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Home / Markets / Mark To Market /  Relaxo Footwears has a rocky road to climb

Relaxo Footwears Ltd is walking a tightrope. Results for the three months ended March (Q4FY22) show costs pressures have deeply hurt profitability. Ebitda (earnings before interest, tax, depreciation and amortization) margin has contracted by 587 basis points (bps) year-on-year (y-o-y) to 15.9% last quarter. One basis point is 0.01%.

Relaxo offered incentives to dealers to partially negate the impact of the goods and services tax rate hike (on footwear priced below 1,000), which was also a drag on Ebitda margins. Further, on average, prices of the company’s raw materials increased by 50-60% y-o-y and 20% quarter-on-quarter.

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To offset this, Relaxo increased prices, boosting its average realizations to 164 a pair from 129 in Q4FY21. Realizations were flat sequentially. However, this did not offer much respite. Its revenues declined by 6.6% y-o-y to 698 crore. Disruptions because of the Omicron variant of coronavirus also affected revenues. Further, the increase in prices weighed on demand. Volumes have declined y-o-y, as well as sequentially.

“Sharp price increases led to downtrading in Q4FY22. While consumers have moved to the unorganized segment, this trend may not last long as the quality remains comparatively inferior," said Akhil Parekh, an analyst at Centrum Broking.

Going ahead, for FY23, Relaxo intends to achieve 17% Ebitda margin, which has been seen in FY20. On this front, FY21 was an exceptional year with a stellar Ebitda margin of 21%.

However, cost pressures have led to a 533 bps drop in Ebitda margin to 15.7% in FY22.

Meanwhile, shares of the company have declined by 22% so far in this calendar year, though they are still 12.6% up over the past one year.

The scope for meaningful upsides is capped against the backdrop of margin troubles in the foreseeable future. Relaxo may well find it difficult to fully pass on the increase in costs. Unsurprisingly then, analysts have trimmed their earnings’ estimates. “There are concerns on demand and margins in the near-term. Accordingly, we have cut our earnings per share estimates by 19% and 11% for FY23/24 respectively," said Parekh.

Accordingly, Centrum has changed its rating from buy to add with a target price of 1,057 valuing at 60x FY24 estimated earnings. On Tuesday, Relaxo’s shares closed at 1,024.25 on NSE.

Notwithstanding the anticipated near- to medium-term pain, prospects seem better from a long-term point of view. “In-house manufacturing, strong distribution reach and increase in penetration are key levers for future growth. We continue to believe that the company has attractive product offerings and has the ability to premiumize portfolio at the lower end of the pyramid," said analysts from Dolat Capital Market Pvt. Ltd in a report on 14 May.

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