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The average selling price of Bata’s products are much higher than Relaxo’s
The average selling price of Bata’s products are much higher than Relaxo’s

Relaxo Footwears may be better placed to ride the covid downturn

Relaxo has done better on the profitability front, and its prospects look relatively good due to its low-cost products

Less is more. A case in point is Relaxo Footwears Ltd. The company’s product offerings are relatively low-priced and predominantly cater to the masses. But its valuations are of the premium category, even ahead of larger competitor Bata India Ltd.

The Relaxo stock trades at about 50 times estimated earnings for financial year 2022, according to Bloomberg data. For Bata, it stands at 41 times. Relaxo has also delivered better revenue growth. In the past three years, its revenue grew at a compounded annual growth rate of 14%, while Bata India grew 7%.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

Besides, some analysts said its product portfolio is better placed to ride the downturn. “We believe that, in the light of expected down-trading, Relaxo has a better product offering at the bottom of the pyramid compared to other players such as Bata," said Dolat Capital Market Pvt. Ltd analysts in a report on 8 June.

The average selling price of Bata’s products are much higher than Relaxo’s. In 2018-19, while the average realisation on sale of Bata’s products stood at 620, Relaxo’s average realizations were only one-fifth of it at 125.

In the short term, however, the disruption owing to covid-19 has hit Relaxo’s revenue harder. Its March quarter revenue has declined by 15%, compared to the 9% drop for Bata. What gives? The answer to this lies in the business strategies.

Akhil Parekh, analyst, Elara Securities (India) Pvt. Ltd, said: “Relaxo is a distribution-led format where a good amount of March quarter sales happen towards the last few weeks of March and as such, was affected more by covid-19 restrictions." On the other hand, this impact was not so pronounced in the case of Bata, which is essentially a retailer. “This also means that Relaxo is an asset-light business and rental costs are much lesser compared to Bata."

The factors seemed to have a bearing on profitability. In Q4FY20, Bata’s comparable operating profits adjusted for Indian Accounting Standard 116 fell by 31%, much higher than the 10.5% drop Relaxo’s profit, Elara added.

But while Relaxo has done better on the profitability front, and its prospects look good owing to the lower cost of its products, its rich valuations suggest they have leapt beyond the rosy expectations.

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