Relaxo Footwear - Building pricing muscle; initiating with Buy - Anand Rathi

Relaxo Footwear (Relaxo) is second largest in the organised segment of Indian footwear, accounting for 7-8% share. It is currently focused on building pricing power by revamping key brands, Sparx and Flite. Over FY12-15, we expect revenue and EPS to post CAGR of 23% and 39%, respectively, and margins to expand 250bps. We initiate coverage with Buy, at a price target of Rs.960.

- Rising volumes, improving value mix. Relaxo is currently focused on growing revenues from its premium brands - Flite and Sparx. Towards this, the company has already set up a manufacturing unit for polyurethane - a key chemical used in making its shoes - which will commence production from Q3FY13. This, together with rapid network expansion, will aid revenues to post 23% CAGR over FY12-15.

- Embarking on major brand revamp. The company has roped in three leading Bollywood stars for its brand endorsements. This marketing strategy is applicable across segments, from low-cost Hawaii to premium Sparx. It would build pricing power, raise market share (especially in East, West) and increase direct reach to customers through stores across India.

- Margin expansion on the cards: Margins are likely to expand 250bps owing to: (a) falling raw material prices, especially of EVA and rubber (more than 50% of RMC); (b) freight costs stabilising at 3% of sales with new warehouses; and c) reducing third-party purchases.

- Valuation. We assign a one-year-forward PE of 13x and derive target price target of Rs.960. It has historically traded at 6-17 PE.At the CMP of Rs.725, the stock trades at PE of 15.1x FY13e and 9.9x FY14e EPS of Rs.48.1and Rs.73.6 respectively. Risk: Rise in input costs.

Source : Equity Bulls

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