Value investor- India mid & small caps

Bhaskar Chakraborty

Equity Bottom-Up

<ul><li>India’s second largest listed footwear maker with a track record of steady growth and improving profitability.</li><li>Likely to be a beneficiary of GST implementation with 50% of the footwear market unorganised.</li><li>Its key brand- Sparx is priced at a discount to aspirational brands like Adidas, Puma and Nike presenting an attractive alternative to the price conscious customer.</li><li>Growth has come under pressure in FY16-17 owing to availability of premium brands in Tier III cities and beyond via the online channel. Aspirational brands with deep pockets have priced aggressively resulting in downward pressure on Relaxo’s pricing.</li><li>Further, its brands School mate, Flite and Bahamas have failed to make any impact in the online channel.</li><li>Relaxo’s in-house manufacturing model requires significant capex to grow earnings. 50-65% of EBITDA gets converted to operating cashflow (OCF) but less than 10% of OCF converts into free cashflow.</li><li>We expect low teens earnings Cagr over FY16-19. Stock is trading at 43x FY18 Bloomberg consensus EPS estimate. Recommend Sell.</li></ul>

India’s second largest listed footwear maker with a track record of steady growth and improving profitability.Likely to be a beneficiary of GST implementation with 50% of the footwear market unorganised.Its key brand- Sparx is priced at a discount to aspirational brands like Adidas, Puma and Nike presenting an attractive alternative to the price conscious customer.Growth has come under pressure in FY16-17 owing to availability of premium brands in Tier III cities and beyond via the online channel. Aspirational brands with deep pockets have priced aggressively resulting in downward pressure on Relaxo’s pricing.Further, its brands School mate, Flite and Bahamas have failed to make any impact in the online channel.Relaxo’s in-house manufacturing model requires significant capex to grow earnings. 50-65% of EBITDA gets converted to operating cashflow (OCF) but less than 10% of OCF converts into free cashflow.We expect low teens earnings Cagr over FY16-19. Stock is trading at 43x FY18 Bloomberg consensus EPS estimate. Recommend Sell.

India Consumer Discretionary: Relaxo Footwear- Burden of Growth, Inflated Valuation

Relaxo Footwears

India Consumer Discretionary: Relaxo Footwear- Burden of Growth, Inflated Valuation