YES Securities initiates 'Sell' on Relaxo Footwear amid rich valuations

In the past two trading sessions, on the bourses, the stock has dropped about 3%. Today (August 26), the stock has fallen as much as 1.87% to hit an intraday low of Rs 794.80 per share.

YES Securities on Relaxo Footwear: Domestic brokerage YES Securities has initiated coverage on footwear brand Relaxo Footwear with a ‘Sell’ rating to the stock due to expensive valuations. The brokerage has set a target price of Rs 718 per share, implying a down side of 11.4 per cent from previous close of Rs 809.95 per share.  

“Historically, Relaxo Footwear has traded at a premium multiple of price-to-earnings (P/E) of 90x (average 1-year forward multiple), since FY18. At current market price (CMP), the stock trades at P/E(x) of 82x/68x on FY25E/FY26E earnings per share (EPS) of Rs 10/Rs 12, respectively. We initiate coverage on Relaxo Footwear Ltd with a ‘Sell’ rating, valuing the company at P/E(x) of 60x on FY26E EPS, for a target price of Rs 718,” said Udit Gajiwala, lead analyst of YES Securities in a note.

In the past two trading sessions, on the bourses, the stock has dropped about 3 per cent. Today (August 26), the stock has fallen as much as 1.87 per cent to hit an intraday low of Rs 794.80 per share. 

That apart, analysts noted that Relaxo Footwear Ltd has built a robust position in the mass open footwear segment with a vast presence covering both trade & D2C channels. Notably, Relaxo Footwear is the only company among its peers to manufacture 100 per cent of its products in-house. They reckon Relaxo Footwear should benefit from the premiumisation trend with increasing penetration of the ‘Sparx’ & ‘Flite’ brands. 

Here are the key factors for initiating coverage on Relaxo Footwear:

Diverse product range in open footwear

Relaxo Footwear, a leading Fortune 500 company in India, dominates the open footwear segment, holding over 50 per cent of the market share, YES Securities said in a note. The company's extensive product line includes rubber-based hawai slippers, Eva slippers, PU slippers, casual shoes, sports shoes, sandals, and school shoes across mass and economy price ranges. As a market leader in open footwear, Relaxo Footwear generates approximately 80 per cent of its revenue from this category, capturing a volume share of around 7-8 per cent and 20 per cent in the organised, non-leather footwear market. A recent surge in demand for open footwear, analysts believe, has boosted Relaxo Footwear’s volumes by 14 per cent year-on-year for FY24.

Growth in organised sector and BIS compliance
 

The organised footwear sector is anticipated to grow at a rate of about 13 per cent compound annual growth rate (CAGR0 compared to the total footwear industry’s 8 per cent CAGR. According to YES Securities, the organised segment’s share is projected to rise to 40 per cent of the total footwear market, positioning Relaxo Footwear to benefit considerably from the shift toward branded products. 

Additionally, the implementation of Bureau of Indian Standards (BIS) norms is expected to further drive growth. Relaxo Footwear is already compliant with BIS across its supply chain, sourcing natural rubber domestically and importing EVA, with no expected disruptions in raw material procurement.

Benefits from Premiumisation trend

Initially a manufacturer of rubber hawai slippers, Relaxo Footwear expanded into the premium segment with its flagship brands ‘Sparx’ and ‘Flite’ starting in FY05. These brands now contribute approximately 75 per cent to Relaxo Footwear’s revenue. Despite recent price cuts to drive volume amidst volatile raw material costs, analysts noted that the average selling price (ASP) has increased from around Rs 48 in FY08 to Rs 150 in FY24, reflecting a 7.4 per cent CAGR. As demand improves and consumer preference shifts towards premium products, YES Securities anticipate an increase in blended realisations and a boost in gross margins to around 59-60 per cent.

Integrated manufacturing and extensive distribution network

As the largest non-leather footwear manufacturer in India, Relaxo Footwear operates nine facilities, with production capacity expanding from 750,000 pairs per day in FY19 to 1,050,000 pairs per day in FY24. The company manages every stage of manufacturing from design to packaging. 

Relaxo Footwear distributes its products through a network of approximately 650 distributors and over 70,000 retailers/MBOs, alongside operating 399 exclusive brand outlets (EBOs), which contribute about 9 per cent of sales, and selling via e-commerce platforms (around 10 per cent of sales). 

While North and East India account for 70 per cent of sales, Relaxo Footwear is also making strategic inroads into new regions and has been exporting since FY07, with exports currently making up about 4-5 per cent of sales to 34 countries.

Expanding Sports and Athleisure (S&A) segment

The Sports and Athleisure segment is projected to grow at a rate of around 15 per cent CAGR. Relaxo Footwear entered this segment with its Sparx brand in FY05, and it now contributes about 38 per cent of revenue, with 55-60 per cent of that coming from closed footwear, analysts said. The Sparx facility operates at 55-60 per cent capacity utilisation, and Relaxo Footwear aims to increase the S&A segment’s share going forward.