Relaxo Footwears Ltd (CMP: Rs 86.

05)

Stock Note September 15, 2009

At the current price of Rs.86.05, Relaxo Footwears Ltd (RFL) is available at 3.0x FY10 (E) EPS. We think that the stock has
the potential to trade at 4-4.5x FY10 (E) EPS of Rs 28.8 in the next 2-3 quarters.

Company Background

RFL is one of India's large quality conscious footwear companies. Headquartered in Delhi, India, it maintains a fine
combination of comfort, style and workmanship and is embarking on appreciable growth plans for the future. It stepped into the
footwear industry in 1976. It started off with the manufacture of Hawaii slippers and subsequently diversified into
manufacturing casuals, joggers, school and leather shoes.

In the year 1995-96 the company transformed from solely a trading/marketing agency to that of a full fledged manufacturing
unit by putting up a facility to produce 50000 pairs of Hawaii and lightweight chappals per day on a two-shift basis at
Bahadurgarh, Haryana. This project was part financed by RFL's maiden public issue aggregating Rs.4.50 crores issued at a
premium of Rs.50 per each share of face value of Rs.10.

The company has established 6 manufacturing plants spanning North India. These are located in Delhi, Bahadurgarh
(Haryana) and Bhiwadi (Rajasthan). With a cumulative area of over 120,000 sq. feet, these units have a huge set up enabling
massive production. Each manufacturing unit is equipped with world-class machinery and hi-tech product testing laboratories.
IN FY10, Hawaii footwear (Relaxo) could contribute ~40% of sales, Light slippers (Flite) ~40% and Sports shoes and sandals
~20% of sales.

Triggers

Gaining Momentum in the top/bottom line

RFL has been gaining momentum in both its topline and bottom line over the last couple of years. The last 2 years (FY08 and
FY09) have been excellent years for RFL as far the overall performance is concerned. The company has been reporting Sales
turnover in the range of Rs 200 to Rs 250 crores since 2004. In FY08 it saw its first jump in the total turnover to Rs 305 crores
and then by the end of FY09 the turnover touched Rs 407 crores. The company has started to gain a momentum in its topline
since the last 2 years as new manufacturing units went on stream. The case has not been very different in terms of the bottom
line also. The company has grown its PAT from the range of Rs 6 crores in FY07 to Rs 14 crores in FY09. Going forward with
2 new facilities going on stream in September 09 and April 2010, the momentum in sales could continue.

Large Player in the FMCG (Footwear) Sector

One of the biggest advantages of RFL is that it is one of the largest players in the sector it belongs to. Other big names in the
footwear industry are Bata India, Liberty Shoes and Lakhani Footwear of which Lakhani is not a listed peer. Bata India cannot
be compared to the business of RFL as Bata follows a different business model. RFL enjoys a very good market share
especially in the northern part of the country. RFL has the capacity to manufacture over 100 million pairs, per annum. It is
second only to Bata India. Its capacity to manufacture 200,000 pairs of Hawaii slippers per day is one of the highest in the
footwear industry. A network of 350 distributors and 30,000 retailers operating across India ensures that all its products reach
customers in almost all parts of North, West and South India.

Moving up the value chain

RFL began by manufacturing and selling Hawaii footwear. Over the years it has added products to its portfolio that are better
placed than Hawaii footwear – i.e. light slippers and shoes & sandals. In terms of perception of trade, it has moved up the
value chain. Design, product development, quality and affordable price – the four cornerstones of footwear business – RFL is
well placed in all of these. Shoes give RFL a higher margin compared to the other two products. The recent increase in
profitability is partially explained by the higher proportion of shoes in the product mix lately.

RFL enjoys a good Brand Value

RFL produces different products under different brands. It produces Hawaii Footwear in the brand name of “Relaxo” whereas
the light slippers segment is branded as “Flite”. The school and sports shoes segment are branded Sparx for which with brand
ambassador is Model and Actor Neil Nitin Mukesh. In FY09, RFL spent Rs 30.3 crores on advertisements and sales
promotion, which accounts to 7.5% of sales. All three brands – Relaxo, Flite and Sparx are quite well known and well accepted
by the common man and therefore this brand value helps the company push its sales further and create more faith in the
minds of the customers. Also a reputed brand name enables the company to have a higher pricing for its products in the
market.

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Constant expansion of facilities to generate volume growth

RFL currently has 6 own plants, and uses production of 3 plants owned by group companies. These plants of the company are
spread across the states of Haryana, Uttaranchal and Rajasthan. The company has a facility of producing about 2 lakh pair of
Hawaii Footwear per day, which is one of the largest in the industry. It has a capacity of producing about 75000 pairs of Flite
per day and about 10000 pairs of Sparx (shoes) products per day. Currently the company is running at a high capacity
utilisation. In order to facilitate more volume growth, it is planning to add two more production plants, one by September 2009
and the other by April 2010 at Bahadurgarh. In FY09, 2 plants manufacturing Flite went into production. These were set up at
a cost of Rs 55 crores (debt has risen by Rs.27 cr to Rs.108cr as at the end of FY09). These units will also cater to exports
and would be designed to produce sports and school shoes named Sparx. This expansion will help generate more volumes in
terms of Sparx products. The company over the last one-year has also shown increase in its exports from just Rs 1.5 crores in
FY08 to Rs 7.1 Crores in FY09. The current exports are to Europe (~70%) and the Middle East (~30%). The Company intends
to increase its revenue from exports further and therefore the 2 new upcoming plants will help the company achieve this.

Decent Margins

The financial year 2009 has been a year of lots of ups and downs for the markets and the economy. It was a roller coaster ride
for many. The same was also felt by RFL, as they were no exception to the global meltdown in the economy. The raw material
prices were pretty high in the initial quarters for the company. The company could not transfer the volatility in the raw material
prices on to the customers and thereby took a hit on the margins. During Q4FY09, the company witnessed a big jump in the
operating margins as there was a fall in the raw material prices and so the company could reduce its raw material expens es
(while keeping its sale prices constant) in turn increasing the margins. In Q1FY10 also the margins remained high due to a fall
in purchase of finished goods. Going forward RFL seems confident to maintain the margins at a high level though not as high
as it did in the last two quarters.

Recent Financial Performance (Q1FY10)

In FY09, RFL took a hit on profitability in the first 3 quarters of FY09 due to rising raw material prices (Rubber and EVA) that
could not be passed on to the customers. Prices of natural rubber rose 11% in FY09 while that of synthetic rubber rose 16%
and EVA rose 33%. In the fourth quarter however, due to reversal in prices of raw materials, RFL performed well and posted
an impressive OPM of 15% (vs 7-10% in the previous 3 quarters). Rubber prices that had risen from Rs 75 to Rs 140 a kg
have fallen back to Rs 80 per kg currently. Similar is the case with EVA prices (largely imported). RFL has not reduced prices
of its products post the fall in price of raw materials. Hence it has cushion to launch schemes for distributors/retailers and fight
competition. Traditionally the 1st and the 4th quarters are good for RFL. The effective tax rate of RFL has fallen from that of
~40% in Q4FY09 to ~30% in Q1FY10. The unit in tax-free zone of Uttaranchal helped bring down the effective tax rate in
Q1FY10. The Net Sales in Q1FY10 increased from Rs 98 crs in Q1FY09 and Rs 122 crs in Q4FY09 to Rs 129.94 crs in
Q1FY10. The total expenses of the company grew very marginally from Rs 105 crs in Q4FY09 to Rs 109 crs in Q1FY10
mainly because of the fall in the purchases of traded goods by 30% q -o-q (and shifting of this production from own units). The
PAT in Q1FY10 jumped 148.79% y-o-y to Rs 10.25 crs from Rs 4.12 crs in Q1FY09 and Rs 7.34 crs in Q4FY09.

Industry Outlook

Indian Footwear Industry

Standing on the threshold of a retail revolution and witnessing a fast changing retail landscape, the Indian footwear market is
set to experience phenomenal growth in coming years. In past few years too, the market has seen robust growth

Key Facts of the Industry

• The Indian footwear retail market is expected to grow at a CAGR of over 20% for the period spanning from 2008 to 2011.
• Footwear is expected to comprise about 60% of the total leather exports by 2011 from over 38% in 2006-07.
• Presently, the Indian footwear market is dominated by Men’s footwear market that accounts for nearly 58% of the total
Indian footwear retail market.
• By products, the Indian footwear market is dominated by casual footwear market that makes up for nearly two-third of the
total footwear retail market.
• As footwear retailing in India remain focused on men’s shoes, there exists a plethora of opportunities in the exclusive ladies’
and kids’ footwear segment with no organized retailing chain having a national presence in either of these categories.
• The Indian footwear market scores over other footwear markets as it gives benefits like low cost of production, abundant raw
material, and has huge consumption market.
• The footwear component industry also has enormous opportunity for growth to cater to increasing production of footwear of
various types, both for export and domestic market.

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Risks and Concerns:

• The raw material price fluctuation is a matter of concern as ~47% of expenditure incurred by company is expenses related
to raw materials. The raw material prices have started to increase slightly again after falling from their peak in October 2008.

• Another matter of concern is the fluctuation in the currency. RFL imports Ethyl Vinyl Acetate (EVA) for the production of Flite
brand. Any depreciation in the rupee would impact the margins of the company. Currently its exports are much less than its
imports. (FY09 exports of Rs 7.1 crores vs. imports of Rs 31 crores)

• RFL has been constantly paying dividend of 15% for the last few years. Inspite of having a current EPS of Rs 12.2 in FY09,
it has declared a low dividend of Rs 0.75. Low dividend payout could hinder value buying by investors.

• The retail business of the company is currently running into losses. Only 50% of the retail shops have managed to break
even while the remaining continues to make losses. RFL as of date has 82 retail stores across the country and is adding
another 7 now taking the total tally of retail stores to 89. The company aims at reaching 100 stores by March 2010. These
are mainly spread across Delhi, Punjab, Haryana, Western UP and certain areas in Gujarat. These stores operate from
rented premises, have low running costs and typically achieve breakeven in 18-24 months. The retail spread helps the
company in creating brand awareness and in pushing sales to wholesalers.

• RFL sells almost 65% of its products in the north Indian market thereby creating a very high dependence on the states of
north India. It is unable to reap the benefits of a wider market and diversified geographical base as its network in other
regions is not as strong.

• Being a branded footwear company, one of the important expenditure incurred by RFL is the expenditure on
advertisements. It will have to keep on spending large amount in advertisement to sustain and improve value of its brands.

• There is always a risk of fresh competitors in this segment as there are no high entry barriers into this industry.

• Certain group companies are engaged in similar business thereby posing a threat as conflict of interest could take place.
Also there are related party transactions such as purchase of goods from the company’s associates that could raise doubts
about arm’s length pricing of these transactions.

• The Relaxo brand is not wholly owned by RFL. It is jointly with a group company. However no royalty is currently being paid
by RFL

Conclusion:

Relaxo Footwear Ltd is one of the large listed players in the footwear segment in India. It has one of the largest production
capacities in the country. The recent performance of the company reflected in the Q4FY09 and Q1FY10 results has been quite
impressive and the company could repeat this going forward.

Constant capacity additions and strong brand value could enhance the company’s presence in the country and the fact that
the company is looking into increasing exports of its products means that it could do well in the coming quarters. The two new
plants are coming up in September 2009 and April 2010. Th e real impact of both could be felt only in FY11. When compared
to its close listed peer Liberty shoes, RFL trades at a steep discount in terms of P/E ratio.

RFL also plans to set up wind farms of an aggregate capacity of 6 MW at a cost of Rs.35 cr over FY10/FY11. This will be
partly funded by debt of Rs.25 cr. Apart from generating a new source of income by way of power sales and being entitled to
carbon credits, it will also result in tax savings for the company.

RFL has announced Sept 19, 2009 as the book closure for determining the shareholders who would be paid dividend of
Rs.0.75 per share. The stock could go ex-dividend on Sept 17, 2009, meaning that investors who buy the stock till Sept 16,
2009 would be entitled to receive dividend.

We think that RFL could record net sales of Rs 510 crores (up 25%) in FY10 and report an EPS of Rs 28.8. Given the fact that
it is engaged in a fast moving products industry, has a brand name and has a retail presence, there is scope for expansion of
its P/E going forward. It has the potential to quote at 4-4.5x FY10 (E) EPS, translating into stock price of Rs 115-130 in the
next 2-3 quarters. Investors could look to buy the stock at the current market price of Rs 86.05 and add if the scrip falls to Rs
63 – Rs 66 band.

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Financials
Standalone

Particulars - Rs Crs. Q1FY10 Q1FY09 % Var Q4FY09 % Var FY09 FY08 FY07
Net Sales 129.94 98.48 31.95 122.41 6.15 407.46 305.66 235.93
Other Income 0.01 0.42 -97.62 0.48 -97.92 0.81 0.23 1.22
Total Income 129.95 98.9 31.40 123.42 5.29 410.05 307.31 237.15
Total Expenditure 109.56 88.75 23.45 105.05 4.29 366.34 274.32 213.16
PBIDT 20.39 10.15 100.89 18.37 11.00 43.71 32.99 23.99
Interest 2.71 1.73 56.65 2.97 -8.75 9.27 6.92 4.69
PBDT 17.68 8.42 109.98 15.4 14.81 34.44 26.07 19.30
Depreciation 3.12 2.27 37.44 2.86 9.09 10.47 9.34 8.30
Total Tax 4.31 2.03 0.00 5.2 -17.12 9.74 6.21 4.60
Reported Profit After Tax 10.25 4.12 148.79 7.34 39.65 14.23 10.52 6.40
Extra-ordinary Items 0 0 0.00 -0.24 -100.00 -0.24 0 0.26
Adjusted Profit After Extra-ordinary item 10.25 4.12 148.79 7.58 35.22 14.47 10.52 6.14
EPS (Rs.) 8.54 3.42 149.71 6.46 32.20 11.85 8.77 5.33
Source: Capitaline Plus

Peer Analysis

Company Net Sales OPM% NPM% BV EPS CMP PE PBV

FY09 FY08 FY09 FY08 FY09 FY08 Latest FY09
Liberty Shoes 239.95 247.85 10.93 14.29 2.95 6.26 71.53 4.15 76.35 18.40 1.07
Mirza Intl 361.03 317.90 9.32 9.49 1.48 1.13 12.76 0.58 14.20 24.48 1.11
Relaxo Footwear 407.46 305.66 10.72 10.79 3.49 3.44 61.63 11.85 86.05 7.26 1.40
Source: Capitaline Plus

Analyst: Tiju K Samuel (tiju.samuel@hdfcsec.com)

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