Liberty Shoes is at an inflection point: IndiaNivesh

Liberty Shoes Ltd (LSL), second largest footwear company in India, is at an inflection point. The company is likely to grow at 27.8% CAGR over FY14-FY16E driven by higher domestic revenues and leverage its portfolio of well-known brands. It is in a sweet spot to leverage 15% CAGR growth in Indian footwear sector as it is expanding its reach aggressively. ROE of the company is likely to double to 19.6% in FY16E as compared to 9.6% in FY14. We initiate coverage on the stock with a BUY rating and target price of Rs 400 per share.

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Outlook and Valuation

At current market price of Rs 306, the stock trades at PE of 21.8x and 14.8x its FY15E and FY16E earnings of Rs 13.5 and Rs 20.0 per share, respectively. We expect the company to grow at a CAGR of 28.7% CAGR over FY14P-FY16E lead by higher domestic revenue growth, including retail network and institutional sales. The profitability of the company is also likely to improve on account of operating leverage arising out of better sales. LSL has charted an aggressive expansion plan for its retail network, which is likely to provide the required impetus to improve the financial performance. Considering the strong brand recall, expansion plans and strategies to improve its growth rate, we are of the opinion that the valuation is attractive. Its peers, Bata India and Relaxo Footwear, are trading at average PE of 32.7x and 26.6x its FY16E Bloomberg earnings. Taking into consideration lower EBITDA margin and return ratios, we assign 20x (25% discount to average FY16E earnings) multiple to LSL to arrive at a target price of Rs 400 per share.

Download Liberty Shoes Initiating Coverage Report By IndiaNivesh