Few takers for footwear stocks despite falling rubber prices

Regardless of falling raw material prices and sound fundamentals of the footwear space, market participants have little conviction in putting money into these stocks.

So, why are investors avoiding footwear stocks? One common response is that there are ample number of better opportunities in the market.

Even as the price of rubber, a key raw material in the manufacture of footwear, has fallen, stocks of footwear makers hardly excite the market, said Awanish Chandra, Executive Director, SMIFS which is a research-based firm offering services in Institutional & Retail Broking, PMS, Research & Advisory, Investment Banking, Depository & Repository and Distribution.

According to Bloomberg data, FIBER US Commodity Rubber spot hit a low of $143.76 per pound on September 6, 2022, and Rubber RSS4 Kottayam hit a low of Rs 13,400 on December 26, 2022. Indian natural rubber (NR) prices had sunk to a two-year low in December on weak demand prospects.

“Even with the fall in rubber prices, footwear stocks are barely attracting investor attention for the simple reason that if I wanted a play on falling rubber prices, I would rather look at tyre companies,” Chandra added.

Besides, a large part of the footwear business economics has already moved to synthetic rubber or leather, while tyre sector margins are still very closely linked with natural rubber, he elaborated.

Since rubber is said to constitute a small percentage of input cost of footwear companies, and most companies are now moving away from NR, a fall in NR prices would hardly push up earnings or share prices.

“Depending on the product mix, rubber accounts for 15-40 percent of the feedstock for footwear production,” Nirav Karkera, Head of Research, Fisdom, said. The fall in rubber prices definitely provides some support to the companies “but is not a game-changer”, he added.

“However, with the need for better unit economics, natural rubber is largely replaced or blended with petrochem-derived EVA and PU materials. The reduction in contribution of natural rubber to overall production reflects in the gradually reducing correlation between rubber prices and footwear manufacturers’ earnings,” he explained.

Especially at a time when many investors are banking on tactical buys ahead of the upcoming Union Budget, footwear stocks often get the cold-shoulder.

Though the industry is broadly categorised under footwear, each company must be evaluated distinctly for its unique characteristics to arrive at an investment decision. Also, unless there is an absolute rationale to invest in an industry, such as footwear in this case, one must be open to exploring industries and sectors offering potentially higher growth prospects, Karkera believes.

Another factor affecting investors’ decision is down-trading in the sector which has dimmed the outlook a little.

Ramesh Kumar Dua, Managing Director, Relaxo Footwear, had said in November, “Consumers were facing inflationary pressures which affected their affordability and they had started moving to cheaper alternatives even at the cost of quality”.

On the contrary, Haitong Securities India has initiated coverage on the shares of Metro Brands, Relaxo Footwear and Campus Activewear with an ‘Outperform’ rating, even as it has downgraded its rating on Bata India shares.

The brokerage firm is of the view that growth of the Indian footwear industry could accelerate going ahead because of the shift to organised from unorganised market estimated at around 70 percent, low per capita consumption compared to global average, increasing disposable income, urbanisation, preference for premium products, and increasing brand consciousness.

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