Multiple price hikes could impact demand of footwear companies, say experts

The increase in product prices are on account of higher input costs, GST hike

From the start of May to their 52-week highs in November, listed footwear majors such as Bata India (Bata) and Relaxo Footwears (Relaxo) have outperformed the BSE 500 companies gaining 40-66 per cent during this period. The unlock process led to a rise in discretionary spends helping the companies reach sales close to the pre-pandemic levels.

The gains were also on expectations that expansion, higher operational leverage and premiumisation would boost the revenue growth and margins of the two companies. While the street is bullish about the prospects of these companies in the medium term, there are some near-term headwinds which could derail demand and margins.

One of the headwinds is the increase in goods and services tax (GST) from 5 per cent to 12 per cent on footwear costing up to Rs 1,000. The revised rates are meant to reverse the inverted duty structure wherein raw materials for the footwear sector are taxed at 12 per cent while the finished products were taxed at 5 per cent resulting in input tax credits. There could be a twin impact on margins as well as demand from the GST rate hike.

Analysts led by Himanshu Nayyar of YES Securities expect some near‐term margin pressure as companies might offer additional discounts to aggressively liquidate the existing inventory with channel partners where changing prices might be difficult. Inventory level for Relaxo at the end of September stood at Rs 542 crore while that for Bata was at Rs 728 crore. Given that the average selling prices per unit of Relaxo is at Rs 150 while that for Bata is Rs 750, they would be impacted due to the hike..

The other headwind would be the impact on demand as companies pass on the GST hike to consumers. “With persistent inflation and this added increase in GST rates, a further 15‐20 per cent price hike in the upcoming season can be expected which has the potential to disrupt the recent recovery seen in consumption,” says Nayyar of YES Securities.

In fact, high raw material costs had led to pressures on margins in the September quarter. Relaxo’s gross margins fell 660 basis points while operating profit margins were down 560 basis points over the year ago quarter. The decline in margins came despite a 15 per cent hike taken by the company so far in the year.

The headwinds for the sector are coming at a time when demand was picking up on the back of higher outdoor activity, opening up of educational institutions and improved sales across categories. Average growth for footwear companies, according to Anand Rathi Research, was up 41 per cent y-o-y. Bata reported the highest growth followed by Khadim India at 33 per cent and Relaxo at 24 per cent.  

While demand for slippers and open footwear was higher over the past year, the trend was reversing with volumes of outside wear and closed footwear increasing in the September quarter. Similarly fashion, wedding and festival segments too saw an improvement but it may get impacted if there are higher curbs on events/travel due to the new Covid variant.  

Among the major listed companies, Bata India’s overall sales recovered to 85 per cent of pre-Covid levels while formal and school footwear are at 60-65 per cent. The company is seeking to increase the share of casual footwear (Power, North Star, Floatz) which is currently at 40 per cent of revenues as compared to 30 per cent prior to Covid. Higher sales from the digital channel which is currently at 14 per cent of revenues could be another trigger.

Relaxo has been a key beneficiary of higher demand for slippers/open footwear over the past year as these products (including brands such Flite, Bahamas, Relaxo, Sparx) contribute 85-90 per cent of sales. The company’s focus on premiumisation will translate to more premium products in each category which should boost gross margins.

Given the near term pressures, investors should await the impact of pricing action by the companies, demand trends and margins before considering Bata and Relaxo.