Watch that walk

PENNY WISE

Liberty Shoes, the second largest Indian footwear manufacturer, is betting big on India's booming retail industry.

There are more than a billion pair of feet in our country. However, since a lot of people still can't afford even one pair of slippers, the average footwear per person in our country is only one pair.

"In several South Asian countries, each person owns at least two pairs of footwear," says an industry expert. That means the footwear industry can hope to at least double its sales given the rising income levels.

Plus, an increasing proportion of younger population in the upper and middle income group are tilting towards more expensive, branded shoes thanks to the increasing affordability.

Liberty Shoes, the second largest footwear manufacturer in the country and one of the largest in the world with a capacity of 75 lakh pairs per annum - will be an obvious beneficiary of this increased sales.

Liberty has a variety of footwear ranging from Rs 250 to Rs 3000. It has several well-known brands like Coolers, Footfun, Force 10, Fortune, Gliders, Senorita, Tiptop and Windsor under its fold. Liberty offers footwear for men, women and children.

Gliders is the flagship brand of the company and contributes about 42 per cent in terms of volume and 27 per cent by value. After the completion of its expansion projects in the tax free zones i.e. a unit in Uttaranchal and two units in Himachal Pradesh, the capacity would be 1.25 crore pairs per annum.

But the company aims to go one step further. It wants to be more than just a plain shoe manufacturer. It has chalked out aggressive retail plans. Liberty has formed a separate subsidiary by way of a 50:50 joint venture with India's largest retailer, Pantaloon India, called Footmark Retail India Pvt Ltd.

After test-marketing the first store in Ahmedabad to be opened shortly, the company plans to add 10-14 stores every year with an average retail area of 10,000 sq ft. In next 3-5 years, the company plans to open 60 such stores.

Adesh Gupta, Executive Director & CEO of Liberty shoes points out, " The tie-up with Pantaloon will give the much needed volumes to our company. The purpose is also to understand what the customer wants rather than what we can manufacture."

According to Mehraboon Irani, vice president-equity, Darashaw Broking & Investment Banking, "The company's tie-up with Pantaloon and the expansion projects in the tax free zones of Uttaranchal and Himachal Pradesh is expected to boost margins and its earnings per share in the coming years."

Besides Pantaloon, the company operates its own retail outlets through its subsidiary called Liberty Retail Revolution (LRRL), which was hived off as a separate subsidiary as a part of restructuring in 2004.

The company currently manages nine Retail Revolution stores and plans to double them in this year by adding 30,000 sq ft to its current 50,000. It also manages footwear section at Westside and Pyramid and few more such arrangements are expected in future.

With this, the company will operate under four different formats, viz. franchise route (400), multibrand outlets (through 5000 distributors), Revolution stores and Footmark.

Though the business through franchises and distributors contribute maximum share to the kitty, the company earns highest realisation from LRRL.

Liberty is also luring global retail majors towards its shore. The company has executed orders worth Rs 4-5 crore for the world's largest retailer, Walmart. And it is hopeful to get more such orders in future.

According to an analyst, this is a step in the right direction as it will give the company global presence and good volumes for bolstering exports, that form about 25 per cent of total turnover.

However this is not likely to translate into higher margins. Even Nike has agreed to source roughly 10,000 pairs of shoes per month from Liberty Shoes starting June 2006.

With all these positive developments, the company expects to grow at about 25-30 per cent in next two years. This is much higher than the overall industry growth of around 10 per cent.

According to industry sources, if the footwear industry is brought on a par with the apparel sector, which attracts a tax rate of only around 4 per cent, then the industry can grow at a robust 15-20 per cent.

This, along with the announcements in the previous two budgets, can boost the company's performance even further. While prices of shoes under Rs 250 were already exempt from excise duty, Union Budget 2006-07 halved the excise duty for shoes ranging from Rs 250-750 from 16 to 8 per cent.

Munish Kakra, company secretary, says, "This will helps us to price our products at competitive rates and thus counter unhealthy competition from the unorganised sector (forming about 80 per cent of the market). The company derives about 15 per cent of its total turnover from this price range."

Since the government has now given a green signal for foreign participation in single brand retail outlets, some analysts feel that the entry of foreign players could spoil the party for Indian branded footwear sellers. They feel that people may be willing to pay a premium and buy foreign brands. However Gupta disagrees.

"The entry of foreign brands is not a big threat as the domestic market size for such products is still quite small. Currently, foreign brands are available mostly in the sports shoes category. On the other hand, we are a one stop shop for the entire family."

For the quarter ended March 2006, the company reported a growth of 30 per cent and 60 per cent in its sales and net profit at Rs 57.7 crore and Rs 5.8 crore respectively (See Table on 'Financials'). Operating profit margin declined mainly due to a modest increase in raw material cost.

However net profit margin improved substantially due to sharp decline in interest costs. For the year ended FY06, though the growth in net sales has been modest at 15 per cent at Rs 204.4, net profit has more than doubled at Rs 19.7 crore.

This holds true even for its consolidated financial performance which includes results of LRRL. Margin improvement in the consolidated results has been even higher. The company hopes to maintain a net margin of 10 per cent.

The company's improving financials has reflected in its price performance on the bourses. The stock price of Liberty has almost tripled to Rs 238. Analysts still expect an upside of around 37.5 per cent in the medium term.

However they advise the investors to take exposure in the stock from an investment perspective. The stock trades at 15.8 times and 12.8 times its FY07 and FY08 estimated earnings.