune over a period of time. In contrast, if we had obsessed over low-quality low P/E stocks, we would have lost good money over a period of time.
In September 2013, Prof. Bakshi wrote a research report on Relaxo Footwears. Like his other reports, this report is also striking for its clarity and simplicity. What is also remarkable is the unbridled confidence that the Prof shows in the stock.
The Prof explained that Relaxo’s moat is in its strong brand image and wide-spread distribution network which a competitor would find difficult to replicate. In an interesting twist, the Prof. also argued that the wafer-thin margin earned by Relaxo (which would have turned off most investors) is actually a “moat” because it deters competitors from barging in. This is probably the first time that the bane of low profit margins is seen as a boon!
Prof. Bakshi left no stone unturned to underline his bullishness about Relaxo Footwears. “What I love about Relaxo is its growth potential” he exclaimed and added that “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”.
Relaxo has lived up to the high expectations placed on it. In the 16th months that have elapsed since Prof. Sanjay Bakshi’s recommendation, the stock is up 300%+%, from Rs. 145 to Rs. 650.
The interesting part is that in March 2014, when the stock had surged to Rs. 224, Prof. Bakshi issued some sort of a “reminder” to his vast legion of fans suggesting that it is still not too late to tuck into Relaxo. He applied “Charlie Munger’s framework to Relaxo Footwers” and said “if both of my assumptions about growth in business volume and average realization materialize, then in 2023 Relaxo will deliver revenues of about Rs 57 billion as opposed to Rs 10 billion in 2013“.
Prof Bakshi literally put the writing on the Wall and the even the dullest of his fans would (should) have taken the hint and rushed to buy the stock.
|Relaxo Footwears Ltd – Financial Overview|
|Figures in Rs crore||2014||2013||2012|
|Profit After Tax||65.64||44.81||39.90|
|Relaxo Footwears Ltd – Ratios||2014||2013||2012|
|Figures in Rs crore||2014||2013||2012|
|Operating Margin (%)||12.19||10.91||11.01|
|Net Profit Margin (%)||5.36||4.41||4.61|
|Return on Capital Employed (%)||25.36||21.25||21.41|
|Return on Net Worth (%)||26.74||23.17||25.99|
It may not be too late to buy Relaxo if you go by IIFL’s latest report. IIFL has recommended a buy on the basis that:
“Relaxo Footwears Ltd (RFL) has tasted success by roping in celebrities (like Salman Khan, Akshay Kumar, Katrina Kaif etc.) to build its brand image and increase product visibility even as competition has stayed away from investing in celebrity endorsement. As a result, revenues have tripled in last five years in a fragmented footwear market. RFL has a strong differentiated portfolio of slippers and shoes catering to the middle income population. Most organized players are either absent or have limited product offerings in this segment of the value chain which has further boosted sales. Consequently, volumes and realizations have witnessed ~16%/23% cagr over FY09-14. We expect RFL to maintain the growth momentum and have built in ~23% revenue cagr over FY14-17.
Strong financial and attractive valuations:
Relaxo Footwears has been generating strong operating cashflows which has enabled it to invest in new manufacturing and warehousing facilities. RFL’s ROE/ROCE has improved from ~22%/17.5% to ~27%/26% during FY11-14. With earnings expected to clock ~39% cagr over FY14-17, return ratios are also likely to improve to ~32%/42%. Gearing remains comfortable at 0.6x. The stock trades at an attractive P/E of ~22x on FY17 earnings while the industry trades in the range of 25-35x. Recommend BUY.”
Another great resource to understand Relaxo Footwears’ potential is the Company’s “Q3 FY2015 Performance Presentation” which provides a crisp update as to the past performance and the future potential.
We must also remember that the basic premise on which Prof. Sanjay Bakshi made his recommendation, namely, that of a strong brand, market dominance, immense demand for the product from a burgeoning population etc, continues unchanged today.
Meanwhile, we also need to keep an eye of Prof. Bakshi’s latest recommendation, Vaibhav Global. The Prof has called the stock “highly profitable, cash generating, extremely well financed, and dominant business in its space”. He emphasizes that he has bought the stock “after deep thought”.