Sharekhan Bets On This Mid Cap Footwear Stock For 18% Potential Upside

Sharekhan retains the "Buy" call to Relaxo Footwears Limited with a revised target price of Rs 1,185 apiece. Investors buying the stock at the current price are likely to get decent returns of around 18% considering the given target price. This mid-cap footwear company has a market cap of Rs 25,158.96 crore.

Brokerage interacted with Mr. Sushil Batra - CFO and Mr. Vikas Tak - Company Secretary, of Relaxo Footwear (Relaxo) to understand the current business environment and future growth prospects of the company. The company has undertaken corrective pricing actions to help revive sales volumes, which were affected by raw material inflation, consumer demand slowdown and a hike in the footwear GST rate to 12% from 5%.

Stock Outlook & Returns

07 October, Friday, the shares of the company closed at Rs. 1,010.70 per share after 0.28% gain from its previous close. Its 52-week low is Rs 925 and its 52-week high is Rs 1,448, respectively. 

Its share price has surged by 3.64% over the last three months and fallen 24.01% over the last year, respectively. Whereas, the share price in the past 3 years surged by 105.51%. It gave a multibagger return of 289.97% in the past 5 years. 

 Investors can keep an eye on this stock for steady gains as it can surge 18% as suggested by the brokerage firm. 
 

Implemented corrective pricing actions to revive sales volumes

The company took cumulative price hikes of 25-30% (in four tranches) in H2FY2022 to pass on the impact of commodity inflation and GST rate hike in footwear products from 5% to 12%. This hit sales volumes in Q4FY2022 and Q1FY2023 due to increased pricing gap vis-à-vis unorganised players. To arrest the sales volume drop, the company took price reduction of 12-15% in its key value for money brands such as Relaxo, Flite and Bahamas to recover the lost volumes. Further, the company is also focusing on scaling up the contribution of close-ended footwear products to improve sales volume in the coming quarters. 

Q2 to be yet another muted quarter; good recovery expected from Q3

According to the brokerage, the price corrections undertaken will take some time to come in the market and hence Q2FY2023 sales volume are expected to be muted due to weak consumer sentiments affected by inflationary pressures. "We expect Relaxo Q2FY2023 revenues to be down by 7-9% while EBIDTA margins to lower by 200-230 bps y-o-y to 14% affected by higher inventory of high-priced raw materials. Management expects gradual recovery from Q3FY2023. Also, if raw material prices continue to correct, it will release pressure on the margins. Overall, margins are expected to be lower in FY23 and are expected to improve from FY24," the brokerage has said.

Key levers in place to drive consistent earnings growth in medium term

The management has identified 4-5 levers which are expected to drive growth including higher contribution from e-commerce channel, expansion in closed footwear, increased export contribution, adoption of the EBO model and steady growth momentum maintained in open footwear. The company recently has started experimenting with the EBO model wherein the company has opened 50-100 stores which will contain all the in-house brands of Relaxo. Through this strategy, the company will focus on improving the sales as well as profitability per store.

Sharekhan Retain Buy with revised price target of Rs. 1,185

According to the brokerage, Relaxo is well poised to achieve revenue and earnings CAGR of 14% and 22%, respectively, over FY2022-FY2025E, with key levers expected to drive consistent growth. The company has a strong, debt-free balance sheet with good cash generation ability. The stock currently trades at 80.6x/59.6x its FY2024E/FY2025E earnings. "We have introduced FY2025E earnings through this note. We maintain a Buy recommendation on the stock with a revised price target (PT) of Rs. 1,185 (rolling it forward to October 2024 earnings)," the brokerage has said.

According to the brokerage, the key risk to the buy call is, "Any slowdown in consumer demand or significant increase in raw material prices would affect earnings estimates."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.