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Saturday, October 31, 2009

Relaxo Footwear - Stock Analysis & Recommendation

Relaxo Footwear is in the humdrum business of making footwear such as Hawaii slippers, casuals, joggers and school shoes. Headquartered in Delhi, the company was founded in 1976. While foreign footwear companies have introduced a brand culture in India and are focusing on the rich and upper-middle-class, Relaxo is catering to the lower-middle-class and the lower-income group.

In this segment, it is competing with Bata India, Action Shoes and Liberty Shoes. Relaxo’s edge is based on low price, reasonable quality and large production capacity. Its manufacturing capacity, of 100 million pairs per annum, is second only to Bata’s. It also has the capacity to manufacture 300,000 pairs of Hawaii slippers per day which is the highest in India.

Economies of scale enable the company to keep its product prices low. It also exports products to the US and the UK. Its financial performance for the past two quarters has been good. Sales have grown 30% and 31%, respectively, while operating profit has risen 80% and 102% in the March and June quarters over the same quarters of the previous year.

The five-quarter average sales and operating profit growth are 33% and 42%, respectively. Its operating margin is low (11%) but the stock is really cheap. Its market-cap is 0.25 and 2.14 times its sales and operating profit.

Following its robust quarterly performance, the stock has soared from Rs28 in March to Rs105 till date. Buy it at around Rs70.
Source: Moneylife

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