Relaxo Footwears Research Report By Sharekhan

Relaxo Footwear’s (Relaxo) Q1FY2020 reported financials are not comparable on a y-o-y basis due to the implementation of Ind AS 116. Relaxo’s revenue and operating profit grew by 15.4% each on a comparable basis, driven by strong volume growth and favourable product mix. Implementation of Ind AS 116 impacted PAT by ~Rs. 2 crore. Relaxo is expected to maintain its steady operating performance backed by sustained volume growth. We expect OPM to sustain at 14- 15% in FY2020 on account of benign raw material prices and operating efficiencies. We maintain our Buy recommendation on the stock with a revised price target (PT) of Rs. 508.

Key positives

ŠŠ Revenue grew by 15.4% y-o-y to Rs. 648 crore, better than our expectation of Rs. 632 crore, mainly on account of good volume growth and a favourable product mix.

ŠŠ Comparable GPM expanded by 47 BPS y-o-y because of softening raw-material prices

ŠŠ The impact of implementation of Ind AS 116 on PAT was limited to Rs. 2 crore.

Key negatives

ŠŠ Comparable OPM stood flat at 14.8% as the benefit of softening input costs was offset by an increase in minimum wage rates

Our Call

Valuation: We have broadly maintained our estimates for FY2020/ FY2021 as Q1FY2020 performance was largely in-line with expectation. The negative impact of Ind AS 116 on PAT in Q1 was around Rs. 2 crore. Roughly, we expect it to be around Rs. 8 crore for FY2020. We expect revenue and earnings to report a CAGR of 18% and 28%, respectively, over FY2019-FY2021. Proposed capacity expansion will help boost the volumes, thus, driving revenue growth. Given the company’s strong business prospects and better earning visibility, we maintain our Buy recommendation on the stock with a revised PT of Rs. 508 (valuing it at 44x FY2021E earnings).

Key Risks

Any slowdown in demand environment and heightened competition would threaten revenue growth.