Dolly Khanna dumped the stock in its prime while Saurabh Mukherjea recommended a buy
Dolly Khanna is well known for her perceptiveness. There are a number of stocks like Hawkins Cooker, CERA, Nandan Denim, RS Software, Avanti Feeds etc where she entered at the right time, milked multibagger gains and dumped the stock when the price had peaked. (see Dolly Khanna Escapes Hawkins Cookers’ Carnage Even As Punters Rue Their Luck).
In Relaxo, Dolly held a massive consignment of 522,815 shares (pre 1:5 split). When she exited the stock, there was a flurry of criticism amongst her followers that the exit was premature and that she had left nearly Rs 100 crore on the table. (See Dolly Khanna lost colossal fortune of Rs. 100 crore by prematurely dumping Relaxo Footwear from portfolio)
At about that time, Saurabh Mukherjea had recommended Relaxo on the basis that it is a category dominator and a compounding stock.
He had given strong logic to support his buy recommendation.
“A category dominator like Relaxo has a bright future and there is very little dependence between Relaxo’s fortunes and the latest GDP print or the NBFC crisis and so on. These sort of stocks provide opportunities which does not really depend on the outcome of RBI policy or elections and so on. You buy companies which are category dominators and you compound with them over several years,” he had said.
The stock was also recommended by Prof Sanjay Bakshi on his blog on the basis, inter alia, that it has a “moat” and high “entry barriers” that would prevent competition from destroying Relaxo’s ability to earn high ROE.
Relaxo has lost market share to rivals like Campus. Its’ longevity scores and free cash flow growth forecasts are reduced leading to exit from Rising Giants portfolio
Relaxo’s sluggish stock price was giving a clear indication that all is not well with the stock. The stock has gained only 175% over 5 years and has lost 38% on a YoY basis.
Saurabh Mukherjea has confirmed in his latest newsletter this is because the Company has lost market share in two major categories – open footwear (specifically PU & EVA segment) and sports shoes.
In the open footwear (~40% of revenues for Relaxo are from the PU & EVA segment), channel checks suggest that in the last 6-9 months, Relaxo had taken significant price hikes on its key products due to the sharp increase in the prices of key raw materials. While this was done to protect margins, it had a negative impact on volumes in a category where the customer is particularly price-sensitive (due to the low-ticket nature of consumption). On one hand, the price differential gave smaller players an opportunity to take up the bottom end of the market by offering cheaper footwear by using low-quality material. And on the other hand, organised players like VKC took the mid and higher end of Relaxo’s market by keeping their prices competitive. While raw material prices have since corrected and Relaxo has passed on the same to consumers, it will be an uphill task for Relaxo to recover the space ceded to competitors, he said.
He also pointed out that in the sports shoes, players like Campus are taking market share with a focus on the design element, which is emerging as the key driver of customer buying preferences. While Relaxo has also been stepping up its focus on designs, Relaxo’s traction in the shoes market has so far been slow.
Saurabh also stated that whilst the correction in commodity prices should help Relaxo claw back its margins, the events of the past year has resulted in his Fund reducing the Company’s longevity scores and free cash flow growth forecasts. This is sufficient reason to jettison the stock from the Rising Giants portfolio, he said.