Relaxo Footwear

Consumption play or Brand play?

9/4/2019
Finnacle Investment Academy
Ahmed Madha
 Relaxo Footwear
Contents
Indian Footwear Industry Overview: ...................................................................................................... 3
Market Size: ........................................................................................................................................ 3
Gender and Category wise breakup of footwear in India:.................................................................. 4
Branded and Organized Share of Footwear in India: .......................................................................... 5
Relaxo Footwear Overview: .................................................................................................................... 6
Relaxo Footwear Brand Portfolio:........................................................................................................... 7
Segmentation of Footwear market in India based on price point: ....................................................... 10
Segmentation of Product range of Relaxo Footwear based on price point in a nutshell: .................... 12
Value Chain of the Footwear Industry: ................................................................................................. 13
Manufacturing the product: ............................................................................................................. 13
Outsourcing the product:.................................................................................................................. 14
Channel-wise break-up: .................................................................................................................... 15
Traditional Footwear Value Chain and Gross Margins: .................................................................... 16
Value Chain of Relaxo Footwear: .......................................................................................................... 17
The Value chain of Relaxo footwear is more or less similar to the value chain of the footwear
Industry. However, at every nod the quantum may change relative to the Industry. ......................... 17
Procuring raw material: .................................................................................................................... 17
Manufacturing Plants and Capacity Utilisation: ............................................................................... 21
Channel-wise break-up: .................................................................................................................... 23
Revenue Drivers: ................................................................................................................................... 25
Change in Revenue Contribution through different channels over the past decade: ...................... 26
Cost Structure: ...................................................................................................................................... 31
Financial Highlights and Ratio Analysis: ................................................................................................ 39
Industry Framework and Michael Porter Analysis: ............................................................................... 44
Moat Analysis:....................................................................................................................................... 46
Management and KMPs Remuneration: .............................................................................................. 47
Few Important aspects: ........................................................................................................................ 48
Contingent Liability: .......................................................................................................................... 48
Major Related Party Transaction: ..................................................................................................... 48
Corporate Governance: .................................................................................................................... 48
Promoter Holding: ............................................................................................................................ 48
Valuation: .............................................................................................................................................. 49

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 Relaxo Footwear
Indian Footwear Industry Overview:
The footwear industry in India has been one of the most crucial components in the country’s
prestigious textile and garment market, contributing significantly to not just the
employment within the country but also the export earnings and overall economic growth in
India as well. Though the footwear industry accounts for less than 1% of GDP but being a
labour-intensive industry, the total employment in this industry is approximately 1.1 million.

*(Source: Bizvibe)*

India is the second-largest global producer of footwear after China which accounts for 13%
of global footwear production of 22 billion pairs. India produces approximately 2 billion
pairs representing approximately 9% of global footwear manufacturing. Given the fact that
India is also the world’s third-largest footwear consumer after China and USA, about 90% of
the footwear made in India is consumed by the domestic market and the rest is exported.

Market Size:
Currently, the domestic footwear market size in India is approximately 47000 Crores
growing at 12%-15%. In the next five to six years, it has the potential to get 80000-85000
Crores given the fact that it is projected to grow at the CAGR of 10-11%. India is still an
underpenetrated market – a per capita consumption of only ~1.66 pair p.a. against a global
average of 3 pairs. India’s share in global exports is just 2% compared to China’s share of
~40%, thus presenting room for growth opportunities.

Market Size of Footwear Industry

90000
80000
70000
60000
INR Crores

50000
40000
30000
20000
10000
0
2013 2019 2025E
Year
Market Size (INR Crores)

*Source: Relaxo Footwear Annual Report, Relaxo Footwear Q4 19 Con-call*

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 Relaxo Footwear
Gender and Category wise break up of footwear in India:
Men’s footwear currently dominates this market with ~54% share; however, women’s
segment will outpace the men’s growth to take 41% of the footwear market in FY 2025
against the current share of 37%.

Gender wise-break up of Market Size (INR Crores)

Break-up 2019 2025E Growth Rate
Men's Footwear 25380 39840 7.8%
Women's Footwear 17390 34030 11.8%
Kid's Footwear 4230 9130 13.7%

Gender wise-break up - 2019

9%
Men's Footwear

Women's
37% Footwear
54%
Kid's Footwear

Gender wise-break up - 2025E

11%
Men's Footwear

48% Women's
Footwear
41% Kid's Footwear

*Source: Khadim India RHP, Relaxo Footwear Annual Report*

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 Relaxo Footwear
Branded and Organized Share of Footwear in India:
Branded Footwear market is expected to grow at a CAGR of 13% to account for ~50% of the
overall market by FY 2025 from current ~42% of the total market. Majority Growth will be
driven by the increasing reach of mid and economy brands to Tier II/III Indian cities.

Branded share of the footwear market in India

Break-up 2019 2025E Growth Rate
Branded 19740 41500 13.2%
Unbranded 27260 41500 7.3%

Branded Footwear share - 2019

Branded
42%
Unbranded
58%

Branded Footwear share - 2025E

Branded
50% 50%
Unbranded

*Source: Khadim India RHP, Relaxo Footwear Annual Report*

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 Relaxo Footwear
Relaxo Footwear Overview:
Relaxo Footwear Ltd. is the largest footwear company in India in terms of volume and the
second-largest footwear Company in India in terms of Value after Bata India Ltd. The
company has production capacity of approximately 7.50 million pairs per day leading to
capacity of 225 million pairs of footwear per annum and the company sold 184 million pairs
of footwear in FY19. The company has market share of approximately 5% in terms of value
and market share of approximately 8% in terms of volume in the highly fragmented and
competitive footwear industry.

The Company’s products include Rubber, Ethylene Vinyl Acetate (EVA) and Polyurethane
(PU) slippers, flip-flops, canvas shoes, sports shoes, sandals, school shoes and other types of
footwear.

The Company has a portfolio of 10 brands. Major brands of the Company are Relaxo, Flite,
Sparx and Schoolmate with Relaxo being the flagship brand.

The Company has nine manufacturing plants six in Bahadurgarh (Haryana) and Two in
Bhiwadi (Rajasthan) and one in Haridwar (Uttaranchal). During the year the Company
commenced commercial production at its new plant at Bhiwadi for manufacturing flip flops
(Hawaii range of footwear). The company is planning to add capacity of 1 Lakh pairs per day
of footwear in Bhiwadi Rajasthan. The new capacity will be added in the next three years i.e.
by FY22.

Currently, the Company has a strong distribution network of approximately more than
50,000 retailers served through distributors and the company has more than 6000 SKUs
(Stock Keeping Units) across every age group & every price point.

The Company has 343 Exclusive Brand outlets (EBOs) across India, with a concentrated
presence in Delhi, Rajasthan, Gujarat, Haryana, Punjab, Uttar Pradesh and Uttarakhand. The
company commenced 8 stores through asset-light franchisee model in FY18 and it may
venture into new territories through the asset-light franchisee model.

In FY19, approximately, 4% of the company’s total revenue was contributed through exports
and the retail outlets and E-commerce contributed 7% and 6% of the company’s total
revenue. The balance was generated through the traditional distribution channel.

With reasonably good demand for branded footwear as mentioned earlier, and Relaxo's
position as the 2nd largest player in the market, added to its strong network of distributors
and Exclusive Brand outlets (EBOs), the company seems to be well placed for future growth.

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 Relaxo Footwear
Relaxo Footwear Brand Portfolio:

Relaxo

Casuals Flite

Kidsfun Sparx

Brand
Portfolio

Elena Bahamas

Mary School
Jane Mate
Boston

*Source: Relaxo Investor Presentation*

Even though the Company has a portfolio of 10 brands, the flagship brands namely Sparx,
Flite and Relaxo contributes the majority of the revenue. Apart from that Bahamas and
Schoolmate also have notable contribution.

Moreover, there is no clear break-up of revenue given by management based on the brands
but through a few reports and sources, I came to the following conclusion. Sparx and Flite
contribute approximately 2/3rd of the company’s revenue, followed by Bahamas and Relaxo
which jointly contribute approximately 1/4th of the company’s revenue. Thus, the remaining
six brands contribute less than 10% of total revenue.

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 Relaxo Footwear
Brand Pricing Product
Brand Overview Target Consumer
Name Point Category
Fashionable and lightweight
Working-class men and
semi-formal footwear. Most
Flite 200-500 women looking for semi- Mass
popular brand of PU / EVA
formal footwear
footwear.
Range of sports and canvas Young Sportsmen and Mass /
Sparx 300-2500
shoes, sandals & slippers. Fitness Enthusiasts Mid
Popular brand of Hawaii
Relaxo slippers with a loyal customer 100-300 All strata of the Society Mass
base over four decades.
Trendy and fashionable flip- Young generation looking for
Bahamas flops and Premium product 150-500 fashionable slippers with a Mass
over traditional brand Relaxo variety of designs and shades

School
Range of school shoes 200-900 School Students Mass
Mate

Relaxo:

The flagship brand Relaxo, launched in 1976, was initially owned by Relaxo Footwear
Limited and other Promoter companies jointly but the company did not pay any royalty for
the same. Currently, it is only owned by Relaxo Footwear Limited.

*Source: https://ipindiaonline.gov.in/tmrpublicsearch/tmsearch.aspx?tn=134911142&st=Wordmark /
http://tmsearch.uspto.gov/bin/showfield?f=doc&state=4803:8t96nv.2.3 *

Flite:

In Flite, there are two subcategories, one is Flite EVA and another one is the Flite PU. The
margins in PU category is relatively lower than the EVA category, but it is the fastest-
growing category in the brand portfolio of Relaxo Footwear Limited.

Flite was initially launched in 2004 based on EVA technology to compete with Hawaii
slippers. However, growth of Flite was under pressure as PU-based products have grabbed
market share from EVA-based products. Flite, with EVA as raw material, costs ~Rs150 per
pair, while a similar PU-based product costs ~Rs190 per pair. As the customers are ready to
pay Rs40 extra per pair for better comfort, PU-based products were taking away market
share from Flite. Hence, the company launched PU-based products in 2013. I will talk about
raw material namely PU and EVA in later part of the report.

*Source: Relaxo Con-call Q4 19*

Sparx:

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 Relaxo Footwear
The flagship brand Sparx, launched in 2004, is currently the brand with the highest average
realization per pair and highest profitability margin, which contributes more than 1/3 rd of
the total revenue.

Bata filed an infringement case against Relaxo Footwear in FY09 alleging that the company is
using an identical mark of the “Sparx” trademark which Bata owned. Bata had alleged to
have registered their Sparx' trademark in November 1978.

*Source: https://smartinvestor.business-standard.com/company/cNews-cnewsdet-14402-60-
Bata_drags_Relaxo_to_court_over_brand_infringement-Bata_India_Ltd.htm#.XW_hiSgzZPY*

However, the Company has executed an assignment of Trademark "SPARX" in favour of

Relaxo Footwears Limited.

*Source: https://www.bseindia.com/corporates/anndet_new.aspx?newsid=c608c445-6c36-4a0e-a8c7-
a4adcffbed86*

Moreover, Sparx is the largest-selling brand on the e-commerce space for the company as it
mainly caters Tier 1 / Tier 2 customers. In order to avoid conflict between e-commerce and
traditional channels, the company started manufacturing separate products for online
business.

To understand the company, we need to understand the industry simultaneously in which

the company is operating, which will help us understand what the company have done and is
doing differently relative to the Industry.

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 Relaxo Footwear
Segmentation of Footwear market in India based on price point:
The products are categorized into a mass, economy, mid and premium on the basis of
pricing:

Premium
(INR 3000+)
(6%)

Mid
(INR 1000-3000)
(10%)

Economy
(INR 500-100)
(30%)

Mass
(INR <500)
(54%)

*Source: Khadim India RHP, Relaxo Footwear Annual Report*

In % terms, Market Share on the basis of Value

In INR terms, Average Selling Price

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 Relaxo Footwear
The premium segment is catered by international brands such as Aldo, Nike, Adidas, Asics,
Under Armour, Vans, Puma and Louis Philippe etc that are currently focusing on Indian
metro-cities. The segment is marked primarily by the Exclusive Branded Outlet format.

The Mid and Economy segment with a share of 40%, witnesses a mix of national footwear
retailers as well as regional footwear companies such as Khadim, Bata, Metro, Liberty,
Woodland, Lotto etc.

Mass footwear brand such as Relaxo Footwear, Action Shoes, VKC, Lakhani Shoes, Ajanta
Footwear, Lancer etc which occupy 54% of the market, are characterized by a predominant
distribution channel. Whilst, distribution brands are dependent on the efficiencies of
distribution network only to drive growth, retail-centric brands have to rely on all the
organized channels viz. EBOs, large format stores (LFS) and online channel.

Apart from that Mass market and Economy market face stiff competition from unbranded
players which accounts for 58% of total footwear Industry.

Thus, based on the segmentation of the footwear market in India by price point, it can be
said that Relaxo footwear mainly caters the mass market which accounts for 54% of the
footwear industry. Apart from that, through premiumization of product in the form of brand
Sparx, it is venturing into economy and mid-market.

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 Relaxo Footwear
Segmentation of Product range of Relaxo Footwear based on price
point in a nutshell:
The products are categorized into a mass and mid-market on the basis of pricing:

Mid
(INR 500-2500)
(<20%)
[Sparx]

Mass
(INR <500)
(>80%)
[Relaxo, Bahamas, Flite, Sparx]

*Source: Khadim India RHP, Relaxo Footwear Annual Report*

In % terms, Market Share on the basis of Value

In INR terms, Average Selling Price

In [], the brand catering the particular segment

Similar to understanding the differentiation of Relaxo footwear from the industry based on
the price point; let us understand the differentiation of Value chain of Industry and Relaxo
footwear.

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 Relaxo Footwear
Value Chain of the Footwear Industry:
A value chain depicts the range of activities included from procuring raw material to deliver
a product or a service to the customers. In any industry, the value chain includes many
nodes and each node creates a certain amount of value as their share of a pie in the whole
Industry.

Manufacturing Outsourcing the

the product product

Traditional
EBOs LFS MBOs E-commerce
Distribution

Traditional
Retailers

Customers

Manufacturing the product:

Procuring raw
material and Cutting and Injection Finishing and
Assembling
its Quality Pelletizing Moulding Packaging
check

*Source: Khadim India RHP*

*Note: This process is for manufacturing non-leather footwear*

Procuring raw material and its Quality check:

The manufacturing of footwear begins with the procuring of raw material namely Ethylene
Vinyl Acetate (EVA), Polyurethane (PU) and Rubber. Apart from that, the materials such as
polishes, soles, adhesives, other chemicals, vulcanizing agents and colours are procured.
Then, the material is sent to laboratory for the quality check and then it is passed on for
production. Then, the material is put in a high-speed mixer to form semi-viscous mixture.

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 Relaxo Footwear

Pelletizing:

To form pelletizing granules the above compound mixture is passed through the extruder
after cutting process which helps to form a semi-finished shape and it is stored in the
cooling tank for ageing, and then sealed in a bag for the next process of manufacturing.

Compressed and Injection moulding:

In the case of the injection moulding process, the pelletized granules are put in a hopper of
EVA/ PU injection moulding machine which is ready with mould and temperature. The
granule passing through the hot screw barrel converts it to a semi-viscous form to be
injected in the mould passing through the cooling system. Once the mould opens after
specified time, slippers are obtained which is kept in a rack for the next process.

Assembling:

Assembling of footwear primarily involves cutting of soles from the sheets, fitting strap into
the sole, printing on soles, trimming of injected PVC/EVA footwear etc.

Finishing and packaging:

Upon completion of the manufacturing process, the footwear undergoes finishing and
quality control checks and is packaged thereafter. The finishing process involves labelling,
tagging, removal of loose and unwanted trims, flash, threads.

Outsourcing the product:

In outsourcing, the footwear company gives its own design to a manufacturing company and
expects a manufacturing company to produce customize a product in a specific manner as
per outsourcing company’s need. Here, the manufacturing company acts as the
representative of the client, executing their instructions. The main advantage is that it leads
to an asset-light model of a business with fixed costs turning into variable costs.

The global footwear giants like Nike and Indian Branded retailers like Bata follow this model,
where they outsource the manufacturing of the product and focus more on developing a
brand.

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 Relaxo Footwear

Channel-wise break-up:

Channel-wise break up of revenue Footwear

Industry in India

5%
4%
6%

Traditional
13%
EBOs
LFS
MBOs
74%
E-Commerce

*Source: Khadim RHP*

The traditional distribution channel accounts for 76% of the total revenue generated in the
Industry. However, with the rise of organized Exclusive outlets and online shopping, the
growth of revenue through the organized retail market will outpace the growth of revenue
through traditional distribution channel.

EBOs include exclusive outlets of players like Nike, Puma, Reebok, Liberty, Relaxo, Shree
leathers, Bata etc.

LFS include departmental stores like Shoppers Stop, Lifestyle and Pantaloons as well as
hypermarket such as Big Bazaar, Spencer retail etc.

MBOs include retailers selling multiple brands such as Metro, Mochi etc.

Traditional includes typical Mom and Pop footwear stores.

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 Relaxo Footwear

General Distributor Selection and Dynamics:

The distributor must have knowledge about product quality and material. E.g.: Shift from
EVA to PU based footwear.

Regional Expertise: A sound knowledge of the regional market and dynamics is an important
aspect of distribution selection.

Infrastructure (warehouse, manpower etc), availability to support company targets

The distributor must not keep competing brands in the same price range (varies from brand
to brand).

Traditional Footwear Value Chain and Gross Margins:

Manufacturer
(35-40%) (60-65)

Traditional
Distribution
(3-11%) (70-72)

Wholesaler
(6-8%) (75-80)

Traditional
Retailers
(20-25%) (100)

*Source: Khadim RHP, Channel Check*

In %, Margins as a % of MRP

In (), the price at which product is sold to forward nod of value chain

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 Relaxo Footwear
Value Chain of Relaxo Footwear:

Manufacturing Outsourcing the

the product product

Regional
Distribution
Centres / Central
Warehouse

Traditional
EBOs E-commerce Exports
Distribution

Traditional
Retailers

The Value chain of Relaxo footwear is more or less similar to the value chain of the footwear
Industry. However, at every node, the quantum may change relative to the Industry.

Procuring raw material:

The main raw materials consumed by Relaxo footwear are Ethylene Vinyl Acetate (EVA),
Polyurethane (PU) and Rubber.

For the traditional Hawaii slippers, the main raw material required is rubber and hence for
manufacturing of the product of brand Relaxo, the company might be utilizing rubber. However,
with a change in consumer expectations towards more comfortable and durable products, the
company is moving towards product manufactured from Ethylene Vinyl Acetate (EVA) and
Polyurethane (PU). For the brand Flite, the company uses EVA as well as PU.

Ethylene Vinyl Acetate (EVA) / Polyurethane (PU):

Ethylene-vinyl acetate (EVA) is a type of copolymer. It's very soft and elastic and it can be
made into a plastic that's like rubber, yet extremely tough. Polyurethane (PU) is the most
durable and comfortable material used in footwear- not to mention affordable.

These raw materials are generally imported and hence are considerably impacted by the
Currency fluctuations. Following are the price trends of the raw material:

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 Relaxo Footwear

EVA (Ethylene Vinyl Acetate) Price

160
150
140
130
INR/Kg

120
110
100
90
80

Month
INR/Kg

*Source: Indiapetrochem.com*

Polyurethane (PU) Price

340
330
320
310
INR/Kg

300
290
280
270
260
250
Mar/15

Mar/16

Mar/17

Mar/18

Mar/19
Jun/14

Sep/14

Jun/15

Sep/15

Jun/16

Sep/16

Jun/17

Sep/17

Jun/18

Sep/18
Dec/14

Dec/15

Dec/16

Dec/17

Dec/18

Month

INR/Kg

*Source: Indiapetrochem.com*

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 Relaxo Footwear

Rubber Price
300

250

200
INR/Kg

150

100

50

Dec/15

Dec/16
Dec/10

Dec/11

Dec/12

Dec/13

Dec/14

Dec/18
Jun/10

Jun/11

Jun/12

Jun/13

Jun/14

Jun/15

Jun/16

Dec/17
Jun/17

Jun/18
Month
INR/Kg

*Source: Indexmundi.com*

EVA Price In INR Rubber Price In INR

Price as on 31/3/19 116.00 Price as on 31/3/19 119.50
Average Price in the past 7 Years 123.04 Average Price 142.32
Standard Deviation 11.61 Standard Deviation 42.36
Lowest Price 105.00 Lowest Price 84.58
Highest Price 150.00 Highest Price 243.84
Change in Current Price from Average -5.72% Change in Current Price from Average -16.03%
Change in Current Price from Lowest 10.48% Change in Current Price from Lowest 41.29%
Change in Current Price from Highest -22.67% Change in Current Price from Highest -50.99%

PU Price In INR
Price as on 31/3/19 330.00
Average Price 297.15
Standard Deviation 21.30
Lowest Price 262.00
Highest Price 330.00
Change in Current Price from Average 11.06%
Change in Current Price from Lowest 25.95%
Change in Current Price from Highest 0.00%

Given the fact, that the company is moving from Rubber to EVA and PU, there is an uptrend
in the proportion of raw material being imported.

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 Relaxo Footwear
The following is the trend of raw material procurement domestically and through imports:

INR crores
Particulars Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17
Indigenous 335 373 368 302 433 410 362
As a % of total 98% 96% 85% 63% 69% 67% 62%
Imported 5 14 67 178 195 198 218
As a % of total 2% 4% 15% 37% 31% 33% 38%
Total 340 387 435 480 628 608 580
*Source: Relaxo Annual Reports*

Based on the payable amount of raw material imports, the company has hedged currency
risks though forward contracts over the years. The following is the snapshot of the same
from the annual report of Relaxo Footwear:

Relaxo-footwear mainly manufactures the products in-house; however, they outsource the
small portion of product where they get a better price for procurement.

Contribution of Manufacturing and

Outsourcing in FY19

5%
In-house
Manufacturing
Outsourcing

95%

*Source: Q419 Con-call*

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 Relaxo Footwear
Manufacturing Plants and Capacity Utilisation:
The Company has nine manufacturing plants six in Bahadurgarh (Haryana) and Two in
Bhiwadi (Rajasthan) and one in Haridwar (Uttaranchal). During the year the Company
commenced commercial production at its new plant at Bhiwadi for manufacturing flip flops
(Hawaii range of footwear). The company is planning to add capacity of 1 Lakh pairs per day
of footwear in Bhiwadi Rajasthan. The new capacity will be added in the next three years i.e.
by FY22.

Out of the nine-manufacturing plants, six plants are located at Bahadurgarh, which is
approximately only 20 km away from the Central warehouse and hence the transportation
cost reduces drastically because of such arrangement.

Capacity Utilisation (In %)

25 90.00%
80.00%
Number of Pairs (In Crores)

Capacity Utilisation (In %)

20 70.00%
60.00%
15
50.00%
40.00%
10
30.00%

5 20.00%
10.00%
0 0.00%
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19

Year
Capacity Utilisation (In %)
Per Annum Capacity (In Crores) (Assuming 300 Working Days)
Numbers of Pairs Sold (In Crores)

Average Capacity Utilisation in last 9 Years: 77%

*Source: Relaxo Annual Reports*

CWIP (INR Crores) 0.53 21.02 23.37 23.16 1.27 27.99 61.91 136.44 10.17
*Source: Relaxo Annual Reports*

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 Relaxo Footwear
In FY13, the plant at Bahadurgarh was established and in the subsequent year, the capacity
was increased to 5.35 lacs pairs per day from 3.77 lacs pairs per day in FY12.

During the FY14 and FY18, the company increased its capacity from 5.35 lacs pairs per day in
FY14 to 6.25 lacs pairs per day in FY18 by doing Maintenance capex and Debottlenecking at
an existing plant.

In FY19, the Company commenced commercial production at its new Plant at Bhiwadi for
manufacturing flip flops (Hawaii range) in Q1 FY19. The new plant has a production capacity
of 1.25 lacs pairs per day which led to a total capacity of 7.5 lacs pairs per day.

In FY19, the capacity utilization was approximately 80% and if the volume growth remains
high for the next 3 years, the company may need to Debottlenecking at existing plant as it
did during the period of FY14 and FY18 because the capacity of 1 Lac pairs per day in
Bhiwadi Rajasthan is expected to be added in the next 3 years.

Moreover, if the plants will run at higher capacity utilization, there will be no incremental
fixed costs for running the plant and hence operating leverage will kick in improving the
profitability margins.

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 Relaxo Footwear
Regional Distribution Centers / Central Warehouse:

The company has significantly improved its supply chain. It has reduced the order
replacement cycle from 24 days earlier to 48 hours currently by setting up a central
warehouse in Bahadurgarh, Haryana and establishing seven regional distribution centres
(RDCs). Currently, products to the majority of its outlets are supplied within a span of 48
hours and the company has plan set up more RDCs to reduce the replacement cycle at
remaining outlets. Following the reduction in the order replacement cycle, the company
may witness increase in market share/self space at existing distributors, which will lead to
rising in revenue per distributor.

Channel-wise break-up:

Channel-wise break up of revenue of

Relaxo Footwear in FY19

6% 4%
7%
Traditional
EBOs
E-Commerce
83% Exports

*Source: Relaxo Annual Reports, Con-call Q419*

The Company has a strong distribution network of approximately more than 50,000 retailers
served through 800 distributors and the company has more than 6000 SKUs (Stock Keeping
Units) across every age group & every price point.

In FY19, approximately, 4% of the company’s total revenue was contributed through exports
and the retail outlets and E-commerce contributed 7% and 5% of the company’s total
revenue. The balance was generated through the traditional distribution channel.

The company has even opened an overseas office in Dubai in FY18 to create a better
relationship with overseas customers.

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 Relaxo Footwear
The Company has 343 Exclusive Brand outlets (EBOs) across India currently, with a
concentrated presence in Delhi, Rajasthan, Gujarat, Haryana, Punjab, Uttar Pradesh and
Uttarakhand. The company commenced 8 stores through asset-light franchisee model in
FY18 on an experimental basis.

*Source: Relaxo Investor Presentation*

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 Relaxo Footwear
Revenue Drivers:
Before understanding which revenue contributor can drive revenue for Relaxo Footwear in
the future, let us first understand how the revenue has grown over the years and
decompose the contribution of Volume and Price Growth.

Price and Volume Growth

₹ 140.0 20.00
18.00
₹ 120.0

Number of pairs sold (In Crores)

16.00
Price per pair sold (In INR)

₹ 100.0 14.00

₹ 80.0 12.00
10.00
₹ 60.0 8.00
₹ 40.0 6.00
4.00
₹ 20.0
2.00
₹ 0.0 0.00
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19

Price per Pair Sold Numbers of Pairs Sold (In Crores)

*Source: Relaxo Annual Reports*

During the period of 2011 to 2019, the average realization has grown from INR 73 to INR
123 at the CAGR of 6.7% and the number of pairs sold per annum has grown from 8.7 crores
to INR 18.4 crores at the CAGR of 9.9%, which shows that over the last decade, the
contribution of both price growth and volume growth has been significant.

However, if we observe the data for shorter period i.e. for 5 years and 2 years, it can be said
that the revenue contribution is skewed towards volume growth and price growth is even
significantly lower than average inflation during the period. Thus, the company is more of
consumption and volume play which is gaining market share from unbranded products in
the mass category.

Particulars CAGR - 2 Years CAGR - 5 Years CAGR - 8 Years

Numbers of Pairs Sold (In Crores) 16.89% 11.28% 9.88%
Price per Pair Sold 2.31% 3.96% 6.67%
Revenue from Footwear 18.58% 15.69% 17.20%
*Source: Relaxo Annual Reports*

Apart from that, one notable point is that the company’s revenue has grown at the rate 17-
18% in the last 8 years, while the Industry is grown at the rate of 10-12%, thus generating
alpha of 6-7% in terms of revenue growth.

25
 Relaxo Footwear
Change in Revenue Contribution through different channels over the past
decade:

FY 11

4%
7%
Traditional
EBOs
Exports
89%

FY 14

0%
8% 3%
Traditional
EBOs
E-Commerce
Exports
89%

FY19

6% 4%
7% Traditional
EBOs
E-Commerce
83%
Exports

*Source: Relaxo Annual Reports, Investor Presentation, Con-call Q419*

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 Relaxo Footwear
The highlights of the above depicted pie-charts are that the revenue contribution through
traditional channel will fall and revenue contribution through E-commerce will rise. Now let
us understand how these revenue contributors can perform in the future:

1) Traditional Distribution Channel:

The main catalyst of growth through Traditional Distribution Channel is shifting of consumer
towards the branded products across mass category and after the implementation of Goods
and Service Tax (GST), larger companies like Relaxo, VKC, Paragon etc will stand to benefit at
the cost of unbranded players because financial health of unbranded players will get
affected because of high cost of compliance.

Moreover, to give tough competition to unbranded players, Relaxo footwear needs to keep
price competitive relative to unbranded players to gain the market share and the company
has been implementing the same strategy for the past two years.

Particulars Mar'18 Mar'19

Volume Growth 16.94% 16.84%
Price Growth 2.00% 0.90%
*Source: Relaxo Annual Reports*

Hawaii Slippers
Year Average price Change YoY
per pair
2015 200 -
2016 220 10.00%
2017 215 -2.27%
2018 210 -2.33%
2019 200 -4.76%
*Source: Brochures, Company Website*

Moreover, there is a shift in the shelves of the retailers in the market as multiple
unorganized brands are getting lower and organized brands are taking more shelf space.

From the period of 2014 to 2019, the revenue through the traditional channel has almost
doubled from 980 Crores to 1886 Crores and has grown at the CAGR of 14.0%, whereas the
overall revenue has grown at the CAGR of 15.7%.

27
 Relaxo Footwear
2) Exclusive Brand Outlets:

Relaxo footwear launched its first Exclusive store in 2005 and since then revenue growth
through retail outlets is more or less in line with the growth of the company’s revenue.

Growth in Exclusive Brand Outlets (EBOs)

400 30.00%

350
25.00%
300
Number of Outlets

20.00%

YoY Growth
250

200 15.00%

150
10.00%
100
5.00%
50

0 0.00%
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year

YoY growth Exclusive Brand Outlets

*Source: Relaxo Investor Presentation, Relaxo Annual Reports*

Revenue per outlet

0.50

0.40
INR Crores

0.30

0.20

0.10

0.00
Mar'11 Mar'14 Mar'19
Year

Revenue per outlet

*Source: Relaxo Investor Presentation, Relaxo Annual Reports*

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 Relaxo Footwear
The number of outlets has grown at the CAGR of 13% during the last 5 years; however
revenue per outlets has been constant, hence revenue CAGR growth through these outlets
is same as growth in the number of outlets. Moreover, it takes at least 1.5-2 years to
achieve break-even of Exclusive outlet. Hence, after the period of time, the profitability may
grow non-linearly higher relative to the growth in revenue.

Apart from the growth in revenue, the crucial aspect is that the Exclusive outlets help to
understand the customers’ needs and plays important role in Brand-recall.

But growing through Exclusive outlets is asset-heavy and hence the Company commenced 8
stores through asset-light franchisee model in FY18 on an experimental basis and the
company may venture into new territories through the asset-light franchisee model.
However, this franchisee contributed negligible amount of revenue in FY18 and FY19, given
the very small number of franchisee outlets relative to size of the company.

3) Exports:

For the past decade, the management of Relaxo and MD Dr Ramesh Kumar Dua is optimistic
regarding the export opportunity, however the revenue through exports have grown from
22 Crores in FY11 to 31 crores in FY15, at CAGR of 8.61%. However, for the period of 2015-
2018, revenue growth was relatively high but taking into account the lower base, the
growth should be considered as extremely low. In FY18, the company has even opened an
overseas office in Dubai to create better relationship with overseas customers and in the
year FY19, the revenue through exports has grown to 86 crores from 47 crores in FY18 i.e.
the growth of 81%.

Revenue from Exports

₹ 100
₹ 90
₹ 80
₹ 70
INR Crores

₹ 60
₹ 50
₹ 40
₹ 30
₹ 20
₹ 10
₹0
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year
Revenue from Exports
*Source: Relaxo Investor Presentation, Relaxo Annual Reports*

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 Relaxo Footwear
4) E-Commerce:

The revenue contribution through E-commerce has grown from 3 crores in FY14 to 136
crores in FY19, contributing 6% of total revenue. E-commerce has outpaced all other
channels in terms of growth. However, E-commerce is not a new source of growth, rather it
is cannibalization of channels from Traditional distribution channel to E-commerce and
because of E-commerce growth in the traditional distribution channel is relatively lower
than the past growth.

E-Commerce contribution to Revenue

160.00
140.00
120.00
INR Crores

100.00
80.00
60.00
40.00
20.00
0.00
Mar'14 Mar'19
Year

E-Commerce contribution to Revenue

*Source: Relaxo Investor Presentation, Relaxo Annual Reports*

30
 Relaxo Footwear
Cost Structure:
To understand the main cost drivers of Relaxo Footwear, I common-sized the profit and loss
statement of the company and this helped me to figure out the cost structure of Relaxo
Footwear, which can be seen in the following pie-chart:

Cost Structure

Cost of goods sold

10% Employee Benefit Expenses

0% Contract Processing
Charges
4% 3% 3% Freight and Forwarding
Charges
5% Advertisement Expenses

53%
Power & Fuel
9%
Depreciation &
Amortization
13% Finance Cost

Others

*Source: Relaxo Annual Reports*

The cost structure of this business is fairly simple to understand and the majority of the line
items of cost structure have been more or less in the same range over the past decade
except raw material.

1) Cost of Goods Sold:

I have already mentioned about raw materials in the value chain and now let us how the
cost of producing / purchasing per pair have grown over the past decade and impact of each
raw material on cost per pair.

Particulars CAGR - 2 Years CAGR - 5 Years CAGR - 8 Years

Cost of producing / purchasing per pair 3.73% 2.66% 3.76%
*Source: Relaxo Annual Reports*

So, more or less the cost per pair has grown at the CAGR of 3-4%.

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 Relaxo Footwear

Cost of producing / purchasing per pair

₹ 70.0

₹ 60.0

₹ 50.0
INR per pair

₹ 40.0

₹ 30.0

₹ 20.0

₹ 10.0

₹ 0.0
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year
Cost of producing / purchasing per pair

*Source: Relaxo Annual Reports*

EVA and Raw Rubber as a % of Sales

18.0%
16.0%
14.0%
12.0%
As a % of sales

10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17
Year

Raw Rubber EVA

*Source: Relaxo Annual Reports* *Note: Data for PU is not given*

Given the fact that the cost of raw rubber as a % of sales has declined from 8% to 3%
because of the change in strategy of company as it is moving more towards PU and EVA
products, it will not have any material impact of cost of producing per pair in recent period,
which led me understand the impact of change in price of EVA and PU on cost per pair.

32
 Relaxo Footwear

EVA Vs Cost of producing / purchasing per pair

140 59.0
58.0
120
57.0
100 56.0
55.0
80
54.0
60
53.0

40 52.0
51.0
20
50.0
0 49.0
FY 15 FY 16 FY 17 FY 18 FY 19

Ethylene Vinyl Acetate (EVA) Price Cost of producing / purchasing per pair

*Source: Relaxo Annual Reports, Indianpetrochem.com*

Polyurethane (PU) Vs Cost of producing / purchasing

per pair
330 59.0
320 58.0

310 57.0
56.0
300
55.0
290
54.0
280
53.0
270
52.0
260 51.0
250 50.0
240 49.0
FY 15 FY 16 FY 17 FY 18 FY 19

Polyurethane (PU) Price Cost of producing / purchasing per pair

*Source: Relaxo Annual Reports, Indianpetrochem.com*

The data and graph suggest that in recent times the cost per pair is influenced by PU price
relatively higher than the EVA price or Rubber price. Moreover, the price of PU is near 5-
year high and hence the gross margins of the company have declined by approximately
200 bps in the last 2 years.

33
 Relaxo Footwear
2) Advertisement expense:

Since inception, the company has incurred 3-4% of sales as the advertisement expense.
Even though the advertisement cost has helped the company in creating a brand but it has
not given the company pricing power. Rather the advantage of advertisement is that it helps
the customers to know the product which in turn attracts the distributors and retailers,
which leads to product visibility on more number of shelves and which in turn helps the
company gain market share.

Advertisement Cost per Pair

4.50
4.00
3.50
3.00
INR per pair

2.50
2.00
1.50
1.00
0.50
0.00
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year

Advertisement Expense per Pair

*Source: Relaxo Annual Reports *

3) Freight and Forwarding charges:

Given the pan-India network of more than 800 distributors and more than 300 exclusive
outlets of Relaxo footwear, the company has to incur heavy Freight and Forwarding charges.

However, the company generates more than 75% of revenue from North and East India and
as the manufacturing units of the company are mainly in North, this expense has been more
or less constant over the past decade. But the company is now planning to expand more in
West and South India and hence this expense may increase as a % of sales.

The company is now constructing new manufacturing units in Western India so that this
cost remains in some control.

34
 Relaxo Footwear

Advertisement Expenses and Freight as a % of Sales

6.0%

5.0%
As a % of sales

4.0%

3.0%

2.0%

1.0%

0.0%
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year

Freight and Forwarding Charges Advertisement Expenses

*Source: Relaxo Annual Reports *

4) Employee Benefit expense:

For the past decade, the employee benefit expense is in the range of 10-11%, which is
reasonable for keeping in mind the manufacturing operation of the business.

Employee benefits expense is a fixed cost which rises at the rate of inflation, which is lower
than the revenue growth of Relaxo footwear hence this expense has decreased as a % of
sales during the period of 2011-16. However, after 30% wage hike in Haryana and
retrospective increase in Bonus ceiling from Rs.10 K to 21 K, this expense has increased.

Employee Benefit Expenses a % of Sales

12.0%
11.0%
10.0%
As a % of sales

9.0%
8.0%
7.0%
6.0%
5.0%
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year

Employee Benefit Expenses

*Source: Relaxo Annual Reports *

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 Relaxo Footwear
5) Contract Processing charges:

Other expenses which form approximately 20% of sales majorly include contract processing
charge which is labour cost on a contractual basis. As per management guidelines, some
categories are growing which require more job work and hence contract processing charges
have increased as a % of sales from 5% in FY13 to 8.45 in FY19.

Contract Processing Charges as a % of Sales

9.0%
8.0%
7.0%
As a % of sales

6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18
Year

Contract Processing Charges

*Source: Relaxo Annual Reports *

6) Power and Fuel Cost

Given the manufacturing business, power cost also forms an important component of total
expenses. To understand the trend of power cost, I have calculated power and fuel cost per
pair rather than calculating power and fuel cost as a % of sales because this cost moves in
line with volume rather than sales.

7) Depreciation expense:

The company has depreciated fixed assets approximately at the rate of 9-11% in the past
decade (on weighted average basis of total fixed assets excluding Freehold Land). The
depreciation expense has been more or less near 3% of revenue in the past nine years.

8) Finance expense:

With gradual repayment of long term debt, finance cost as a % of sales has decreased from
2.5% in FY11 to 0.3% in FY19, which now forms negligible amount in the total cost structure
of the business.

36
 Relaxo Footwear

Power and Fuel Cost per Pair

4.50
4.00
3.50
3.00
INR per pair

2.50
2.00
1.50
1.00
0.50
0.00
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year

Power and Fuel Cost per Pair

*Source: Relaxo Annual Reports *

Depreciation & Amortization as a % of Sales

3.5%

3.0%

2.5%
As a % of sales

2.0%

1.5%

1.0%

0.5%

0.0%
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year

Depreciation & Amortization

*Source: Relaxo Annual Reports *

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 Relaxo Footwear

Finance cost as a % of sales

3.0%

2.5%
As a % of sales

2.0%

1.5%

1.0%

0.5%

0.0%
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year

Finance Cost

*Source: Relaxo Annual Reports *

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 Relaxo Footwear
Financial Highlights and Ratio Analysis:
Topline and Bottom-line Growth:

Revenue Growth
Revenue CAGR - 8 Years 17.13%
Revenue CAGR - 5 Years 15.27%
Revenue CAGR - 3 Years 13.27%
EBITDA Growth
EBITDA CAGR - 8 Years 20.72%
EBITDA CAGR - 5 Years 17.14%
EBITDA CAGR - 3 Years 10.57%
PAT Growth
PAT CAGR - 8 Years 26.49%
PAT CAGR - 5 Years 21.72%
PAT CAGR - 3 Years 13.39%
*Source: Relaxo Annual Reports *

Profitabilty per pair

₹ 18.0 ₹ 70.0
Net/Operating Inome per pair (INR)

₹ 16.0
₹ 60.0

Gross Inome per pair (INR)

₹ 14.0
₹ 50.0
₹ 12.0
₹ 10.0 ₹ 40.0

₹ 8.0 ₹ 30.0
₹ 6.0
₹ 20.0
₹ 4.0
₹ 10.0
₹ 2.0
₹ 0.0 ₹ 0.0
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year
Gross Profit per Pair Sold (Not included profit from other operating income)
Operating Income per Pair
Net Income per Pair

*Source: Relaxo Annual Reports *

The above data depicts that the growth is slowing down due to base effect as revenue and
profitability growth during five years period is lower than eight years period and revenue
and profitability growth during three years period is lower than five years period.

Apart from that, in the past 3-4 years, profitability per pair is constant which shows that the
majority of growth is volume driver and not price-driven.

39
 Relaxo Footwear

Cash Conversion Cycle (In Days)

140.0
120.0
Number of days

100.0
80.0
60.0
40.0
20.0
0.0
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Receivable Days Inventory Days
Payable Days Cash Conversion Cycle (In Days)

*Source: Relaxo Annual Reports *

During the period of FY11 to FY19, Receivable days has moved from 13 days to 31 days,
Inventory days has moved from 113 days to 136 days, Payable days has moved from 52 days
to 65 days, whereas Cash Conversion cycle has deteriorated from 75 days to 103 days.

Revenue Vs Receivable
Revenue CAGR - 8 Years 17.13%
Receivable CAGR - 8 Years 30.59%

Revenue CAGR - 5 Years 15.27%

Receivable CAGR - 5 Years 23.58%

Revenue CAGR - 3 Years 13.27%

Receivable CAGR - 3 Years 22.01%
*Source: Relaxo Annual Reports*

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019
Bad Debts as a % of
0.01% 0.02% 0.00% 0.01% 0.01% 0.00% 0.00% 0.02% 0.00%
Sales
*Source: Relaxo Annual Reports*

Even though the Receivable has grown at a considerably higher rate than Revenue, there is
no major bad debt write off or inventory write off, negligible amount of receivable which
are more than 6 months, no non-current receivable.

Thus, it depicts that the company is not stuffing the channel but providing better credit
terms to gain market share.

40
 Relaxo Footwear
Also, with an increase in number of product designs, inventory days have deteriorated.
Increase in payable days depicts that company is able to get better terms from suppliers and
bargaining power of the company is increasing with increase in scale of business.

Capital Structure and Solvency Ratio Analysis

1.40 20.00
18.00
1.20
16.00

CFO to Interest (Cash ICR)

1.00
Debt to Equity ratio

14.00

0.80 12.00
10.00
0.60 8.00
0.40 6.00
4.00
0.20
2.00
0.00 0.00
Mar'11 Mar'13 Mar'15 Mar'17 Mar'19
Debt to Equity (D/E) CFO to Interest

*Source: Relaxo Annual Reports*

Du-pont Analysis of RoIC

25.0% 3.00

2.50
20.0%
in % (Margin and RoIC)

Capital Asset Turnover

2.00
15.0%
1.50
10.0%
1.00

5.0%
0.50

0.0% 0.00
Mar'11 Mar'13 Mar'15 Mar'17 Mar'19
Capital Asset Turnover RoIC NOPAT Margins

*Source: Relaxo Annual Reports*

41
 Relaxo Footwear

Du-Pont Analysis of RoE

30.0% 3.50

Asset Turnover / Leverage Ratio

25.0% 3.00
in % (Margin and RoE)

2.50
20.0%
2.00
15.0%
1.50
10.0%
1.00
5.0% 0.50

0.0% 0.00
Mar'11Mar'12Mar'13Mar'14Mar'15Mar'16Mar'17Mar'18Mar'19
Year

Total Asset Turnover Leverage Ratio RoE PAT Margins

*Source: Relaxo Annual Reports*

Particulars Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19

3- Year Rolling RoIIC 22.7% 19.4% 23.2% 14.3% 37.2% 12.6%
3- Year Rolling Change in NOPAT ₹ 41.3 ₹ 63.0 ₹ 74.9 ₹ 41.3 ₹ 47.6 ₹ 40.9
3- Year Rolling Change in Invested Capital ₹ 181.4 ₹ 325.7 ₹ 322.5 ₹ 289.5 ₹ 128.1 ₹ 324.2

3- Year Rolling Incremental RoE 27.4% 32.3% 27.5% 16.5% 14.7% 9.0%
3- Year Rolling Change in Net Profit ₹ 38.9 ₹ 63.1 ₹ 75.6 ₹ 54.3 ₹ 57.7 ₹ 55.1
3- Year Rolling Change in Book Value ₹ 141.9 ₹ 195.4 ₹ 275.2 ₹ 329.8 ₹ 393.4 ₹ 615.5
*Source: Relaxo Annual Reports*

The above charts depict that over the years, profitability and margins have improved, the
efficiency of assets and turnover have improved and leverage has decreased.

However, in the year 2019, the gross margins fell because of increase in raw material prices
(PU) and turnover fell because of increase in capacity by 1.25 lacs unit in 2019 and the plant
will take a year or two to come at an average capacity utilization of the company. Hence,
there is dip in 2019 in return ratios.

42
 Relaxo Footwear
The above ratios and financial parameters suggest that the company has earned accounting
profit and there is significant growth in revenue and profitability in the past decade. But the
value is generated for shareholders if the company earns economic profit i.e. Return on
Invested Capital above the cost of Capital.

Economic Value Creation

12.0% 25.0%

10.0%
20.0%
Spread of RoIC - WACC

8.0%

6.0% 15.0%

RoIC
4.0% 10.0%
2.0%
5.0%
0.0%

-2.0% 0.0%

Year
Spread of RoIC - WACC RoIC

*Source: Relaxo Annual Reports*

I have considered the cost of capital i.e. Opportunity cost as 12%, the return generated by
Nifty ETF in the past decade.

Relaxo Footwear has consistently beaten the cost of capital in the past eight years and
generated value for its stakeholders as well as shareholders.

But the main aspect is to figure out whether Relaxo footwear will be able to generate
positive spread over RoIC in the future or not. For that, we need to understand the
competitiveness in the industry as well the competitive advantage of Relaxo.

43
 Relaxo Footwear
Industry Framework and Michael Porter Analysis:
Following table depicts the footwear industry’s framework and the competitive intensity of
the same:

Key Points Description Conclusion

In order to gain market share, new entrants need to
provide significant credit period need to keep price
very competitive, need to incur lot of expenditure on
marketing and advertisement and hence the new
entrants may not able to sustain and compete with
developed players in the market.

Supply Chain Management and Distribution Network

are very important in this industry to make product
Threat of new
available at various touchpoints which cannot be built Low Threat
entrants
overnight.

As larger volumes translate into lower cost in this

industry, the developed players have cost advantage
and it becomes difficult for new entrants to match
economies of scale of developed players.

Some brand loyalty of customers in branded footwear

segment
The raw material is mainly imported and hence the
companies mainly stick to particular suppliers as the
suppliers understand the quality required by the
Bargaining Medium
company.
power of Bargaining power
Suppliers of suppliers
However, such commodities have international market
pricing. So the footwear companies do not have control
over pricing neither do suppliers.
A large number of players (Fragmented Players) in the
industry gives the customers a lot of options to choose
Bargaining
the product. High Bargaining
Power of
power of Buyers
Buyers
The products are mainly undifferentiated and the
switching cost of changing products/brands is low

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 Relaxo Footwear
Key Points Description Conclusion
Footwear Industry is highly fragmented industry
with unbranded players forming more than 55% of
the total market leading to fierce competition for
their share of pie.

Stiffer competition in the mass and economy

segment i.e. High volume low price segment.
Medium-High
Rivalry among
Rivalry among
the existing E-commerce is slowly becoming the preferred
the existing
player source of channel by customers and there is fierce
player
competition on E-commerce platform for capturing
market share.

Also, the industry is growing at fairly higher rate and

hence the competitors may want to capture the new
customers rather than capturing market share of
existing players.
There is no switching cost in footwear, especially in
mass and economy segment as customers will buy
the product if it caters his/her need and taste.
However, in the premium category, the customers
may have high attachment with brand.

Thus, low switching cost in mass segment leads to

higher price sensitivity while in premium category,
price sensitivity is low.

Threat of Moreover, this industry is less prone to disruption as Medium-High

Substitutes there is no alternative to footwear but the trends Threat
within the industry change quickly so the
incumbents need to stay abreast with the latest
trends in the industry to maintain their edge in the
market.

With the rise in market size of copy (pirated)

products of global footwear brands, the consumer
may prefer (pirated) products of global brands like
Nike, Adidas over the products of Indian branded
footwear companies.

On the basis of Michael Porter analysis of footwear Industry, it can be concluded that the
competitiveness in the Industry is fairly high.

I have also created a checklist for understanding the industry’s competitiveness and I have attached
the excel file of the same along with this report.

45
 Relaxo Footwear
Moat Analysis:
Moat is a source of a durable competitive advantage which helps the company to generate
alpha in Return on Capital over the cost of capital, over the Industry Average and its Peers.

In India, only two listed players (out of seven) in the Footwear Industry have been able to
consistently generate return on Capital over the cost of capital and Relaxo Footwear being
one of them.

In my opinion, Relaxo Footwear has two sources of competitive advantage: first Entry
barrier which is because of economies of scale and the second, Distribution Network.

Entry Barriers:

The average realization per pair of Relaxo Footwear is INR 123 and an average profit per pair
is INR 10, which makes it, extremely difficult for the new players to compete with Relaxo. If
a company prices its products lower than that of Relaxo to attract customers, it has to bear
huge losses in order to gain market share.

Moreover, the new players have to provide better credit term and better margins to
distributors and retailers than Relaxo; need to incur a lot of expenditure on marketing and
advertisement. Apart from that new player has to pay higher prices for raw material than
Relaxo because new players will be smaller customer for suppliers of EVA and PU. Also the
new company has to pay suppliers much earlier than Relaxo pays to its suppliers.

Thus, it becomes next to impossible for the new company to bear negative margins, huge
working capital, so it is not feasible to compete with Relaxo Footwear.

Distribution Network:

As mentioned before, Relaxo has a pan-India distribution network of 50000 retailers being
served through 800 distributors. It takes decades (not years) to build such network.
Connecting with entry barriers, distributors would like sell the product of discovered brand
like Relaxo than to sell product of new entrant unless they get extraordinary terms from the
company.

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 Relaxo Footwear
Management and KMPs Remuneration:
Key Managerial Personnel
Over 42 years of experience in sales and marketing, production and new product
development in the Footwear Industry
Ramesh Kumar Dua,
Commerce Graduate & Rubber Technologist (LPRI, London)
Managing Director
At the age of 17, he was helping his brother to run the manufacturing unit of
Hawaii chappals.
Over 45 years of experience in new product development and quality control in
the Footwear Industry
Mukand Lal Dua,
Whole Time Director
Director in Relaxo Rubber Private Limited & Marvel Polymers Private Limited §
Science Graduate
Over 22 years of experience in production and new product development and has
rich knowledge of product mix in the Footwear Industry
Nikhil Dua, Whole
Time Director
Commerce graduate and has studied from International School of Modern Shoe-
making, Czech Republic

KMP's Remuneration
35 19.00%

KMP's Remuneration as a % of Net profit

30 17.00%

25 15.00%
INR Crores

20 13.00%

15 11.00%

10 9.00%

5 7.00%

0 5.00%
Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18 Mar'19
Year

KMP's Remuneration KMP's Remuneration as a % of Net profit

*Source: Relaxo Annual Reports*

Majority of KMPs Remuneration is in the form of Commission which is aligned with Profit
after tax. This is a very positive sign; as the interest of promoter is align with shareholders’
interest. However, KMP’s remuneration as a % of Net profit i.e. 15-17% of Net profit seems
to be considerably higher.

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 Relaxo Footwear
Few Important aspects:
Contingent Liability:
Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019
Claims against company ₹1 ₹1 ₹2 ₹1 ₹1 ₹1 ₹3 ₹4 ₹3
Surety/Guarantor ₹0 ₹0 ₹0 ₹0 ₹0 ₹0 ₹0 ₹0 ₹0
Entry tax** ₹0 ₹4 ₹ 7 ₹ 12 ₹ 14 ₹ 22 ₹ 29 ₹ 37 ₹ 46
Total ₹1 ₹5 ₹ 9 ₹ 13 ₹ 15 ₹ 23 ₹ 32 ₹ 41 ₹ 49
As a % of Net profit 5% 12% 20% 19% 15% 19% 27% 25% 28%
*Source: Relaxo Annual Reports*

**The matter was decided in favour of the Company and department preferred appeal
before Supreme Court of India

Major Related Party Transaction:

Particulars 2011 2012 2013
Purchase of goods from Associates ₹ 172 ₹ 165 ₹ 99
Purchase of goods from Associates as a % of Total COGS 45.74% 35.83% 21.03%
. *Source: Relaxo Annual Reports*

Before FY14, the company was importing few raw materials through the associates but since
FY14, there has been no major Related Party Transaction.

Corporate Governance:
All the boards' meetings are attended by the board of directors.

No related party / KMP (Key Managerial Personnel) transaction issues.

No adverse opinion by the auditor.

CSR policy fulfilled.

No shares pledged by the promoter.

Promoter Holding:
Particulars Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Shareholding
75% 75% 75% 75% 75% 75% 75% 74% 71%
of Promoters

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 Relaxo Footwear
Valuation:
In the attached excel sheet, I have forecasted revenue and EPS of the company and based
on that I have calculated the expected return in next 5 years based on Median PE multiple
and Median Market Capitalisation / Revenue Multiple.

2024 Base 2024 Bull 2024 Bear

Year
Case Case Case
Revenue ₹ 4,266.10 ₹ 5,243.50 ₹ 3,539.80
Expected Revenue growth CAGR 13.20% 18.00% 9.10%
PAT ₹ 362.40 ₹ 482.70 ₹ 274.80
Outstanding Shares (Crores) 25 25 25
EPS (INR) ₹ 14.50 ₹ 19.30 ₹ 11.00
Expected EPS growth CAGR 15.40% 22.20% 9.20%

Median P/E (2011 to 2019) 38.43 38.43 38.43

Current Share Price (06/09/19) (INR) ₹ 478.00 ₹ 478.00 ₹ 478.00
Expected Share Price (INR) ₹ 557.00 ₹ 741.90 ₹ 422.40
Expected Return 3.11% 9.19% -2.44%

Median Market Capitalisation / Revenue (2011 to 2019) 2.88 2.88 2.88

Current Market Cap (06/09/19) ₹ 11,950.00 ₹ 11,950.00 ₹ 11,950.00
Expected Market Cap ₹ 12,272.60 ₹ 15,084.50 ₹ 10,183.40
Current Share Price (06/09/19) (INR) ₹ 478.00 ₹ 478.00 ₹ 478.00
Expected Share Price (INR) ₹ 490.90 ₹ 603.40 ₹ 407.30
Expected Return 0.53% 4.77% -3.15%
(In INR Crores except per share amounts or otherwise stated)

Given the fact that valuation based on Median multiple may not be appropriate, I have done
a sensitivity analysis of the potential return.

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 Relaxo Footwear
Sensitivity analysis based on PE multiple:

Current EPS (INR) 7.07

Current P/E 67.5
Current Share Price (INR) 478

EPS Growth
Expected PE Bear Case 12% Base Case 16% 18% 20% Bull Case
70 10% 13% 16% 17% 19% 21% 23%
60 7% 9% 13% 13% 15% 17% 19%
50 3% 5% 9% 9% 11% 13% 15%
40 -2% 1% 4% 4% 6% 8% 10%
35 -4% -2% 1% 2% 3% 5% 7%
30 -7% -5% -2% -1% 0% 2% 4%
20 -14% -12% -10% -9% -8% -6% -4%
10 -25% -24% -21% -21% -19% -18% -17%

Sensitivity analysis based on Current Market Cap / Sales multiple:

Current Revenue 2292.08

Current Market Cap / Sales 5.2
Current Market Cap 11950

Revenue Growth
Expected Market Cap to Sales Bear Case 12% 14% Base Case 16% Bull Case 22%
6 12% 15% 17% 16% 19% 21% 25%
5 8% 11% 13% 12% 15% 17% 21%
4 3% 6% 8% 7% 10% 12% 16%
3 -2% 0% 2% 1% 4% 6% 9%
2 -10% -8% -6% -7% -4% -3% 1%
1 -22% -20% -18% -19% -17% -15% -12%

In this case, if we take the all-time high multiple as well as bull case of revenue and EPS
growth, the expected return is near CAGR of 20-25%, which in my opinion is lower
considering the lower margin of safety as the probability of going wrong is extremely high.

However, if assume that exit multiple will be near the median, the stock will only generate
return at the CAGR of 5-7%.

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 Relaxo Footwear
Right price to buy the stock:

Current EPS ₹ 7.07

Current PE Multiple 67.58

BASE CASE EPS ₹ 14.50

Median PE Exit Multiple 38.43

Expected Share Price 557.235

As an Individual, I will expect at least 20% return with a high margin of

safety

Right Price to buy the

stock ₹ 223.94

I will buy the stock, if I get it at less than INR 223, below more than 50% from the current
market price.

Therefore, after analysing the operational and financial performance of the company, it can
be said that Relaxo Footwear is a good business run by capable and ethical management. It
can be a potential investment opportunity but not at the current market price.

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