Krishna Karwa Moneycontrol Research
For a long time, popular footwear manufacturers and retailers like Bata and Relaxo hogged the limelight and caught the market’s fancy, despite their premium valuations. In the midst of this, Sreeleathers Limited (SLL) (with a market capitalization Rs 370 crore), a relatively unheard-of company, deserves an investor’s attention owing to its consistently strong financials since the past few years.
The Kolkata-based company, a retailer and wholesaler of footwear and leather articles, manufactures a diverse range of products encompassing men’s footwear and unisex leather articles (bags, wallets, hand bags, trolley bags, school bags and jackets). With 30 retail outlets (including franchise-owned ones), the company’s presence spans across nine states in India, mostly in the eastern region.
What differentiates SLL from its competitors is its ability to grow profitably in select markets (West Bengal, Bihar and Jharkhand being the decisive ones). Unlike its larger peers, the company continues to play successfully on its strengths by not opting for a pan-India presence.
While critics may argue that this may limit SLL’s top-line progress, a focused approach, backed by consequent cost savings on the product promotion and distribution front, have yielded superior margins, evident from the company's performance over the years.
A better understanding of the local consumers’ preferences positions SLL reasonably well to cater to price-sensitive buyers (mainly in the non-metro areas) instead of competing head-on with its branded counterparts in major cities, where people are comparatively less price-sensitive.
SLL boasts of a steady financial track record. Barring minor margin blips in FY17, its overall parameters seem to be pretty well balanced. The lower return ratios can be attributed to the company’s inability to sweat its assets as effectively as its peers. Going forward, with revenues gaining traction, we expect the returns to improve.
SLL Vs Peers
Return Ratios & Valuation Multiples
GST: The Game-changer
Even as SLL competed with organised players, it simultaneously faced price competition from the unorganised entities. The tax arbitrage that the latter enjoyed in the pre-GST era eroded the competitive positioning of efficient companies like SLL.
However, in the post-GST phase, the arbitrage benefit wouldn’t exist since all manufacturers would come under the purview of a similar levy structure, thereby providing a key opportunity for firms like SLL, which prima facie cater to price-conscious customers, to gain a greater share of the market at the expense of the unorganised units.
Industry in a Sweet Spot
According to a Technopak report, India’s footwear market, which has been growing by 12 percent per annum, is anticipated to be worth USD 11.5 billion by FY20 in comparison to USD 6 billion in FY14. The number of footwear products manufactured domestically is estimated to exceed 4 billion pairs by FY20 from the existing level of 2.1 billion. The per capita consumption of footwear in the country, which stands at 1.7 pairs per annum, fairly low when compared to the international average of 3-5 pairs, has an immense potential to grow in tandem with the increase in middle-class population.
While SLL had a decent and smooth journey so far, it has to manage volatility arising out of fluctuations in raw material prices and labour costs. The new GST rates for footwear at 18 percent (where the sale price exceeds Rs 500) and 5 percent (for those costing less than Rs 500) are unlikely to impact SLL’s competitiveness materially.
Valuation
We foresee SLL participating meaningfully in the secular growth opportunity of the industry. While we are emphasizing more on its organic investment propositions, the premium for inorganic events for a small regional company like this cannot be ruled out. At the current market price, the stock, which trades at 15.6x FY19 projected earnings, seems to be reasonably priced given its future prospects. Long-term investors, looking for moderate growth with decent quality, wouldn’t perhaps want to take their eyes off this efficient performer.
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