Why some footwear stocks are walking ahead of others

There is optimism on the easing of the restrictions imposed during the pandemic, leading to better consumer discretionary demand. Rising work from office trends and the wedding season also influence some categories positively. However, this does not mean all footwear stocks have taken off. So far in FY23, shares of Bata India Ltd are down by nearly 6% and those of Relaxo Footwears Ltd remain flattish.

“People are moving out now; so they need shoes that can be worn outside, which naturally doesn’t augur well for Relaxo, which has higher salience of open footwear," said an analyst requesting anonymity. For Bata, the growth outlook is relatively muted, according to analysts.

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Why are investors thrilled about the prospects of Campus and Metro? Campus is primarily engaged in the sports and athleisure (S&A) segment. “Rather than competing at the top of the pyramid with established multinational corporation brands, Campus identified the opportunity in the mid and bottom of the pyramid, (about 85% of the addressable market) of the S&A market, where there was a need for branded products," said analysts from JM Financial Institutional Securities Ltd.

The company has been able to drive premiumization (average selling price CAGR of about 9% over FY19-22), resulting in strong revenue growth and Ebitda margin expansion, the brokerage firm said.

As such, Campus’ revenue and profit growth expectations are strong over the next few years. The same holds true for Metro as well. “Metro Brands’ ability to run an efficient retail network, as witnessed by the superlative productivity of ₹25,000 per sq. ft. and store-level Ebitda margin of 25%, has translated into healthy net cash balance sheet and superlative return on invested capital," said analysts from Motilal Oswal Financial Services. Being one-third the size of Bata, there is a huge opportunity for the company to expand its store count, the brokerage said in a recent report.

On the other hand, though Bata has a wide footprint, the company’s recovery from the covid lows has been slow. Bata’s three-year revenue CAGR in the June quarter (Q1FY23) was 2.2% and Relaxo clocked 1%. Metro’s three-year revenue CAGR in Q1 was 18%, according to HDFC Securities.

Relaxo has a large presence in the lower-priced footwear segment, which has borne the brunt of higher inflation. Such pressures would continue to weigh on Relaxo’s growth. However, the upcoming festive season may bring some respite. The company is adding capacity and also focusing on the premium segment. Bata’s expansion into the sneaker segment is likely to accelerate growth. In Q1, Bata’s average selling price rose by 20% year-on-year, helped by an increase in contribution from the sneakers category. However, competition is a big concern.

That said, valuations of all these footwear companies are demanding. Campus, Metro, Bata, and Relaxo trade at 68 times, 49 times, 47 times and 77 times, respectively, their estimated earnings per share for FY24, according to Motilal Oswal.

Investors seem to be capturing the bright picture to a good extent. Even so, high inflation that may hurt demand, rising input costs. and competition are some factors that can make the path difficult for footwear companies.

 

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